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, 2022, we owned and/or operated 364 inpatient facilities and 41 outpatient and other facilities including the following located in 38 U.S 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 58% and 56% during the three-month periods ended March 31, 2022 and 2021, respectively. Net revenues from our behavioral health care facilities and commercial health insurer accounted for 42% and 44% of our consolidated net revenues during the three-month period ended March 31, 2022 and 2021, respectively.
Our behavioral health care facilities located in the U.K. generated net revenues of approximately $176 million and $165 million during the three-month periods ended March 31, 2022 and 2021, respectively. Total assets at our U.K. behavioral health care facilities were approximately $1.320 billion as of March 31, 2022 and $1.351 billion as of December 31, 2021.
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 our Annual Report on Form 10-K for the year ended December 31, 2021, 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 set forth herein in Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 and in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements and Risk Factors, as included herein. 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.
There have been no significant changes to our critical accounting policies or estimates from those disclosed in our 2021 Annual Report on Form 10-K.
The impact of the COVID-19 pandemic, which began during the second half of March, 2020, has had a material effect on our operations and financial results since that time. The COVID-19 vaccination process commenced during the first quarter of 2021. Since that time through the second quarter of 2021, we had generally experienced a decline in COVID-19 patients as well as a corresponding recovery in non-COVID patient activity. However, during the third and fourth quarters of 2021, and continuing into the early part of the first quarter of 2022, our facilities generally experienced an increase in COVID-19 patients resulting from the Delta and, more
The nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issue facing us and other healthcare providers. Like others in the healthcare industry, we continue to experience a shortage of nurses and other clinical staff and support personnel at our acute care and behavioral health care hospitals in many geographic areas. In some areas, the labor scarcity is putting a strain on our resources and staff, which has required us to utilize higher‑cost temporary labor and pay premiums above standard compensation for essential workers. This staffing shortage has required us to hire expensive temporary personnel and/or enhance wages and benefits to recruit and retain nurses and other clinical staff and support personnel. At certain facilities, particularly within our behavioral health care segment, we have been unable to fill all vacant positions and, consequently, have been required to limit patient volumes. These factors had a material unfavorable impact on our results of operations during the first quarter of 2022. The length and extent of the disruptions caused by the COVID‑19 pandemic are currently unknown; however, we expect such disruptions to continue during 2022.
Since the future volumes and severity of COVID-19 patients remain highly uncertain and subject to change, including potential increases in future COVID-19 patient volumes caused by new variants of the virus, as well as related pressures on staffing and wage rates, we are not able to fully quantify the impact that these factors will have on our future financial results. However, conditions related to the COVID-19 pandemic and its unfavorable impact on our labor costs and behavioral health patient volumes could continue to materially affect our financial performance during the remainder of 2022.
The following table summarizes our results of operations and is used in the discussion below for the three-month periods ended March 31, 2022 and 2021 (dollar amounts in thousands):
Net revenues increased by 9.3%, or $280 million, to $3.29 billion during the three-month period ended March 31, 2022 as compared to $3.01 billion during the first quarter of 2021. The net increase was primarily attributable to: (i) a $211 million or 7.2% increase in net revenues generated from our acute care hospital services and behavioral health services operated during both periods (which we refer to as “same facility”), and; (ii) $69 million of other combined net increases.
Income before income taxes (before income attributable to noncontrolling interests) decreased by $73 million to $200 million during the three-month period ended March 31, 2022 as compared to $273 million during the first quarter of 2021. The $73 million net decrease was due to:
We believe that providing our results on a “Same Facility” basis (which is a non-GAAP measure), which includes the operating results for facilities and businesses operated in both the current year and prior year periods, is helpful to our investors as a measure of our operating performance. Our Same Facility results also neutralize (if applicable) the effect of items that are non-operational in nature including items such as, but not limited to, gains/losses on sales of assets and businesses, impacts of settlements, legal judgments and lawsuits, impairments of long-lived and intangible assets and other amounts that may be reflected in the current or prior year financial statements that relate to prior periods.
Our Same Facility basis results reflected on the table below also exclude from net revenues and other operating expenses, provider tax assessments incurred in each period as discussed below Sources of Revenue-Various State Medicaid Supplemental Payment Programs. However, these provider tax assessments are included in net revenues and other operating expenses as reflected in the table below under All Acute Care Hospital Services. The provider tax assessments had no impact on the income before income taxes as reflected on the tables below since the amounts offset between net revenues and other operating expenses. To obtain a complete understanding of our financial performance, the Same Facility results should be examined in connection with our net income as determined in accordance with U.S. 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, 2022 and 2021 (dollar amounts in thousands):
During the three-month period ended March 31, 2022, as compared to the comparable prior year quarter, net revenues from our acute care hospital services, on a same facility basis increased by $163 million or 9.7%. Income before income taxes (and before income attributable to noncontrolling interests) decreased by $21 million, or 12%, amounting to $152 million, or 8.3% of net revenues during the first quarter of 2022 as compared to $174 million, or 10.4% of net revenues during the first quarter of 2021.
During the three-month period ended March 31, 2022, net revenue per adjusted admission increased by 3.1% while net revenue per adjusted patient day increased by 3.3%, as compared to the comparable quarter of 2021. During the three-month period ended March 31, 2022, as compared to the comparable prior year quarter, inpatient admissions to our acute care hospitals increased by 2.8% and adjusted admissions (adjusted for outpatient activity) increased by 5.7%. Patient days at these facilities increased by 2.5% and adjusted patient days increased by 5.5% during the three-month period ended March 31, 2022 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 5.4 days during each of the three-month periods ended March
The following table summarizes the results of operations for all our acute care operations during the three-month periods ended March 31, 2022 and 2021. These amounts include: (i) our acute care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including, if applicable, the results of recently acquired/opened ancillary facilities and businesses. Dollar amounts below are reflected in thousands.
During the three-month period ended March 31, 2022, as compared to the comparable prior year quarter, net revenues from our acute care hospital services increased by $218 million, or 12.9%, due to: (i) the $163 million, or 9.7% increase in same facility revenues, as discussed above, and; (ii) $55 million of other combined increases due to facilities and businesses acquired during the past year as well as an increase in provider tax assessments.
Income before income taxes decreased by $24 million, or 14%, to $149 million, or 7.8% of net revenues during the first quarter of 2022, as compared to $173 million, or 10.2% of net revenues during the first quarter of 2021. The $24 million decrease in income before income taxes from our acute care hospital services resulted from the $21 million, or 12% decrease in income before income taxes at our hospitals, on a same facility basis, as discussed above, and $3 million of other combined net decreases related to start-up losses incurred at a newly constructed hospital that opened in early, April, 2022, and other facilities and businesses acquired during the past year.
Charity Care and Uninsured Discounts:
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, 2022 and 2021:
Uncompensated care:
Amounts in millions |
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
2022 |
|
|
% |
|
|
|
2021 |
|
|
% |
|
Charity care |
|
$ |
215 |
|
|
|
46 |
% |
|
$ |
167 |
|
|
|
39 |
% |
Uninsured discounts |
|
255 |
|
|
|
54 |
% |
|
259 |
|
|
|
61 |
% |
Total uncompensated care |
|
$ |
470 |
|
|
|
100 |
% |
|
$ |
426 |
|
|
|
100 |
% |
33
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 |
|
|
2022 |
|
|
|
2021 |
|
Estimated cost of providing charity care |
|
$ |
23 |
|
|
$ |
18 |
|
Estimated cost of providing uninsured discounts related care |
|
27 |
|
|
28 |
|
Estimated cost of providing uncompensated care |
|
$ |
50 |
|
|
$ |
46 |
|
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 U.S. 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, 2022 and 2021 (dollar amounts in thousands):
Same Facility—Behavioral Health
|
|
Three months ended
March 31, 2022 |
|
|
Three months ended
March 31, 2021 |
|
|
|
|
Amount |
|
|
% of Net
Revenues |
|
|
Amount |
|
|
% of Net
Revenues |
|
|
Net revenues |
|
$ |
1,334,532 |
|
|
|
100.0 |
% |
|
$ |
1,285,977 |
|
|
|
100.0 |
% |
|
Operating charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
|
|
745,806 |
|
|
|
55.9 |
% |
|
|
698,228 |
|
|
|
54.3 |
% |
|
Other operating expenses |
|
|
265,691 |
|
|
|
19.9 |
% |
|
|
244,365 |
|
|
|
19.0 |
% |
|
Supplies expense |
|
|
49,597 |
|
|
|
3.7 |
% |
|
|
50,513 |
|
|
|
3.9 |
% |
|
Depreciation and amortization |
|
|
44,731 |
|
|
|
3.4 |
% |
|
|
45,090 |
|
|
|
3.5 |
% |
|
Lease and rental expense |
|
|
10,724 |
|
|
|
0.8 |
% |
|
|
11,251 |
|
|
|
0.9 |
% |
|
Subtotal-operating expenses |
|
|
1,116,549 |
|
|
|
83.7 |
% |
|
|
1,049,447 |
|
|
|
81.6 |
% |
|
Income from operations |
|
|
217,983 |
|
|
|
16.3 |
% |
|
|
236,530 |
|
|
|
18.4 |
% |
|
Interest expense, net |
|
|
465 |
|
|
|
0.0 |
% |
|
|
338 |
|
|
|
0.0 |
% |
|
Other (income) expense, net |
|
|
(115 |
) |
|
|
(0.0 |
)% |
|
|
413 |
|
|
|
0.0 |
% |
|
Income before income taxes |
|
$ |
217,633 |
|
|
|
16.3 |
% |
|
$ |
235,779 |
|
|
|
18.3 |
% |
|
Three-month periods ended March 31, 2022 and 2021:
During the three-month period ended March 31, 2022, as compared to the comparable prior year quarter, net revenues from our behavioral health services, on a same facility basis, increased by $49 million or 3.8%. Income before income taxes (and before income attributable to noncontrolling interests) decreased by $18 million, or 8%, amounting to $218 million or 16.3% of net revenues during the first quarter of 2022 as compared to $236 million or 18.3% of net revenues during the first quarter of 2021.
During the three-month period ended March 31, 2022, net revenue per adjusted admission increased by 5.8% while net revenue per adjusted patient day increased by 5.1%, as compared to the comparable quarter of 2021. During the three-month period ended March 31, 2022, as compared to the comparable prior year quarter, inpatient admissions to our behavioral health care hospitals decreased by 2.3% and adjusted admissions decreased by 1.9%. Patient days at these facilities decreased by 1.7% and adjusted patient days
34
decreased by 1.3% during the three-month period ended March 31, 2022 as compared to the comparable prior year quarter. The average length of inpatient stay at these facilities was 13.4 days during each of the three-month periods ended March 31, 2022 and 2021. The occupancy rate, based on the average available beds at these facilities, was 70% and 72% during the three-month periods ended March 31, 2022 and 2021, respectively.
As discussed above in COVID-19 and Clinical Staffing Shortage, the nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issue facing us and other healthcare providers. At certain of our behavioral health care facilities, we have been unable to fill all vacant positions and, consequently, have been required to limit patient volumes which had a material unfavorable impact on our results of operations during the first quarter of 2022. Conditions related to the COVID-19 pandemic and its unfavorable impact on our staffing and related impact on our behavioral health care patient volumes could continue to materially affect our financial performance during the remainder of 2022.
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, 2022 and 2021. These amounts include: (i) our behavioral health care results on a same facility basis, as indicated above; (ii) the impact of provider tax assessments which increased net revenues and other operating expenses but had no impact on income before income taxes, and; (iii) certain other amounts including the results of facilities acquired or opened during the past year (if applicable) as well as the results of certain facilities that were closed or restructured during the past year. Dollar amounts below are reflected in thousands.
|
|
Three months ended
March 31, 2022 |
|
|
Three months ended
March 31, 2021 |
|
|
|
|
Amount |
|
|
% of Net
Revenues |
|
|
Amount |
|
|
% of Net
Revenues |
|
|
Net revenues |
|
$ |
1,366,467 |
|
|
|
100.0 |
% |
|
$ |
1,315,337 |
|
|
|
100.0 |
% |
|
Operating charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
|
|
753,886 |
|
|
|
55.2 |
% |
|
|
703,975 |
|
|
|
53.5 |
% |
|
Other operating expenses |
|
|
298,467 |
|
|
|
21.8 |
% |
|
|
269,297 |
|
|
|
20.5 |
% |
|
Supplies expense |
|
|
50,178 |
|
|
|
3.7 |
% |
|
|
51,009 |
|
|
|
3.9 |
% |
|
Depreciation and amortization |
|
|
46,079 |
|
|
|
3.4 |
% |
|
|
46,482 |
|
|
|
3.5 |
% |
|
Lease and rental expense |
|
|
10,820 |
|
|
|
0.8 |
% |
|
|
11,683 |
|
|
|
0.9 |
% |
|
Subtotal-operating expenses |
|
|
1,159,430 |
|
|
|
84.8 |
% |
|
|
1,082,446 |
|
|
|
82.3 |
% |
|
Income from operations |
|
|
207,037 |
|
|
|
15.2 |
% |
|
|
232,891 |
|
|
|
17.7 |
% |
|
Interest expense, net |
|
|
1,365 |
|
|
|
0.1 |
% |
|
|
1,153 |
|
|
|
0.1 |
% |
|
Other (income) expense, net |
|
|
(115 |
) |
|
|
(0.0 |
)% |
|
|
413 |
|
|
|
0.0 |
% |
|
Income before income taxes |
|
$ |
205,787 |
|
|
|
15.1 |
% |
|
$ |
231,325 |
|
|
|
17.6 |
% |
|
Three-month periods ended March 31, 2022 and 2021:
During the three-month period ended March 31, 2022, as compared to the comparable prior year quarter, net revenues generated from our behavioral health services increased by $51 million, or 3.9% due primarily to the above-mentioned $49 million, or 3.8% increase in net revenues on a same facility basis.
Income before income taxes decreased by $26 million, or 11.0%, to $206 million or 15.1% of net revenues during the first quarter of 2022, as compared to $231 million or 17.6% of net revenues during the first quarter of 2021. The decrease in income before income taxes at our behavioral health facilities during the first quarter of 2022, as compared to the compared quarter of 2021, was primarily attributable to the $18 million, or 8% decrease in income before income taxes experienced at our behavioral health facilities on a same facility basis, as discussed above, as well as $8 million of other combined net decreases consisting primarily of the startup losses incurred at six facilities opened during the past year.
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
35
increased outpatient levels mirrors the general trend occurring in the health care industry and we are unable to predict the rate of growth and resulting impact on our future revenues.
Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, and managed care plans, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Indications from recent federal and state legislation are that this trend will continue. Collection of amounts due from individuals is typically more difficult than from governmental or business payers which unfavorably impacts the collectability of our patient accounts.
As described below in the section titled 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation, the federal government has enacted multiple pieces of legislation to assist healthcare providers during the COVID-19 world-wide pandemic and U.S. National Emergency declaration. We have outlined those legislative changes related to Medicare and Medicaid payment and their estimated impact on our financial results, where estimates are possible.
Sources of Revenues and Health Care Reform: Given increasing budget deficits, the federal government and many states are currently considering additional ways to limit increases in levels of Medicare and Medicaid funding, which could also adversely affect future payments received by our hospitals. In addition, the uncertainty and fiscal pressures placed upon the federal government as a result of, among other things, impacts on state revenue and expenses resulting from the COVID-19 pandemic, economic recovery stimulus packages, responses to natural disasters, and the federal and state budget deficits in general may affect the availability of government funds to provide additional relief in the future. We are unable to predict the effect of future policy changes on our operations.
On March 23, 2010, President Obama signed into law the Legislation. Two primary goals of the Legislation are to provide for increased access to coverage for healthcare and to reduce healthcare-related expenses.
The Legislation revises reimbursement under the Medicare and Medicaid programs to emphasize the efficient delivery of high-quality care and contains a number of incentives and penalties under these programs to achieve these goals. The Legislation provides for decreases in the annual market basket update for federal fiscal years 2010 through 2019, a productivity offset to the market basket 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 2024. The Legislation implemented a value-based purchasing program, which will reward the delivery of efficient care. Conversely, certain facilities will receive reduced reimbursement for failing to meet quality parameters; such hospitals will include those with excessive readmission or hospital-acquired condition rates.
A 2012 U.S. Supreme Court ruling limited the federal government’s ability to expand health insurance coverage by holding unconstitutional sections of the Legislation that sought to withdraw federal funding for state noncompliance with certain Medicaid coverage requirements. Pursuant to that decision, the federal government may not penalize states that choose not to participate in the Medicaid expansion by reducing their existing Medicaid funding. Therefore, states can choose to expand or not to expand their Medicaid program without risking the loss of federal Medicaid funding. As a result, many states, including Texas, have not expanded their Medicaid programs without the threat of loss of federal funding. CMS has previously granted section 1115 demonstration waivers providing for work and community engagement requirements for certain Medicaid eligible individuals. CMS has also released guidance to states interested in receiving their Medicaid funding through a block grant mechanism. The Biden administration has signaled its intent to withdraw previously issued section 1115 demonstrations aligned with these policies. However, if implemented, the previously issued section 1115 demonstrations are anticipated to lead to reductions in coverage, and likely increases in uncompensated care, in states where these demonstration waivers are granted.
On December 14, 2018, a Texas Federal District Court deemed the Legislation to be unconstitutional in its entirety. The Court concluded that the Individual Mandate is no longer permissible under Congress’s taxing power as a result of the Tax Cut and Jobs Act of 2017 (“TCJA”) reducing the individual mandate’s tax to $0 (i.e., it no longer produces revenue, which is an essential feature of a tax), rendering the Legislation unconstitutional. The court also held that because the individual mandate is “essential” to the Legislation and is inseverable from the rest of the law, the entire Legislation is unconstitutional. Because the court issued a declaratory judgment and did not enjoin the law, the Legislation remained in place pending its appeal. The District Court for the Northern District of Texas ruling was appealed to the U.S. Court of Appeals for the Fifth Circuit. On December 18, 2019, the Fifth Circuit Court of Appeals’ three-judge panel voted 2-1 to strike down the Legislation individual mandate as unconstitutional. The Fifth Circuit Court also sent the case back to the Texas district court to determine which Legislation provisions should be stricken with the mandate or whether the entire Legislation is unconstitutional. On March 2, 2020, the U.S. Supreme Court agreed to hear, during the 2020-2021 term, two consolidated cases, filed by the State of California and the United States House of Representatives, asking the U.S. Supreme Court to review the ruling by the Fifth Circuit Court of Appeals. Oral argument was heard on November 10, 2020, and on June 17, 2021, the U.S. Supreme Court issued an opinion holding 7-2 that a group of states and individuals lacked standing to challenge the constitutionality of the Legislation. The Court did not reach the plaintiffs’ merits arguments, which specifically challenged the
36
constitutionality of the Legislation’s individual mandate and the entirety of the Legislation itself. As a result, the Legislation will continue to be law, and HHS and its respective agencies will continue to enforce regulations implementing the law.
The various provisions in the Legislation that directly or indirectly affect Medicare and Medicaid reimbursement are scheduled to take effect over a number of years. The impact of the Legislation on healthcare providers will be subject to implementing regulations, interpretive guidance and possible future legislation or legal challenges. Certain Legislation provisions, such as that creating the Medicare Shared Savings Program creates uncertainty in how healthcare may be reimbursed by federal programs in the future. Thus, we cannot predict the impact of the Legislation on our future reimbursement at this time and we can provide no assurance that the Legislation will not have a material adverse effect on our future results of operations.
The Legislation also contained provisions aimed at reducing fraud and abuse in healthcare. The Legislation amends several existing laws, including the federal Anti-Kickback Statute and the False Claims Act, making it easier for government agencies and private plaintiffs to prevail in lawsuits brought against healthcare providers. While Congress had previously revised the intent requirement of the Anti-Kickback Statute to provide that a person is not required to “have actual knowledge or specific intent to commit a violation of” the Anti-Kickback Statute in order to be found in violation of such law, the Legislation also provides that any claims for items or services that violate the Anti-Kickback Statute are also considered false claims for purposes of the federal civil False Claims Act. The Legislation provides that a healthcare provider that retains an overpayment in excess of 60 days is subject to the federal civil False Claims Act. The Legislation also expands the Recovery Audit Contractor program to Medicaid. These amendments also make it easier for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations.
We have partnered with local physicians in the ownership of certain of our facilities. These investments have been permitted under an exception to the physician self-referral law. The Legislation permits existing physician investments in a hospital to continue under a “grandfather” clause if the arrangement satisfies certain requirements and restrictions, but physicians are prohibited from increasing the aggregate percentage of their ownership in the hospital. The Legislation also imposes certain compliance and disclosure requirements upon existing physician-owned hospitals and restricts the ability of physician-owned hospitals to expand the capacity of their facilities. As discussed below, should the Legislation be repealed in its entirety, this aspect of the Legislation would also be repealed restoring physician ownership of hospitals and expansion right to its position and practice as it existed prior to the Legislation.
The impact of the Legislation on each of our hospitals may vary. Because Legislation provisions are effective at various times over the next several years, we anticipate that many of the provisions in the Legislation may be subject to further revision. Initiatives to repeal the Legislation, in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements to modify its provisions have been persistent. The ultimate outcomes of legislative attempts to repeal or amend the Legislation and legal challenges to the Legislation are unknown. Legislation has already been enacted that eliminated the individual mandate penalty, effective January 1, 2019, related to the obligation to obtain health insurance that was part of the original Legislation. In addition, Congress previously considered legislation that would, in material part: (i) eliminate the large employer mandate to offer health insurance coverage to full-time employees; (ii) permit insurers to impose a surcharge up to 30 percent on individuals who go uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits accordingly to income level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding of state Medicaid programs, or, if elected by a state, transition federal funding to block grants, and; (vi) permit states to seek a waiver of certain federal requirements that would allow such state to define essential health benefits differently from federal standards and that would allow certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums.
In addition to legislative changes, the Legislation can be significantly impacted by executive branch actions. President Biden is expected to undertake executive actions that will strengthen the Legislation and may reverse the policies of the prior administration. The Trump Administration had directed the issuance of final rules (i) enabling the formation of health plans that would be exempt from certain Legislation essential health benefits requirements; (ii) expanding the availability of short-term, limited duration health insurance; (iii) eliminating cost-sharing reduction payments to insurers that would otherwise offset deductibles and other out-of-pocket expenses for health plan enrollees at or below 250 percent of the federal poverty level; (iv) relaxing requirements for state innovation waivers that could reduce enrollment in the individual and small group markets and lead to additional enrollment in short-term, limited duration insurance and association health plans; and (vi) incentivizing the use of health reimbursement arrangements by employers to permit employees to purchase health insurance in the individual market. The uncertainty resulting from these Executive Branch policies led to reduced Exchange enrollment in 2018, 2019 and 2020. To date, the Biden administration has issued executive orders implementing a special enrollment period permitting individuals to enroll in health plans outside of the annual open enrollment period and reexamining policies that may undermine the ACA or the Medicaid program. The ARPA’s expansion of subsidies to purchase coverage through an exchange contributed to increased exchange enrollment in 2021. The recent and on-going COVID-19 pandemic and related U.S. National Emergency declaration may significantly increase the number of uninsured patients treated at our facilities extending beyond the most recent CBO published estimates due to increased unemployment and loss of group health plan health insurance coverage. It is also anticipated that these policies may create additional cost and reimbursement pressures on hospitals.
37
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, 2022, CMS published its IPPS 2023 proposed payment rule which provides for a 3.1% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments, and adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall increase in IPPS payments is approximately 3.3%. Including DSH payments, an increase to the Medicare Outlier threshold and certain other adjustments, we estimate our overall increase from the proposed IPPS 2023 rule (covering the period of October 1, 2022 through September 30, 2023) will approximate 2.4%. This projected impact from the IPPS 2023 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, as required by the 21st Century Cures Act, but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below.
In August, 2021, CMS published its IPPS 2022 final payment rule which provides for a 2.7% market basket increase to the base Medicare MS-DRG blended rate. When statutorily mandated budget neutrality factors, annual geographic wage index updates, documenting and coding adjustments, and adjustments mandated by the Legislation are considered, without consideration for the required Medicare DSH payments changes and increase to the Medicare Outlier threshold, the overall final increase in IPPS payments is approximately 2.5%. Including DSH payments and certain other adjustments, we estimate our overall increase from the final IPPS 2022 rule (covering the period of October 1, 2021 through September 30, 2022) will approximate 1.5%. This projected impact from the IPPS 2022 final rule includes an increase of approximately 0.5% to partially restore cuts made as a result of the American Taxpayer Relief Act of 2012 (“ATRA”), as required by the 21st Century Cures Act but excludes the impact of the sequestration reductions related to the 2011 Act, Bipartisan Budget Act of 2015, and Bipartisan Budget Act of 2018, as discussed below.
In June, 2019, the Supreme Court of the United States issued a decision favorable to hospitals impacting prior year Medicare DSH payments (Azar v. Allina Health Services, No. 17-1484 (U.S. Jun. 3, 2019)). In Allina, the hospitals challenged the Medicare DSH adjustments for federal fiscal year 2012, specifically challenging CMS’s decision to include inpatient hospital days attributable to Medicare Part C enrollee patients in the numerator and denominator of the Medicare/SSI fraction used to calculate a hospital’s DSH payments. This ruling addresses CMS’s attempts to impose the policy espoused in its vacated 2004 rulemaking to a fiscal year in the 2004–2013 time period without using notice-and-comment rulemaking. This decision should require CMS to recalculate hospitals’ DSH Medicare/SSI fractions, with Medicare Part C days excluded, for at least federal fiscal year 2012, but likely federal fiscal years 2005 through 2013. In August, 2020, CMS issued a rule that proposed to retroactively negate the effects of the aforementioned Supreme Court decision, which rule has yet to be finalized. Although we can provide no assurance that we will ultimately receive
38
additional funds, we estimate that the favorable impact of this court ruling on certain prior year hospital Medicare DSH payments could range between $18 million to $28 million in the aggregate.
The 2011 Act included the imposition of annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $917 billion between 2012 and 2021, according to a report released by 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. Recent legislation suspended payment reductions through December 31, 2021, in exchange for extended cuts through 2030. In December, 2021, the suspended 2% payment reduction was extended until March 31, 2022 and partially suspended at a 1% payment reduction for an additional three-month period that ends on June 30, 2022.
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, 2022, CMS published its Psych PPS proposed rule for the federal fiscal year 2023. Under this proposed rule, payments to our psychiatric hospitals and units are estimated to increase by 2.7% compared to federal fiscal year 2022. This amount includes the effect of the 3.1% net market basket update which reflects the offset of a 0.4% productivity adjustment.
In July, 2021, CMS published its Psych PPS final rule for the federal fiscal year 2022. Under this final rule, payments to our psychiatric hospitals and units are estimated to increase by 2.2% compared to federal fiscal year 2021. This amount includes the effect of the 2.0% net market basket update which reflects the offset of a 0.7% productivity adjustment.
CMS’s calendar year 2018 final OPPS rule, issued on November 13, 2017, substantially reduced Medicare Part B reimbursement for 340B Program drugs paid to hospitals. Beginning January 1, 2018, CMS reimbursement for certain separately payable drugs or biologicals that are acquired through the 340B Program by a hospital paid under the OPPS (and not excepted from the payment adjustment policy) is the average sales price of the drug or biological minus 22.5 percent, an effective reduction of 26.89% in payments for 340B program drugs. In December, 2018, the U.S. District Court for the District of Columbia ruled that HHS did not have statutory authority to implement the 2018 Medicare OPPS rate reduction related to hospitals that qualify for drug discounts under the federal 340B Program and granted a permanent injunction against the payment reduction. On July 31, 2020, the U.S. Court of Appeals for the D.C. Circuit reversed the District Court and held that HHS’s decision to lower drug reimbursement rates for 340B hospitals rests on a reasonable interpretation of the Medicare statute. As a result, we recognized $8 million of revenues during 2020 that were previously reserved in a prior year. These payment reductions are being challenged before the U.S. Supreme Court, which heard the oral arguments in American Hospital Association v. Becerra on November 30, 2021. The final result of such lawsuit cannot be predicted.
On November 2, 2021, CMS issued its OPPS final rule for 2022. The hospital market basket increase is 2.7% and the productivity adjustment reduction is -0.7% for a net market basket increase of 2.0%. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2022 will aggregate to a net increase of 2.4% which includes a 3.0% increase to behavioral health division partial hospitalization rates.
In December, 2020, CMS published its OPPS final rule for 2021. The hospital market basket increase is 2.4% and there is no productivity adjustment reduction to the 2021 OPPS market basket. When other statutorily required adjustments and hospital patient service mix are considered, we estimate that our overall Medicare OPPS update for 2021 will aggregate to a net increase of 3.3% which includes a 9.2% increase to behavioral health division partial hospitalization rates.
In November, 2019, CMS finalized its Hospital Price Transparency rule that implements certain requirements under the June 24, 2019 Presidential Executive Order related to Improving Price and Quality Transparency in American Healthcare to Put Patients First. Under this final rule, effective January 1, 2021, CMS will require: (1) hospitals make public their standard changes (both gross charges and payer-specific negotiated charges) for all items and services online in a machine-readable format, and; (2) hospitals to make public standard charge data for a limited set of “shoppable services” the hospital provides in a form and manner that is more consumer friendly. On November 2, 2021, CMS released a final rule increasing the monetary penalty that CMS can impose on hospitals that fail to comply with the price transparency requirements. We believe that our hospitals are in full compliance with the applicable federal regulations.
Medicaid: Medicaid is a joint federal-state funded health care benefit program that is administered by the states to provide benefits to qualifying individuals. Most state Medicaid payments are made under a PPS-like system, or under programs that negotiate payment levels with individual hospitals. Amounts received under the Medicaid program are generally significantly less than a hospital’s customary charges for services provided. In addition to revenues received pursuant to the Medicare program, we receive a large portion of our revenues either directly from Medicaid programs or from managed care companies managing Medicaid. All of our
39
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 annual Medicaid revenues of approximately $100 million, or greater, from each of Texas, California, Nevada, Illinois, Pennsylvania, Washington, D.C., Kentucky, Florida and Massachusetts. We also receive 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 Legislation substantially increases the federally and state-funded Medicaid insurance program, and authorizes states to establish federally subsidized non-Medicaid health plans for low-income residents not eligible for Medicaid starting in 2014. However, the Supreme Court has struck down portions of the Legislation requiring states to expand their Medicaid programs in exchange for increased federal funding. Accordingly, many states in which we operate have not expanded Medicaid coverage to individuals at 133% of the federal poverty level. Facilities in states not opting to expand Medicaid coverage under the Legislation may be additionally penalized by corresponding reductions to Medicaid disproportionate share hospital payments beginning in 2020, as discussed below. We can provide no assurance that further reductions to Medicaid revenues, particularly in the above-mentioned states, will not have a material adverse effect on our future results of operations.
On November 12, 2019, CMS issued the proposed Medicaid Fiscal Accountability Rule (“MFAR”) which CMS believed would strengthen the fiscal integrity of the Medicaid program and help ensure that state supplemental payments and financing arrangements are transparent and value-driven. In January, 2021, CMS issued a formal notice of withdrawal of this proposed rule.
In January, 2020, CMS announced a new opportunity to support states with greater flexibility to improve the health of their Medicaid populations. The new 1115 Waiver Block Grant Type Demonstration program, titled Healthy Adult Opportunity (“HAO”), emphasizes the concept of value-based care while granting states extensive flexibility to administer and design their programs within a defined budget. CMS believes this state opportunity will enhance the Medicaid program’s integrity through its focus on accountability for results and quality improvement, making the Medicaid program stronger for states and beneficiaries. The Biden administration has signaled its intent to withdraw the HAO demonstration. Accordingly, we are unable to predict whether the HAO demonstration will impact our future results of operations.
Various State Medicaid Supplemental Payment Programs:
We incur health-care related taxes (“Provider Taxes”) imposed by states in the form of a licensing fee, assessment or other mandatory payment which are related to: (i) healthcare items or services; (ii) the provision of, or the authority to provide, the health care items or services, or; (iii) the payment for the health care items or services. Such Provider Taxes are subject to various federal regulations that limit the scope and amount of the taxes that can be levied by states in order to secure federal matching funds as part of their respective state Medicaid programs. As outlined below, we derive a related Medicaid reimbursement benefit from assessed Provider Taxes in the form of Medicaid claims based payment increases and/or lump sum Medicaid supplemental payments.
Included in these Provider Tax programs are reimbursements received in connection with the Texas Uncompensated Care/Upper Payment Limit program (“UC/UPL”) and Texas Delivery System Reform Incentive Payments program (“DSRIP”). Additional disclosure related to the Texas UC/UPL and DSRIP programs is provided below.
Texas Uncompensated Care/Upper Payment Limit Payments:
Certain of our acute care hospitals located in various counties 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.
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, the federal fiscal year (“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. In September 2019, CMS approved the annual UC pool size in the amount of $3.9 billion for demonstration years (“DYs”) 9, 10 and 11 (October 1, 2019 to September 30, 2022).
40
On April 16, 2021, CMS rescinded its January 15, 2021, 1115 Waiver ten year expedited renewal approval that was effective through September 30, 2030. In July, 2021, HHSC submitted another 1115 Waiver renewal application to CMS which reflects the same terms and conditions agreed to by CMS on January 15, 2021, in order to receive an extension beyond September 30, 2022. On April 22, 2022, CMS withdraw its recission of the 1115 Waiver and now considers the 1115 Waiver approved as extended and governed by the special terms and conditions that CMS approved on January 15, 2021.
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. In July 2020, THHSC announced CMS approval of an increase to UHRIP pool for the state’s 2021 fiscal year to $2.7 billion from its prior funding level of $1.6 billion.
On March 26, 2021, HHSC published a final rule that will apply to program periods on or after September 1, 2021, and UHRIP will be re-named the Comprehensive Hospital Increase Reimbursement Program (“CHIRP”). CHIRP will be comprised of a UHRIP component and an Average Commercial Incentive Award component. HHSC has a pool size of $4.7 billion. On March 25, 2022, CMS approved the CHIRP program retroactive to September 1, 2021. Actual impact is expected to become known during the second quarter of 2022 upon finalization of CHIRP program details including the collection of the necessary inter-governmental transfers by the state used to finance the non-federal share of the 2023 CHIRP payments as well as interaction with other state payment programs. As a result of CMS’ approval of CHIRP, our results of operations for the quarter ended March 31, 2022 include approximately $12 million of estimated CHIRP revenues (net of associated provider taxes) attributable to the period September 1, 2021 through December 31, 2021.
On January 11, 2021, HHSC announced that CMS approved the pre-print modification that HHSC submitted for UHRIP period March 1, 2021 through August 31, 2021. CMS approved rate changes that will now increase rates for private Institutions of Mental Disease (“IMD”) for services provided to patients under age 21 or patients 65 years of age or older. The impact of this program is included in the Medicaid Supplemental Payment Programs table below.
On September 24, 2021, HHSC finalized New Fee-for-Service Supplemental Payment Program: Hospital Augmented Reimbursement Program (“HARP”) to be effective October 1, 2021. The HARP program continues the financial transition for providers who have historically participated in the Delivery System Reform Incentive Payment program described below. The program will provide additional funding to hospitals to help offset the cost hospitals incur while providing Medicaid services. HHSC financial model released concurrent with the publication of the final rule indicates net potential incremental Medicaid reimbursements to us of approximately $15 million annually, without consideration of any potential adverse impact on future Medicaid DSH or Medicaid UC payments. This program remains subject to CMS approval.
Texas Delivery System Reform Incentive Payments:
In addition, the Texas Medicaid Section 1115 Waiver includes a DSRIP pool to incentivize hospitals and other providers to transform their service delivery practices to improve quality, health status, patient experience, coordination, and cost-effectiveness. DSRIP pool payments are incentive payments to hospitals and other providers that develop programs or strategies to enhance access to health care, increase the quality of care, the cost-effectiveness of care provided and the health of the patients and families served. In May, 2014, CMS formally approved specific DSRIP projects for certain of our hospitals for demonstration years 3 to 5 (our facilities did not materially participate in the DSRIP pool during demonstration years 1 or 2). DSRIP payments are contingent on the hospital meeting certain pre-determined milestones, metrics and clinical outcomes. Additionally, DSRIP payments are contingent on a governmental entity providing an IGT for the non-federal share component of the DSRIP payment. THHSC generally approves DSRIP reported metrics, milestones and clinical outcomes on a semi-annual basis in June and December. Under the CMS approval noted above, the Waiver renewal requires the transition of the DSRIP program to one focused on "health system performance measurement and improvement." THHSC must submit a transition plan describing "how it will further develop its delivery system reforms without DSRIP funding and/or phase out DSRIP funded activities and meet mutually agreeable milestones to demonstrate its ongoing progress." The size of the DSRIP pool will remain unchanged for the initial two years of the waiver renewal with unspecified decreases in years three and four of the renewal, FFY 2020 and 2021, respectively. In FFY 2022, DSRIP funding under the waiver is eliminated. In connection with this DSRIP program, included in our results of operations was an aggregate of approximately $34 million in 2021 and $23 million in each of 2020 and 2019. For the quarters ending, March 31, 2022 and March 31, 2021, no DSRIP revenue was recorded. For FFY 2022, we will no longer receive DSRIP funds due to the elimination of this funding source by CMS in the Waiver renewals except for certain carryover DSRIP projects for which achievement of the required metrics will not be known until the second quarter of 2022. In March, 2020, HHSC submitted a DSRIP Transition Plan to CMS as required by the 1115 Waiver Special Terms and Conditions #37 that outlines a transition from the current DSRIP program to a Value-Based Purchasing (“VBP”) type payment model. As noted above, HHSC finalized a rule to make changes to existing UHRIP program (now referred to as CHIRP). This rule change reflects HHSC’s effort to comply with federal regulations that require directed-payment programs to advance goals included in the state’s Medicaid managed care quality strategy and to align with the ongoing efforts to transition from the Delivery System Reform Incentive Payment program. We are unable to estimate the financial impact of this payment change.
41
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, 2022 and 2021. The Provider Taxes are recorded in other operating expenses on the Condensed Consolidated Statements of Income as included herein.
|
(amounts in millions) |
|
|
Three Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2022 |
|
2021 |
|
Texas UC/UPL: |
|
|
|
|
|
|
Revenues |
$ |
66 |
|
$ |
26 |
|
Provider Taxes |
|
(29 |
) |
|
(6 |
) |
Net benefit |
$ |
37 |
|
$ |
20 |
|
|
|
|
|
|
|
|
Texas DSRIP: |
|
|
|
|
|
|
Revenues |
$ |
0 |
|
$ |
0 |
|
Provider Taxes |
|
0 |
|
|
0 |
|
Net benefit |
$ |
0 |
|
$ |
0 |
|
|
|
|
|
|
|
|
Various other state programs: |
|
|
|
|
|
|
Revenues |
$ |
104 |
|
$ |
85 |
|
Provider Taxes |
|
(42 |
) |
|
(40 |
) |
Net benefit |
$ |
62 |
|
$ |
45 |
|
|
|
|
|
|
|
|
Total all Provider Tax programs: |
|
|
|
|
|
|
Revenues |
$ |
170 |
|
$ |
111 |
|
Provider Taxes |
|
(71 |
) |
|
(46 |
) |
Net benefit |
$ |
99 |
|
$ |
65 |
|
We estimate that our aggregate net benefit from the Texas and various other state Medicaid supplemental payment programs will approximate $406 million (net of Provider Taxes of $255 million) during the year ending December 31, 2022. These amounts are based upon various terms and conditions that are out of our control including, but not limited to, the states’/CMS’s continued approval of the programs and the applicable hospital district or county making IGTs consistent with 2021 levels. The decrease in the projected aggregate net benefit from these programs for 2022, as compared to the $430 million aggregate net benefit recorded during the year ended December 31, 2021, relates primarily to a $37 million projected net decrease in reimbursements from the Kentucky Hospital Rate Increase Program, as discussed below, since the $97 million net benefit realized from this program during 2021 was applicable to the eighteen-month period of July 1, 2020 through December 31, 2021.
Future changes to these terms and conditions could materially reduce our net benefit derived from the programs which could have a material adverse impact on our future consolidated results of operations. In addition, Provider Taxes are governed by both federal and state laws and are subject to future legislative changes that, if reduced from current rates in several states, could have a material adverse impact on our future consolidated results of operations. As described below in 2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation, a 6.2% increase to the Medicaid Federal Matching Assistance Percentage (“FMAP”) is included in the Families First Coronavirus Response Act. The impact of the enhanced FMAP Medicaid supplemental and DSH payments are reflected in our financial results for the quarters ended March 31, 2022 and 2021. We are unable to estimate the prospective financial impact of this provision at this time as our financial impact is contingent on unknown state action during future eligible federal fiscal quarters.
Texas and South Carolina Medicaid Disproportionate Share Hospital 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 2022 DSH fiscal year (covering the period of October 1, 2021 through September 30, 2022).
42
In connection with these DSH programs, included in our financial results was an aggregate of approximately $11 million during each of the three-month periods ended March 31, 2022 and 2021. We expect the aggregate reimbursements to our hospitals pursuant to the Texas and South Carolina 2022 fiscal year programs to be approximately $46 million.
The Legislation and subsequent federal legislation provides for a significant reduction in Medicaid disproportionate share payments beginning in federal fiscal year 2024 (see above in Sources of Revenues and Health Care Reform-Medicaid Revisions for additional disclosure related to the delay of these DSH reductions). HHS is to determine the amount of Medicaid DSH payment cuts imposed on each state based on a defined methodology. As Medicaid DSH payments to states will be cut, consequently, payments to Medicaid-participating providers, including our hospitals in Texas and South Carolina, will be reduced in the coming years. Based on the CMS final rule published in September, 2019, beginning in fiscal year 2024 (as amended by the CARES Act and the CAA), annual Medicaid DSH payments in South Carolina and Texas could be reduced by approximately 74% and 44%, respectively, from 2020 DSH payment levels.
Our behavioral health care facilities in Texas have been receiving Medicaid DSH payments since FFY 2016. As with all Medicaid DSH payments, hospitals are subject to state audits that typically occur up to three years after their receipt. DSH payments are subject to a federal Hospital Specific Limit (“HSL”) and are not fully known until the DSH audit results are concluded. In general, freestanding psychiatric hospitals tend to provide significantly less charity care than acute care hospitals and therefore are at more risk for retroactive recoupment of prior year DSH payments in excess of their respective HSL. In light of the retroactive HSL audit risk for freestanding psychiatric hospitals, we have established DSH reserves for our facilities that have been receiving funds since FFY 2016. These DSH reserves are also impacted by the resolution of federal DSH litigation related to Children’s Hospital Association of Texas v. Azar (“CHAT”) where the calculation of HSL was being challenged. In August, 2019, DC Circuit Court of Appeals issued a unanimous decision in CHAT and reversed the judgment of the district court in favor of CMS and ordered that CMS’s “2017 Rule” (regarding Medicaid DSH Payments—Treatment of Third Party Payers in Calculating Uncompensated Care Costs) be reinstated. CMS has not issued any additional guidance post the ruling. In April 2020, the plaintiffs in the case have petitioned the Supreme Court of the United States to hear their case. Additionally, there have been separate legal challenges on this same issue in the Fifth and Eight Circuits. On November 4, 2019, in Missouri Hosp. Ass’n v. Azar, the United States Court of Appeals for the Eighth Circuit issued an opinion upholding the 2017 Rule. On April 20, 2020, in Baptist Memorial Hospital v. Azar, the United States Court of Appeals of the Fifth Circuit issued a decision also upholding the 2017 Rule. In light of these court decisions, we continue to maintain reserves in the financial statements for cumulative Medicaid DSH and UC reimbursements related to our behavioral health hospitals located in Texas that amounted to $43 million as of March 31, 2022 and $40 million as of December 31, 2021.
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 2022 fiscal year covering the period of July 1, 2021 through June 30, 2022.
In connection with this program, included in our financial results for the quarters ended March 31, 2022 and 2021 was approximately $5 million and $6 million, respectively. We estimate that our reimbursements pursuant to this program will approximate $21 million during the year ended December 31, 2022.
California SPA:
In California, CMS issued formal approval of the 2017-19 Hospital Fee Program in December, 2017 retroactive to January 1, 2017 through September 30, 2019. In September, 2019, the state submitted a request to renew the Hospital Fee Program for the period July 1, 2019 to December 31, 2021. On February 25, 2020, CMS approved this renewed program. These approvals include the Medicaid inpatient and outpatient fee-for-service supplemental payments and the overall provider tax structure but did not yet include the approval of the managed care rate setting payment component for certain rate periods (see table below). The managed care payment component consists of two categories of payments, “pass-through” payments and “directed” payments. The pass-through payments are similar in nature to the prior Hospital Fee Program payment method whereas the directed payment method will be based on actual concurrent hospital Medicaid managed care in-network patient volume.
43
California Hospital Fee Program CMS Approval Status:
|
|
|
Hospital Fee Program Component |
CMS Methodology Approval Status |
CMS Rate Setting Approval Status |
Fee For Service Payment |
Approved through December 31, 2021 |
Approved through December 31, 2021; Paid through September 30, 2021 |
Managed Care-Pass-Through Payment |
Approved through December 31, 2021 |
Approved through June 30, 2017; Paid in advance of approval through December 31, 2021 |
Managed Care-Directed Payment |
Approved through December 31, 2021 |
Approved through June 30, 2017; Paid in advance of approval through June 30, 2020 |
In connection with the existing program, included in our financial results was approximately $14 million during each of the three-month periods ended March 31, 2022 and 2021. We estimate that our reimbursements pursuant to this program will approximate $52 million during the year ended December 31, 2022. The aggregate impact of the California supplemental payment program, as outlined above, is included in the above State Medicaid Supplemental Payment Program table.
In April, 2020, the California Department of Health Care Services (“DHCS”) notified hospital providers that participate in the Medicaid managed care directed payment program that DHCS would recalculate directed payments for the period of July 1, 2017 through September 30, 2018 (“SFY 2018”) to remedy an identified data error. In August, 2020, as a follow-up to that notification, DHCS issued its corrected directed payment calculations. The updated calculation resulted in a favorable adjustment to the above program year and also resulted in increased expected supplemental payment amount for program years subsequent to the recalculated SFY 2018 rate period. The California Hospital Fee amounts noted above include our portion of the state corrected data.
Kentucky Hospital Rate Increase Program (“HRIP”):
In early 2021, CMS approved the Kentucky Medicaid Managed Care Hospital Rate Improvement Program (“HRIP”) for SFY 2021, which covered the period of July 1, 2020 through June 30, 2021. In December 2021, CMS approved the HRIP program period for the period July 1, 2021 to December 31, 2021. Included in our financial results during the three-month periods ended March 31, 2022 and 2021 was approximately $17 million and $1 million, respectively.
Programs such as HRIP require an annual state submission and approval by CMS. In December, 2021, CMS approved the program for the period of January 1, 2022 through December 31, 2022 at rates similar to the prior year. We estimate that our reimbursements pursuant to HRIP will approximate $60 million during the year ended December 31, 2022.
Florida Medicaid Managed Care Directed Payment Program (“DPP”):
During the fourth quarter of 2021, we recorded approximately $23 million of increased reimbursement resulting from the Medicaid managed care directed payment program for the 2021 rate period (covering the period of October 1, 2020 to September 30, 2021). Various DPP related legislative and regulatory approvals result in the retroactive payment of the increased reimbursement after the applicable rate year has ended. The payment methodology and amount of the 2022 DPP (covering the period of October 1, 2021 to September 30, 2022) is expected to be comparable to the 2021 DPP. As a result, if CMS and other legislative and regulatory approvals occur in connection with the 2022 DPP, we estimate that our reimbursements pursuant to the 2022 DPP will approximate $21 million during the year ended December 31, 2022, all of which we expect to record during the fourth quarter. Additional Medicaid managed regions in the state may participate in the program during the 2022 DPP year which, if implemented, would increase our reimbursements received pursuant to the 2022 DPP.
Risk Factors Related To State Supplemental Medicaid Payments:
As outlined above, we receive substantial reimbursement from multiple states in connection with various supplemental Medicaid payment programs. The states include, but are not limited to, Texas, Kentucky, California, Illinois, Indiana and Nevada. Failure to renew these programs beyond their scheduled termination dates, failure of the public hospitals to provide the necessary IGTs for the states’ share of the DSH programs, failure of our hospitals that currently receive supplemental Medicaid revenues to qualify for future funds under these programs, or reductions in reimbursements, could have a material adverse effect on our future results of operations.
In April, 2016, CMS published its final Medicaid Managed Care Rule which explicitly permits but phases out the use of pass-through payments (including supplemental payments) by Medicaid Managed Care Organizations (“MCO”) to hospitals over ten years but allows for a transition of the pass-through payments into value-based payment structures, delivery system reform initiatives or payments tied to services under a MCO contract. Since we are unable to determine the financial impact of this aspect of the final rule, we can provide no assurance that the final rule will not have a material adverse effect on our future results of operations. In
44
November, 2020, CMS issued a final rule permitting pass-through supplemental provider payments during a time-limited period when states transition populations or services from fee-for-service Medicaid to managed care.
HITECH Act: 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 Medicare and Medicaid incentive payments started in federal fiscal year 2011 and can end as late as 2016 for Medicare and 2021 for the state Medicaid programs. State Medicaid program participation in this federally funded incentive program is voluntary but all of the states in which our eligible hospitals operate have chosen to participate. Our acute care hospitals qualified for these EHR incentive payments upon implementation of the EHR application assuming they meet the “meaningful use” criteria. The government’s ultimate goal is to promote more effective (quality) and efficient healthcare delivery through the use of technology to reduce the total cost of healthcare for all Americans and utilizing the cost savings to expand access to the healthcare system.
All of our acute care hospitals have met the applicable meaningful use criteria. However, under the HITECH Act, hospitals must continue to meet the applicable meaningful use criteria in each fiscal year or they will be subject to a market basket update reduction in a subsequent fiscal year. Failure of our acute care hospitals to continue to meet the applicable meaningful use criteria would have an adverse effect on our future net revenues and results of operations.
In the 2019 IPPS final rule, CMS overhauled the Medicare and Medicaid EHR Incentive Program to focus on interoperability, improve flexibility, relieve burden and place emphasis on measures that require the electronic exchange of health information between providers and patients. We can provide no assurance that the changes will not have a material adverse effect on our future results of operations.
Managed Care: A significant portion of our net patient revenues are generated from managed care companies, which include health maintenance organizations, preferred provider organizations and managed Medicare (referred to as Medicare Part C or Medicare Advantage) and Medicaid programs. In general, we expect the percentage of our business from managed care programs to continue to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating results of our facilities vary among the markets in which we operate. Typically, we receive lower payments per patient from managed care payers than we do from traditional indemnity insurers, however, during the past few years we have secured price increases from many of our commercial payers including managed care companies.
Commercial Insurance: Our hospitals also provide services to individuals covered by private health care insurance. Private insurance carriers typically make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon the particular hospital’s established charges and the particular coverage provided in the insurance policy. Private insurance reimbursement varies among payers and states and is generally based on contracts negotiated between the hospital and the payer.
Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including predetermined payment or DRG-based payment systems, for more inpatient and outpatient services. To the extent that such efforts are successful and reduce the insurers’ reimbursement to hospitals and the costs of providing services to their beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of our hospitals.
Surprise Billing Interim Final Rule: On September 30, 2021, the Department of Labor, and the Department of the Treasury (collectively, the Departments), along with the Office of Personnel Management (“OPM”), released an interim final rule with comment period, entitled “Requirements Related to Surprise Billing; Part II.” This rule is related to Title I (the No Surprises Act) of Division BB of the Consolidated Appropriations Act, 2021, and establishes new protections from surprise billing and excessive cost sharing for consumers receiving health care items/services. It implements additional protections against surprise medical bills under the No Surprises Act, including provisions related to the independent dispute resolution process, good faith estimates for uninsured (or self-pay) individuals, the patient-provider dispute resolution process, and expanded rights to external review. We do not expect this interim final rule to have a material impact on our results of operations.
Other Sources: Our hospitals provide services to individuals that do not have any form of health care coverage. Such patients are evaluated, at the time of service or shortly thereafter, for their ability to pay based upon federal and state poverty guidelines, qualifications for Medicaid or other state assistance programs, as well as our local hospitals’ indigent and charity care policy. Patients without health care coverage who do not qualify for Medicaid or indigent care write-offs are offered substantial discounts in an effort to settle their outstanding account balances.
Health Care Reform: Listed below are the Medicare, Medicaid and other health care industry changes which have been, or are scheduled to be, implemented as a result of the Legislation.
45
Implemented Medicare Reductions and Reforms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• |
The Legislation reduced the market basket update for inpatient and outpatient hospitals and inpatient behavioral health facilities by 0.25% in each of 2010 and 2011, by 0.10% in each of 2012 and 2013, 0.30% in 2014, 0.20% in each of 2015 and 2016 and 0.75% in each of 2017, 2018 and 2019. |
|
• |
The Legislation implemented certain reforms to Medicare Advantage payments, effective in 2011. |
|
• |
A Medicare shared savings program, effective in 2012. |
|
|
|
|
|
• |
A hospital readmissions reduction program, effective in 2012. |
|
|
|
|
• |
A value-based purchasing program for hospitals, effective in 2012. |
|
|
• |
A national pilot program on payment bundling, effective in 2013. |
|
|
|
• |
Reduction to Medicare DSH payments, effective in 2014, as discussed above.
|
Medicaid Revisions:
|
|
|
|
|
|
|
|
|
• |
Expanded Medicaid eligibility and related special federal payments, effective in 2014. |
|
|
• |
The Legislation (as amended by subsequent federal legislation) requires annual aggregate reductions in federal DSH funding from FFY 2024 through FFY 2027. Medicaid DSH reductions have been delayed several times. Commencing in federal fiscal year 2024, and continuing through 2027, DSH payments will be reduced by $8 billion annually. |
Health Insurance Revisions:
|
|
|
|
|
|
|
|
|
|
|
• |
Large employer insurance reforms, effective in 2015. |
|
|
|
• |
Individual insurance mandate and related federal subsidies, effective in 2014. As noted above in Health Care Reform, the Tax Cuts and Jobs Act enacted into law in December, 2017 eliminated the individual insurance federal mandate penalty beginning January 1, 2019. |
|
|
• |
Federally mandated insurance coverage reforms, effective in 2010 and forward. |
The Legislation seeks to increase competition among private health insurers by providing for transparent federal and state insurance exchanges. The Legislation also prohibits private insurers from adjusting insurance premiums based on health status, gender, or other specified factors. We cannot provide assurance that these provisions will not adversely affect the ability of private insurers to pay for services provided to insured patients, or that these changes will not have a negative material impact on our results of operations going forward.
Value-Based Purchasing:
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events.
The Legislation required HHS to implement a value-based purchasing program for inpatient hospital services which became effective on October 1, 2012. The Legislation requires HHS to reduce inpatient hospital payments for all discharges by 2% in FFY 2017 and subsequent years. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions. As part of the FFY 2022 IPPS final rule and FFY 2023 proposed rule, as discussed above, and as a result of the on-going COVID-19 pandemic, CMS has implemented a budget neutral payment policy to fully offset the 2% VBP withhold during each of FFY 2022 and FFY 2023.
Hospital Acquired Conditions:
The Legislation prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital acquired conditions (“HAC”). Beginning in FFY 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. As part of the FFY 2023 proposed rule discussed above, and as a result of the on-going COVID-19 pandemic, CMS has proposed to suppress all six measures
46
in the HAC Reduction Program for the FY 2023 program year and eliminate the HAC reduction program’s one percent payment penalty.
Readmission Reduction Program:
In the Legislation, Congress also mandated implementation of the hospital readmission reduction program (“HRRP”). Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard. The HRRP currently assesses penalties on hospitals having excess readmission rates for heart failure, myocardial infarction, pneumonia, acute exacerbation of chronic obstructive pulmonary disease (COPD) and elective total hip arthroplasty (THA) and/or total knee arthroplasty (TKA), excluding planned readmissions, when compared to expected rates. In the fiscal year 2015 IPPS final rule, CMS added readmissions for coronary artery bypass graft (CABG) surgical procedures beginning in fiscal year 2017. To account for excess readmissions, an applicable hospital's base operating DRG payment amount is adjusted for each discharge occurring during the fiscal year. Readmissions payment adjustment factors can be no more than a 3 percent reduction. As part of the FFY 2023 IPPS proposed rule discussed above, CMS proposed to modify all of the condition-specific readmission measures to include an adjustment for patient history of COVID-19 for FFY 2024.
Accountable Care Organizations:
The Legislation requires HHS to establish a Medicare Shared Savings Program that promotes accountability and coordination of care through the creation of accountable care organizations (“ACOs”). The ACO program allows providers (including hospitals), physicians and other designated professionals and suppliers to voluntarily work together to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. The program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve quality performance standards established by HHS will be eligible to share in a portion of the amounts saved by the Medicare program. CMS is also developing and implementing more advanced ACO payment models, such as the Next Generation ACO Model, which require ACOs to assume greater risk for attributed beneficiaries. On December 21, 2018, CMS published a final rule that, in general, requires ACO participants to take on additional risk associated with participation in the program. On April 30, 2020, CMS issued an interim final rule with comment in response to the COVID-19 national emergency permitting ACOs with current agreement periods expiring on December 31, 2020 the option to extend their existing agreement period by one year, and permitting certain ACOs to retain their participation level through 2021. It remains unclear to what extent providers will pursue federal ACO status or whether the required investment would be warranted by increased payment.
Bundled Payments for Care Improvement Advanced:
The Center for Medicare & Medicaid Innovation (“CMMI”) implemented a new, second generation voluntary episode payment model, Bundled Payments for Care Improvement Advanced (“BPCI-Advanced” or the “Program”), with the first performance period beginning October 1, 2018. BPCI-Advanced is designed to test a new iteration of bundled payments with an aim to align incentives among participating health care providers to reduce expenditures and improve quality of care for traditional Medicare beneficiaries.
During the fourth quarter of 2020, CMS restructured the FY2021 to FY2023 program and required participants to select from eight Clinical Episode Service Line Groups instead of individual clinical episodes. CMS also announced that the now voluntary program would become mandatory in 2024.
For our hospitals that participated in the program, the CMS BPCI-A reconciliation for the period October 1, 2018 through June 30, 2021 did not have a material impact on our financial results.
The ultimate success and financial impact of the BPCI-Advanced program is contingent on multiple variables so we are unable to estimate the future impact. However, given the breadth and scope of participation of our acute care hospitals in BPCI-Advanced, the impact could be significant (either favorably or unfavorably) depending on actual program results.
2019 Novel Coronavirus Disease Medicare and Medicaid Payment Related Legislation
In response to the growing threat of COVID-19, on March 13, 2020 a national emergency was declared. The declaration empowered the HHS Secretary to waive certain Medicare, Medicaid and Children’s Health Insurance Program (“CHIP”) program requirements and Medicare conditions of participation under Section 1135 of the Social Security Act. Having been granted this authority by HHS, CMS issued a broad range of blanket waivers, which eased certain requirements for impacted providers, including:
|
• |
Waivers and Flexibilities for Hospitals and other Healthcare Facilities including those for physical environment requirements and certain Emergency Medical Treatment & Labor Act provisions |
|
• |
Provider Enrollment Flexibilities |
|
• |
Flexibility and Relief for State Medicaid Programs including those under section 1135 Waivers |
|
• |
Suspension of Certain Enforcement Activities |
47
In addition to the national emergency declaration, Congress passed and Presidents Trump and Biden have signed various forms of legislation intended to support state and local authority responses to COVID-19 as well as provide fiscal support to businesses, individuals, financial markets, hospitals and other healthcare providers.
Some of the financial support included in the various legislative actions include:
|
• |
Medicaid FMAP Enhancement |
|
|
• |
The FMAP was increased by 6.2% retroactive to the federal fiscal quarter beginning January 1, 2020 and each subsequent federal fiscal quarter for all states and U.S. territories during the declared public health emergency, in accordance with specified conditions. |
|
• |
Public Health Emergency Declaration |
|
|
• |
The HHS Secretary renewed the public health emergency (“PHE”) effective April 16, 2022 for ninety (90) days. As a result, states would be eligible for the enhanced FMAP through the end of federal fiscal quarter ending September 30, 2022 should the PHE not be rescinded by the Secretary before the end of the ninety day period. |
|
• |
Creation of a $250 billion Public Health and Social Services Emergency Fund (“PHSSEF”) |
|
|
• |
Makes grants available to hospitals and other healthcare providers to cover unreimbursed healthcare related expenses or lost revenues attributable to the public health emergency resulting from the coronavirus. |
|
• |
During 2021, we received approximately $189 million in PHSSEF grants from the federal government as provided for by the CARES Act. As previously disclosed, we returned these funds to HHS during the second quarter of 2021. Since our intent was to return these funds, our financial results for the year ended December 31, 2021 include no impact from the receipt of these federal funds. In connection with this PHSSEF program, as well as other various state and local governmental stimulus programs, included in financial results for the quarter ended March 31, 2022 and March 31, 2021 were reimbursements of approximately $1 million and $11 million, respectively. |
|
• |
During the year ended December 31, 2020, we received approximately $417 million of funds from various governmental stimulus programs, most notably the PHSSEF as provided for by the CARES Act. As mentioned above, included financial results for the year ended December 31, 2020 was approximately $413 million of revenues recognized in connection with funds received from these federal, state and local governmental stimulus programs. |
|
• |
All PHSSEF receipts are subject to meeting the applicable the terms and conditions of the various distribution programs as of September 30, 2021. The Consolidated Appropriations Act, 2021 (H.R. 133) enacted on December 27, 2020 includes language that provides specific instructions on: (1) the redistribution of PHSSEF grant payments by a parent company among its subsidiaries, and; (2) the calculation of lost revenue in a PHSSEF grant entitlement determination. The HHS terms and conditions for all grant recipients and specific fund distributions are located at https://www.hhs.gov/coronavirus/cares-act-provider-relief-fund/for-providers/index.html |
|
• |
Reimburse hospitals at Medicare rates for uncompensated COVID-19 care for the uninsured |
|
|
• |
Our financial results for the quarters ended March 31, 2022 and 2021 include approximately $17 million, respectively, of revenues recorded in connection with this COVID-19 uninsured program. Revenue for the eligible patient encounters is recorded in the period in which the encounter is deemed eligible for this program net of any normal accounting reserves. |
|
• |
Effective March 22, 2022, HHS announced that the HRSA COVID-19 Uninsured Program and Coverage Assistance Fund is no longer accepting claims due to insufficient funding. |
|
• |
Medicare Sequestration Relief |
|
|
• |
Suspension of the 2% Medicare sequestration offset for Medicare services provided from May 1, 2020 through December 31, 2021 by various legislative extensions. In December, 2021, the suspended 2% payment reduction was extended until March 31, 2022 and partially suspended at a 1% payment reduction for an additional three-month period that ends on June 30, 2022. |
|
• |
Our financial results for each of the quarters ended March 31, 2022 and 2021 include approximately $11 million of revenues recorded in connection with this Medicare sequestration relief program. |
|
• |
Medicare add-on for inpatient hospital COVID-19 patients |
|
|
• |
Increases the payment that would otherwise be made to a hospital for treating a Medicare patient admitted with COVID-19 by twenty percent (20%) for the duration of the COVID-19 public health emergency. |
48
|
• |
Our financial results for each of the quarters ended March 31, 2022 and 2021 include approximately $16 million of revenue recorded each quarter in connection with this COVID-19 Medicare add-on program. These payments were intended to offset the increased expenses associated with the treatment of Medicare COVID-19 patients. |
|
• |
Expansion of the Medicare Accelerated and Advance Payment Program (“MAAPP”) |
|
|
• |
In March, 2021, we fully repaid the $695 million of Medicare Accelerated payments received during 2020. |
In addition to statutory and regulatory changes to the Medicare program and each of the state Medicaid programs, our operations and reimbursement may be affected by administrative rulings, new or novel interpretations and determinations of existing laws and regulations, post-payment audits, requirements for utilization review and new governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments to our facilities. The final determination of amounts we receive under the Medicare and Medicaid programs often takes many years, because of audits by the program representatives, providers’ rights of appeal and the application of numerous technical reimbursement provisions. We believe that we have made adequate provisions for such potential adjustments. Nevertheless, until final adjustments are made, certain issues remain unresolved and previously determined allowances could become either inadequate or more than ultimately required.
Finally, we expect continued third-party efforts to aggressively manage reimbursement levels and cost controls. Reductions in reimbursement amounts received from third-party payers could have a material adverse effect on our financial position and our results.
Other Operating Results
Interest Expense:
As reflected on the schedule below, interest expense was $22 million during each of the three-month periods ended March 31, 2022 and 2021, respectively (amounts in thousands):
|
|
Three Months
Ended
March 31,
2022 |
|
|
Three Months
Ended
March 31,
2021 |
|
Revolving credit & demand notes (a.) |
|
$ |
2,335 |
|
|
$ |
496 |
|
$400 million, 5.00% Senior Notes due 2026 (b.) |
|
|
- |
|
|
|
5,000 |
|
$800 million, 2.65% Senior Notes due 2030 (c.) |
|
|
5,356 |
|
|
|
5,400 |
|
$700 million, 1.65% Senior Notes due 2026 (d.) |
|
|
2,932 |
|
|
|
- |
|
$500 million, 2.65% Senior Notes due 2032 (e.) |
|
|
3,345 |
|
|
|
- |
|
Tranche A term loan facility (a.) |
|
|
6,026 |
|
|
|
7,117 |
|
Tranche B term loan facility (a.) |
|
|
- |
|
|
|
2,298 |
|
Accounts receivable securitization program (f.) |
|
|
10 |
|
|
|
760 |
|
Subtotal-revolving credit, demand notes, Senior Notes,
term loan facilities and accounts receivable
securitization program |
|
|
20,004 |
|
|
|
21,071 |
|
Amortization of financing fees |
|
|
1,105 |
|
|
|
1,092 |
|
Other combined interest expense |
|
|
1,905 |
|
|
|
1,337 |
|
Capitalized interest on major projects |
|
|
(1,328 |
) |
|
|
(639 |
) |
Interest income |
|
|
(13 |
) |
|
|
(904 |
) |
Interest expense, net |
|
$ |
21,673 |
|
|
$ |
21,957 |
|
|
(a.) |
In August, 2021, we entered into a seventh amendment to our credit agreement dated November 15, 2010, as amended, which provided for the amendment and restatement of the previously existing credit facility. In September, 2021, we entered into an eighth amendment to our credit agreement which modified the definition of “Adjusted LIBO Rate”. The seventh amendment, provided for, among other things, the following: (i) a $1.2 billion aggregate amount revolving credit facility that is scheduled to mature in August, 2026, ($460 million of borrowings outstanding as of March 31, 2022); (ii) a $1.68 billion tranche A term loan facility that is scheduled to mature in August, 2026 (representing a reduction of $150 million from the previous commitment), and; (iii) repayment of approximately $488 million of borrowings outstanding under the previous tranche B term loan facility. The $638 million net repayment of borrowings under the tranche A and tranche B term loan facilities in connection with the seventh amendment ($150 million and $488 million, respectively), were funded utilizing a portion of the proceeds generated from the August, 2021 issuance of the $700 million, 1.65% Senior Notes due in 2026, and the $500 million, 2.65%, Senior Notes due in 2032. |
|
(b.) |
In September, 2021, we redeemed the entire $400 million aggregate principal amount of our previously outstanding 5.00% Senior Secured Notes that were scheduled to mature in 2026 at a cash redemption price equal to the sum of 102.50% of the |
49
|
|
aggregate principal amount. This redemption was funded utilizing a portion of the proceeds generated from the August, 2021 issuance of the $700 million, 1.65% Senior Notes due in 2026, and the $500 million, 2.65% Senior Notes due in 2032, as discussed in (d.) and (e.) below. |
|
(c.) |
In September, 2020, we completed the offering of $800 million aggregate principal amount of 2.65% Senior Notes due in 2030. |
|
(d.) |
In August, 2021, we completed the offering of $700 million aggregate principal amount of 1.65% Senior Notes due in 2026. |
|
(e.) |
In August, 2021, we completed the offering of $500 million aggregate principal amount of 2.65% Senior Notes due in 2032. |
|
(f.) |
Our accounts receivable securitization program was amended in April, 2021 to reduce the borrowing commitment to $20 million (from $450 million previously), and amended in April, 2022 to extend the maturity date to July 22, 2022. There are no outstanding borrowings as of March 31, 2022. |
Interest expense was relatively unchanged during the three-month period ended March 31, 2022 as compared to the three-month period ended March 31, 2021. Changes in the components of interest expense included the following: (i) a net $1 million decrease in aggregate interest expense on our revolving credit, demand notes, senior notes, term loan facilities and accounts receivable securitization program resulting from a decrease in our aggregate average cost of borrowings pursuant to these facilities (1.9% during 2022 as compared to 2.2% during 2021), partially offset by an increase in the aggregate average outstanding borrowings ($4.26 billion during 2022 as compared to $3.81 billion during 2021), and; (ii) a net $1 million increase in capitalized interest on major projects.
The average effective interest rate, including amortization of deferred financing costs, original issue discount and designated interest rate swap expense/income, on borrowings outstanding under our revolving credit, demand notes, senior notes, term loan A and B facilities and accounts receivable securitization program, which amounted to approximately $4.26 billion and $3.81 billion during the first quarters of 2022 and 2021, respectively, were 2.0% during 2022 and 2.3% during 2021.
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, 2022 and 2021 (dollar amounts in thousands):
|
|
Three months ended |
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
2022 |
|
|
2021 |
|
|
Provision for income taxes |
|
$ |
48,962 |
|
|
$ |
63,807 |
|
|
Income before income taxes |
|
|
199,983 |
|
|
|
272,877 |
|
|
Effective tax rate |
|
|
24.5 |
% |
|
|
23.4 |
% |
|
The provision for income taxes decreased $15 million during the three-month period ended March 31, 2022, as compared to the first quarter of 2021, due primarily to: (i) the income tax benefit recorded in connection with the $70 million decrease in pre-tax income, partially offset by; (ii) a $1 million increase in the provision for income taxes recorded in connection with ASU 2016-09.
Liquidity
Net cash provided by operating activities
Net cash provided by operating activities was $445 million during the three-month period ended March 31, 2022 and $72 million during the first quarter of 2021. The net increase of $374 million was attributable to the following:
|
• |
a favorable change of $510 million resulting primarily from the early return of the $695 million of Medicare accelerated payments which were received during 2020 and repaid during the first quarter of 2021; |
|
• |
an unfavorable change of $72 million in accounts receivable; |
|
• |
an unfavorable change of $44 million resulting from a decrease in net income plus depreciation and amortization expense, stock-based compensation expense and gain/loss on sale of assets and businesses, and; |
|
• |
$20 million of other combined net unfavorable changes. |
Days sales outstanding (“DSO”): Our DSO are calculated by dividing our net revenue by the number of days in the three-month periods. The result is divided into the accounts receivable balance at March 31st of each year to obtain the DSO. Our DSO were 48 days and 50 days at March 31, 2022 and 2021, respectively.
Net cash used in investing activities
During the first three months of 2022, we used $169 million of net cash in investing activities as follows:
|
• |
$200 million spent on capital expenditures including capital expenditures for equipment, renovations and new projects at various existing facilities; |
50
|
• |
$21 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, and; |
|
• |
$10 million received from the sales of assets and businesses. |
During the first three months of 2021, we used $262 million of net cash in investing activities as follows:
|
• |
$247 million spent on capital expenditures including capital expenditures for equipment, renovations and new projects at various existing facilities; |
|
• |
$14 million spent in connection with net cash outflows from forward exchange contracts that hedge our investment in the U.K. against movements in exchange rates, and; |
|
• |
$1 million spent on the purchase and implementation of information technology applications. |
Net cash used in financing activities
During the first three months of 2022, we used $278 million of net cash in financing activities as follows:
|
• |
spent $366 million to repurchase shares of our Class B Common Stock in connection with: (i) open market purchases pursuant to our stock repurchase program ($350 million), and; (ii) income tax withholding obligations related to stock-based compensation programs ($16 million); |
|
• |
generated $117 million of additional borrowings pursuant to our revolving credit facility; |
|
• |
spent $12 million on net repayments of debt as follows: (i) $11 million related to our tranche A term loan facility, and; (ii) $1 million related to other debt facilities; |
|
• |
spent $15 million to pay quarterly cash dividends of $.20 per share; |
|
• |
spent $5 million to pay profit distributions related to noncontrolling interests in majority owned businesses; |
|
• |
generated $4 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans, and; |
|
• |
spent $1 million in connection with the purchase of ownership interests from minority members. |
During the first three months of 2021, we used $270 million of net cash in financing activities as follows:
|
• |
spent $252 million on net repayments of debt as follows: (i) $225 million in connection with our accounts receivable securitization program; (ii) $25 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; |
|
• |
spent $17 million to pay cash dividends of $.20 per share during the first quarter; |
|
• |
received $8 million in connection with the sale of ownership interest to minority members; |
|
• |
spent $7 million to repurchase shares of our Class B Common Stock in connection with income tax withholding obligations related to stock-based compensation programs; |
|
• |
spent $5 million to pay profit distributions related to noncontrolling interests in majority owned businesses, and; |
|
• |
generated $3 million from the issuance of shares of our Class B Common Stock pursuant to the terms of employee stock purchase plans. |
Expected capital expenditures during remainder of 2022
During the full year of 2022, we expect to spend approximately $950 million to $1.1 billion on capital expenditures which includes expenditures for capital equipment, construction of new facilities, and renovations and expansions at existing hospitals. During the first three months of 2022, we spent approximately $200 million on capital expenditures. During the remaining nine months of 2022, we expect to spend approximately $750 million to $900 million on capital expenditures.
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 August 24, 2021, we entered into a seventh amendment to our credit agreement dated as of November 15, 2010, as amended and restated as of September 21, 2012, August 7, 2014 and October 23, 2018, among UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, and JPMorgan Chase Bank, N.A., as administrative agent, (the
51
“Credit Agreement”). In September, 2021, we entered into an eighth amendment to our Credit Agreement which modified the definition of “Adjusted LIBO Rate”.
The seventh amendment to the Credit Agreement, among other things, provided for the following:
|
o |
a $1.2 billion aggregate amount revolving credit facility, which is scheduled to mature on August 24, 2026, representing an increase of $200 million over the $1.0 billion previous commitment. As of March 31, 2022, this facility had $460 million of borrowings outstanding and $736 million of available borrowing capacity, net of $4 million of outstanding letters of credit; |
|
o |
a $1.7 billion initial tranche A term loan facility, which is scheduled to mature on August 24, 2026, resulting in an initial reduction of $150 million from the $1.85 billion of borrowings outstanding under the previous tranche A term loan facility, and; |
|
o |
repayment of approximately $488 million of outstanding borrowings and termination of the previous tranche B term loan facility. |
Pursuant to the terms of the seventh amendment, the tranche A term loan, which had $1.679 billion of borrowings outstanding as of March 31, 2022, provides for installment payments of $10.625 million per quarter beginning on December 31, 2021 through September 30, 2023 and $21.25 million per quarter beginning on December 31, 2023 through June 30, 2026. The unpaid principal balance at June 30, 2026 is due on the maturity date.
Revolving credit and tranche A term loan borrowings under the Credit Agreement bear interest at our election at either (1) the ABR rate which is defined as the rate per annum equal to the greatest of (a) the lender’s prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month LIBOR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.25% to 0.625%, or (2) the one, three or six month LIBOR rate (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.25% to 1.625%. As of March 31, 2022, the applicable margins were 0.375% for ABR-based loans and 1.375% for LIBOR-based loans under the revolving credit and term loan A facilities. The revolving credit facility includes a $125 million sub-limit for letters of credit. The Credit Agreement is secured by certain assets of the Company and our material subsidiaries (which generally excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, and certain real estate assets and assets held in joint-ventures with third parties) and is guaranteed by our material subsidiaries.
The Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement also contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens and indebtedness, transactions with affiliates, dividends and stock repurchases; and requires compliance with financial covenants including maximum leverage. We were in compliance with all required covenants as of March 31, 2022 and December 31, 2021.
On August 24, 2021, we completed the following via private offerings to qualified institutional buyers under Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended:
|
o |
Issued $700 million of aggregate principal amount of 1.65% senior secured notes due on September 1, 2026, and; |
|
o |
Issued $500 million of aggregate principal amount of 2.65% senior secured notes due on January 15, 2032. |
In April, 2021, our accounts receivable securitization program (“Securitization”) was amended (the eighth amendment) to: (i) reduce the aggregate borrowing commitments to $20 million (from $450 million previously); (ii) slightly reduce the borrowing rates and commitment fee, and; (iii) extend the maturity date to April 25, 2022. In April, 2022, the Securitization was amended (the ninth amendment) to extend the maturity date to July 22, 2022. Substantially all other material terms and conditions remained unchanged. There were no borrowings outstanding pursuant to the Securitization as of March 31, 2022.
On September 13, 2021, we redeemed $400 million of aggregate principal amount of 5.00% senior secured notes, that were scheduled to mature on June 1, 2026, at 102.50% of the aggregate principal, or $410 million.
As of March 31, 2022, we had combined aggregate principal of $2.0 billion from the following senior secured notes:
|
o |
$700 million aggregate principal amount of 1.65% senior secured notes due in September, 2026 (“2026 Notes”) which were issued on August 24, 2021. |
|
o |
$800 million aggregate principal amount of 2.65% senior secured notes due in October, 2030 (“2030 Notes”) which were issued on September 21, 2020. |
|
o |
$500 million of aggregate principal amount of 2.65% senior secured notes due in January, 2032 (“2032 Notes”) which were issued on August 24, 2021. |
On September 28, 2020, we redeemed the entire $700 million aggregate principal amount of our previously outstanding 4.75% senior secured notes, which were scheduled to mature in August, 2022, at 100% of the aggregate principal amount.
52
Interest on the 2026 Notes is payable on March 1st and September 1st until the maturity date of September 1, 2026. Interest on the 2030 Notes payable on April 15th and October 15th, until the maturity date of October 15, 2030. Interest on the 2032 Notes is payable on January 15th and July 15th until the maturity date of January 15, 2032.
The 2026 Notes, 2030 Notes and 2032 Notes (collectively “The Notes”) were offered only to qualified institutional buyers under Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
The Notes are guaranteed (the “Guarantees”) on a senior secured basis by all of our existing and future direct and indirect subsidiaries (the “Subsidiary Guarantors”) that guarantee our Credit Agreement, or other first lien obligations or any junior lien obligations. The Notes and the Guarantees are secured by first-priority liens, subject to permitted liens, on certain of the Company’s and the Subsidiary Guarantors’ assets now owned or acquired in the future by the Company or the Subsidiary Guarantors (other than real property, accounts receivable sold pursuant to the Company’s Existing Receivables Facility (as defined in the Indenture pursuant to which The Notes were issued (the “Indenture”)), and certain other excluded assets). The Company’s obligations with respect to The Notes, the obligations of the Subsidiary Guarantors under the Guarantees, and the performance of all of the Company’s and the Subsidiary Guarantors’ other obligations under the Indenture, are secured equally and ratably with the Company’s and the Subsidiary Guarantors’ obligations under the Credit Agreement and The Notes by a perfected first-priority security interest, subject to permitted liens, in the collateral owned by the Company and its Subsidiary Guarantors, whether now owned or hereafter acquired. However, the liens on the collateral securing The Notes and the Guarantees will be released if: (i) The Notes have investment grade ratings; (ii) no default has occurred and is continuing, and; (iii) the liens on the collateral securing all first lien obligations (including the Credit Agreement and The Notes) and any junior lien obligations are released or the collateral under the Credit Agreement, any other first lien obligations and any junior lien obligations is released or no longer required to be pledged. The liens on any collateral securing The Notes and the Guarantees will also be released if the liens on that collateral securing the Credit Agreement, other first lien obligations and any junior lien obligations are released.
In connection with the issuance of The Notes, the Company, the Subsidiary Guarantors and the representatives of the several initial purchasers, entered into Registration Rights Agreements (the “Registration Rights Agreements”), whereby the Company and the Subsidiary Guarantors have agreed, at their expense, to use commercially reasonable best efforts to: (i) cause to be filed a registration statement enabling the holders to exchange The Notes and the Guarantees for registered senior secured notes issued by the Company and guaranteed by the then Subsidiary Guarantors under the Indenture (the “Exchange Securities”), containing terms identical to those of The Notes (except that the Exchange Securities will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with the Registration Rights Agreements); (ii) cause the registration statement to become effective; (iii) complete the exchange offer not later than 60 days after such effective date and in any event on or prior to a target registration date of March 21, 2023 in the case of the 2030 Notes and February 24, 2024 in the case of the 2026 and 2032 Notes, and; (iv) file a shelf registration statement for the resale of The Notes if the exchange offers cannot be effected within the time periods listed above. The interest rate on The Notes will increase and additional interest thereon will be payable if the Company does not comply with its obligations under the Registration Rights Agreements.
As discussed in Note 2 to the Consolidated Financial Statements-Relationship with Universal Health Realty Income Trust and Other Related Party Transactions, on December 31, 2021, we (through wholly-owned subsidiaries of ours) entered into an asset purchase and sale agreement with Universal Health Realty Income Trust (the “Trust”). Pursuant to the terms of the agreement, which was amended during the first quarter of 2022, we, among other things, transferred to the Trust, the real estate assets of Aiken Regional Medical Center (“Aiken”) and Canyon Creek Behavioral Health (“Canyon Creek”). In connection with this transaction, Aiken and Canyon Creek (as lessees), entered into a master lease and individual property leases (with the Trust as lessor, and as amended during the first quarter of 2022), for initial lease terms on each property of approximately twelve years, ending on December 31, 2033. As a result of our purchase option within the Aiken and Canyon Spring lease agreements, this asset purchase and sale transaction is accounted for as a failed sale leaseback in accordance with U.S. GAAP and we have accounted for the transaction as a financing arrangement. Our monthly lease payments payable to the Trust will be recorded to interest expense and as a reduction of the outstanding financial liability. The amount allocated to interest expense will be determined using our incremental borrowing rate and will be based on the outstanding financial liability. In connection with this transaction, our Consolidated Balance Sheets at March 31, 2022 and December 31, 2021 reflect financial liabilities of approximately $83 million and $82 million, respectively, which is included in debt.
At March 31, 2022, the carrying value and fair value of our debt were approximately $4.3 billion and $4.0 billion, respectively. At December 31, 2021, the carrying value and fair value of our debt were each approximately $4.2 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, 2022 and 41% at December 31, 2021.
We expect to finance all capital expenditures and acquisitions and pay dividends and potentially repurchase shares of our common stock utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing
53
revolving credit facility, which had $736 million of available borrowing capacity as of March 31, 2022, or through refinancing the existing Credit Agreement; (ii) the issuance of other short-term and/or long-term debt, and/or; (iii) the issuance of equity. We believe that our operating cash flows, cash and cash equivalents, available commitments under existing agreements, as well as access to the capital markets, provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months. However, in the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.
Off-Balance Sheet Arrangements
During the three months ended March 31, 2022, there have been no material changes in the off-balance sheet arrangements consisting of standby letters of credit and surety bonds.
As of March 31, 2022 we were party to certain off balance sheet arrangements consisting of standby letters of credit and surety bonds which totaled $171 million consisting of: (i) $160 million related to our self-insurance programs, and; (ii) $11 million of other debt and public utility guarantees.