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 ofFebruary 25, 2021 , we owned and/or operated 360 inpatient facilities and 39 outpatient and other facilities including the following located in 38 states,Washington, D.C. , theUnited Kingdom andPuerto Rico :
Acute care facilities located in the
• 26 inpatient acute care hospitals; • 17 free-standing emergency departments, and; • 6 outpatient centers & 1 surgical hospital.
Behavioral health care facilities (334 inpatient facilities and 15 outpatient facilities):
Located in theU.S. : • 185 inpatient behavioral health care facilities, and; • 12 outpatient behavioral health care facilities.
Located in the
• 146 inpatient behavioral health care facilities, and; • 3 outpatient behavioral health care facilities.
Located in
• 3 inpatient behavioral health care facilities.
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and commercial health insurer accounted for 55% during 2020, 54% during 2019 and 53% during 2018. Net revenues from our behavioral health care facilities and commercial health insurer accounted for 45% of our consolidated net revenues during 2020, 46% during 2019 and 47% during 2018. Our behavioral health care facilities located in theU.K. generated net revenues of approximately$584 million in 2020,$554 million in 2019 and$505 million in 2018. Total assets at ourU.K. behavioral health care facilities were approximately$1.334 billion as ofDecember 31, 2020 ,$1.270 billion as ofDecember 31, 2019 and$1.224 billion as ofDecember 31, 2018 . Services provided by our hospitals include general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services. We provide capital resources as well as a variety of management services to our facilities, including central purchasing, information services, finance and control systems, facilities planning, physician recruitment services, administrative personnel management, marketing and public relations.
Forward-Looking Statements and Risk Factors
You should carefully review the information contained in this Annual Report, and should particularly consider any risk factors that we set forth in this Annual Report and in other reports or documents that we file from time to time with theSecurities and Exchange Commission (the "SEC"). In this Annual Report, we state our beliefs of future events and of our future financial performance. This Annual Report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those set forth herein in Item 1A. Risk Factors. Those factors may cause our actual results to differ materially from any of our forward-looking statements. 39
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Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
our good faith belief with respect to future events, and is subject to risks and
uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements. Such factors include, among
other things, the following:
• we are subject to risks associated with public health threats and
epidemics, including the health concerns relating to the COVID-19
pandemic. In
("CDC") confirmed the spread of the disease to
pandemic. The federal government has declared COVID-19 a national
emergency, as many federal and state authorities have implemented
aggressive measures to "flatten the curve" of confirmed individuals
diagnosed with COVID-19 in an attempt to curtail the spread of the virus
and to avoid overwhelming the health care system;
• the 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 continue to have a
material adverse effect on our business, results of operations and
financial condition. In an effort to slow the spread of the disease, since
March, 2020, at various times, 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. Some of
these restrictions remain in place. Additionally, evidence suggests that
individuals may be deciding to forego medical care delivered in
traditional venues. These dynamics have manifested themselves in our
hospitals in, among other ways, reduced emergency room visits,elective/scheduled procedures and acute and behavioral health patient
days. 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 continue
to have, an adverse impact on the operations and financial position of
health care provider systems due to increased costs (including labor costs
which have been pressured during the COVID-19 pandemic due to a shortage
of clinicians and increased wage rates resulting from increased demand for
those services), actual reduction and potential reduction in overall
patient volume, and shifts in payor mix. Despite these measures, there
have been waves of escalated COVID-19 cases at various times, including
the fourth quarter of 2020 and into the first quarter of 2021, in many
states in the
Recently, COVID-19 vaccinations have begun to be administered and while we
expect the administration of vaccines will assist in easing the number of
COVID-19 patients, the pace at which this is likely to occur is difficult
to predict. 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 futuredevelopments, 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 our future financial results, but expect developments
related to the COVID-19 pandemic to materially affect our financial
performance in 2021. Even after the COVID-19 pandemic has subsided, we may
continue to experience materially adverse impacts on our financialcondition and our results of operations as a result of its macroeconomic
impact, including any recession that has occurred or may occur in the
future, and many of our known risks described in the Risk Factors section
herein;
• 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 and Advance
Payment Program in light of the availability of the PHSSEF and thesignificant 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 April 24, 2020 ,
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includes additional emergency appropriations for COVID-19 response,
including
PHSSEF. A third phase of PHSSEF allocations was recently announced, under
which
received, rejected or accepted PHSSEF payments. Applicants that have not
yet received PHSSEF payments of 2 percent of patient revenue will receive
a payment that, when combined with prior payments (if any), equals 2
percent of patient care revenue. Providers that have already received
payments of approximately 2 percent of annual revenue from patient care
can submit more information and may be eligible for an additional
payment. On December 27, 2020 , the Consolidated Appropriations Act, 2021
("CAA") was signed into law. The CAA appropriated an additional
to the PHSSEF, codified flexibility for providers to calculate lost
revenues, and permitted parent organizations to allocate PHSSEF targeted
distributions to subsidiary organizations. The CAA also provides that not
less than 85 percent of the unobligated PHSSEF amounts and any future
funds recovered from health care providers should be used for additional
distributions that consider financial losses and changes in operating
expenses in the third or fourth quarters of 2020 and the first quarter of
2021 that are attributable to the coronavirus. The CAA provided additional
funding for testing, contact tracing and vaccine administration. Providers
receiving payments were required to sign terms and conditions regarding
utilization of the payments. Any provider receiving funds in excess of
$10,000 in the aggregate will be required to report data elements to HHSdetailing utilization of the payments. Providers will report healthcare
related expenses attributable to COVID-19 that have not been reimbursed by
another source, which may include general and administrative or healthcare
related operating expenses. Funds may also be applied to lost revenues,
represented as a negative change in year-over-year net patient care
operating income. All
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 to predict the impact of such
legislation on our operations or how they will affect operations of our
competitors. Moreover, we are unable to assess the extent to which
anticipated negative impacts on 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").
that will strengthen the Legislation and may reverse the policies of the
prior administration.
of final rules (i) enabling the formation of association health plans that
would be exempt from certain Legislation requirements such as the
provision of essential health benefits; (iii) expanding the of short-term,
limited duration health insurance, (iii) eliminating cost-sharing
reduction payments to insurers that would otherwise offset deductibles and
other out-of-pocket expenses for health plan enrollees at or below 250
percent of the federal poverty level; (iv) relaxing requirements for state
innovation waivers that could reduce enrollment in the individual and
small group markets and lead to additional enrollment in short-term,
limited duration insurance and association health plans, and; (v)
incentivizing the use of health reimbursement arrangements by employers to
permit employees to purchase health insurance in the individual market.
The uncertainty resulting from these Executive Branch policies has led to
reduced Exchange enrollment in 2018, 2019 and 2020 and is expected to
further worsen the individual and small group market risk pools in future
years. It is also anticipated that these policies, to the extent that they
remain as implements, 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
appealed and on
voted 2-1 to strike down the Legislation individual mandate as
unconstitutional and sent the case back to the U.S. District Court in
Texas to determine which Legislation provisions should be stricken with
the mandate or whether the entire law is unconstitutional without the
individual mandate. On March 2, 2020 , the U.S. Supreme Court agreed to
hear, during the 2020-2021 term, two consolidated cases, filed by the
the Supreme Court to review the ruling by the Fifth Circuit Court of
Appeals . Oral argument was heard on November 10, 2020 , and a ruling isexpected in 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 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 beunconstitutional, 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;
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• under the Legislation, hospitals are required to make public a list of
their standard charges, and effective
that this disclosure be in machine-readable format and include charges for
all hospital items and services and average charges for diagnosis-related
groups. On
Transparency Requirements for Hospitals to Make Standard Charges Public."
This rule took effect on
also make public their payor-specific negotiated rates, minimum negotiated
rates, maximum negotiated rates, and cash for all items and services,
including individual items and services and service packages, that could
be provided by a hospital to a patient. Failure to comply with these
requirements may result in daily monetary penalties;
• as part of the CAA,
limiting patient balance billing in certain circumstances. The CAA
addresses surprise medical bills stemming from emergency services,
out-of-network ancillary providers at in-network facilities, and air
ambulance carriers. The legislation prohibits surprise billing when
out-of-network emergency services or out-of-network services at anin-network facility are provided, unless informed consent is received. In
these circumstances providers are prohibited from billing the patient for
any amounts that exceed in-network cost-sharing requirements. The
legislation requires HHS, as well as the
Department of Labor to issue implementing regulations within a year of enactment;
• 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
in the
in January, 2020. Although we estimate that the unfavorable impact of the
projected declines in patient volumes should be largely offset by thefavorable impact of the increased rates, we can provide no assurance that
these developments, as well as the effect of COVID-19 on the
market, will not have a material adverse impact on our future results of
operations;
• the outcome of known and unknown litigation, government investigations,
false claims act allegations, and liabilities and other claims asserted
against us and other matters as disclosed in Note 8 to the Consolidated
Financial Statements - Commitments and Contingencies and the effects of
adverse publicity relating to such matters;
• the unfavorable impact on our business of the deterioration in national,
regional and local economic and business conditions, including a worsening
of unfavorable credit market conditions;
• competition from other healthcare providers (including physician owned
facilities) in certain markets;
• technological and pharmaceutical improvements that increase the cost of
providing, or reduce the demand for healthcare;
• our ability to attract and retain qualified personnel, nurses, physicians
and other healthcare professionals and the impact on our labor expenses
resulting from a shortage of nurses and other healthcare professionals;
• demographic changes;
• we experienced a cyberattack in September, 2020 that had an adverse effect
on our operating results during the fourth quarter of 2020. Although we
can provide no assurance or estimation related to the amount of the
ultimate insurance proceeds that we may receive in connection with this
incident, we believe we are entitled to recovery of the majority of theunfavorable economic impact of the cyberattack pursuant to a commercial
insurance policy. However, there is a heightened risk of future
cybersecurity threats, including ransomware attacks targeting healthcare
providers. If successful, future cyberattacks could have a material
adverse effect on our business. Any costs that we incur as a result of a
data security incident or breach, including costs to update our security
protocols to mitigate such an incident or breach could be significant. Any
breach or failure in our operational security systems can result in loss
of data or an unauthorized disclosure of or access to sensitive or
confidential member or protected personal or health information and 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;
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• as discussed below in Sources of Revenue, we receive revenues from various
state and county based programs, including Medicaid in all the states in
which we operate (we receive Medicaid revenues in excess of
annually from each of
supplemental programs in certain states including
Medicaid disproportionate share hospital payments in certain states
including Texas and South Carolina . We are therefore particularly
sensitive to potential reductions in Medicaid and other state based
revenue programs as well as regulatory, economic, environmental andcompetitive changes in those states. We can provide no assurance that
reductions to revenues earned pursuant to these programs, and the effect
of the COVID-19 pandemic on state budgets, particularly in the
above-mentioned states, will not have a material adverse effect on our
future results of operations;
• our ability to continue to obtain capital on acceptable terms, including
borrowed funds, to fund the future growth of our business;
• our inpatient acute care and behavioral health care facilities may
experience decreasing admission and length of stay trends;
• our financial statements reflect large amounts due from various commercial
and private payers and there can be no assurance that failure of the
payers to remit amounts due to us will not have a material adverse effect
on our future results of operations;
• in August, 2011, the Budget Control Act of 2011 (the "2011 Act") was
enacted into law. The 2011 Act imposed annual spending limits for most
federal agencies and programs aimed at reducing budget deficits by
billion between 2012 and 2021, according to a report released by the
established a bipartisan Congressional committee, known as the Joint
tasked with making recommendations aimed at reducing future federal budget
deficits by an additional
was unable to reach an agreement by the
a result, across-the-board cuts to discretionary, national defense and
Medicare spending were implemented on
payment reductions of up to 2% per fiscal year with a uniform percentage
reduction across all Medicare programs. The Bipartisan Budget Act of 2015,
enacted on
reimbursement imposed under the 2011 Act. The CARES Act suspended payment
reductions
cuts through 2030. The CAA extended the suspension of payment reductions
until
the 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
Union reached a post-Brexit trade and cooperation agreement that created
new business and security requirements and preserved the
tariff- and quota-free access to the European Union member states. We do
not know to what extent Brexit will ultimately impact the business and
regulatory environment in the U.K. , the European Union , or other
countries. Any of these effects of Brexit, and others we cannotanticipate, 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.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in
A summary of our significant accounting policies is outlined in Note 1 to the financial statements. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following: Revenue Recognition: OnJanuary 1, 2018 , we adopted, using the modified retrospective approach, ASU 2014-09 and ASU 2016-08, "Revenue from Contracts with Customers (Topic 606)" and "Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)", respectively, which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The most significant change from the adoption of the new standard relates to our estimation for the allowance for doubtful accounts. Under the previous standards, our estimate for amounts not expected to be collected based upon our historical experience, were reflected as provision for doubtful accounts, included within net revenue. Under the new standard, our estimate for amounts not expected to be collected based on historical experience will continue to be recognized as a reduction to net revenue, however, not reflected separately as provision for doubtful accounts. Under the new standard, subsequent changes in estimate of collectability due to a change in the financial status of a payer, for example a bankruptcy, will be recognized as bad debt expense in operating charges. The adoption of this ASU in 2018, and amounts recognized as bad debt expense and included in other operating expenses, did not have a material impact on our consolidated financial statements. See Note 10 to the Consolidated Financial Statements-Revenue Recognition, for additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein. We report net patient service revenue at the estimated net realizable amounts from patients and third-party payers and others for services rendered. We have agreements with third-party payers that provide for payments to us at amounts different from our established rates. Payment arrangements include rates per discharge, reimbursed costs, discounted charges and per diem payments. Estimates of contractual allowances, which represent explicit price concessions under ASC 606, under managed care plans are based upon the payment terms specified in the related contractual agreements. We closely monitor our historical collection rates, as well as changes in applicable laws, rules and regulations and contract terms, to assure that provisions are made using the most accurate information available. However, due to the complexities involved in these estimations, actual payments from payers may be different from the amounts we estimate and record. We estimate our Medicare and Medicaid revenues using the latest available financial information, patient utilization data, government provided data and in accordance with applicable Medicare and Medicaid payment rules and regulations. The laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation and as a result, there is at least a reasonable possibility that recorded estimates will change by material amounts in the near term. Certain types of payments by the Medicare program and state Medicaid programs (e.g.Medicare Disproportionate Share Hospital , Medicare Allowable Bad Debts and Inpatient Psychiatric Services) are subject to retroactive adjustment in future periods as a result of administrative review and audit and our estimates may vary from the final settlements. Such amounts are included in accounts receivable, net, on our Consolidated Balance Sheets. The funding of both federal Medicare and state Medicaid programs are subject to legislative and regulatory changes. As such, we cannot provide any assurance that future legislation and regulations, if enacted, will not have a material impact on our future Medicare and Medicaid reimbursements. Adjustments related to the final settlement of these retrospectively determined amounts did not materially impact our results in 2020, 2019 or 2018. If it were to occur, each 1% adjustment to our estimated net Medicare revenues that are subject to retrospective review and settlement as ofDecember 31, 2020 , would change our after-tax net income by approximately$1 million .Charity Care , Uninsured Discounts and Other Adjustments to Revenue: Collection of receivables from third-party payers and patients is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and the portion of the bill which is the patient's responsibility, primarily co-payments and deductibles. We estimate our revenue adjustments for implicit price concessions based on general factors such as payer mix, the aging of the receivables and historical collection experience. We routinely review accounts receivable balances in conjunction with these factors and other economic conditions which might ultimately affect the collectability of the patient accounts and make adjustments to our allowances as warranted. At our acute care hospitals, third party liability accounts are pursued until all payment and adjustments are posted to the patient account. For those accounts with a patient balance after third party liability is finalized or accounts for uninsured patients, the patient receives statements and collection letters. Historically, a significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients which, in part, has resulted from patients who are employed but do not have health insurance or who have policies with relatively high deductibles. Patients treated at our hospitals for non-elective services, who have gross income of various amounts, dependent upon the state, ranging from 200% to 400% of the federal poverty guidelines, are deemed eligible for charity care. The federal poverty 44
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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 in 2020, 2019 or 2018 since our facilities make estimates at each financial reporting period to adjust revenue based on historical collections. Under ASC 605, these estimates were reported in the provision for doubtful accounts. We also provide discounts to uninsured patients (included in "uninsured discounts" amounts below) who do not qualify for Medicaid or charity care. Because we do not pursue collection of amounts classified as uninsured discounts, the transaction price is fully adjusted and there is no impact in our net revenues or in our net accounts receivable. In implementing the discount policy, we first attempt to qualify uninsured patients for governmental programs, charity care or any other discount program. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.
Uncompensated care (charity care and uninsured discounts):
The following table shows the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on charges at established rates, for the years endedDecember 31, 2020 , 2019 and 2018: (dollar amounts in thousands) 2020 2019 2018 Amount % Amount % Amount % Charity care$ 622,668 28 %$ 672,326 31 %$ 761,783 40 % Uninsured discounts 1,578,470 72 % 1,511,738 69 % 1,132,811 60 % Total uncompensated care$ 2,201,138 100 %$ 2,184,064 100 %$ 1,894,594 100 %
The estimated cost of providing uncompensated care:
The estimated cost of providing uncompensated care, as reflected below, were
based on a calculation which multiplied the percentage of operating expenses for
our acute care hospitals to gross charges for those hospitals by the
above-mentioned total uncompensated care amounts. The percentage of cost to
gross charges is calculated based on the total operating expenses for our acute
care facilities divided by gross patient service revenue for those facilities.
An increase in the level of uninsured patients to our facilities and the
resulting adverse trends in the adjustments to net revenues and uncompensated
care provided could have a material unfavorable impact on our future operating
results.
(amounts in thousands)
2020 2019 2018
Estimated cost of providing charity care
$ 94,088 Estimated cost of providing uninsured discounts related care 186,804 175,128
139,913
Estimated cost of providing uncompensated care$ 260,494 $ 253,014
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 inReno, Nevada , andPuerto Rico and; (ii) maintain self- 45
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insured employee benefits programs for employee healthcare and dental claims. The ultimate costs related to these programs/operations include expenses for claims incurred and paid in addition to an accrual for the estimated expenses incurred in connection with claims incurred but not yet reported. Given our significant insurance-related exposure, there can be no assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results of operations.
See Note 8 to the Consolidated Financial Statements-Commitments and Contingencies, for additional disclosure related to our professional and general liability, workers' compensation liability and property insurance.
Long-Lived Assets: We review our long-lived assets for impairment whenever events or circumstances indicate that the carrying value of these assets may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of our asset based on our estimate of its undiscounted future cash flow. If the analysis indicates that the carrying value is not recoverable from future cash flows, the asset is written down to its estimated fair value and an impairment loss is recognized. Fair values are determined based on estimated future cash flows using appropriate discount rates.Goodwill and Intangible Assets:Goodwill and indefinite-lived intangible assets are reviewed for impairment at the reporting unit level on an annual basis or sooner if the indicators of impairment arise. Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance of each reporting unit. We have designatedOctober 1st as our annual impairment assessment date for our goodwill and indefinite-lived intangible assets. We performed an impairment assessment as ofOctober 1, 2020 which indicated no impairment of goodwill. There were also no goodwill impairments during 2019 or 2018. Our 2019 and 2018 financial results included aggregate pre-tax provisions for asset impairments of$98 million and$49 million , respectively, recorded in connection withFoundations Recovery Network, L.L.C. ("Foundations"), which was acquired by us in 2015. These pre-tax provisions for asset impairments include: (i) a$124 million impairment provision to write-off the carrying value of the Foundations' tradename intangible asset ($75 million recorded during 2019 and$49 million recorded during 2018), and; (ii) a$23 million impairment provision recorded during 2019 to reduce the carrying value of real property assets of certain Foundations' facilities. Please see below in Provision for Asset Impairment-Foundations Recovery Network for additional information. Future changes in the estimates used to conduct the impairment review, including profitability and market value projections, could indicate impairment in future periods potentially resulting in a write-off of a portion or all of our goodwill or indefinite-lived intangible assets. Income Taxes: Deferred tax assets and liabilities are recognized for the amount of taxes payable or deductible in future years as a result of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. We believe that future income will enable us to realize our deferred tax assets net of recorded valuation allowances relating to state and foreign net operating loss carry-forwards, foreign tax credits, and interest deduction limitations. OnDecember 22, 2017 , the President ofthe United States signed into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "TCJA-17"). The TCJA-17 made broad and complex changes to theU.S. tax code, including, but not limited to, (1) reducing theU.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminatingU.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring current inclusion inU.S. federal taxable income of certain earnings of controlled foreign corporations through the implementation of a territorial tax system; (5) creating a new limitation on deductible interest expense, and; (6) limiting certain other deductions. We provided a provisional estimate of the effects of the TCJA-17 in the fourth quarter of 2017 financial statements. In the fourth quarter of 2018, we completed our analysis to determine the effects of the TCJA-17 in accordance with Staff Accounting Bulletin No. 118 as follows: Reduction ofU.S. federal corporate tax rate: The TCJA-17 reduces the corporate tax rate to 21 percent, effectiveJanuary 1, 2018 . Deferred income taxes are based on the estimated future tax effects of differences between the financial statement carrying amounts and the tax basis of assets and liabilities under the provisions of the enacted laws. For certain of our deferred tax assets and deferred tax liabilities, we recorded a provisional decrease of$97 million and$127 million , respectively, with a corresponding net adjustment to deferred tax benefit of$30 million for the year endedDecember 31, 2017 . Upon completion of our 2017 U.S. Corporate Income Tax Return, an increase of$1 million attributable to certain deferred tax assets and a decrease of$5 million attributable to certain deferred tax liabilities was recorded resulting in an additional net deferred tax benefit of$6 million . Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of certain of our foreign subsidiaries. The one-time Transition Tax is based upon the amount of post-1986 E&P of the relevant subsidiaries, the amount of non-U.S. income tax paid on such earnings, as well as other factors. We originally estimated and recorded a provisional Transition Tax obligation of$11.3 million . Upon 46
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completion of our 2017 U.S. Corporate Income Tax Return, the final Transition
Tax increased by
We operate in multiple jurisdictions with varying tax laws. We are subject to audits by any of these taxing authorities. Our tax returns have been examined by the Internal Revenue Service through the year endedDecember 31, 2006 . We believe that adequate accruals have been provided for federal, foreign and state taxes.
See Provision for Income Taxes and Effective Tax Rates below for discussion of our effective tax rates during each of the last three years.
Recent Accounting Pronouncements: For a summary of recent accounting
pronouncements, please see Note 1 to the Consolidated Financial
Statements-Accounting Standards as included in this Report on Form 10-K for the
year ended
CARES Act and Other Governmental Grants and Medicare Accelerated Payments:
As ofDecember 31, 2020 , we have received an aggregate of$1.112 billion as follows: • Approximately$417 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 year ended
December 31, 2020 , was the favorable impact of
approximately
million resulting from the recording of approximately $413
million of CARES Act and other grant income
revenues. Approximately $316 million of the grant income revenues
were attributable to our acute care services andapproximately
$97 million were attributable to our behavioral health care services. o As ofDecember 31, 2020 , approximately$4 million of these funds remain in the Medicare accelerated payments and deferred CARES Act and other grants liability account in our consolidated balance sheet. o Approximately$695 million of Medicare accelerated payments received pursuant to the Medicare Accelerated and Advance Payment Program ("MAAPP"). 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 2020 in connection with receipt of these funds. ? We are planning for the early repayment of the$695 million of Medicare accelerated payments previously received pursuant to the MAAPP. We have commenced the repayment process and anticipate that the$695 million of funds will be repaid to the government in March or April of 2021.
Additional CARES Act grants amounting to
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. Our information technology applications were substantially restored at our acute care and behavioral health hospitals at various times in October, 2020, on a rolling/staggered basis, and our facilities generally resumed standard operating procedures at that time. Immediately after the incident, we worked diligently with our information technology security partners to restore our information technology infrastructure and business operations as quickly as possible. In parallel, we began investigating the nature and potential impact of the security incident and engaged third-party information technology and forensic vendors to assist. No evidence of unauthorized access, copying or misuse of any patient or employee data has been identified to date. 47
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Given the disruption to the standard operating procedures at our facilities during the period ofSeptember 27, 2020 into October, 2020, certain patient activity, including ambulance traffic and elective/scheduled procedures at our acute care hospitals, were diverted to competitor facilities. We also incurred significant incremental labor expense, both internal and external, to restore information technology operations as expeditiously as possible. Additionally, certain administrative functions such as coding and billing were delayed into December, 2020, which had a negative impact on our operating cash flows during the fourth quarter of 2020. As a result of these factors, we estimate that this incident had an aggregate unfavorable pre-tax impact of approximately$67 million during the year endedDecember 31, 2020 . The substantial majority of the unfavorable impact was attributable to our acute care services and consisted primarily of lost operating income resulting from the related decrease in patient activity as well as increased revenue reserves recorded in connection with the associated billing delays. Also included were certain labor expenses, professional fees and other operating expenses incurred as a direct result of this incident and the related disruption to our operations. Although we can provide no assurance or estimation related to the receipt timing, or amount, of the proceeds that we may receive pursuant to commercial insurance coverage we have in connection with this incident, we believe we are entitled to recovery of the majority of the ultimate financial impact resulting from the cyberattack.
Results of Operations
The following table summarizes our results of operations, and is used in the discussion below, for the years endedDecember 31, 2020 , 2019 and 2018 (dollar amounts in thousands): Year Ended December 31, 2020 2019 2018 % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Net revenues$ 11,558,897 100.0 % $
11,378,259 100.0 %
48.6 % 5,588,893 49.1 % 5,254,536 48.8 %
Other operating expenses 2,672,762 23.1 % 2,723,911 23.9 % 2,614,687 24.3 %
Supplies expense 1,288,132 11.1 % 1,251,346 11.0 % 1,168,654 10.8 %
Depreciation and amortization 510,493 4.4 % 490,392 4.3 % 453,045 4.2 %
Lease and rental expense 116,059 1.0 % 107,809 0.9 % 106,094 1.0 %
Subtotal-operating expenses 10,200,543 88.2 % 10,162,351 89.3 % 9,597,016 89.1 %
Income from operations 1,358,354 11.8 % 1,215,908 10.7 % 1,175,262 10.9 %
Interest expense, net 106,285 0.9 % 162,733 1.4 % 154,956 1.4 %
Other (income) expense, net (14 ) 0.0 % (13,162 ) -0.1 % (14,219 ) -0.1 %
Income before income taxes 1,252,083 10.8 % 1,066,337 9.4 % 1,034,525 9.6 %
Provision for income taxes 299,293 2.6 % 238,794 2.1 % 236,642 2.2 %
Net income 952,790 8.2 % 827,543 7.3 % 797,883 7.4 %Less: Net income attributable to
noncontrolling interests 8,837 0.1 % 12,689 0.1 % 18,178 0.2 % Net income attributable to UHS$ 943,953 8.2 %$ 814,854 7.2 %$ 779,705 7.2 %
Year Ended
Net revenues increased 1.6%, or$181 million , to$11.56 billion during 2020 as compared to$11.38 billion during 2019. As discussed above, included in our net revenues during 2020 was approximately$413 million of net revenues recorded in connection with various governmental stimulus programs, most notably the CARES Act.
The increase in net revenues was primarily attributable to:
• a
care and behavioral health care operations owned during both periods
(which we refer to as "same facility"), and;
•
reduction in revenues related to provider tax programs which had no impact
on net income attributable to UHS as reflected above since the amounts
were offset between net revenues and other operating expenses.
Income before income taxes increased$186 million to$1.25 billion during 2020 as compared to$1.07 billion during 2019. The net increase in our income before income taxes during 2020, as compared to 2019, was due to the following:
• a decrease of
in Acute Care Hospital Services, including the favorable impact of
approximately
interests) resulting from the
48
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$316 million of net revenues recorded during 2020 in connection with various governmental stimulus programs, most notably the CARES Act;
• an increase of
discussed below in
impact of approximately
recorded during 2020 in connection with various governmental stimulus
programs, most notably the CARES Act, and excluding the impact of a $98
million provision for asset impairment recorded 2019;
• an increase of
recorded during 2019 in connection with
L.L.C. (see Other Operating Results-Provision for Asset
Impairment-
• an increase of $56 million due to a decrease in interest expense due
primarily to lower average outstanding borrowings and a decrease in the
average cost of borrowings, as discussed below in Other Operating
Results-Interest Expense;
• an increase of
reserve previously established in connection with the settlement finalized
in July, 2020 with the Department of Justice , Civil Division, and;
• $17 million of other combined net increases.
Net income attributable to UHS increased
• 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 which increased our provision for income
taxes by approximately
of approximately
million decrease in the provision for income taxes due to the 2019
recording of the non-deductible portion of the net federal and state
income taxes due on the settlement finalized in July, 2020 with the
below in Other Operating Results-Provision for Income Taxes and Effective
Tax Rates.
Increase to self-insured professional and general liability reserves:
Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. As a result of unfavorable trends experienced during 2020, we recorded an increase of$25 million to our reserves for self-insured professional and general liability claims. 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.
Year Ended
Net revenues increased 5.6%, or$606 million , to$11.38 billion during 2019 as compared to$10.77 billion during 2018. The increase was primarily attributable to:
• a
care and behavioral health care operations on a same facility basis, and;
•
revenues generated at 25 behavioral health facilities located in the
acquired during the third quarter of 2018 in connection with our
acquisition of
Income before income taxes increased$32 million to$1.07 billion during 2019 as compared to$1.03 billion during 2018. The net increase in our income before income taxes during 2019, as compared to 2018, was due to the following:
• an increase of
• an increase of
Services, excluding the asset impairment charges recorded during 2019 and
2018 related to Foundations Recovery Network, LLC , as discussed below;
49
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• a net increase of
increases recorded during 2019 and 2018 to the reserve established in
connection with the civil aspects of the government's investigation of
certain of our behavioral health care facilities (
reserve increase recorded during 2019 as compared to a $102 million
pre-tax increase recorded during 2018);
• a net decrease of
charges recorded during 2019 (
connection with
during 2015 (see Other Operating Results-Provision for Asset
Impairment-
• a decrease of
as discussed below in Other Operating Results-Interest Expense, and;
•$41 million of other combined net decreases.
Net income attributable to UHS increased
The increase consisted of:
• an increase of
• an increase of
noncontrolling interests, and;
• a decrease of
for income taxes resulting primarily from: (i) an increase in the
provision for income taxes due to the
income; (ii) a $6 million increase in the provision for income taxes
recorded during 2019 resulting from the net estimated federal and stateincome taxes due on the portion of the reserve established in connection
with the civil aspects of the government's investigation of certain of our
behavioral health care facilities that is estimated to be non-deductible
for income tax purposes, partially offset by; (iii) a decrease in the
provision for income taxes of
ASU 2016-09 which decreased our provision for income taxes by
approximately
approximately
below in Other Operating Results-Provision for Income Taxes and Effective
Tax Rates.
Acute Care Hospital Services
Year Ended
Acute Care Hospital Services-Same Facility Basis
We believe that providing our results on a "Same Facility" basis (which is a
non-GAAP measure), which includes the operating results for facilities and
businesses operated in both the current year and prior year periods, is helpful
to our investors as a measure of our operating performance. Our Same Facility
results also neutralize (if applicable) the 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 tables below also exclude from
net revenues and other operating expenses, provider tax assessments incurred in
each period as discussed below Sources of Revenue-Various State Medicaid
Supplemental Payment Programs. However, these provider tax assessments are
included in net revenues and other operating expenses as reflected in the table
below under All Acute Care Hospital Services. The provider tax assessments had
no impact on the income before income taxes as reflected on the tables below
since the amounts offset between net revenues and other operating expenses. To
obtain a complete understanding of our financial performance, the Same Facility
results should be examined in connection with our net income as determined in
accordance with GAAP and as presented in the condensed consolidated financial
statements and notes thereto as contained in this Annual Report on Form 10-K.
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The following table summarizes the results of operations for our acute care hospital services on a same facility basis and is used in the discussions below for the years endedDecember 31, 2020 and 2019 (dollar amounts in thousands): Year Ended Year Ended December 31, 2020 December 31, 2019 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 6,238,236 100.0 %$ 6,054,901 100.0 % Operating charges: Salaries, wages and benefits 2,611,143 41.9 % 2,559,682 42.3 % Other operating expenses 1,462,627 23.4 % 1,365,015 22.5 % Supplies expense 1,081,154 17.3 % 1,049,747 17.3 % Depreciation and amortization 318,077 5.1 % 305,264 5.0 % Lease and rental expense 69,638 1.1 % 60,485 1.0 % Subtotal-operating expenses 5,542,639 88.8 % 5,340,193 88.2 % Income from operations 695,597 11.2 % 714,708 11.8 % Interest expense, net 1,567 0.0 % 1,330 0.0 % Other (income) expense, net 0 0.0 % (32 ) 0.0 % Income before income taxes$ 694,030 11.1 %$ 713,410 11.8 % On a same facility basis during 2020, as compared to 2019, net revenues from our acute care hospital services increased$183 million or 3.0%. Income before income taxes (and before income attributable to noncontrolling interests) decreased$19 million , or 3%, to$694 million or 11.1% of net revenues during 2020 as compared to$713 million or 11.8% of net revenues during 2019. As mentioned above, included in our acute care hospital services' revenues during 2020 was approximately$316 million of revenues recorded in connection with funds received from various governmental stimulus programs, most notably the CARES Act. Excluding these governmental stimulus program revenues from 2020, net revenues from our acute care hospital services, on a same facility basis, decreased$132 million or 2.2% during 2020, as compared to 2019, and income before income taxes decreased$335 million or 47% during 2020, as compared to 2019. During 2020, excluding the impact of the$316 million of governmental stimulus program revenues recorded during 2020, net revenue per adjusted admission increased 14.1% while net revenue per adjusted patient day increased 2.4%, as compared to 2019. During 2020, as compared to 2019, inpatient admissions to our acute care hospitals decreased 9.9% and adjusted admissions decreased 15.2%. Patient days at these facilities increased 0.4% and adjusted patient days decreased 5.5% during 2020 as compared to 2019. The average length of inpatient stay at these facilities increased to 5.1 days during 2020, as compared to 4.6 days during 2019. The occupancy rate, based on the average available beds at these facilities, was 63% and 64% during 2020 and 2019, respectively. As mentioned above, we estimate that the information technology security incident that occurred onSeptember 27, 2020 , had an aggregate unfavorable pre-tax impact of approximately$67 million on our consolidated results of operations during the year endedDecember 31, 2020 . The substantial majority of the unfavorable impact was attributable to our acute care services and consisted primarily of lost operating income resulting from the related decrease in patient activity as well as increased revenue reserves recorded in connection with the associated billing delays. Please see Information Technology Incident as included above for additional disclosure regarding this incident, including potential related commercial insurance recoveries.
All Acute Care Hospital Services
The following table summarizes the results of operations for all our acute care
operations during 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 businesses. Dollar amounts below are reflected in thousands.
51
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Year Ended Year Ended
December 31, 2020 December 31, 2019
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 6,337,304 100.0 % $ 6,164,560 100.0 %
Operating charges:
Salaries, wages and benefits 2,611,514 41.2 % 2,559,682 41.5 %
Other operating expenses 1,561,875 24.6 % 1,474,674 23.9 %
Supplies expense 1,081,159 17.1 % 1,049,747 17.0 %
Depreciation and amortization 318,124 5.0 % 305,264 5.0 %
Lease and rental expense 69,638 1.1 % 60,485 1.0 %
Subtotal-operating expenses 5,642,310 89.0 % 5,449,852 88.4 %
Income from operations 694,994 11.0 % 714,708 11.6 %
Interest expense, net 1,567 0.0 % 1,330 0.0 %
Other (income) expense, net 0 0.0 % (32 ) 0.0 %
Income before income taxes $ 693,427 10.9 % $ 713,410 11.6 %
During 2020, as compared to 2019, net revenues from our acute care hospital
services increased $173 million or 2.8% to $6.34 billion as compared to $6.16
billion during 2019 due to: (i) the $183 million , or 3.0%, increase in same
facility revenues, as discussed above, and; (ii) an $10 million reduction in
provider tax assessments which had no impact on net income attributable to UHS
since the amounts were offset between net revenues and other operating
expenses.
Income before income taxes decreased $20 million , or 3%, to $693 million or
10.9% of net revenues during 2020 as compared to $713 million or 11.6% of net
revenues during 2019. The $20 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.
Excluding the above-mentioned $316 million of revenues recorded during 2020 in
connection with various governmental stimulus programs, net revenues from our
acute care hospital services decreased $143 million or 2.3% during 2020, as
compared to 2019, and income before income taxes decreased $336 million or 47%
during 2020, as compared to 2019.
Year Ended
Acute Care Hospital Services-Same Facility Basis
The following table summarizes the results of operations for our acute care hospital services on a same facility basis and is used in the discussions below for the years endedDecember 31, 2019 and 2018 (dollar amounts in thousands): Year Ended Year Ended December 31, 2019 December 31, 2018 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 6,053,228 100.0 %$ 5,621,338 100.0 % Operating charges: Salaries, wages and benefits 2,556,383 42.2 % 2,366,985 42.1 % Other operating expenses 1,364,735 22.5 % 1,242,521 22.1 % Supplies expense 1,048,639 17.3 % 968,067 17.2 % Depreciation and amortization 304,206 5.0 % 278,661 5.0 % Lease and rental expense 60,324 1.0 % 57,235 1.0 % Subtotal-operating expenses 5,334,287 88.1 % 4,913,469 87.4 % Income from operations 718,941 11.9 % 707,869 12.6 % Interest expense, net 1,330 0.0 % 1,658 0.0 % Other (income) expense, net (32 ) 0.0 % (2,498 ) 0.0 % Income before income taxes$ 717,643 11.9 %$ 708,709 12.6 % On a same facility basis during 2019, as compared to 2018, net revenues from our acute care services increased$432 million or 7.7%. Income before income taxes increased$9 million or 1% to$718 million or 11.9% of net revenues during 2019 as compared to$709 million or 12.6% of net revenues during 2018. 52
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Inpatient admissions to our acute care hospitals owned during both years increased 4.6% during 2019, as compared to 2018, while patient days increased 5.4%. Adjusted admissions (adjusted for outpatient activity) increased 4.8% and adjusted patient days increased 5.7% during 2019, as compared to 2018. The average length of inpatient stay at these facilities was 4.6 days during 2019 and 4.5 days during 2018. The occupancy rate, based on the average available beds at these facilities, was 64% during 2019 and 62% during 2018. On a same facility basis, net revenue per adjusted admission at these facilities increased 2.5% during 2019, as compared to 2018, and net revenue per adjusted patient day increased 1.7% during 2019, as compared to 2018.
All Acute Care Hospital Services
The following table summarizes the results of operations for all our acute care
operations during 2019 and 2018. 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 businesses. Dollar amounts below are reflected in thousands.
Year Ended Year Ended
December 31, 2019 December 31, 2018
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 6,164,560 100.0 % $ 5,719,905 100.0 %
Operating charges:
Salaries, wages and benefits 2,559,682 41.5 % 2,367,014 41.4 %
Other operating expenses 1,474,674 23.9 % 1,341,088 23.4 %
Supplies expense 1,049,747 17.0 % 968,067 16.9 %
Depreciation and amortization 305,264 5.0 % 278,661 4.9 %
Lease and rental expense 60,485 1.0 % 57,235 1.0 %
Subtotal-operating expenses 5,449,852 88.4 % 5,012,065 87.6 %
Income from operations 714,708 11.6 % 707,840 12.4 %
Interest expense, net 1,330 0.0 % 1,658 0.0 %
Other (income) expense, net (32 ) 0.0 % (2,498 ) 0.0 %
Income before income taxes $ 713,410 11.6 % $ 708,680 12.4 %
During 2019, as compared to 2018, net revenues generated from our acute care
hospital services increased $445 million or 7.8% to $6.16 billion due primarily
to: (i) a $432 million , or 7.7%, increase same facility revenues, as discussed
above, and; (ii) other combined net increase of $13 million due primarily to
increased provider tax assessments incurred during 2019 as compared to 2018.
Income before income taxes increased $5 million to $713 million or 11.6% of net
revenues during 2019 as compared to $709 million or 12.4% of net revenues during
2018. The increase resulted from the $9 million increase in income before income
taxes from our acute care hospital services, on a same facility basis, as
discussed above, partially offset by $4 million of other combined net
unfavorable changes.
Behavioral Health Care Services
Year Ended
Behavioral Health Care Services-Same Facility Basis
Our Same Facility basis results (which is a non-GAAP measure), which include the
operating results for facilities and businesses operated in both the current
year and prior year period, neutralize (if applicable) the effect of items that
are non-operational in nature including items such as, but not limited to,
gains/losses on sales of assets and businesses, impact of the reserve
established in connection with the civil aspects of the government's
investigation of certain of our behavioral health care facilities, impacts of
settlements, legal judgments and lawsuits, impairments of long-lived and
intangible assets and other amounts that may be reflected in the current or
prior year financial statements that relate to prior periods. Our Same Facility
basis results reflected on the 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 Annual Report on Form 10-K.
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The following table summarizes the results of operations for our behavioral health care services, on a same facility basis, and is used in the discussions below for the years endedDecember 31, 2020 and 2019 (dollar amounts in thousands): Year Ended Year Ended December 31, 2020 December 31, 2019 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 5,124,358 100.0 %$ 5,092,071 100.0 % Operating charges: Salaries, wages and benefits 2,722,041 53.1 % 2,711,813 53.3 % Other operating expenses 931,850 18.2 % 952,714 18.7 % Supplies expense 204,658 4.0 % 199,726 3.9 % Depreciation and amortization 176,652 3.4 % 167,340 3.3 % Lease and rental expense 42,532 0.8 % 42,956 0.8 % Subtotal-operating expenses 4,077,733 79.6 % 4,074,549 80.0 % Income from operations 1,046,625 20.4 % 1,017,522 20.0 % Interest expense, net 1,447 0.0 % 1,460 0.0 % Other (income) expense, net 1,060 0.0 % 404 0.0 % Income before income taxes$ 1,044,118 20.4 %$ 1,015,658 19.9 % On a same facility basis during 2020, net revenues generated from our behavioral health services increased$32 million , or 0.6%, to$5.12 billion , from$5.09 billion generated during 2019. Income before income taxes increased$28 million , or 3%, to$1.04 billion or 20.4% of net revenues during 2020, as compared to$1.02 billion or 19.9% of net revenues during 2019. As mentioned above, included in our behavioral health services' revenues during 2020 was approximately$97 million of revenues recorded in connection with funds received from various governmental stimulus programs, most notably the CARES Act. Excluding these governmental stimulus program revenues from 2020, net revenues from our behavioral health services, on a same facility basis, decreased$65 million or 1.3% during 2020, as compared to 2019, and income before income taxes decreased$69 million or 7% during 2020, as compared to 2019. During 2020, excluding the impact of the$97 million of governmental stimulus program revenues, net revenue per adjusted admission increased 7.3% and net revenue per adjusted patient day increased 4.3%, as compared to 2019. On a same facility basis, inpatient admissions and adjusted admissions to our behavioral health facilities decreased 7.5% and 8.0%, respectively, during 2020 as compared to 2019. Patient days and adjusted patient days at these facilities decreased 4.8% and 5.3% during 2020, respectively, as compared to 2019. The average length of inpatient stay at these facilities was 13.7 days and 13.3 days during 2020 and 2019, respectively. The occupancy rate, based on the average available beds at these facilities, was 71% and 76% during 2020 and 2019, respectively.
All Behavioral Health Care Services
The following table summarizes the results of operations for all our behavioral health care services during 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; (iii) provision for asset impairments recorded during 2019 in connection withFoundations Recovery Network, L.L.C. , and; (iv) certain other amounts including the results of facilities acquired or opened during the past year as well as the results of certain facilities that were closed or restructured during the past year. Dollar amounts below are reflected in thousands. 54
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Year Ended Year Ended
December 31, 2020 December 31, 2019
% of Net % of Net
Amount Revenues Amount Revenues
Net revenues $ 5,208,722 100.0 % $ 5,210,063 100.0 %
Operating charges:
Salaries, wages and benefits 2,727,129 52.4 % 2,739,871 52.6 %
Other operating expenses 1,023,733 19.7 % 1,152,733 22.1 %
Supplies expense 204,711 3.9 % 201,114 3.9 %
Depreciation and amortization 182,012 3.5 % 172,697 3.3 %
Lease and rental expense 45,505 0.9 % 46,799 0.9 %
Subtotal-operating expenses 4,183,090 80.3 % 4,313,214 82.8 %
Income from operations 1,025,632 19.7 % 896,849 17.2 %
Interest expense, net 1,599 0.0 % 1,460 0.0 %
Other (income) expense, net 776 0.0 % (5,576 ) -0.1 %
Income before income taxes $ 1,023,257 19.6 % $ 900,965 17.3 %
During 2020, as compared to 2019, net revenues generated from our behavioral
health services decreased $1 million due to: (i) the above-mentioned $32 million
or 0.6% increase in net revenues on a same facility basis, and; (ii) $33 million
other combined net decreases.
Income before income taxes increased $122 million , or 14%, to $1.02 billion or
19.6% of net revenues during 2020, as compared to $901 million or 17.3% of net
revenues during 2019. The increase in income before income taxes at our
behavioral health facilities was due primarily to: (i) the above-mentioned $28
million increase on a same facility basis, and; (ii) the $98 million provision
for asset impairment recorded during 2019 in connection with Foundations
Recovery Network, L.L.C. (see Other Operating Results-Provision for Asset
Impairment-Foundations Recovery Network below for additional disclosure).
Excluding the above-mentioned $97 million of revenues recorded during 2020 in
connection with various governmental stimulus programs, net revenues from our
behavioral health services decreased $98 million or 1.9% during 2020, as
compared to 2019, and income before income taxes increased $25 million or 3%
during 2020, as compared to 2019.
Year Ended
Behavioral Health Care Services-Same Facility Basis
The following table summarizes the results of operations for our behavioral health care services, on a same facility basis, and is used in the discussions below for the years endedDecember 31, 2019 and 2018 (dollar amounts in thousands): Year Ended Year Ended December 31, 2019 December 31, 2018 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 5,058,199 100.0 %$ 4,907,002 100.0 % Operating charges: Salaries, wages and benefits 2,687,677 53.1 % 2,577,411 52.5 % Other operating expenses 947,073 18.7 % 939,220 19.1 % Supplies expense 199,578 3.9 % 197,243 4.0 % Depreciation and amortization 163,963 3.2 % 155,652 3.2 % Lease and rental expense 44,123 0.9 % 45,673 0.9 % Subtotal-operating expenses 4,042,414 79.9 % 3,915,199 79.8 % Income from operations 1,015,785 20.1 % 991,803 20.2 % Interest expense, net 1,460 0.0 % 1,597 0.0 % Other (income) expense, net (380 ) 0.0 % 2,530 0.1 % Income before income taxes$ 1,014,705 20.1 %$ 987,676 20.1 %
On a same facility basis during 2019, as compared to 2018, net revenues
generated from our behavioral health care services increased
55
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increased
Inpatient admissions to our behavioral health care facilities owned during both years increased 1.1% during 2019, as compared to 2018, while patient days increased 0.5%. Adjusted admissions increased 1.2% and adjusted patient days increased 0.6% during 2019, as compared to 2018. The average length of inpatient stay at these facilities were 13.1 days and 13.2 days during 2019 and 2018, respectively. The occupancy rate, based on the average available beds at these facilities, were 76% during each of 2019 and 2018. On a same facility basis, net revenue per adjusted admission at these facilities increased 2.2% during 2019, as compared to 2018, and net revenue per adjusted patient day increased 2.7% during 2019, as compared to 2018.
During 2019, as compared to longer term historical trends, admission growth slowed, in part, due to labor shortages in selected geographies which reduced our ability to fully meet the demand of patients eligible for admission.
All Behavioral Health Care Services
The following table summarizes the results of operations for all our behavioral health care services during 2019 and 2018. These amounts include: (i) our behavioral health care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes; (iii) provision for asset impairments recorded during 2019 and 2018 in connection withFoundations Recovery Network, L.L.C. , and; (iv) certain other amounts including the results of facilities acquired or opened during the past year as well as the results of certain facilities that were closed or restructured during the past year. Dollar amounts below are reflected in thousands. Year Ended Year Ended December 31, 2019 December 31, 2018 % of Net % of Net Amount Revenues Amount Revenues Net revenues$ 5,210,063 100.0 %$ 5,038,874 100.0 % Operating charges: Salaries, wages and benefits 2,739,871 52.6 % 2,617,337 51.9 % Other operating expenses 1,152,733 22.1 % 1,091,102 21.7 % Supplies expense 201,114 3.9 % 200,008 4.0 % Depreciation and amortization 172,697 3.3 % 163,155 3.2 % Lease and rental expense 46,799 0.9 % 48,316 1.0 % Subtotal-operating expenses 4,313,214 82.8 % 4,119,918 81.8 % Income from operations 896,849 17.2 % 918,956 18.2 % Interest expense, net 1,460 0.0 % 1,597 0.0 % Other (income) expense, net (5,576 ) -0.1 % 1,842 0.0 % Income before income taxes$ 900,965 17.3 %$ 915,517 18.2 % During 2019, as compared to 2018, net revenues generated from our behavioral health care services increased$171 million , or 3.4%, to$5.21 billion during 2019 as compared to$5.04 billion during 2018. The increase in net revenues was attributable to: (i)$151 million or 3.1% increase in same facility revenues, as discussed above, and; (ii) a$20 million other combined net increase consisting primarily of the revenues generated at the 25 behavioral health facilities acquired in theU.K. acquired during the third quarter of 2018 in connection with our acquisition ofThe Danshell Group . Income before income taxes decreased$15 million or 2% to$901 million or 17.3% of net revenues during 2019 as compared to$916 billion or 18.2% of net revenues during 2018. The decrease in income before income taxes at our behavioral health facilities was attributable to:
• a
facility basis, as discussed above;
• a net decrease of
during 2019 (
(see Other Operating Results-Provision for Asset Impairment-Foundations
Recovery Network below for additional disclosure), and;
• other combined net increase of
asset disposal recording during 2019.
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.
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Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary depending on the type of services provided (e.g., medical/surgical, intensive care or behavioral health) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. The percentage of patient service revenue attributable to outpatient services has generally increased in recent years, primarily as a result of advances in medical technology that allow more services to be provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to our increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of growth and resulting impact on our future revenues. Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payers which unfavorably impacts the collectability of our patient accounts. As described below in the section titled 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation, the federal government has enacted multiple pieces of legislation to assist healthcare providers during the COVID-19 world-wide pandemic andU.S. National Emergency declaration. We have outlined those legislative changes related to Medicare and Medicaid payment and their estimated impact on our financial results, where estimates are possible. Sources of Revenues and Health Care Reform: Given increasing budget deficits, the federal government and many states are currently considering additional ways to limit increases in levels of Medicare and Medicaid funding, which could also adversely affect future payments received by our hospitals. In addition, the uncertainty and fiscal pressures placed upon the federal government as a result of, among other things, impacts on state revenue and expenses resulting from the COVID-19 pandemic, economic recovery stimulus packages, responses to natural disasters, and the federal and state budget deficits in general may affect the availability of government funds to provide additional relief in the future. We are unable to predict the effect of future policy changes on our operations. OnMarch 23, 2010 ,President Obama signed into law the Patient Protection and Affordable Care Act (the "Legislation"). Two primary goals of the Legislation are to provide for increased access to coverage for healthcare and to reduce healthcare-related expenses. The Legislation revises reimbursement under the Medicare and Medicaid programs to emphasize the efficient delivery of high quality care and contains a number of incentives and penalties under these programs to achieve these goals. The Legislation provides for decreases in the annual market basket update for federal fiscal years 2010 through 2019, a productivity offset to the market basket update beginningOctober 1, 2011 for Medicare Part B reimbursable items and services and beginningOctober 1, 2012 for Medicare inpatient hospital services. The Legislation and subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions began in October, 2013 while the Medicaid DSH reductions are scheduled to begin in 2024. The Legislation implemented a value-based purchasing program, which will reward the delivery of efficient care. Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such hospitals will include those with excessive readmission or hospital-acquired condition rates. A 2012U.S. Supreme Court ruling limited the federal government's ability to expand health insurance coverage by holding unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the Medicaid expansion by reducing their existing Medicaid funding. Therefore, states can choose to expand or not to expand their Medicaid program without risking the loss of federal Medicaid funding. As a result, many states, includingTexas , have not expanded their Medicaid programs without the threat of loss of federal funding. CMS has 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 57
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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 was heard onNovember 10, 2020 , and a ruling is expected in 2021. OnFebruary 10, 2021 , theDepartment of Justice announced that it has withdrawn support for the challenge before theSupreme Court . 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 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 individuals who go uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums. In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions.President Biden is expected to undertake executive actions that will strengthen the Legislation and may reverse the policies of the prior administration.The Trump Administration had directed the issuance of final rules (i) enabling the formation of health plans that would be exempt from certain Legislation essential health benefits requirements; (ii) expanding the availability of short-term, limited duration health insurance; (iii) eliminating cost-sharing reduction payments to insurers that would otherwise offset deductibles and other out-of- 58
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pocket expenses for health plan enrollees at or below 250 percent of the federal poverty level; (iv) relaxing requirements for state innovation waivers that could reduce enrollment in the individual and small group markets and lead to additional enrollment in short-term, limited duration insurance and association health plans; (vi) incentivizing the use of health reimbursement arrangements by employers to permit employees to purchase health insurance in the individual market, and; (vii) increasing 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 spolicies may create additional cost and reimbursement pressures on hospitals. It remains unclear what portions of the Legislation may remain, or whether any replacement or alternative programs may be created by any future legislation. Any such future repeal or replacement may have significant impact on the reimbursement for healthcare services generally, and may create reimbursement for services competing with the services offered by our hospitals. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will not have a negative financial impact on our hospitals, including their ability to compete with alternative healthcare services funded by such potential legislation, or for our hospitals to receive payment for services. For additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein, please see Note 12 to the Consolidated Financial Statements-Revenue. Medicare: Medicare is a federal program that provides certain hospital and medical insurance benefits to persons aged 65 and over, some disabled persons and persons with end-stage renal disease. All of our acute care hospitals and many of our behavioral health centers are certified as providers of Medicare services by the appropriate governmental authorities. Amounts received under the Medicare program are generally significantly less than a hospital's customary charges for services provided. Since a substantial portion of our revenues will come from patients under the Medicare program, our ability to operate our business successfully in the future will depend in large measure on our ability to adapt to changes in this program. Under the Medicare program, for inpatient services, our general acute care hospitals receive reimbursement under the inpatient prospective payment system ("IPPS"). Under the IPPS, hospitals are paid a predetermined fixed payment amount for each hospital discharge. The fixed payment amount is based upon each patient's Medicare severity diagnosis related group ("MS-DRG"). Every MS-DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. The MS-DRG payment rates are based upon historical national average costs and do not consider the actual costs incurred by a hospital in providing care. This MS-DRG assignment also affects the predetermined capital rate paid with each MS-DRG. The MS-DRG and capital payment rates are adjusted annually by the predetermined geographic adjustment factor for the geographic region in which a particular hospital is located and are weighted based upon a statistically normal distribution of severity. While we generally will not receive payment from Medicare for inpatient services, other than the MS-DRG payment, a hospital may qualify for an "outlier" payment if a particular patient's treatment costs are extraordinarily high and exceed a specified threshold. MS-DRG rates are adjusted by an update factor each federal fiscal year, which begins onOctober 1 . The index used to adjust the MS-DRG rates, known as the "hospital market basket index," gives consideration to the inflation experienced by hospitals 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.
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In August, 2019, CMS published its IPPS 2020 final payment rule which provides for a 3.0% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments, and adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments is approximately 2.8%. Including DSH payments and certain other adjustments, we estimate our overall increase from the final IPPS 2020 rule (covering the period ofOctober 1, 2019 throughSeptember 30, 2020 ) will approximate 2.1%. This projected impact from the IPPS 2020 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result ATRA, as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. CMS completed its full phase-in to use uncompensated care data from the 2015 Worksheet S-10 hospital cost reports to allocate approximately$8.5 billion in theDSH Uncompensated Care Pool . In June, 2019, theSupreme Court of the United States issued a decision favorable to hospitals impacting prior year Medicare DSH payments (Azar v.Allina Health Services , No. 17-1484 (U.S. Jun. 3, 2019 )). In Allina, the hospitals challenged the Medicare DSH adjustments for federal fiscal year 2012, specifically challenging CMS's decision to include inpatient hospital days attributable to Medicare Part C enrollee patients in the numerator and denominator of the Medicare/SSI fraction used to calculate a hospital's DSH payments. This ruling addresses CMS's attempts to impose the policy espoused in its vacated 2004 rulemaking to a fiscal year in the 2004-2013 time period without using notice-and-comment rulemaking. This decision should require CMS to recalculate hospitals' DSH Medicare/SSI fractions, with Medicare Part C days excluded, for at least federal fiscal year 2012, but likely federal fiscal years 2005 through 2013. In August, 2020, CMS issued a rule that proposes to retroactively negate the effects of the aforementionedSupreme Court decision. 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 ofOctober 1, 2018 throughSeptember 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 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. The Consolidated Appropriations Act, 2021 extended the suspension of payment reductions untilMarch 31, 2021 . 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. 60
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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. No further legal challenges are available to the plaintiffs and, as a result, we recognized$8 million of revenues during 2020 that were previously reserved in a prior year. In December, 2020, CMS published its OPPS final rule for 2021. The hospital market basket increase is 2.4% and there is no productivity adjustment reduction to the 2021 OPPS market basket. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2021 will aggregate to a net increase of 3.3% which includes a 9.2% increase to behavioral health division partial hospitalization rates. In November, 2019, CMS published its OPPS final rule for 2020. The hospital market basket increase is 3.0%. The Medicare statute requires a productivity adjustment reduction of 0.4% to the 2020 OPPS market basket resulting in a 2020 update to OPPS payment rates by 2.6%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2020 will aggregate to a net increase of 2.7% which includes a 7.7% increase to behavioral health division partial hospitalization rates. When the behavioral health division's partial hospitalization rate impact is excluded, we estimate that our Medicare 2020 OPPS payments will result in a 1.9% increase in payment levels for our acute care division, as compared to 2019. For CY 2020, CMS will use the FY 2020 hospital IPPS post-reclassified wage index for urban and rural areas as the wage index for the OPPS to determine the wage adjustments for both the OPPS payment rate and the copayment standardized amount. 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 . OnDecember 29, 2020 , the Appeals Court ruled against the Plaintiffs challenge. As a result, the price transparency rule became effectiveJanuary 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
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Pennsylvania ,Illinois ,Florida 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. OnJanuary 14, 2021 , CMS issued a formal notice of withdrawal of this proposed rule. In January, 2020, CMS announced a new opportunity to support states with greater flexibility to improve the health of their Medicaid populations. The new 1115 Waiver Block Grant Type Demonstration program, titled Healthy Adult Opportunity ("HAO"), emphasizes the concept of value-based care while granting states extensive flexibility to administer and design their programs within a defined budget. CMS believes this state opportunity will enhance the Medicaid program's integrity through its focus on accountability for results and quality improvement, making the Medicaid program stronger for states and beneficiaries.
The HAO program will include:
• Beneficiary Protections. • Flexibility in theAdministration of Benefits . • Transparency. • Financing and Program Integrity
o States participating in HAO demonstrations will need to agree to
operate their program within a defined budget target, set on either a
total expenses or per-enrollee basis, in a manner similar to that used
in other section 1115 demonstrations.
o To the extent states achieve savings and demonstrate no declines in
access or quality, CMS will share back a portion of the federal
savings for reinvestment into Medicaid.
• Limited Medicaid Population
o The population includes adults under age 65 who are not eligible for
Medicaid on the basis of disability or on their need for long term
care services and supports, and who are not eligible under a state
plan.
• Benefit Design and Drug Coverage
o States have the opportunity to design a benefit package that aligns
with private coverage.
o Provide states with greater negotiating power to lower drug spending
and promote value in the program.
• Managed Care and Delivery Systems
o States will be able to use any combination of fee-for-service and
managed care delivery systems and will have flexibility to alter these
arrangements over the course of the demonstration
• Streamlined Application Process Transitioning 1115 Demonstrations
• Quality Strategy and Performance Assessment
o States will be held to a high standard of accountability for producing
positive health outcomes and will be subject to regular and thorough
monitoring and evaluation.
We are unable to predict whether any states will opt to apply for participation in the HAO demonstration or the impact on our future results of operations.
Various State Medicaid Supplemental Payment Programs:
We incur health-care related taxes ("Provider Taxes") imposed by states in the
form of a licensing fee, assessment or other mandatory payment which are related
to: (i) healthcare items or services; (ii) the provision of, or the authority to
provide, the health care items or services, or; (iii) the payment for the health
care items or services. Such Provider Taxes are subject to various federal
regulations that limit the scope and amount of the taxes that can be levied by
states in order to secure federal matching funds as part of
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their respective state Medicaid programs. As outlined below, we derive a related Medicaid reimbursement benefit from assessed Provider Taxes in the form of Medicaid claims based payment increases and/or lump sum Medicaid supplemental payments.
Included in these Provider Tax programs are reimbursements received in connection with the Texas Uncompensated Care/Upper Payment Limit program ("UC/UPL") and Texas Delivery System Reform Incentive Payments program ("DSRIP"). Additional disclosure related to the Texas UC/UPL and DSRIP programs is provided below.
Texas Uncompensated Care/Upper Payment Limit Payments:
Certain of our acute care hospitals located in various counties ofTexas (Grayson ,Hidalgo ,Maverick ,Potter andWebb ) participate in Medicaid supplemental payment Section 1115 Waiver indigent care programs. Section 1115 Waiver Uncompensated Care ("UC") payments replace the former Upper Payment Limit ("UPL") payments. These hospitals also have affiliation agreements with third-party hospitals to provide free hospital and physician care to qualifying indigent residents of these counties. Our hospitals receive both supplemental payments from the Medicaid program and indigent care payments from third-party, affiliated hospitals. The supplemental payments are contingent on the county or hospital district making an Inter-Governmental Transfer ("IGT") to the state Medicaid program while the indigent care payment is contingent on a transfer of funds from the applicable affiliated hospitals. However, the county or hospital district is prohibited from entering into an agreement to condition any IGT on the amount of any private hospital's indigent care obligation. OnDecember 21, 2017 , CMS approved the 1115 Waiver for the periodJanuary 1, 2018 toSeptember 30, 2022 . The Waiver continued to include UC and DSRIP payment pools with modifications and new state specific reporting deadlines that if not met by THHSC will result in material decreases in the size of the UC and DSRIP pools. For UC during the initial two years of this renewal, the UC program will remain relatively the same in size and allocation methodology. For year three of this waiver renewal, FFY 2020, and through FFY 2022, the size and distribution of the UC pool will be determined based on charity care costs reported to HHSC in accordance with Medicare cost report Worksheet S-10 principles. InSeptember 2019 , CMS approved the annual UC pool size in the amount of$3.9 billion for demonstration years ("DYs") 9, 10 and 11 (October 1, 2019 toSeptember 30, 2022 ). OnJanuary 15, 2021 , CMS approved the 1115 Waiver renewal throughSeptember 30, 2030 . The terms of the Waiver renewal require HHSC to resize the UC pool in (1) FFY 2022 (DY 11) using 2019 cost report year data and (2) in FFY 2027 (DY 16) using 2025 cost report data. Our impact of the UC pool resizing is not known. 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. OnJanuary 4, 2021 , HHSC published a proposed rule that will apply to program periods on or afterSeptember 1, 2021 , and UHRIP will be re-named the Comprehensive Hospital Increase Reimbursement Program ("CHIRP"). CHIRP will be comprised of a UHRIP component and an Average Commercial Incentive Award ("ACIA") component. HHSC has proposed a pool size of$5.0 billion subject to CMS approval. The Company is not able to estimate the financial impact of the program change. OnJanuary 11, 2021 , HHSC announced that CMS approved the pre-print modification that HHSC submitted for UHRIP periodMarch 1, 2021 throughAugust 31, 2021 . CMS approved rate changes that will now increase rates for private Institutions of Mental Disease ("IMD") for services provided to patients under age 21 or patients 65 years of age or older. We estimate that this payment policy change will increase our UHRIP reimbursement by$10 million in FY 2021 and this amount is included the aggregated FY 2021 Medicaid Supplemental Payment projection total below. 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. 63
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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$4 million decrease in DSRIP payments, respectively. For FFY 2022, we will no longer receive DSRIP funds due to the elimination of this funding source by CMS in the Waiver renewals. In March, 2020, HHSC submitted a DSRIP Transition Plan to CMS as required by the 1115 Waiver Special Terms and Conditions #37 that outlines a transition from the current DSRIP program to a Value-Based Purchasing ("VBP") type payment model. As noted above, HHSC proposed a rule to make changes to existing UHRIP program. These proposed amendments are HHSC's efforts to comply with federal regulations that require directed-payment programs to advance goals included in the state's Medicaid managed care quality strategy and to align with the ongoing efforts to transition from the Delivery System Reform Incentive Payment program. The effective date of a new VBP payment model (if proposed by HHSC and approved by CMS) is not yet known. Similarly, details of any VBP model are still under HHSC consideration and possible development. As a result, we are unable to estimate the financial impact of this payment change.
Summary of Amounts Related To The Above-Mentioned Various State Medicaid Supplemental Payment Programs:
The following table summarizes the revenues, Provider Taxes and net benefit related to each of the above-mentioned Medicaid supplemental programs for the years endedDecember 31, 2020 , 2019 and 2018. The Provider Taxes are recorded in other operating expenses on the Condensed Consolidated Statements of Income as included herein. (amounts in millions) 2020 2019 2018 Texas UC/UPL: Revenues$ 119 $ 123 $ 135 Provider Taxes (37 ) (47 ) (51 ) Net benefit$ 82 $ 76 $ 84 Texas DSRIP: Revenues$ 33 $ 35 $ 29 Provider Taxes (10 ) (12 ) (9 ) Net benefit$ 23 $ 23 $ 20 Various other state programs: Revenues$ 336 $ 261 $ 223 Provider Taxes (138 ) (135 ) (119 ) Net benefit$ 198 $ 126 $ 104 Total all Provider Tax programs: Revenues$ 488 $ 419 $ 387 Provider Taxes (185 ) (194 ) (179 ) Net benefit$ 303 $ 225 $ 208 We estimate that our aggregate net benefit from theTexas and various other state Medicaid supplemental payment programs will approximate$262 million (net of Provider Taxes of$216 million ) during the year endingDecember 31, 2021 . 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 2020 levels. Future changes to these terms and conditions could materially reduce our net benefit derived from the programs which could have a material adverse impact on our future consolidated results of operations. In addition, Provider Taxes are governed by both federal and state laws and are subject to 64
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future legislative changes that, if reduced from current rates in several
states, could have a material adverse impact on our future consolidated results
of operations. As described below in 2019 Novel Coronavirus Disease Medicare and
Medicaid Payment Related Legislation, a 6.2% increase to the Medicaid Federal
Matching Assistance Percentage ("FMAP") is included in the Families First
Coronavirus Response Act. The impact of the enhanced FMAP Medicaid supplemental
and DSH payments are reflected in our results for year ended December 31, 2020 .
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$48 million during 2020,$50 million during 2019 and$38 million during 2018. We expect the aggregate reimbursements to our hospitals pursuant to theTexas andSouth Carolina 2021 fiscal year programs to be approximately$45 million . The Legislation and subsequent federal legislation provides for a significant reduction in Medicaid disproportionate share payments beginning in federal fiscal year 2024 (see above in Sources of Revenues and Health Care Reform-Medicaid Revisions for additional disclosure related to the delay of these DSH reductions). HHS is to determine the amount of Medicaid DSH payment cuts imposed on each state based on a defined methodology. As Medicaid DSH payments to states will be cut, consequently, payments to Medicaid-participating providers, including our hospitals inTexas andSouth Carolina , will be reduced in the coming years. Based on the CMS final rule published in September, 2019, beginning in fiscal year 2024 (as amended by the CARES Act and the CAA), annual Medicaid DSH payments inSouth Carolina andTexas could be reduced by approximately 74% and 44%, respectively, from 2020 DSH payment levels. Our behavioral health care facilities inTexas have been receiving Medicaid DSH payments since FFY 2016. As with all Medicaid DSH payments, hospitals are subject to state audits that typically occur up to three years after their receipt. DSH payments are subject to a federal Hospital Specific Limit ("HSL") and are not fully known until the DSH audit results are concluded. In general, freestanding psychiatric hospitals tend to provide significantly less charity care than acute care hospitals and therefore are at more risk for retroactive recoupment of prior year DSH payments in excess of their respective HSL. In light of the retroactive HSL audit risk for freestanding psychiatric hospitals, we have established DSH reserves for our facilities that have been receiving funds since FFY 2016. These DSH reserves are also impacted by the resolution of federal DSH litigation related toChildren's Hospital Association of Texas v. Azar ("CHAT"), No. 17-cv-844 (D.D.C.March 2, 2018 ), appeal docketed, No. 18-5135 (D.C. Cir.May 9, 2018 ) where the calculation of HSL was being challenged. In August, 2019,DC Circuit Court of Appeals issued a unanimous decision in CHAT and reversed the judgment of the district court in favor of CMS and ordered that CMS's "2017 Rule" (regarding Medicaid DSH Payments-Treatment of Third Party Payers in Calculating Uncompensated Care Costs) be reinstated. CMS has not issued any additional guidance post the ruling. InApril 2020 , the plaintiffs in the case have petitioned theSupreme Court of the United States to hear their case. Additionally, there have been separate legal challenges on this same issue in the Fifth and Eight Circuits. OnNovember 4, 2019 , theUnited States Court of Appeals for the Eighth Circuit issued an opinion upholding the 2017 Rule. Missouri Hosp. Ass'n v. Azar, No. 18-1778 (8th Cir.Nov. 4, 2019 ) (i.e. reversing a district court order enjoining the 2017 rule). OnApril 20, 2020 , theUnited States Court of Appeals of the Fifth Circuit issued a decision also upholding the 2017 Rule.Baptist Memorial Hospital v. Azar, No. 18-60592 (5th Cir.April 20, 2020 ). In light of these court decisions, we continue to maintain reserves in the financial statements for cumulative Medicaid DSH and UC reimbursements related to our behavioral health hospitals located inTexas that amounted to$35 million and$34 million as ofDecember 31, 2020 and 2019, respectively. Nevada SPA: InNevada , CMS approved a state plan amendment ("SPA") in August, 2014 that implemented a hospital supplemental payment program retroactive toJanuary 1, 2014 . This SPA has been approved for additional state fiscal years including the 2021 fiscal year covering the period ofJuly 1, 2020 throughJune 30, 2021 . In connection with this program, included in our financial results was approximately$25 million during 2020,$28 million during 2019 and$26 million during 2018. We estimate that our reimbursements pursuant to this program will approximate$20 million during the year endedDecember 31, 2021 . 65
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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.
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 throughDecember 31, 2018 In connection with the existing program, included in our financial results was approximately$63 million during 2020,$29 million during 2019 and$25 million during 2018. Our financial results for the year endedDecember 31, 2020 include a$28 million favorable adjustment, as discussed below, of which$11 million relates to 2020 and$17 million relates to prior years. We estimate that our reimbursements pursuant to this program will approximate$43 million during the year endedDecember 31, 2021 . 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.
Kentucky Hospital Rate Increase Program ("HRIP"):
In January, 2021, CMS approved the Medicaid Managed Care Hospital Rate Increase
Program ("HRIP") for state fiscal year 2021 (covering the period of July 1, 2020
to June 30, 2021 ). The CMS approval could increase the program statewide net
benefit to eligible Kentucky hospitals to approximately $1.1 billion from the
original HRIP CMS-approved pool size of $86 million . The increased HRIP payments
are contingent on various actions occurring including the enactment of
legislative authority to permit the payment of the increased HRIP pool size as
well as certification of the new HRIP rates by the state actuaries and related
CMS approval of the rates. Although we are unable to estimate the amount of the
program change, given the material increase in the overall pool size, the
program change could have a favorable impact on our operating results and would
be retroactive to July 1, 2020 .
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, 66
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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. 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 coverage who do not qualify for Medicaid or indigent care write-offs are offered substantial discounts in an effort to settle their outstanding account balances. Health Care Reform: Listed below are the Medicare, Medicaid and other health care industry changes which have been, or are scheduled to be, implemented as a result of the Legislation.
Implemented Medicare Reductions and Reforms:
• The Legislation reduced the market basket update for inpatient and outpatient
hospitals and inpatient behavioral health facilities by 0.25% in each of 2010
and 2011, by 0.10% in each of 2012 and 2013, 0.30% in 2014, 0.20% in each of
2015 and 2016 and 0.75% in each of 2017, 2018 and 2019.
• The Legislation implemented certain reforms to Medicare Advantage payments,
effective in 2011.
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• A Medicare shared savings program, effective in 2012. • A hospital readmissions reduction program, effective in 2012. • A value-based purchasing program for hospitals, effective in 2012. • A national pilot program on payment bundling, effective in 2013.
• Reduction to Medicare DSH payments, effective in 2014, as discussed above.
Medicaid Revisions:
• Expanded Medicaid eligibility and related special federal payments,
effective in 2014.
• The Legislation (as amended by subsequent federal legislation) requires annual
aggregate reductions in federal DSH funding from federal fiscal year ("FFY")
2024 through FFY 2027. The aggregate annual reduction amounts are
for FFY 2024 through FFY 2027. In December, 2019, federal legislation was
enacted which delays the reduction in the Medicaid DSH allotment through May
22, 2020 and then subsequent federal legislation in March, 2020 delayed the
reduction through
delayed these Medicaid DSH reductions through
Consolidated Appropriation Act, 2021 (H.R. 133) and other intervening
legislation further delayed the Medicaid DSH reductions through FFY 2023.
Health Insurance Revisions:
• Large employer insurance reforms, effective in 2015.
• Individual insurance mandate and related federal subsidies, effective in 2014.
As noted above in Health Care Reform, the Tax Cuts and Jobs Act enacted into
law in December, 2017 eliminated the individual insurance federal mandate
penalty beginning
• Federally mandated insurance coverage reforms, effective in 2010 and forward.
The Legislation seeks to increase competition among private health insurers by providing for transparent federal and state insurance exchanges. The Legislation also prohibits private insurers from adjusting insurance premiums based on health status, gender, or other specified factors. We cannot provide assurance that these provisions will not adversely affect the ability of private insurers to pay for services provided to insured patients, or that these changes will not have a negative material impact on our results of operations going forward.
Value-Based Purchasing:
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events. The Legislation required HHS to implement a value-based purchasing program for inpatient hospital services which became effective onOctober 1, 2012 . The Legislation requires HHS to reduce inpatient hospital payments for all discharges by 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:
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In the Legislation,Congress also mandated implementation of the hospital readmission reduction program ("HRRP"). Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard. The HRRP currently assesses penalties on hospitals having excess readmission rates for heart failure, myocardial infarction, pneumonia, acute exacerbation of chronic obstructive pulmonary disease (COPD) and elective total hip arthroplasty (THA) and/or total knee arthroplasty (TKA), excluding planned readmissions, when compared to expected rates. In the fiscal year 2015 IPPS final rule, CMS added readmissions for coronary artery bypass graft (CABG) surgical procedures beginning in fiscal year 2017. To account for excess readmissions, an applicable hospital's base operating DRG payment amount is adjusted for each discharge occurring during the fiscal year. Readmissions payment adjustment factors can be no more than a 3 percent reduction.
Accountable Care Organizations:
The Legislation requires HHS to establish a Medicare Shared Savings Program that
promotes accountability and coordination of care through the creation of
accountable care organizations ("ACOs"). The ACO program allows providers
(including hospitals), physicians and other designated professionals and
suppliers to voluntarily work together to invest in infrastructure and redesign
delivery processes to achieve high quality and efficient delivery of services.
The program is intended to produce savings as a result of improved quality and
operational efficiency. ACOs that achieve quality performance standards
established by HHS will be eligible to share in a portion of the amounts saved
by the Medicare program. CMS is also developing and implementing more advanced
ACO payment models, such as the Next Generation ACO Model, which require ACOs to
assume greater risk for attributed beneficiaries. On December 21, 2018 , CMS
published a final rule that, in general, requires ACO participants to take on
additional risk associated with participation in the program. On April 30, 2020 ,
CMS issued an interim final rule with comment in response to the COVID-19
national emergency permitting ACOs with current agreement periods expiring on
December 31, 2020 the option to extend their existing agreement period by one
year, and permitting certain ACOs to retain their participation level through
2021. It remains unclear to what extent providers will pursue federal ACO status
or whether the required investment would be warranted by increased payment.
Bundled Payments for Care Improvement Advanced:
The Center for Medicare & Medicaid Innovation ("CMMI") implemented a new, second generation voluntary episode payment model, Bundled Payments for Care Improvement Advanced ("BPCI-Advanced" or the "Program"), with the first performance period beginningOctober 1, 2018 . BPCI-Advanced is designed to test a new iteration of bundled payments with an aim to align incentives among participating health care providers to reduce expenditures and improve quality of care for traditional Medicare beneficiaries. During the fourth quarter of 2020, CMS restructured the FY2021 to FY2023 program and required participants to select from eight Clinical Episode Service Line Groups instead of individual clinical episodes. CMS also announced that the now voluntary program would become mandatory in 2024.
For our hospitals that participated in the program, the CMS BPCI-A
reconciliation for the period
The ultimate success and financial impact of the BPCI-Advanced program is contingent on multiple variables so we are unable to estimate the future impact. However, given the breadth and scope of participation of our acute care hospitals in BPCI-Advanced, the impact could be significant (either favorably or unfavorably) depending on actual program results.
2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation
In response to the growing threat of the 2019 Novel Coronavirus Disease
("COVID-19"), on March 13, 2020 President Trump declared a national emergency.
The 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)
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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.
• 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 January 21, 2021 for ninety (90) days. As a result,
states would be eligible for the enhanced FMAP through the third
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$22 million as ofDecember 31, 2020 in connection with this program). o Grants to eligible recipients will be made in multiple tranches by HHS. • As ofDecember 31, 2020 , we have received
approximately
various governmental stimulus programs, most notably the PHSSEF as provided by the
CARES Act. Our operating results for the year ended
recognition of $413 million in PHSSEF grant income pursuant to meeting the applicable
the terms and conditions of the various distribution
programs as of
The Consolidated Appropriations Act, 2021 (H.R. 133)
enacted on
includes language that provides specific instructions on: (1) the redistribution of
PHSSEF grant payments by a parent company among its subsidiaries, and; (2) the
calculation of lost revenue in a PHSSEF grant entitlement determination. The HHS terms
and conditions for all grant recipients and specific fund distributions are located at
https://www.hhs.gov/coronavirus/cares-act-provider-relief-fund/for-providers/index.html
Additional CARES Act grants amounting to$187 million were received in January, 2021. There was no impact on results of operations for the year endedDecember 31, 2020 in connection with receipt of these funds. • HHS expects providers will only useProvider 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. AllProvider Relief Fund payments must be expended by no later thanJune 30, 2021 . If providers have leftoverProvider 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. 70
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• 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 and
extended to March 31, 2021 by subsequent legislation (see H.R.
133 below).
• We estimate that this provision had a favorable impact of $30
million during 2020.
• 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 December 31, 2020 , we estimate that additional payments
under this provision were approximately $16 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 December 31, 2020 , we have received approximately $695
million under MAAPP. 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 COVID-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.
• Consolidated Appropriations Act, 2021 (H.R. 133) (12/27/2020)
The legislation includes the following highlighted provisions:
• $22.4 billion for testing, contract tracing, and other
activities necessary to effectively monitor and suppress
COVID-19.
• $3 billion in additional grants for hospital and health care
providers to be reimbursed for health care related expenses or
lost revenue directly attributable to the public health
emergency resulting from coronavirus, along with direction to
allocate not less than 85% of unobligated funding in the
Provider Relief Fund through an application-based portal to
reimburse health care providers based on "financial losses and
changes in operating expenses" occurring in the third and fourth
quarters of calendar year 2020, or the first quarter of calendar
year 2021.
• Provides for a one-time, one-year increase in the Medicare
physician fee schedule of 3.75%.
• Further suspends the 2% sequestration cuts for an additional
three months (through March 31, 2021 ).
• Eliminates Medicaid Disproportionate Share Hospital ("DSH")
payment reduction for FYs 2021, 2022 and 2023, adding DSH
reductions for FYs 2026 and 2027.
• Redefines the hospital-specific Medicaid DSH limit to generally
exclude dual eligible patients from the hospital-specific DSH
limit calculation beginning with FY 2022.
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 as of
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our hospitals located inWashington, D.C. ,Massachusetts andCalifornia . 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.
Other Operating Results Interest Expense Reflected below are the components of our interest expense which amounted to$106 million during 2020,$163 million during 2019 and$155 million during 2018 (amounts in thousands): 2020 2019 2018 Revolving credit & demand notes (a.)$ 2,248 $ 3,066 $ 12,240 $300 million , 3.75% Senior Notes due 2019 (b.) - -
10,156
32,280
20,000
$800 million , 2.65% Senior Notes due 2030 (e.) 5,849 - - Term loan facility A (a.) 38,467 73,005 63,021 Term loan facility B (a.) 11,892 20,274 3,511 Accounts receivable securitization program (f.) 3,752 12,471
11,785
Subtotal-revolving credit, demand notes, Senior Notes, term loan facility and accounts receivable securitization program 106,140 161,096
152,993
Interest rate swap (income)/expense, net - (3,400 ) (6,726 ) Amortization of financing fees 4,938 5,118
9,143
Other combined interest expense 2,268 3,754
3,343
Capitalized interest on major projects (4,257 ) (3,366 ) (2,266 ) Interest income (2,804 ) (469 ) (1,531 ) Interest expense, net$ 106,285 $ 162,733 $ 154,956 (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 Trance B term loan matures on October 31, 2025 .
The credit agreement, as amended in October, 2018, consists of: (i) an $1
billion revolving credit facility with no outstanding borrowings as of December
31, 2020 ; (ii) a term loan A facility with $1.9 billion of outstanding
borrowings as of December 31, 2020 , and; (iii) a term loan B facility with $490
million of outstanding borrowings as of December 31, 2020 .
(b.) On
3.75% Senior Notes due 2019. The 2019 Notes were redeemed for an
aggregate price equal to 100.485% of the principal amount (premium of
approximately $1 million ) plus accrued interest to the redemption date.
(c.) In September, 2020, we redeemed the entire $700 million aggregate
principal amount of our previously outstanding 4.75% Senior Secured Notes
that were scheduled to mature in 2022 ("2022 Notes") at a cash redemption
price equal to the sum of:
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(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.
(d.) In June, 2016, we completed the offering of $400 million aggregate
principal amount of 5.00% Senior Notes due in 2026.
(e.) 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.
(f.) 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
pursuant to this program.
Interest expense decreased$56 million during 2020 to$106 million as compared to$163 million during 2019. The decrease was due primarily to a net$55 million decrease in aggregate interest expense on our revolving credit, demand notes, senior notes, term loan A and B facilities and accounts receivable securitization program resulting from a decrease in our aggregate average cost of borrowings pursuant to these facilities (2.8% during 2020 and 4.0% during 2019), as well as a decrease in the aggregate average outstanding borrowings ($3.70 billion during 2020 and$3.99 billion during 2019). Interest expense increased$8 million during 2019 to$163 million as compared to$155 million during 2018. The increase was due primarily to an increase in our aggregate average cost of borrowings pursuant to our revolving credit, demand notes, senior notes, term loan A and B facilities and accounts receivable securitization program facilities. The average cost of borrowings on these facilities increased to 4.0% during 2019, as compared to 3.8% during 2018, on average outstanding borrowings of approximately$4.0 billion during each year. The average effective interest rate, including amortization of deferred financing costs, original issue discount and designated interest rate swap expense/income, on borrowings outstanding under our revolving credit, demand notes, senior notes, term loan A and B facilities and accounts receivable securitization program, which amounted to approximately$3.7 billion during 2020 and$4.0 billion during each of 2019 and 2018, were 3.0% during 2020, 4.0% during 2019 and 3.8% during 2018.
Costs Related to Early Extinguishment of Debt
In connection with financing transactions completed during 2020 and 2018, our results of operations for each year include pre-tax charges of$1 million in 2020 and$4 million in 2018, incurred for the costs related to the extinguishment of debt. These charges, which were included in other operating expenses, consisted of the following: (ii) during 2020, write-off of deferred charges ($3 million ), partially offset by the recording of the unamortized bond premium ($2 million ), related to the above-mentioned redemption, in September, 2020, of the$700 million aggregate principal amount of our previously outstanding 4.75% senior secured notes that were scheduled to mature in 2022, and; (ii) during 2018, write-off of deferred charges ($3 million ) as well as the make-whole premium paid ($1 million ) on the early redemption of the$300 million , 3.75% senior notes which were scheduled to mature in 2019.
Provision for Asset Impairment-Foundations Recovery Network:
Our financial results for the years endedDecember 31, 2019 and 2018 include pre-tax provisions for asset impairments of approximately$98 million and$49 million , respectively, recorded in connection withFoundations Recovery Network, L.L.C. ("Foundations"), which was acquired by us in 2015. The pre-tax provision for asset impairment recording during 2019 includes: (i) a$75 million impairment provision to write-off the carrying value of the Foundations' tradename intangible asset, and; (ii) a$23 million impairment provision to reduce the carrying value of real property assets of certain Foundations' facilities. The$49 million pre-tax provision for asset impairment recorded during 2018 reduced the carrying value of a tradename intangible asset to approximately$75 million from its original value of approximately$124 million . The provision for asset impairment recorded during 2019, which is included in other operating expenses in our consolidated statements of income, was recorded after evaluation of the estimated fair value of the Foundations' tradename as well as certain related real property assets. The provision for asset impairment was impacted by the following: (i) decisions made by management during 2019 to cancel the opening of future planned de novo facilities; (ii) reductions in projected future patient volumes, revenues and cash flows resulting from continued operating trends and financial results experienced by existing facilities that significantly lagged expectations, and; (iii) competitive pressures experienced in certain markets that were deemed to be permanent. The provision for asset impairment recorded during 2018, which is also included in other operating expenses, was recorded after an evaluation, at that time, of the estimated fair value of the Foundations' tradename for its existing facilities, consisting of 4 inpatient and 12 outpatient facilities as ofDecember 31, 2018 , as well as estimated planned de novos. The 2018 asset impairment charge was 73
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impacted by the following: (i) the lost future revenue and cash flows resulting from the permanent closure of a Foundations' inpatient facility located inMalibu, California that was severely damaged in theCalifornia wildfires during the fourth quarter of 2018; (ii) reduction in growth rates of projected future patient volumes, revenues and operating cash flows based upon pressures on reimbursement rates experienced from certain payers and competitive pressures experienced in certain markets, and; (iii) revisions made to the number and timing of planned de novo facilities.
Provision for Income Taxes and Effective Tax Rates
The effective tax rates, as calculated by dividing the provision for income
taxes by income before income taxes, were as follows for each of the years ended
2020 2019 2018
Provision for income taxes
23.9 % 22.4 % 22.9 %
The provision for income taxes increased $60 million and the effective tax rate
increased 1.5% during 2020, as compared to 2019, due primarily to: (i) the
income tax provision recorded in connection with the $186 million increase in
pre-tax income, as discussed above in Results of Operations; (ii) a $20 million
increase in the provision for income taxes recorded in connection with our
adoption of ASU 2016-09 which increased our provision for income taxes by
approximately $7 million during 2020, as compared to a decrease of approximately
$12 million during 2019; partially offset by; (iii) a $6 million decrease in the
provision for income taxes due the 2019 recording 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 $2 million and the effective tax rate
decreased 0.5% during 2019, as compared 2018, due primarily to: (i) an increase
resulting from the provision for income taxes recorded on the $32 million
increase in pre-tax income, as discussed above in Results of Operations; (ii) a
decrease of $11 million resulting from our adoption of ASU 2016-09 which
decreased our provision for income taxes by approximately $12 million during
2019, as compared to a decrease of approximately $1 million during 2018; (iii) a
$4 million decrease resulting from a favorable adjustment recorded during 2019
related to a change in state tax law, partially offset by; (iv) a $6 million
increase recorded during 2019 resulting from the above-mentioned net estimated
federal and state income taxes due on the portion of the DOJ Reserve that is
estimated to be non-deductible for income tax purposes.
Effects of Inflation and Seasonality
Seasonality -Our acute care services business is typically seasonal, with higher
patient volumes and net patient service revenue in the first and fourth quarters
of the year. This seasonality occurs because, generally, more people become ill
during the winter months, which results in significant increases in the number
of patients treated in our hospitals during those months.
Inflation -Inflation has not had a material impact on our results of operations
over the last three years. However, since the healthcare industry is very labor
intensive and salaries and benefits are subject to inflationary pressures, as
are supply and other costs, we cannot predict the impact that future economic
conditions may have on our ability to contain future expense increases. Our
ability to pass on increased costs associated with providing healthcare to
Medicare and Medicaid patients is limited due to various federal, state and
local laws which have been enacted that, in certain cases, limit our ability to
increase prices. We believe, however, that through adherence to cost containment
policies, labor management and reasonable price increases, the effects of
inflation on future operating margins should be manageable.
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Liquidity
Year ended
Net cash provided by operating activities
Net cash provided by operating activities was
• a favorable change of
million of Medicare accelerated payments received during 2020;
• a favorable change of
employer's share of Social Security taxes, as provided for by the CARES
Act;
• an unfavorable change of
to the coding and billing delays experienced during the fourth quarter of
2020 resulting from the information technology incident discussed herein;
• a favorable change of
plus/minus depreciation and amortization expense, stock-based
compensation, provision for asset impairment, net gains/losses on sales of
assets and businesses and costs related to extinguishment of debt;
• a favorable change of
commercial premiums paid;
• a favorable change of
•
Days sales outstanding ("DSO"): Our DSO are calculated by dividing our net
revenue by the number of days in the year. The result is divided into the
accounts receivable balance at the end of the year. Our DSO were 55 days at
Net cash used in investing activities
Net cash used in investing activities was
2020:
The
•
for equipment, renovations and new projects at various existing facilities;
•
of the real estate assets of an acute care hospital located in
Nevada ;
•
contracts that hedge our investment in the U.K. against movements in
exchange rates;
• $8 million of proceeds received from sales of assets and businesses;
• $3 million spent on the purchase and implementation of information
technology applications, and;
• $3 million spent to fund investments in various joint-ventures;
2019:
The
•
for equipment, renovations and new projects at various existing facilities;
•$21 million spent on the purchase and implementation of information technology applications;
•
contracts that hedge our investment in the U.K. against movements in
exchange rates;
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•$15 million spent to fund investments in various joint-ventures;
•
•$8 million spent to acquire businesses and property.
Net cash used in financing activities
Net cash used in financing activities was
2020:
The
• spent
to redeem our previously outstanding 4.75% senior secured notes which were
scheduled to mature in 2022; (ii)
receivable securitization program; (iii)
loan A facility; (iv)
credit facility; (v)
(vi)
• generated
(i)
the issuance in September, 2020, of the
notes which are scheduled to mature in 2030, and; (ii)
to other debt facilities.
• spent
connection with: (i) open market purchases pursuant to our
stock repurchase program, which was suspended in April, 2020 for the
remainder of 2020 as a result of the COVID-19 pandemic (
and; (ii) income tax withholding obligations related to stock-based
compensation programs ($10 million );
• spent
interests in majority owned businesses;
• received
majority owned businesses;
• spent $17 million to pay a cash dividend of $.20 per share during the
first quarter of 2020 (quarterly dividends were suspended during the
remainder of 2020 as a result of the COVID-19 pandemic);
• generated
Stock pursuant to the terms of employee stock purchase plans, and;
• spent
$800 million , 2.65% senior secured notes which were issued during the third quarter of 2020. 2019:
The
• spent
related to our term loan A facility; (ii)
loan B facility, and; (iii)
• generated
(i)
and; (iii)
• spent
connection with: (i) open market purchases pursuant to our
stock repurchase program (
obligations related to stock-based compensation programs (
• spent
each of September and December of 2019 and
and June of 2019;
• spent
interests in majority owned businesses;
• generated
Stock pursuant to the terms of employee stock purchase plans, and;
• received
majority owned businesses.
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Year ended
Net cash provided by operating activities
Net cash provided by operating activities was
• a favorable change of
income plus/minus depreciation and amortization expense, stock-based
compensation, provision for asset impairment, net gains on sales of assets
and costs related to extinguishment of debt;
• a favorable change of
•
Net cash used in investing activities
Net cash used in investing activities was
2018:
The
•
for equipment, renovations and new projects at various existing facilities;
•
of the acquisition of: (i)
health facilities located in the
2018), and; (ii) a 109-bed behavioral health care facility located in
Gulfport, Mississippi (acquired during the first quarter of 2018);
•
exchange contracts that hedge our investment in the
in exchange rates;
• $36 million spent on the purchase and implementation of information
technology applications;
•
facility, that is jointly owned by us and a third-party, that was completed
and opened during the third quarter of 2018, and;
•
including The Limes, an 18-bed facility located in the
Net cash used in financing activities
Net cash used in financing activities was
2018:
The
• spent
related to our term loan A facility; (ii)
revolving credit facility; (iii)
redemption of our 3.75% bonds that were scheduled to mature in 2019; (iv)
$29 million related to our short-term, on-demand credit facility, and; (vi)$2 million related to other debt facilities;
• generated
our term loan A facility (
million);
• spent
connection with: (i) open market purchases pursuant to our stock
repurchase program (
obligations related to stock-based compensation programs (
• spent$37 million to pay quarterly cash dividends of$.10 per share; • spent$14 million in financing costs;
• spent
interests in majority owned businesses, and;
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• generated
Stock pursuant to the terms of employee stock purchase plans.
2021 Expected Capital Expenditures:
During 2021, we expect to spend approximately$850 million to$1.0 billion on capital expenditures which includes expenditures for capital equipment, construction of new facilities, and renovations and expansions 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 and Cash Equivalents
As ofDecember 31, 2020 , we had approximately$1.22 billion of cash and cash equivalents consisting primarily of short-term cash accounts on which interest is being earned at various annual rates ranging from 0.20% to 0.25%.
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 to the Senior Credit Agreement, 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
As ofDecember 31, 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$1.900 billion of borrowings outstanding as ofDecember 31, 2020 , provided for eight installment payments of$12.5 million per quarter which commenced in March of 2019 and continued through December of 2020. 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$490 million of borrowings outstanding as ofDecember 31, 2020 , provides for installment payments of$1.25 million per quarter, which commenced onMarch 31, 2019 and are scheduled to continue until maturity in October of 2025, when all outstanding amounts will be due. Borrowings under the Senior Credit Agreement bear interest at our election at either (1) the ABR rate which is defined as the rate per annum equal to the greatest of (a) the lender's prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.375% to 0.625% for revolving credit and term loan A borrowings and 0.75% for tranche B borrowings, or (2) the one, two, three or six month LIBOR rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.375% to 1.625% for revolving credit and term loan A borrowings and 1.75% for the tranche B term loan. As ofDecember 31, 2020 , the applicable margins were 0.375% for ABR-based loans and 1.375% for LIBOR-based loans under the revolving credit and term loan A facilities. The revolving credit facility includes a$125 million sub-limit for letters of credit. The Senior Credit Agreement is secured by certain assets of the Company and our material subsidiaries (which generally excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, and certain real estate assets and assets held in joint-ventures with third parties) and is guaranteed by our material subsidiaries. The Senior Credit Agreement includes a material adverse change clause that must be represented at each draw. The Senior Credit Agreement contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with affiliates, dividends and stock repurchases; and requires compliance with financial covenants including maximum leverage. We are in compliance with all required covenants as ofDecember 31, 2020 andDecember 31, 2019 . 78
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In April, 2018, we entered into the sixth amendment to our accounts receivable
securitization program ("Securitization") dated as of October 27, 2010 with a
group of conduit lenders, liquidity banks, and PNC Bank, National Association ,
as administrative agent, which provides for borrowings outstanding from time to
time by certain of our subsidiaries in exchange for undivided security interests
in their respective accounts receivable. The sixth amendment, among other
things, extended the term of the Securitization program through April 26, 2021
and increased the borrowing capacity to $450 million (from $440 million
previously). In July, 2020, we entered into the seventh amendment to the
Securitization which temporarily waived the minimum borrowing requirement
through September 30, 2020 . Pursuant to the terms of our Securitization program,
substantially all of the patient-related accounts receivable of our acute care
hospitals ("Receivables") serve as collateral for the outstanding borrowings. We
have accounted for this Securitization as borrowings. We maintain effective
control over the Receivables since, pursuant to the terms of the Securitization,
the Receivables are sold from certain of our subsidiaries to special purpose
entities that are wholly-owned by us. The Receivables, however, are owned by the
special purpose entities, can be used only to satisfy the debts of the
wholly-owned special purpose entities, and thus are not available to us except
through our ownership interest in the special purpose entities. The wholly-owned
special purpose entities use the Receivables to collateralize the loans obtained
from the group of third-party conduit lenders and liquidity banks. The group of
third-party conduit lenders and liquidity banks do not have recourse to us
beyond the assets of the wholly-owned special purpose entities that securitize
the loans. At December 31, 2020 , we had $225 million of outstanding borrowings
pursuant to the terms of the Securitization (which are included in current
maturities of long-term debt at December 31, 2020 ) and $225 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. 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 Subsidiary 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 the Guarantees for registered senior secured notes issued by the Company and guaranteed by the then Subsidiary Guarantors under the Indenture (the "Exchange Securities "), containing terms identical to those of the 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. 79
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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. AtDecember 31, 2020 , the carrying value and fair value of our debt were each approximately$3.9 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 pay dividends and potentially repurchase shares of our common stock utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing revolving credit facility, which has$997 million of availably borrowing capacity as ofDecember 31, 2020 , 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 repayment or refinancing of our above-mentioned Securitization which is scheduled to mature in April, 2021. 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.
Contractual Obligations and Off-Balance Sheet Arrangements
As ofDecember 31, 2020 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled$158 million consisting of: (i)$149 million related to our self-insurance programs, and; (ii)$9 million of other debt and public utility guarantees. Obligations under operating leases for real property, real property master leases and equipment amount to$442 million as ofDecember 31, 2020 . The real property master leases are leases for buildings on or near hospital property for which we guarantee a certain level of rental income. We sublease space in these buildings and any amounts received from these subleases are offset against the expense. In addition, we lease four hospital facilities fromUniversal Health Realty Trust (the "Trust") with two hospital terms expiring in 2021, one in 2026, and one (which commenced in December, 2020) in 2040. These leases contain various 5-year renewal options. We also lease two free-standing emergency departments and space in certain medical office buildings which are owned by the Trust. In addition, we lease the real property of certain other facilities from non-related parties as indicated in Item 2. Properties, as included herein. The following represents the scheduled maturities of our contractual obligations as ofDecember 31, 2020 : Payments Due by Period (dollars in thousands) Less than 2-3 4-5 After Total 1 year years years 5 years Long-term debt obligations (a)$ 3,856,251 $ 331,998 $ 1,812,666 $ 476,926 $ 1,234,661 Estimated future interest payments on debt outstanding as of December 31, 2020 (b) 517,912 94,142 162,442 107,847 153,481 Construction commitments (c) 94,525 66,439 28,086 0 0
Purchase and other obligations (d) 348,907 55,002 120,386 55,714 117,805 Operating leases (e)
442,368 72,722 118,581 87,963 163,102
Estimated future payments for
defined benefit
pension plan, and other
retirement plan (f) 180,517 17,577 16,045 18,567 128,328
Health and dental unpaid claims (g) 90,639 90,639 0 0 0
Total contractual cash obligations
(a) Reflects borrowings outstanding, after unamortized financing costs, as of
December 31, 2020 as discussed in Note 4 to the Consolidated Financial Statements. 80
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(b) Assumes that all debt outstanding as of
borrowings under our Credit Agreement and accounts receivable securitization
program, remain outstanding until the final maturity of the debt agreements
at the same interest rates (some of which are floating) which were in effect
as of
notice and without penalty, pursuant to the terms of the Credit Agreement and
accounts receivable securitization program.
(c) Our share of the remaining estimated construction cost of five behavioral
health care facilities that are under construction and scheduled to be
completed at various times in 2021, 2022 and 2023. We are required to build
these facilities pursuant to joint-venture agreements with third parties. In
addition, we had various other projects under construction as of
2020. Because we can terminate substantially all of the construction
contracts related to the various other projects at any time without paying a
termination fee, these costs are excluded from the table above.
(d) Consists of: (i)
third-parties consisting primarily of certain revenue cycle data processing
services for our acute care facilities; (ii)
future expected costs to be paid to a third-party vendor in connection with
the ongoing operation of an electronic health records application and
purchase and implementation of a revenue cycle and other applications for our
acute care facilities; (iii) and
and; (iv)
connection with various agreements with the
discussed below.
(e) Reflects our future minimum operating lease payment obligations related to
our operating lease agreements outstanding as of
discussed in Note 7 to the Consolidated Financial Statements. Some of the
lease agreements provide us with the option to renew the lease and our future
lease obligations would change if we exercised these renewal options. In
connection with these operating lease commitments, our consolidated balance
sheet as of
million and aggregate operating lease liabilities of $338 million ($60
million included in current liabilities and $278 million included in
noncurrent liabilities).
(f) Consists of
non-contributory, defined benefit pension plan (estimated through 2078), as
disclosed in Note 8 to the Consolidated Financial Statements, and
of estimated future payments related to other retirement plan liabilities
(
(g) Consists of accrued and unpaid estimated claims expense incurred in
connection with our commercial health insurers and self-insured employee
benefit plans.
As ofDecember 31, 2020 , the total accrual for our professional and general liability claims was$264 million , of which$74 million is included in other current liabilities and$190 million is included in other non-current liabilities. We exclude the$264 million for professional and general liability claims from the contractual obligations table because there are no significant contractual obligations associated with these liabilities and because of the uncertainty of the dollar amounts to be ultimately paid as well as the timing of such payments. Please see Self-Insured/Other Insurance Risks above for additional disclosure related to our professional and general liability claims and reserves. During 2020, we entered into a various agreements with theDistrict of Columbia (the "District") related to the development, leasing and operation of an acute care hospital and certain other facilities/structures on land owned by the District ("District Facilities"). The agreements contemplate that we will serve as manager for development and construction of the District Facilities on behalf of the District, with a projected aggregate cost of approximately$375 million which will be entirely funded by the District. Construction of the District Facilities is expected to be completed by 2024. Upon completion of the District Facilities, we will lease the District Facilities for a nominal rental amount for a period of 75 years and are obligated to operate the District Facilities during the lease term. We have certain lease termination rights in connection with the District Facilities beginning on the tenth anniversary of the lease commencement date for various and decreasing amounts as provided for in the agreements. Additionally, any time after the 10th anniversary of the lease term, we have a right to purchase the District Facilities for a price equal to the greater of fair market value of the District Facilities or the amount necessary to defease the bonds issued by the District to fund the construction of the District Facilities. The lease agreement also entitles the District to participation rent should certain specified earnings before interest, taxes, depreciation and amortization thresholds be achieved by the acute care hospital. Additionally, we have committed to expend no less than$75 million , over a projected 13-year period, in healthcare infrastructure including expenditures related to the District Facilities as well as other healthcare related expenditures in certain specified areas ofWashington, D.C. This financial commitment is included in "Purchase and other obligations" as reflected on the contractual obligations table above. Pursuant to the agreements, the District is entitled to certain termination fees and other amounts as specified in the agreements in the event we, within certain specified periods of time, cease to operate the acute care hospital or there is a transfer of control of us or our subsidiary operating the hospital.
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