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An investor’s guide to Universal Health Services’ service mix

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Service mix

The healthcare industry, represented by the Healthcare Select Sector SPDR (XLV), includes varied service lines such as acute care, general surgery, specialty care, rehabilitation centers, behavioral health, and emergency centers. For-profit hospital operators such as Universal Health Services (UHS), Community Health Systems (CYH), HCA Holdings (HCA), and Tenet Healthcare (THC) have each focused on one other service line in addition to acute care services to reduce their business risk and earn sustainable profits.

The above graph shows that earnings before interest, tax, depreciation, and amortization (or EBITDA) margins of Universal Health Services’ behavioral health business has always exceeded that of the company’s acute care business.

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Acute care services’ EBITDA margins rose to 18.3% in 2014 mainly on account of the Affordable Care Act (or ACA). An increase in insured levels and improving economic conditions helped boost patient volumes for all acute care hospital operators in 2014. EBITDA margins for behavioral health services have, however, remained in the range of 26.0% to 28.0%. As more people with mental ailments get insured and healthcare plans implement mental parity laws ensuring uncapped coverage, these margins are expected to rise further.

Acute care services

Acute care hospitals have high operating expenses in terms of salaries and supplies. Favorable demographics and economic growth are expected to drive revenues in this segment. For more information on social and economic drivers, see The key economic and social factors affecting hospital revenues.

Behavioral health services

The behavioral health segment has high salary expenses, but it spends very little on medical supplies. Universal Health Services ranks as a leading behavioral health provider based on its total hospitals, total beds, and net patient revenues.

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