Our principal business is owning and operating, through our subsidiaries, acute care hospitals and outpatient facilities and behavioral health care facilities.
As of March 31, 2019, we owned and/or operated 353 inpatient facilities and 38 outpatient and other facilities including the following located in 37 states, Washington, D.C., the United Kingdom and Puerto Rico:
As a percentage of our consolidated net revenues, net revenues from our acute care hospitals, outpatient facilities and commercial health insurer accounted for 54% during each the three-month periods ended March 31, 2019 and 2018. Net revenues from our behavioral health care facilities and commercial health insurer accounted for 46% of our consolidated net revenues during each of three-month periods ended March 31, 2019 and 2018.
Our behavioral health care facilities located in the U.K. generated net revenues of approximately $137 million and $115 million during the three-month periods ended March 31, 2019 and 2018, respectively. Total assets at our U.K. behavioral health care facilities were approximately $1.237 billion as of March 31, 2019 and $1.224 billion as of December 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.
You should carefully review the information contained in this Quarterly Report, and should particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the “SEC”). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. This Quarterly Report contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in future tense, identify forward-looking statements. In evaluating those statements, you should specifically consider various factors, including the risks related to healthcare industry trends and those detailed in our filings with the SEC including those set forth herein and in our Annual Report on Form 10-K for the year ended December 31, 2018 in
Item 1A. Risk Factors
and in
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors
. Those factors may cause our actual results to differ materially from any of our forward-looking statements.
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.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our consolidated financial statements. For a summary of our significant accounting policies, please see
Note 1 to the Consolidated Financial Statements
as included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Under ASC 605, our hospitals established a partial reserve for self-pay accounts in the allowance for doubtful accounts for both unbilled balances and those that have been billed and were under 90 days old. All self-pay accounts were fully reserved at 90 days from the date of discharge. Third party liability accounts were fully reserved in the allowance for doubtful accounts when the balance aged past 180 days from the date of discharge. Patients that express an inability to pay were reviewed for potential sources of financial assistance including our charity care policy. If the patient was deemed unwilling to pay, the account was written-off as bad debt and transferred to an outside collection agency for additional collection effort. Under ASC 606, while similar processes and methodologies are considered, these revenue adjustments are considered at the time the services are provided in determination of the transaction price.
Historically, a significant portion of the patients treated throughout our portfolio of acute care hospitals are uninsured patients which, in part, has resulted from patients who are employed but do not have health insurance or who have policies with relatively high deductibles. Patients treated at our hospitals for non-elective services, who have gross income less than 400% of the federal poverty guidelines, are deemed eligible for charity care. The federal poverty guidelines are established by the federal government and are based on income and family size. Because we do not pursue collection of amounts that qualify as charity care, the transaction price is fully adjusted and there is no impact in our net revenues or in our accounts receivable, net.
A portion of the accounts receivable at our acute care facilities are comprised of Medicaid accounts that are pending approval from third-party payers but we also have smaller amounts due from other miscellaneous payers such as county indigent programs in certain states. Our patient registration process includes an interview of the patient or the patient’s responsible party at the time of registration. At that time, an insurance eligibility determination is made and an insurance plan code is assigned. There are various pre-established insurance profiles in our patient accounting system which determine the expected insurance reimbursement for each patient based on the insurance plan code assigned and the services rendered. Certain patients may be classified as Medicaid pending at registration based upon a screening evaluation if we are unable to definitively determine if they are currently Medicaid eligible. When a patient is registered as Medicaid eligible or Medicaid pending, our patient accounting system records net revenues for services provided to that patient based upon the established Medicaid reimbursement rates, subject to the ultimate disposition of the patient’s Medicaid eligibility. When the patient’s ultimate eligibility is determined, reclassifications may occur which impacts net revenues in future periods. Although the patient’s ultimate eligibility determination may result in adjustments to net revenues, these adjustments do not have a material impact on our results of operations during the first quarter ended March 31, 2019 or the year ended December 31, 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.
The following tables show the amounts recorded at our acute care hospitals for charity care and uninsured discounts, based on charges at established rates, for the three-month periods ended March 31, 2019 and 2018:
Uncompensated care:
|
Amounts in millions
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
%
|
|
|
|
2018
|
|
|
%
|
|
|
Charity care
|
|
$
|
146
|
|
|
|
31
|
%
|
|
$
|
146
|
|
|
|
36
|
%
|
|
Uninsured discounts
|
|
328
|
|
|
|
69
|
%
|
|
263
|
|
|
|
64
|
%
|
|
Total uncompensated care
|
|
$
|
474
|
|
|
|
100
|
%
|
|
$
|
409
|
|
|
|
100
|
%
|
Estimated cost of providing uncompensated care:
The estimated costs of providing uncompensated care as reflected below were based on a calculation which multiplied the percentage of operating expenses for our acute care hospitals to gross charges for those hospitals by the above-mentioned total uncompensated care amounts. The percentage of cost to gross charges is calculated based on the total operating expenses for our acute care facilities divided by gross patient service revenue for those facilities.
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Amounts in millions
|
|
|
2019
|
|
|
|
2018
|
|
|
Estimated cost of providing charity care
|
|
$
|
17
|
|
|
$
|
18
|
|
|
Estimated cost of providing uninsured discounts related care
|
|
37
|
|
|
32
|
|
|
Estimated cost of providing uncompensated care
|
|
$
|
54
|
|
|
$
|
50
|
|
Self-Insured/Other Insurance Risks:
We provide for self-insured risks including general and professional liability claims, workers’ compensation claims and healthcare and dental claims. Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimate of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. All relevant information, including our own historical experience is used in estimating the expected amount of claims. While we continuously monitor these factors, our ultimate liability for professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in making this estimate. Our estimated self-insured reserves are reviewed and changed, if necessary, at each reporting date and changes are recognized currently as additional expense or as a reduction of expense. In addition, we also: (i) own commercial health insurers headquartered in Reno, Nevada, and Puerto Rico and; (ii) maintain self-insured employee benefits programs for employee healthcare and dental claims. The ultimate costs related to these programs/operations include expenses for claims incurred and paid in addition to an accrual for the estimated expenses incurred in connection with claims incurred but not yet reported. Given our significant insurance-related exposure, there can be no assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results of operations.
See
Note 6 to the Consolidated Financial Statements-Commitments and Contingencies
, for additional disclosure related to our professional and general liability, workers’ compensation liability and property insurance.
The total accrual for our professional and general liability claims and workers’ compensation claims was $317 million as of March 31, 2019, of which $82 million is included in current liabilities. The total accrual for our professional and general liability claims and workers’ compensation claims was $315 million as of December 31, 2018, of which $82 million is included in current liabilities.
Recent Accounting Standards:
For a summary of accounting standards, please see
Note 14 to the Consolidated Financial Statements
, as included herein.
31
Results of Operations
Three-month periods ended March 31, 2019 and 2018:
The following table summarizes our results of operations and is used in the discussion below for the three-month periods ended March 31, 2019 and 2018 (dollar amounts in thousands):
|
|
|
Three months ended
March 31, 2019
|
|
|
Three months ended
March 31, 2018
|
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Net revenues
|
|
$
|
2,804,391
|
|
|
|
100.0
|
%
|
|
$
|
2,687,516
|
|
|
|
100.0
|
%
|
|
Operating charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
1,365,546
|
|
|
|
48.7
|
%
|
|
|
1,300,148
|
|
|
|
48.4
|
%
|
|
Other operating expenses
|
|
|
644,780
|
|
|
|
23.0
|
%
|
|
|
620,819
|
|
|
|
23.1
|
%
|
|
Supplies expense
|
|
|
307,463
|
|
|
|
11.0
|
%
|
|
|
292,929
|
|
|
|
10.9
|
%
|
|
Depreciation and amortization
|
|
|
120,040
|
|
|
|
4.3
|
%
|
|
|
113,103
|
|
|
|
4.2
|
%
|
|
Lease and rental expense
|
|
|
26,125
|
|
|
|
0.9
|
%
|
|
|
26,703
|
|
|
|
1.0
|
%
|
|
Subtotal-operating expenses
|
|
|
2,463,954
|
|
|
|
87.9
|
%
|
|
|
2,353,702
|
|
|
|
87.6
|
%
|
|
Income from operations
|
|
|
340,437
|
|
|
|
12.1
|
%
|
|
|
333,814
|
|
|
|
12.4
|
%
|
|
Interest expense, net
|
|
|
39,640
|
|
|
|
1.4
|
%
|
|
|
37,576
|
|
|
|
1.4
|
%
|
|
Other (income) expense, net
|
|
|
4,501
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
—
|
|
|
Income before income taxes
|
|
|
296,296
|
|
|
|
10.6
|
%
|
|
|
296,238
|
|
|
|
11.0
|
%
|
|
Provision for income taxes
|
|
|
58,898
|
|
|
|
2.1
|
%
|
|
|
67,569
|
|
|
|
2.5
|
%
|
|
Net income
|
|
|
237,398
|
|
|
|
8.5
|
%
|
|
|
228,669
|
|
|
|
8.5
|
%
|
|
Less: Income attributable to noncontrolling interests
|
|
|
3,230
|
|
|
|
0.1
|
%
|
|
|
4,837
|
|
|
|
0.2
|
%
|
|
Net income attributable to UHS
|
|
$
|
234,168
|
|
|
|
8.4
|
%
|
|
$
|
223,832
|
|
|
|
8.3
|
%
|
Net revenues increased 4.3%, or $117 million, to $2.80 billion during the three-month period ended March 31, 2019 as compared to $2.69 billion during the first quarter of 2018. The net increase was primarily attributable to: (i) a $103 million or 3.9% increase in net revenues generated from our acute care hospital services and behavioral health services operated during both periods (which we refer to as “same facility”), and; (ii) $14 million of other combined net increases due primarily to the revenues generated at 25 behavioral health facilities located in the U.K. acquired during the third quarter of 2018 in connection with our acquisition of The Danshell Group.
Income before income taxes (before deduction for income attributable to noncontrolling interests) remained unchanged amounting to $296 million during each of the three-month periods ended March 31, 2019 and 2018. Noted below are certain changes to income before income taxes during the first quarter of 2019, as compared to the comparable quarter of 2018:
|
|
•
|
a decrease of $11 million at our acute care facilities as discussed below in Acute Care Hospital Services;
|
|
|
•
|
an increase of $5 million at our behavioral health care facilities, as discussed below in Behavioral Health Services;
|
|
|
•
|
an increase of $13 million due to an increase recorded during the first quarter of 2018 to the reserve established in connection with the civil aspects of the government’s investigation of certain of our behavioral health care facilities (see
Item 1 - Legal Proceedings
for additional disclosure);
|
|
|
•
|
a decrease of $4 million from an unrealized loss recorded during the first quarter of 2019 resulting from a decrease in the market value of shares of certain marketable securities held for investment and classified as available for sale, and;
|
|
|
•
|
$3 million of other combined net decreases.
|
Net income attributable to UHS increased $10 million to $234 million during the three-month period ended March 31, 2019 as compared to $224 million during the comparable prior year quarter. Changes to our net income attributable to UHS during the first quarter of 2019, as compared to the comparable prior year quarter, included:
|
|
•
|
no net change in income before income taxes, as discussed above;
|
|
|
•
|
an increase of $2 million due to an decrease in income attributable to noncontrolling interests, and;
|
|
|
•
|
an increase of $9 million resulting from a decrease in the provision for income taxes resulting from a net decrease to our provision for income taxes resulting from ASU 2016-09 which decreased our provision for income taxes by $11 million during the first three months of 2019 as compared to $2 million during the first quarter of 2018.
|
32
Acute Care Hospital Services
Same Facility Basis Acute Care Hospital Services
We believe that providing our results on a “Same Facility” basis (which is a non-GAAP measure), which includes the operating results for facilities and businesses operated in both the current year and prior year periods, is helpful to our investors as a measure of our operating performance. Our Same Facility results also neutralize (if applicable) the effect of items that are non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, impacts of settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods. Our Same Facility basis results reflected on the 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 Quarterly Report on Form 10-Q.
The following table summarizes the results of operations for our acute care facilities on a same facility basis and is used in the discussion below for the three-month periods ended March 31, 2019 and 2018 (dollar amounts in thousands):
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Net revenues
|
|
$
|
1,490,862
|
|
|
|
100.0
|
%
|
|
$
|
1,423,777
|
|
|
|
100.0
|
%
|
|
Operating charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
618,691
|
|
|
|
41.5
|
%
|
|
|
581,768
|
|
|
|
40.9
|
%
|
|
Other operating expenses
|
|
|
331,885
|
|
|
|
22.3
|
%
|
|
|
308,181
|
|
|
|
21.6
|
%
|
|
Supplies expense
|
|
|
257,711
|
|
|
|
17.3
|
%
|
|
|
243,153
|
|
|
|
17.1
|
%
|
|
Depreciation and amortization
|
|
|
74,228
|
|
|
|
5.0
|
%
|
|
|
72,150
|
|
|
|
5.1
|
%
|
|
Lease and rental expense
|
|
|
14,256
|
|
|
|
1.0
|
%
|
|
|
14,283
|
|
|
|
1.0
|
%
|
|
Subtotal-operating expenses
|
|
|
1,296,771
|
|
|
|
87.0
|
%
|
|
|
1,219,535
|
|
|
|
85.7
|
%
|
|
Income from operations
|
|
|
194,091
|
|
|
|
13.0
|
%
|
|
|
204,242
|
|
|
|
14.3
|
%
|
|
Interest expense, net
|
|
|
279
|
|
|
|
0.0
|
%
|
|
|
531
|
|
|
|
0.0
|
%
|
|
Other (income) expense, net
|
|
|
-
|
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
|
Income before income taxes
|
|
$
|
193,812
|
|
|
|
13.0
|
%
|
|
$
|
203,711
|
|
|
|
14.3
|
%
|
Three-month periods ended March 31, 2019 and 2018:
During the three-month period ended March 31, 2019, as compared to the comparable prior year quarter, net revenues from our acute care hospital services, on a same facility basis, increased $67 million or 4.7%. Income before income taxes (and before income attributable to noncontrolling interests) decreased $10 million, or 5%, amounting to $194 million or 13.0% of net revenues during the first quarter of 2019 as compared to $204 million or 14.3% of net revenues during the first quarter of 2018.
During the three-month period ended March 31, 2019, net revenue per adjusted admission decreased 0.4% while net revenue per adjusted patient day remained unchanged, as compared to the comparable quarter of 2018. During the three-month period ended March 31, 2019, as compared to the comparable prior year quarter, inpatient admissions to our acute care hospitals increased 5.2% and adjusted admissions (adjusted for outpatient activity) increased 4.9%. Patient days at these facilities increased 4.8% and adjusted patient days increased 4.4% during the three-month period ended March 31, 2019 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 4.6 days during each of the three-month periods ended March 31, 2019 and 2018. The occupancy rate, based on the average available beds at these facilities, was 66% during each of the three-month periods ended March 31, 2019 and 2018.
All Acute Care Hospitals
The following table summarizes the results of operations for all our acute care operations during the three-month periods ended March 31, 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.
33
|
|
|
Three months ended
March 31, 2019
|
|
|
Three months ended
March 31, 2018
|
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Net revenues
|
|
$
|
1,514,844
|
|
|
|
100.0
|
%
|
|
$
|
1,445,632
|
|
|
|
100.0
|
%
|
|
Operating charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
619,317
|
|
|
|
40.9
|
%
|
|
|
581,768
|
|
|
|
40.2
|
%
|
|
Other operating expenses
|
|
|
356,231
|
|
|
|
23.5
|
%
|
|
|
330,036
|
|
|
|
22.8
|
%
|
|
Supplies expense
|
|
|
258,144
|
|
|
|
17.0
|
%
|
|
|
243,153
|
|
|
|
16.8
|
%
|
|
Depreciation and amortization
|
|
|
74,361
|
|
|
|
4.9
|
%
|
|
|
72,150
|
|
|
|
5.0
|
%
|
|
Lease and rental expense
|
|
|
14,299
|
|
|
|
0.9
|
%
|
|
|
14,283
|
|
|
|
1.0
|
%
|
|
Subtotal-operating expenses
|
|
|
1,322,352
|
|
|
|
87.3
|
%
|
|
|
1,241,390
|
|
|
|
85.9
|
%
|
|
Income from operations
|
|
|
192,492
|
|
|
|
12.7
|
%
|
|
|
204,242
|
|
|
|
14.1
|
%
|
|
Interest expense, net
|
|
|
279
|
|
|
|
0.0
|
%
|
|
|
531
|
|
|
|
0.0
|
%
|
|
Other (income) expense, net
|
|
|
-
|
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
|
Income before income taxes
|
|
$
|
192,213
|
|
|
|
12.7
|
%
|
|
$
|
203,711
|
|
|
|
14.1
|
%
|
Three-month periods ended March 31, 2019 and 2018:
During the three-month period ended March 31, 2019, as compared to the comparable prior year quarter, net revenues from our acute care hospital services increased $69 million or 4.8% to $1.51 billion as compared to $1.45 billion due to: (i) a $67 million, or 4.7%, increase same facility revenues, as discussed above, and; (ii) other combined net increase of $2 million due primarily to increased provider taxes incurred during the first quarter of 2019 as compared to the first quarter of 2018.
Income before income taxes decreased $11 million, or 6%, to $192 million or 12.7% of net revenues during the first quarter of 2019 as compared to $204 million or 14.1% of net revenues during the first quarter of 2018. The decrease resulted primarily from the $10 million decrease in income before income taxes from our acute care hospital services, on a same facility basis, as discussed above.
Behavioral Health Services
Our Same Facility basis results (which is a non-GAAP measure), which include the operating results for facilities and businesses operated in both the current year and prior year period, neutralize (if applicable) the effect of items that are non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, impact of the reserve established in connection with the civil aspects of the government’s investigation of certain of our behavioral health care facilities, impacts of settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods. Our Same Facility basis results reflected on the table below also excludes from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below
Sources of Revenue-Various State Medicaid Supplemental Payment Programs.
However, these provider tax assessments are included in net revenues and other operating expenses as reflected in the table below under
All Behavioral Health Care Services
. The provider tax assessments had no impact on the income before income taxes as reflected on the tables below since the amounts offset between net revenues and other operating expenses. To obtain a complete understanding of our financial performance, the Same Facility results should be examined in connection with our net income as determined in accordance with GAAP and as presented in the condensed consolidated financial statements and notes thereto as contained in this Quarterly Report on Form 10-Q.
The following table summarizes the results of operations for our behavioral health care facilities, on a same facility basis, and is used in the discussions below for the three-month periods ended March 31, 2019 and 2018 (dollar amounts in thousands):
34
Same Facility—Behavioral Health
|
|
|
Three months ended
March 31, 2019
|
|
|
Three months ended
March 31, 2018
|
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Net revenues
|
|
$
|
1,241,225
|
|
|
|
100.0
|
%
|
|
$
|
1,205,048
|
|
|
|
100.0
|
%
|
|
Operating charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
655,586
|
|
|
|
52.8
|
%
|
|
|
630,831
|
|
|
|
52.3
|
%
|
|
Other operating expenses
|
|
|
234,424
|
|
|
|
18.9
|
%
|
|
|
230,586
|
|
|
|
19.1
|
%
|
|
Supplies expense
|
|
|
48,618
|
|
|
|
3.9
|
%
|
|
|
48,743
|
|
|
|
4.0
|
%
|
|
Depreciation and amortization
|
|
|
39,872
|
|
|
|
3.2
|
%
|
|
|
36,738
|
|
|
|
3.0
|
%
|
|
Lease and rental expense
|
|
|
10,917
|
|
|
|
0.9
|
%
|
|
|
11,696
|
|
|
|
1.0
|
%
|
|
Subtotal-operating expenses
|
|
|
989,417
|
|
|
|
79.7
|
%
|
|
|
958,594
|
|
|
|
79.5
|
%
|
|
Income from operations
|
|
|
251,808
|
|
|
|
20.3
|
%
|
|
|
246,454
|
|
|
|
20.5
|
%
|
|
Interest expense, net
|
|
|
375
|
|
|
|
0.0
|
%
|
|
|
427
|
|
|
|
0.0
|
%
|
|
Other (income) expense, net
|
|
|
-
|
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
|
Income before income taxes
|
|
$
|
251,433
|
|
|
|
20.3
|
%
|
|
$
|
246,027
|
|
|
|
20.4
|
%
|
Three-month periods ended March 31, 2019 and 2018:
On a same facility basis during the first quarter of 2019, as compared to the first quarter of 2018, net revenues generated from our behavioral health services increased $36 million, or 3.0%, to $1.24 billion from $1.21 billion. Income before income taxes increased $5 million, or 2%, to $251 million or 20.3% of net revenues during the three-month period ended March 31, 2019, as compared to $246 million or 20.4% of net revenues during the comparable quarter of 2018.
During the three-month period ended March 31, 2019, net revenue per adjusted admission increased 0.4% and net revenue per adjusted patient day increased 2.5%, as compared to the comparable quarter of 2018. On a same facility basis, inpatient admissions and adjusted admissions to our behavioral health facilities increased 2.8% and 2.9%, respectively, during the three-month period ended March 31, 2019 as compared to the comparable quarter of 2018. Patient days and adjusted patient days increased 0.8% and 0.9% during the three-month period ended March 31, 2019 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 12.9 days and 13.1 days during the three-month periods ended March 31, 2019 and 2018, respectively. The occupancy rate, based on the average available beds at these facilities, was 77% during each of the three-month periods ended March 31, 2019 and 2018.
All Behavioral Health Care Facilities
The following table summarizes the results of operations for all our behavioral health care services during the three-month periods ended March 31, 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, and; (iii) 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.
|
|
|
Three months ended
March 31, 2019
|
|
|
Three months ended
March 31, 2018
|
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Net revenues
|
|
$
|
1,286,383
|
|
|
|
100.0
|
%
|
|
$
|
1,237,996
|
|
|
|
100.0
|
%
|
|
Operating charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
675,699
|
|
|
|
52.5
|
%
|
|
|
642,128
|
|
|
|
51.9
|
%
|
|
Other operating expenses
|
|
|
262,137
|
|
|
|
20.4
|
%
|
|
|
256,402
|
|
|
|
20.7
|
%
|
|
Supplies expense
|
|
|
49,131
|
|
|
|
3.8
|
%
|
|
|
49,536
|
|
|
|
4.0
|
%
|
|
Depreciation and amortization
|
|
|
42,552
|
|
|
|
3.3
|
%
|
|
|
38,454
|
|
|
|
3.1
|
%
|
|
Lease and rental expense
|
|
|
11,644
|
|
|
|
0.9
|
%
|
|
|
12,301
|
|
|
|
1.0
|
%
|
|
Subtotal-operating expenses
|
|
|
1,041,163
|
|
|
|
80.9
|
%
|
|
|
998,821
|
|
|
|
80.7
|
%
|
|
Income from operations
|
|
|
245,220
|
|
|
|
19.1
|
%
|
|
|
239,175
|
|
|
|
19.3
|
%
|
|
Interest expense, net
|
|
|
375
|
|
|
|
0.0
|
%
|
|
|
427
|
|
|
|
0.0
|
%
|
|
Other (income) expense, net
|
|
|
677
|
|
|
|
0.1
|
%
|
|
|
0
|
|
|
|
—
|
|
|
Income before income taxes
|
|
$
|
244,168
|
|
|
|
19.0
|
%
|
|
$
|
238,748
|
|
|
|
19.3
|
%
|
35
Three-month periods ended
March 31
,
2019 and
2018:
During the three-month period ended March 31, 2019, as compared to the comparable prior year quarter, net revenues generated from our behavioral health services increased $48 million or 3.9% due to primarily to: (i) the above-mentioned $36 million or 3.0% increase in net revenues on a same facility basis, and; (ii) an $12 million other combined net increase due primarily to the revenues generated at 25 behavioral health facilities located in the U.K. acquired during the third quarter of 2018 in connection with our acquisition of The Danshell Group.
Income before income taxes increased $5 million, or 2%, to $244 million or 19.0% of net revenues during the first quarter of 2019 as compared to $239 million or 19.3% during the first quarter of 2018. The increase resulted from the $5 million increase in income before income taxes generated at our behavioral health facilities, on a same facility basis, as discussed above.
Sources of Revenue
Overview:
We receive payments for services rendered from private insurers, including managed care plans, the federal government under the Medicare program, state governments under their respective Medicaid programs and directly from patients.
Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary depending on the type of services provided (e.g., medical/surgical, intensive care or behavioral health) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. The percentage of patient service revenue attributable to outpatient services has generally increased in recent years, primarily as a result of advances in medical technology that allow more services to be provided on an outpatient basis, as well as increased pressure from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to our increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of growth and resulting impact on our future revenues.
Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payers which unfavorably impacts the collectability of our patient accounts.
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, economic recovery stimulus packages, responses to natural disasters, and the federal budget deficit in general may affect the availability of federal funds to provide additional relief in the future. We are unable to predict the effect of future policy changes on our operations.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the “ACA”). The Healthcare and Education Reconciliation Act of 2010 (the “Reconciliation Act”), which contains a number of amendments to the ACA, was signed into law on March 30, 2010. Two primary goals of the ACA, combined with the Reconciliation Act (collectively referred to as 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 beginning October 1, 2011 for Medicare Part B reimbursable items and services and beginning October 1, 2012 for Medicare inpatient hospital services. The Legislation and subsequent revisions provide for reductions to both Medicare DSH and Medicaid DSH payments. The Medicare DSH reductions began in October, 2013 while the Medicaid DSH reductions are scheduled to begin in 2020. The Legislation implements a value-based purchasing program, which will reward the delivery of efficient care. Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such hospitals will include those with excessive readmission or hospital-acquired condition rates.
A 2012 U.S. Supreme Court ruling limited the federal government’s ability to expand health insurance coverage by holding unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the
36
Medicaid expansion program by reducing their existing Medicaid funding. Therefore, states can choose to accept or not to p
articipate without risking the loss of federal Medicaid funding. As a result, many states, including Texas, have not expanded their Medicaid programs without the threat of loss of federal funding. CMS has granted, and is expected to grant additional, secti
on 1115 demonstration waivers providing for work and community engagement requirements for certain Medicaid eligible individuals. It is anticipated this will lead to reductions in coverage, and likely increases in uncompensated care, in states where these
demonstration waivers are granted.
On December 14, 2018, a Texas Federal District Court deemed the ACA to be unconstitutional in its entirety. The Court concluded that the Individual Mandate is no longer permissible under Congress’s taxing power as a result of the Tax Cut and Jobs Act of 2017 (“TCJA”) reducing the Individual Mandate’s tax to $0 (i.e., it no longer produces revenue, which is an essential feature of a tax), rendering the ACA unconstitutional. The court also held that because the individual mandate is “essential” to the ACA and is inseverable from the rest of the law, the entire ACA is unconstitutional. Because the court issued a declaratory judgment and did not enjoin the law, the ACA remains in place pending its appeal. The District Court for the Northern District of Texas ruling has been appealed to the U.S. Court of Appeals for the Fifth Circuit, and will likely be appealed to the United States Supreme Court. 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. While Congress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a person is not required to “have actual knowledge or specific intent to commit a violation of” the Anti-Kickback Statute in order to be found in violation of such law, the Legislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the federal civil False Claims Act. The Legislation also expands the Recovery Audit Contractor program to Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations.
We have partnered with local physicians in the ownership of certain of our facilities. These investments have been permitted under an exception to the physician self-referral law. The Legislation permits existing physician investments in a hospital to continue under a “grandfather” clause if the arrangement satisfies certain requirements and restrictions, but physicians are prohibited from increasing the aggregate percentage of their ownership in the hospital. The Legislation also imposes certain compliance and disclosure requirements upon existing physician-owned hospitals and restricts the ability of physician-owned hospitals to expand the capacity of their facilities. As discussed below, should the Legislation be repealed in its entirety, this aspect of the Legislation would also be repealed restoring physician ownership of hospitals and expansion right to its position and practice as it existed prior to the Legislation.
The impact of the Legislation on each of our hospitals may vary. Because Legislation provisions are effective at various times over the next several years, we anticipate that many of the provisions in the Legislation may be subject to further revision. Initiatives to repeal the Legislation, in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements to modify its provisions have been persistent. The ultimate outcomes of legislative attempts to repeal or amend the Legislation and legal challenges to the Legislation are unknown. Legislation has already been enacted that eliminated the penalty, effective January 1, 2019, related to the individual mandate to obtain health insurance that was part of the original Legislation. In addition, Congress previously considered legislation that would, in material part: (i) eliminate the large employer mandate to offer health insurance coverage to full-time employees; (ii) permit insurers to impose a surcharge up to 30 percent on individuals who go uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums.
In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions. In relevant part, President Trump has already taken executive actions: (i) requiring all federal agencies with authorities and responsibilities under the
37
Legislation to “exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay” parts of the Legislation that place “unwarranted economic and regulatory
burdens” on states, individuals or health care providers; (ii) the issuance of a final rule in June, 2018 by the Department of Labor to enable the formation of health plans that would be exempt from certain Legislation essential health benefits requirement
s; (iii) the issuance of a final rule in August, 2018 by the Department of Labor, Treasury, and Health and Human Services to expand the availability of short-term, limited duration health insurance; (iv) eliminating cost-sharing reduction payments to insur
ers that would otherwise offset deductibles and other out-of-pocket expenses for health plan enrollees at or below 250 percent of the federal poverty level, (v) relaxing requirements for state innovation waivers that could reduce enrollment in the individu
al and small group markets and lead to additional enrollment in short-term, limited duration insurance and association health plans, and; (vi) the issuance of a proposed rule by the Department of Labor that would incentivize the use of health reimbursement
accounts by employers to permit employees to purchase health insurance in the individual market. The uncertainty resulting from these Executive Branch policies led to reduced Exchange enrollment in 2018 with final CMS reported data for 2019 indicating fur
ther decline and is expected to further worsen the individual and small group market risk pools in future years.
In May, 2019, The Congressional Budget Office projected that 32 million people will be uninsured in 2020.
It is also anticipated that these an
d future policies may create additional cost and reimbursement pressures on hospitals.
It remains unclear what portions of the Legislation may remain, or whether any replacement or alternative programs may be created by any future legislation. Any such future repeal or replacement may have significant impact on the reimbursement for healthcare services generally, and may create reimbursement for services competing with the services offered by our hospitals. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will not have a negative financial impact on our hospitals, including their ability to compete with alternative healthcare services funded by such potential legislation, or for our hospitals to receive payment for services.
For additional disclosure related to our revenues including a disaggregation of our consolidated net revenues by major source for each of the periods presented herein, please see
Note 12 to the Consolidated Financial Statements-Revenue
.
Medicare:
Medicare is a federal program that provides certain hospital and medical insurance benefits to persons aged 65 and over, some disabled persons and persons with end-stage renal disease. All of our acute care hospitals and many of our behavioral health centers are certified as providers of Medicare services by the appropriate governmental authorities. Amounts received under the Medicare program are generally significantly less than a hospital’s customary charges for services provided. Since a substantial portion of our revenues will come from patients under the Medicare program, our ability to operate our business successfully in the future will depend in large measure on our ability to adapt to changes in this program.
Under the Medicare program, for inpatient services, our general acute care hospitals receive reimbursement under the inpatient prospective payment system (“IPPS”). Under the IPPS, hospitals are paid a predetermined fixed payment amount for each hospital discharge. The fixed payment amount is based upon each patient’s Medicare severity diagnosis related group (“MS-DRG”). Every MS-DRG is assigned a payment rate based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. The MS-DRG payment rates are based upon historical national average costs and do not consider the actual costs incurred by a hospital in providing care. This MS-DRG assignment also affects the predetermined capital rate paid with each MS-DRG. The MS-DRG and capital payment rates are adjusted annually by the predetermined geographic adjustment factor for the geographic region in which a particular hospital is located and are weighted based upon a statistically normal distribution of severity. While we generally will not receive payment from Medicare for inpatient services, other than the MS-DRG payment, a hospital may qualify for an “outlier” payment if a particular patient’s treatment costs are extraordinarily high and exceed a specified threshold. MS-DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The index used to adjust the MS-DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services. Generally, however, the percentage increases in the MS-DRG payments have been lower than the projected increase in the cost of goods and services purchased by hospitals.
In April, 2019, CMS published its IPPS 2020 proposed payment rule which provides for a 3.2% 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 changes related to the required Medicare DSH payment changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments is approximately 3.2%. Including DSH payments (where no change is projected) and certain other adjustments, we estimate our overall increase from the proposed IPPS 2020 rule (covering the period of October 1, 2019 through September 30, 2020) will approximate 2.7%. This projected impact from the IPPS 2020 proposed rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the American Taxpayer Relief Act of 2012 (“ATRA”), as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the Budget Control Act of 2011, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. CMS completed its full phase-in to use uncompensated care data from the 2015 Worksheet S-10 hospital cost reports to allocate approximately $8.5 billion in the DSH Uncompensated Care Pool.
38
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 upd
ates, 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 paym
ents is approximately 0.5%. Including the estimated increase to our DSH payments (approximating 2.1%) and certain other adjustments, we estimate our overall increase from the final IPPS 2019 rule (covering the period of October 1, 2018 through September 30
, 2019) will approximate 2.7%. This projected impact from the IPPS 2019 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the ATRA, as required by the 21st Century Cures Act but excludes the impact of the s
equestration reductions related to the Budget Control Act of 2011, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. CMS continued to phase-in the use of uncompensated care data from both the 2014 and 2015 Worksheet S-1
0 hospital cost reports, two-third weighting as part of the proxy methodology to allocate approximately $8 billion in the DSH Uncompensated Care Pool. This final rule change will continue to result in wide variations among all hospitals nationwide in the d
istribution of these DSH funds compared to previous years until the full phase-in of worksheet S-10 is completed by CMS.
In August, 2017, CMS published its IPPS 2018 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 and ACA-mandated adjustments are considered, without consideration for the decreases related to the required Medicare DSH payment changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments would approximate 2.3%. Including the estimated decrease to our DSH payments (approximating 0.1%) and certain other adjustments, we estimate our overall increase from the final IPPS 2018 rule (covering the period of October 1, 2017 through September 30, 2018) will approximate 1.8%. This projected impact from the IPPS 2018 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the ATRA, as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the Budget Control Act of 2011, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below. CMS began using uncompensated care data from the 2014 hospital cost report Worksheet S-10, one-third weighting as part of the proxy methodology to allocate approximately $7 billion in the DSH Uncompensated Care Pool. This final rule change resulted in wide variations among all hospitals nationwide in the distribution of these DSH funds compared to previous years.
In August, 2011, the Budget Control Act of 2011 (the “2011 Act”) was enacted into law. Included in this law are the imposition of annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by the Congressional Budget Office. Among its other provisions, the law established a bipartisan Congressional committee, known as the Joint Committee, which was responsible for developing recommendations aimed at reducing future federal budget deficits by an additional $1.5 trillion over 10 years. The Joint Committee was unable to reach an agreement by the November 23, 2011 deadline and, as a result, across-the-board cuts to discretionary, national defense and Medicare spending were implemented on March 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year. The Bipartisan Budget Act of 2015, enacted on November 2, 2015, and the Bipartisan Budget Act of 2018, enacted on February 9, 2018, continued the 2% reductions to Medicare reimbursement imposed under the 2011 Act.
Inpatient services furnished by psychiatric hospitals under the Medicare program are paid under a Psychiatric Prospective Payment System (“Psych PPS”). Medicare payments to psychiatric hospitals are based on a prospective per diem rate with adjustments to account for certain facility and patient characteristics. The Psych PPS also contains provisions for outlier payments and an adjustment to a psychiatric hospital’s base payment if it maintains a full-service emergency department.
In April, 2019, CMS published its Psych PPS proposed rule for the federal fiscal year 2020. Under this proposed rule, payments to our psychiatric hospitals and units are estimated to increase by 1.85% compared to federal fiscal year 2019. This amount includes the effect of the 3.1% market basket update less a 0.75% adjustment as required by the ACA and a 0.5% productivity adjustment.
In August, 2018, CMS published its Psych PPS final rule for the federal fiscal year 2019. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 1.35% compared to federal fiscal year 2018. This amount includes the effect of the 2.90% market basket update less a 0.75% adjustment as required by the ACA and a 0.8% productivity adjustment.
In August, 2017, CMS published its Psych PPS final rule for the federal fiscal year 2018. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 1.25% compared to federal fiscal year 2017. This amount includes the effect of the 2.6% market basket update less a 0.75% adjustment as required by the ACA and a 0.6% productivity adjustment.
In December, 2018, the U.S. District Court for the District of Columbia ruled that the U.S. Department of Health and Human Services (“HHS”) did not have statutory authority to implement the 2018 Medicare OPPS rate reduction related to hospitals that qualify for drug discounts under the federal 340B Drug Discount Program and granted a permanent injunction against the payment reduction.
39
However, recognizing both the complexity of the OPPS payment system as well as its budget neutral rate setting system, the C
ourt refrained from imposing a remedy. Instead the Judge in the case called for additional briefing from the Plaintiffs and Defendants on the proper scope and implementation for relief. The case
has been
appealed by HHS. We are unable to predict the ult
imate outcome of any appeal and the type of relief that may be ordered by the Courts. We estimate that the CMS 2018 change in the 340B payment policy increased our 2018 Medicare OPPS payments by approximately $8 million, which has been fully reserved in ou
r results of operations for the year, and estimate that a comparable amount was scheduled to be earned during 2019.
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 division, as compared to 2018.
In November, 2017, CMS published its OPPS final rule for 2018. The hospital market basket increase is 2.7%. The Medicare statute requires a productivity adjustment reduction of 0.6% and 0.75% reduction to the 2018 OPPS market basket resulting in a 2018 OPPS market basket update at 1.35%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2018 will aggregate to a net increase of 4.2% which includes a 0.8% 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 2018 OPPS payments will result in a 4.8% increase in payment levels for our acute care division, as compared to 2017. Additionally, the Medicare inpatient-only (IPO) list includes procedures that are only paid under the Hospital Inpatient Prospective Payment System. Each year, CMS uses established criteria to review the IPO list and determine whether or not any procedures should be removed from the list. CMS removed total knee arthroplasty (TKA) from the IPO list effective January 1, 2018. Additionally, CMS redistributed $1.6 billion in cost savings within the OPPS system attributable to changes in the federal 340B hospital drug pricing payment methodology in 2018 but, as discussed above, this 340B-related payment methodology is currently under legal challenge. The impact of these IPO and 340B changes are reflected in the above noted estimated acute care division percentage change in OPPS reimbursement.
In November, 2016, CMS published its OPPS final rule for 2017. The hospital market basket increase is 2.7%. The Medicare statute requires a productivity adjustment reduction of 0.3% and 0.75% reduction to the 2017 OPPS market basket resulting in a 2017 OPPS market basket update at 1.65%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2017 resulted in a net increase of 1.5% which included a -1.3% decrease to behavioral health division partial hospitalization rates. When the behavioral health division’s partial hospitalization rate impact is excluded, we estimate that our Medicare 2017 OPPS payments resulted in a 2.1% increase in payment levels for our acute care division, as compared to 2016.
Medicaid:
Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide benefits to qualifying individuals. Most state Medicaid payments are made under a PPS-like system, or under programs that negotiate payment levels with individual hospitals. Amounts received under the Medicaid program are generally significantly less than a hospital’s customary charges for services provided. In addition to revenues received pursuant to the Medicare program, we receive a large portion of our revenues either directly from Medicaid programs or from managed care companies managing Medicaid. All of our acute care hospitals and most of our behavioral health centers are certified as providers of Medicaid services by the appropriate governmental authorities.
We receive revenues from various state and county based programs, including Medicaid in all the states in which we operate (we receive Medicaid revenues in excess of $100 million annually from each of Texas, California, Nevada, Washington, D.C., Pennsylvania and Illinois); CMS-approved Medicaid supplemental programs in certain states including Texas, Mississippi, Illinois, Oklahoma, Nevada, Arkansas, California and Indiana, and; state 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 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 ACA 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, the Supreme Court has struck down portions of the ACA 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 ACA may be additionally penalized by
40
corresponding reductions to Medicaid disproportionate share hospital payments beginning in 2020, as discussed below. We can provide no assurance th
at further reductions to Medicaid revenues, particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations.
Various State Medicaid Supplemental Payment Programs:
We incur health-care related taxes (“Provider Taxes”) imposed by states in the form of a licensing fee, assessment or other mandatory payment which are related to: (i) healthcare items or services; (ii) the provision of, or the authority to provide, the health care items or services, or; (iii) the payment for the health care items or services. Such Provider Taxes are subject to various federal regulations that limit the scope and amount of the taxes that can be levied by states in order to secure federal matching funds as part of their respective state Medicaid programs. As outlined below, we derive a related Medicaid reimbursement benefit from assessed Provider Taxes in the form of Medicaid claims based payment increases and/or lump sum Medicaid supplemental payments.
Included in these Provider Tax programs are reimbursements received in connection with 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 of Texas (Grayson, Hidalgo, Maverick, Potter and Webb) 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.
For state fiscal year 2017, Texas Medicaid continued to operate under a CMS-approved Section 1115 five-year Medicaid waiver demonstration program extended by CMS for fifteen months to December 31, 2017. During the first five years of this program that started in state fiscal year 2012, the THHSC transitioned away from UPL payments to new waiver incentive payment programs, UC and DSRIP payments. During demonstration periods ending December 31, 2017, THHSC continued to, make incentive payments under the program after certain qualifying criteria were met by hospitals. Supplemental payments are also subject to aggregate statewide caps based on CMS approved Medicaid waiver amounts.
On December 21, 2017, CMS approved the 1115 Waiver for the period January 1, 2018 to September 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. For FFY 2020 and forward, we are unable to estimate the impact on of these UC program changes on our future operating results.
Effective April 1, 2018, certain of our acute care hospitals located in Texas 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. The Texas 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.
On November 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 ending September 30, 2018, and; (ii) decreased UC payments/revenue for the federal fiscal year beginning October 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.
41
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 are unable to estimate the impact of these DSRIP program changes on its operating results. For FFY 2022, we will no longer receive DSRIP funds due to the elimination of this funding source by CMS in the Waiver renewal.
Summary of Amounts Related To The Above-Mentioned Various State Medicaid Supplemental Payment Programs:
The following table summarizes the revenues, Provider Taxes and net benefit related to each of the above-mentioned Medicaid supplemental programs for the three-month periods ended March 31, 2019 and 2018. The Provider Taxes are recorded in other operating expenses on the Condensed Consolidated Statements of Income as included herein.
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(amounts in millions)
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|
|
|
Three Months Ended
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|
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|
March 31,
|
|
March 31,
|
|
|
|
2019
|
|
2018
|
|
|
Texas UC/UPL:
|
|
|
|
|
|
|
|
Revenues
|
$
|
26
|
|
$
|
21
|
|
|
Provider Taxes
|
|
(10
|
)
|
|
(6
|
)
|
|
Net benefit
|
$
|
16
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Texas DSRIP:
|
|
|
|
|
|
|
|
Revenues
|
$
|
0
|
|
$
|
0
|
|
|
Provider Taxes
|
|
0
|
|
|
0
|
|
|
Net benefit
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Various other state programs:
|
|
|
|
|
|
|
|
Revenues
|
$
|
61
|
|
$
|
56
|
|
|
Provider Taxes
|
|
(34
|
)
|
|
(36
|
)
|
|
Net benefit
|
$
|
27
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
Total all Provider Tax programs:
|
|
|
|
|
|
|
|
Revenues
|
$
|
87
|
|
$
|
77
|
|
|
Provider Taxes
|
|
(44
|
)
|
|
(42
|
)
|
|
Net benefit
|
$
|
43
|
|
$
|
35
|
|
We estimate that our aggregate net benefit from the Texas and various other state Medicaid supplemental payment programs will approximate $178 million (net of Provider Taxes of $186 million) during the year ending December 31, 2019. 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 2018 levels. Future changes to these terms and conditions could materially reduce our net benefit derived from the programs which could have a material adverse impact on our future consolidated results of operations. In addition, Provider Taxes are governed by both federal and state laws and are subject to future legislative changes that, if reduced from current rates in several states, could have a material adverse impact on our future consolidated results of operations.
42
Texas and South Carolina Medicaid Disproportionate Share Hospit
al Payments:
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 of Texas’ and South Carolina’s low income patients, five of our facilities located in Texas and one facility located in South Carolina received additional reimbursement from each state’s DSH fund. The South Carolina and Texas DSH programs were renewed for each state’s 2019 DSH fiscal year (covering the period of October 1, 2018 through September 30, 2019).
In connection with these DSH programs, included in our financial results was an aggregate of approximately $9 million and $10 million during the three-month periods ended March 31, 2019 and 2018, respectfully. We expect the aggregate reimbursements to our hospitals pursuant to the Texas and South Carolina 2019 fiscal year programs to be approximately $33 million.
The ACA and subsequent federal legislation provides for a significant reduction in Medicaid disproportionate share payments beginning in federal fiscal year 2020 (see below in
Sources of Revenues and Health Care Reform-Medicaid Revisions
for additional disclosure). The U.S. Department of Health and Human Services 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 in Texas and South Carolina, will be reduced in the coming years. Based on the CMS proposed rule published in July, 2017, Medicaid DSH payments in South Carolina and Texas could be reduced by approximately 20% and 14%, respectively, from projected 2018 DSH payment levels beginning in FFY 2020.
Nevada SPA:
In Nevada, CMS approved a state plan amendment (“SPA”) in August, 2014 that implemented a hospital supplemental payment program retroactive to January 1, 2014. This SPA has been approved for additional state fiscal years including the 2019 fiscal year covering the period of July 1, 2018 through June 30, 2019.
In connection with this program, included in our financial results was approximately $7 million and $6 million during the three-month periods ended March 31, 2019 and 2018, respectively. We estimate that our reimbursements pursuant to this program will approximate $26 million during the year ended December 31, 2019.
California SPA:
In California, CMS issued formal approval of the 2017-19 Hospital Fee Program in December, 2017 retroactive to January 1, 2017 through June 30, 2019. This approval included the Medicaid inpatient and outpatient fee-for-service supplemental payments and the overall provider tax structure but did not yet include the approval of the managed care payment component. Upon approval by CMS, the managed care payment component will consist of two categories of payments, “pass-through” payments and “directed” payments. The pass-through payments will be similar in nature to the prior Hospital Fee Program payment method whereas the directed payment method will be based on actual concurrent hospital Medicaid managed care in-network patient volume. In March, 2018, CMS approved the “directed” payment component methodology for the period of July 1, 2017 through September 30, 2018. The timing of CMS approval of the “pass through” component and the remaining “directed” payment periods is uncertain. We estimate that the managed care component of the Hospital Fee Program will result in a favorable impact on our operating results of $6 million in 2019 while this program favorably impacted our 2018 results of operations by $16 million, $7 million of which related to prior years. The aggregate impact of the California supplemental payment program, as outlined above, is included in the above
State Medicaid Supplemental Payment Program
table.
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 and Indiana. 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
43
allows for a transition of the pass-through paym
ents into value-based payment structures, delivery system reform initiatives or payments tied to services under a MCO contract. Since we are unable to determine the financial impact of this aspect of the final rule, we can provide no assurance that the fi
nal 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 populatio
ns or services from fee-for-service Medicaid to managed care.
HITECH Act:
In July 2010, the Department of Health and Human Services (“HHS”) published final regulations implementing the health information technology (“HIT”) provisions of the American Recovery and Reinvestment Act (referred to as the “HITECH Act”). The final regulation defines the “meaningful use” of Electronic Health Records (“EHR”) and establishes the requirements for the Medicare and Medicaid EHR payment incentive programs. The final rule established an initial set of standards and certification criteria. The implementation period for these new Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. State Medicaid program participation in this federally funded incentive program is voluntary but all of the states in which our eligible hospitals operate have chosen to participate. Our acute care hospitals qualified for these EHR incentive payments upon implementation of the EHR application assuming they meet the “meaningful use” criteria. The government’s ultimate goal is to promote more effective (quality) and efficient healthcare delivery through the use of technology to reduce the total cost of healthcare for all Americans and utilizing the cost savings to expand access to the healthcare system.
Pursuant to HITECH Act regulations, hospitals that do not qualify as a meaningful user of EHR by 2015 are subject to a reduced market basket update to the IPPS standardized amount in 2015 and each subsequent fiscal year. We believe that all of our acute care hospitals have met the applicable meaningful use criteria and therefore are not subject to a reduced market basked update to the IPPS standardized amount in federal fiscal year 2015. 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.
Federal regulations require that Medicare EHR incentive payments be computed based on the Medicare cost report that begins in the federal fiscal period in which a hospital meets the applicable “meaningful use” requirements. Since the annual Medicare cost report periods for each of our acute care hospitals ends on December 31
st
, we will recognize Medicare EHR incentive income for each hospital during the fourth quarter of the year in which the facility meets the “meaningful use” criteria and during the fourth quarter of each applicable subsequent year.
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
44
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 ACA.
Implemented Medicare Reductions and Reforms:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
The Reconciliation Act 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 ACA implemented certain reforms to Medicare Advantage payments, effective in 2011.
|
|
|
•
|
A Medicare shared savings program, effective in 2012.
|
|
|
|
|
|
|
•
|
A hospital readmissions reduction program, effective in 2012.
|
|
|
|
|
|
•
|
A value-based purchasing program for hospitals, effective in 2012.
|
|
|
|
•
|
A national pilot program on payment bundling, effective in 2013.
|
|
|
|
|
•
|
Reduction to Medicare DSH payments, effective in 2014, as discussed above.
|
Medicaid Revisions:
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|
|
|
|
|
|
|
|
|
|
|
•
|
Expanded Medicaid eligibility and related special federal payments, effective in 2014.
|
|
|
|
•
|
The ACA (as amended by subsequent federal legislation) requires annual aggregate reductions in federal DSH funding from federal fiscal year (“FFY”) 2020 through FFY 2025. The aggregate annual reduction amounts are $4.0 billion for FFY 2020 and $8.0 billion for FFY 2021 through FFY 2025.
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Health Insurance Revisions:
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|
|
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|
|
|
|
|
|
|
|
|
|
•
|
Large employer insurance reforms, effective in 2015.
|
|
|
|
|
•
|
Individual insurance mandate and related federal subsidies, effective in 2014. As noted above in
Health Care Reform,
the Tax Cuts and Jobs Act enacted into law in December, 2017 eliminated the individual insurance federal mandate penalty after December 31, 2018.
|
|
|
|
•
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Federally mandated insurance coverage reforms, effective in 2010 and forward.
|
The ACA seeks to increase competition among private health insurers by providing for transparent federal and state insurance exchanges. The ACA 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.
45
The ACA required HHS to implement a value-based purchasing program for inpatient hospital services which became effective on October 1, 2012. The ACA requires HHS to reduce inpatient hospital payments for all dischar
ges 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 qu
ality 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 fina
l rule, CMS funded the value-based purchasing program by reducing base operating DRG payment amounts to participating hospitals by 1.75%. For FFY 2017, this reduction was increased to its maximum of 2%.
Hospital Acquired Conditions:
The ACA prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital acquired conditions (“HAC”). Beginning in FFY 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments.
Readmission Reduction Program:
In the ACA, 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 ACA 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. It remains unclear to what extent providers will pursue federal ACO status or whether the required investment would be warranted by increased payment.
Bundled Payments for Care Improvement Advanced:
The Center for Medicare & Medicaid Innovation (“CMMI”) is responsible for establishing demonstration projects and other initiatives aimed to develop, test and encourage the adoption of new methods for delivery and payment for health care that create savings under the Federal Medicare and state Medicaid programs while improving quality of care. For example, providers participating in bundled payment initiatives agree to receive one payment for services provided to Medicare beneficiaries for certain medical conditions or episodes of care, accepting accountability for costs and quality of care across the continuum of care. By rewarding providers for increasing quality and reducing costs, and penalizing providers if costs exceed a set amount, these models are intended to lead to higher quality and more coordinated care at a lower cost to the Medicare beneficiary and overall program. The CMMI has previously implemented a voluntary bundled payment program known as the Bundled Payment for Care Improvement (“BPCI”). Substantially all of our acute care hospitals were participants in the BPCI program, which ended September 30, 2018.
CMMI implemented a new, second generation voluntary episode payment model, Bundled Payments for Care Improvement Advanced (BPCI-Advanced or the Program), with the first performance period beginning October 1, 2018. BPCI-Advanced is designed to test a new iteration of bundled payments for 32 Clinical Episodes (29 inpatient and 3 outpatient) with an aim to align incentives among participating health care providers to reduce expenditures and improve quality of care for traditional Medicare beneficiaries. The first cohort of participants entered BPCI-Advanced on October 1, 2018, and agreed to an initial performance period that will run through December 31, 2023. We have elected to participate in BPCI-Advanced at seventeen (17) of our acute care hospitals across almost two hundred (200) clinical episodes in collaboration with a third-party convener which has extensive experience and success in BPCI. The ultimate success and financial impact of the BPCI-Advanced program is contingent on multiple variables so we are unable to estimate the impact. However, given the breadth and scope of participation of our acute care hospitals in BPCI-Advanced, the impact could be significant (either favorably or unfavorably) depending on actual program results.
46
In addition to statutory and regulatory changes to the Medicare and each of the state Medicaid programs, our operations and reimbursement may be affected by administrative r
ulings, 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 unresolve
d and previously determined allowances could become either inadequate or more than ultimately required.
Finally, we expect continued third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in reimbursement amounts received from third-party payers could have a material adverse effect on our financial position and our results.
Other Operating Results
Interest Expense:
As reflected on the schedule below, interest expense was $40 million and $38 million during the three-month periods ended March 31, 2019 and 2018, respectively (amounts in thousands):
|
|
|
Three Months
Ended
March 31,
2019
|
|
|
Three Months
Ended
March 31,
2018
|
|
|
Revolving credit & demand notes (a.)
|
|
$
|
745
|
|
|
$
|
3,235
|
|
|
$300 million, 3.75% Senior Notes due 2019 (b.)
|
|
|
0
|
|
|
|
2,813
|
|
|
$700 million, 4.75% Senior Notes due 2022, net (c.)
|
|
|
8,069
|
|
|
|
8,069
|
|
|
$400 million, 5.00% Senior Notes due 2026 (d.)
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Term loan facility A (a.)
|
|
|
19,334
|
|
|
|
13,746
|
|
|
Term loan facility B (a.)
|
|
|
5,318
|
|
|
|
-
|
|
|
Accounts receivable securitization program (e.)
|
|
|
3,192
|
|
|
|
2,659
|
|
|
Subtotal-revolving credit, demand notes, Senior Notes,
term loan facility and accounts receivable
securitization program
|
|
|
41,658
|
|
|
|
35,522
|
|
|
Interest rate swap income, net
|
|
|
(2,944
|
)
|
|
|
(709
|
)
|
|
Amortization of financing fees
|
|
|
1,278
|
|
|
|
2,247
|
|
|
Other combined interest expense
|
|
|
691
|
|
|
|
1,040
|
|
|
Capitalized interest on major projects
|
|
|
(774
|
)
|
|
|
(421
|
)
|
|
Interest income
|
|
|
(269
|
)
|
|
|
(103
|
)
|
|
Interest expense, net
|
|
$
|
39,640
|
|
|
$
|
37,576
|
|
47
|
|
(a.)
|
In October, 2018, we entered into a sixth amendment to our credit agreement dated November 15, 2010 to, among other things: (i.) increase the aggregate amount of the revolving commitments by $200 million to $1 billion; (ii) increase the aggregate amount of
the term loan facility A by approximately $290 million to $2 billion, and; (iii) extend the maturity date of the credit agreement from August 7, 2019 to October 23, 2023.
On October 31, 2018,
we added a seven-year, Tranche B term loan facility in the aggr
egate amount of $500 million pursuant to our credit agreement. The Tranche B term loan matures on October 31, 2025.
|
As of March 31, 2019, we had: (i) no outstanding borrowings under the $1 billion revolving credit facility; (ii) $1.988 billion of borrowings outstanding under the term loan A facility, and; (iii) $499 million of borrowings outstanding under the term loan B facility.
|
|
(b.)
|
On November 26, 2018 we redeemed the $300 million aggregate principal, 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 June, 2016, we completed the offering of an additional $400 million aggregate principal amount of 4.75% Senior Notes due in 2022 (issued at a yield of 4.35%), the terms of which were identical to the terms of our $300 million aggregate principal amount of 4.75% Senior Notes due in 2022, issued in August, 2014. These Senior Notes, combined, are referred to as $700 million, 4.75% Senior Notes due in 2022.
|
|
|
(d.)
|
In June, 2016, we completed the offering of $400 million aggregate principal amount of 5.00% Senior Notes due in 2026.
|
|
|
(e.)
|
In April, 2018, we amended our accounts receivable securitization program, which was scheduled to expire in December, 2018. Pursuant to the amendment, the term has been extended through April 26, 2021, and the borrowing limit has been increased to $450 million from $440 million ($290 million outstanding as of March 31, 2019).
|
Interest expense increased $2 million during the three-month period ended March 31, 2019, as compared to the comparable period of 2018, due primarily to: (i) a net $6 million increase in aggregate interest expense on our revolving credit, demand notes, senior notes, term loan facility and accounts receivable securitization program resulting from an increase in our aggregate average cost of borrowings pursuant to these facilities (4.2% during the three months ended March 31, 2019 as compared to 3.6% in the comparable quarter of 2018), slightly offset by a decrease in the aggregate average outstanding borrowings ($3.99 billion during the three months ended March 31, 2019 as compared to $4.00 billion in the comparable 2018 quarter), partially offset by; (ii) $4 million of other combined decreases in interest expense consisting primarily of a $2 million increase in interest rate swap income. The average effective interest rate on these facilities, including amortization of deferred financing costs and original issue discounts and designated interest rate swap expense was 4.0% and 3.7% during the three-month periods ended March 31, 2019 and 2018, respectively.
Provision for Income Taxes and Effective Tax Rates:
The effective tax rates, as calculated by dividing the provision for income taxes by income before income taxes, were as follows for the three-month periods ended March 31, 2019 and 2018 (dollar amounts in thousands):
|
|
|
Three months ended
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Provision for income taxes
|
|
$
|
58,898
|
|
|
$
|
67,569
|
|
|
|
Income before income taxes
|
|
|
296,296
|
|
|
|
296,238
|
|
|
|
Effective tax rate
|
|
|
19.9
|
%
|
|
|
22.8
|
%
|
|
The decrease in the provision for income taxes and effective tax rate during the three-month period ended March 31, 2019, as compared to the comparable quarter of 2018, was due primarily to a favorable change of $9 million resulting from our adoption of ASU 2016-09. As a result of ASU 2016-09, our provision for income taxes was decreased by approximately $11 million during the first quarter of 2019, as compared to a decrease of approximately $2 million during the first quarter of 2018.
48
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was $391 million during the three-month period ended March 31, 2019 and $410 million during the comparable quarter of 2018. The net decrease of $19 million was primarily attributable to the following:
|
|
•
|
a favorable change of $14 million due to an increase in net income plus/minus depreciation and amortization expense, stock-based compensation, and a net gain on sales of assets;
|
|
|
•
|
an unfavorable change of $29 million in accounts receivable;
|
|
|
•
|
a favorable change of $49 million in other working capital accounts resulting primarily from changes in accounts payable due to timing of disbursements;
|
|
|
•
|
an unfavorable change of $9 million in accrued and deferred income taxes, and;
|
|
|
•
|
$44 million of other combined net unfavorable changes.
|
Days sales outstanding (“DSO”):
Our DSO are calculated by dividing our net revenue by the number of days in the three-month periods. The result is divided into the accounts receivable balance at March 31
s
t
of each year to obtain the DSO. Our DSO were 51 days and 53 days at March 31, 2019 and 2018, respectively.
Our accounts receivable as of March 31, 2019 and December 31, 2018 include amounts due from Illinois of approximately $34 million and $32 million, respectively. Collection of the outstanding receivables continues to be delayed due to state budgetary and funding pressures. Approximately $19 million as of March 31, 2019 and $18 million as of December 31, 2018, of the receivables due from Illinois were outstanding in excess of 60 days, as of each respective date. Although the accounts receivable due from Illinois could remain outstanding for the foreseeable future, since we expect to eventually collect all amounts due to us, no related reserves have been established in our consolidated financial statements. However, we can provide no assurance that we will eventually collect all amounts due to us from Illinois. Failure to ultimately collect all outstanding amounts due to us from Illinois would have an adverse impact on our future consolidated results of operations and cash flows.
Net cash used in investing activities
During the first three months of 2019, we used $168 million of net cash in investing activities as follows:
|
|
•
|
$170 million spent on capital expenditures including capital expenditures for equipment, renovations and new projects at various existing facilities;
|
|
|
•
|
$13 million received in connection with net cash inflows from forward exchange contracts that hedge our investment in the U.K. against movements in exchange rates;
|
|
|
•
|
$10 million spent on the purchase and implementation of information technology applications, and;
|
|
|
•
|
$1 million spent to fund investments in and advances to joint ventures and other.
|
During the first three months of 2018, we used $272 million of net cash in investing activities as follows:
|
|
•
|
$189 million spent on capital expenditures including capital expenditures for equipment, renovations and new projects at various existing facilities;
|
|
|
•
|
$46 million paid in connection with net cash outflows from forward exchange contracts that hedge our investment in the U.K. against movements in exchange rates;
|
|
|
•
|
$20 million spent to acquire businesses and property consisting primarily of the acquisition of a 109-bed behavioral health care facility located in Gulfport, Mississippi;
|
|
|
•
|
$9 million spent on the purchase and implementation of information technology application, and;
|
|
|
•
|
$9 million spent to fund construction costs of a new behavioral health care facility which will be jointly owned by us and a third-party.
|
In conjunction with the January 1, 2019 adoption of ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities”, we reclassified our presentation of the net cash inflows or outflows, which were received or paid in connection with foreign exchange
49
contracts that hedge our net investment in foreign operations against movements in exchange rates, to investing cash flows on the consolidated statements of cash flows. As previously disclosed within our footnotes, these cash flows we
re formerly reported as operating activities. Prior period amounts have been reclassified from net cash provided by operating activities to net cash used in investing activities to conform with the current year presentation on the consolidated statements
of cash flows.
Net cash used in financing activities
During the first three months of 2019, we used $266 million of net cash in financing activities as follows:
|
|
•
|
spent $115 million on net repayments of debt as follows: (i) $100 million related to our accounts receivable securitization program; (ii) $13 million related to our term loan A facility; (iii) $1 million related to our term loan B facility, and; (iv) $1 million related to other debt facilities;
|
|
|
•
|
generated $9 million of proceeds related to new borrowings pursuant to a short-term, on-demand credit facility;
|
|
|
•
|
spent $144 million to repurchase shares of our Class B Common Stock in connection with: (i) open market purchases pursuant to our $1.7 billion stock repurchase program ($113 million), and; (ii) income tax withholding obligations related to stock-based compensation programs ($31 million);
|
|
|
•
|
spent $10 million to pay profit distributions related to noncontrolling interests in majority owned businesses;
|
|
|
•
|
spent $9 million to pay quarterly cash dividends of $.10 per share, and;
|
|
|
•
|
generated $3 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans.
|
During the first three months of 2018, we used $141 million of net cash in financing activities as follows:
|
|
•
|
spent $141 million on net repayments of debt as follows: (i) $22 million related to our term loan A facility; (ii) $118 million related to our revolving credit facility, and; (iii) $1 million related to other debt facilities;
|
|
|
•
|
generated $20 million of proceeds related to new borrowings pursuant to our accounts receivable securitization program;
|
|
|
•
|
spent $9 million to repurchase shares of our Class B Common Stock in connection with: (i) open market purchases pursuant to our $1.2 billion stock repurchase program ($5 million), and; (ii) income tax withholding obligations related to stock-based compensation programs ($4 million);
|
|
|
•
|
spent $4 million to pay profit distributions related to noncontrolling interests in majority owned businesses;
|
|
|
•
|
spent $9 million to pay quarterly cash dividends of $.10 per share, and;
|
|
|
•
|
generated $3 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans.
|
During the remaining nine months of 2019, we expect to spend approximately $505 million to $555 million on capital expenditures which includes expenditures for capital equipment, renovations and new projects at existing hospitals. We believe that our capital expenditure program is adequate to expand, improve and equip our existing hospitals. We expect to finance all capital expenditures and acquisitions with internally generated funds and/or additional funds, as discussed below.
Capital Resources
Credit Facilities and Outstanding Debt Securities
On October 23, 2018, we entered into a Sixth Amendment (the “Sixth Amendment”) to our credit agreement dated as of November 15, 2010, as amended on March 15, 2011, September 21, 2012, May 16, 2013, August 7, 2014 and June 7, 2016, among UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents party thereto (the “Senior Credit Agreement”). The Sixth Amendment became effective on October 23, 2018.
The Sixth Amendment amended the Senior Credit Facility to, among other things: (i) increase the aggregate amount of the revolving credit facility to $1 billion (increase of $200 million over the $800 million previous commitment); (ii) increase the aggregate amount of the tranche A term loan commitments to $2 billion (increase of approximately $290 million over the $1.71 billion of outstanding borrowings prior to the amendment), and; (iii) extended the maturity date of the revolving credit and tranche A term loan facilities to October 23, 2023 from August 7, 2019.
On October 31, 2018, we added a seven-year tranche B term loan facility in the aggregate principal amount of $500 pursuant to the Senior Credit Agreement. The tranche B term loan matures on October 31, 2025. We used the proceeds to repay borrowings under the
50
revolving credit facility, the Securitization,
to redeem our
$300 million,
3.75% Senior Notes
that were scheduled to mature
in 2019
and for general corporate p
urposes.
As of March 31, 2019, we had no borrowings outstanding pursuant to our $1 billion revolving credit facility and we had $973 million of available borrowing capacity net of $12 million of outstanding letters of credit and $15 million of outstanding borrowings pursuant to a short-term credit facility.
Pursuant to the terms of the Sixth Amendment, the tranche A term loan, which had $1.988 billion of borrowings outstanding as of March 31, 2019, provides for eight installment payments of $12.5 million per quarter, covering the period of March of 2019 through December of 2020, followed by payments of $25 million per quarter, 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 $499 million of borrowings outstanding as of March 31, 2019, provides for installment payments of $1.25 million per quarter, which commenced on March 31, 2019 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 of March 31, 2019, the applicable margins were 0.50% for ABR-based loans and 1.50% 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 of March 31, 2019 and December 31, 2018.
In late April, 2018, we entered into the sixth amendment to our accounts receivable securitization program (“Securitization”) dated as of October 27, 2010 with a group of conduit lenders, liquidity banks, and PNC Bank, National Association, as administrative agent, which provides for borrowings outstanding from time to time by certain of our subsidiaries in exchange for undivided security interests in their respective accounts receivable. The sixth amendment, among other things, extended the term of the Securitization program through April 26, 2021 and increased the borrowing capacity to $450 million (from $440 million previously). Although the program fee and certain other fees were adjusted in connection with the sixth amendment, substantially all other provisions of the Securitization program remained unchanged. Pursuant to the terms of our Securitization program, substantially all of the patient-related accounts receivable of our acute care hospitals (“Receivables”) serve as collateral for the outstanding borrowings. We have accounted for this Securitization as borrowings. We maintain effective control over the Receivables since, pursuant to the terms of the Securitization, the Receivables are sold from certain of our subsidiaries to special purpose entities that are wholly-owned by us. The Receivables, however, are owned by the special purpose entities, can be used only to satisfy the debts of the wholly-owned special purpose entities, and thus are not available to us except through our ownership interest in the special purpose entities. The wholly-owned special purpose entities use the Receivables to collateralize the loans obtained from the group of third-party conduit lenders and liquidity banks. The group of third-party conduit lenders and liquidity banks do not have recourse to us beyond the assets of the wholly-owned special purpose entities that securitize the loans. At March 31, 2019, we had $290 million of outstanding borrowings pursuant to the terms of the Securitization and $160 million of available borrowing capacity.
As of March 31, 2019, we had combined aggregate principal of $1.1 billion from the following senior secured notes:
|
|
•
|
$700 million aggregate principal amount of 4.75% senior secured notes due in August, 2022 (“2022 Notes”) which were issued as follows:
|
|
|
•
|
$300 million aggregate principal amount issued on August 7, 2014 at par.
|
|
|
•
|
$400 million aggregate principal amount issued on June 3, 2016 at 101.5% to yield 4.35%.
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|
|
•
|
$400 million aggregate principal amount of 5.00% senior secured notes due in June, 2026 (“2026 Notes”) which were issued on June 3, 2016.
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51
Interest on the 2022 Notes is payable on February 1 and August 1 of each year until the m
aturity date of August 1, 2022. Interest on the 2026 Notes is payable on June 1 and December 1 until the maturity date of June 1, 2026. The 2022 Notes and 2026 Notes were offered only to qualified institutional buyers under Rule 144A and to non-U.S. perso
ns outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The 2022 Notes and 2026 Notes have not been registered under the Securities Act and may not be offered or sold in the United State
s absent registration or an applicable exemption from registration requirements
.
On November 26, 2018 we redeemed the $300 million aggregate principal, 3.75% Senior Notes due in 2019. The 2019 Notes were redeemed for an aggregate price equal to 100.485% of the principal amount, resulting in a premium paid of approximately $1 million, plus accrued interest to the redemption date.
At March 31, 2019, the carrying value and fair value of our debt were each approximately $3.9 billion. At December 31, 2018, 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 42% at March 31, 2019 and 43% at December 31, 2018.
During 2015, we entered into nine forward starting interest rate swaps whereby we paid a fixed rate on a total notional amount of $1.0 billion and received one-month LIBOR. The average fixed rate payable on these swaps, all of which matured on April 15, 2019, was 1.31%. Although we can provide no assurance that we will ultimately do so, we are currently monitoring the interest rate environment and evaluating the terms of potential replacement interest rate swaps that we may enter into for a large portion, or potentially all, of the $1 billion total notional amount that expired on April 15, 2019.
We expect to finance all capital expenditures and acquisitions, pay dividends and potentially repurchase shares of our common stock utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing revolving credit facility or through refinancing the existing Senior Credit Agreement; (ii) the issuance of other long-term debt, and/or; (iii) the issuance of equity. We believe that our operating cash flows, cash and cash equivalents, as well as access to the capital markets, provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months, including the refinancing of our above-mentioned Senior Credit Agreement that is scheduled to mature in October, 2023. However, in the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.
Off-Balance Sheet Arrangements
During the three months ended March 31, 2019, there have been no material changes in the off-balance sheet arrangements consisting of standby letters of credit and surety bonds. Effective January 1, 2019, we adopted ASU 2016-02 which requires companies to, among other things, recognize lease assets and lease liabilities on the balance sheet. As a result of our adoption of ASU 2016-02, our consolidated balance sheet as of March 31, 2019 includes right of use assets-operating leases ($342.0 million) and operating lease liabilities ($56.1 million current and $286.1 million noncurrent). Prior period financial statements were not adjusted for the effects of this new standard. Reference is made to
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Off-Balance Sheet Arrangements,
in our Annual Report on Form 10-K for the year ended December 31, 2018.
As of March 31, 2019 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled $116 million consisting of: (i) $111 million related to our self-insurance programs, and; (ii) $5 million of other debt and public utility guarantees.