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Did the payment method affect Universal Health Services?

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Acute care payment

Historically, the Center for Medicare and Medicaid Services, or CMS, established rates and payment methods for reimbursing healthcare companies (XLV) through the Medicare and Medicaid programs. Acute care hospital operators are reimbursed based on a prospective payment system, or PPS, developed by CMS.

Currently, the system is based on a per diagnosis type of fee-for-service method. Hospitals are reimbursed based on the quantity and complexity of the services they provide.

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In 3Q14, Universal Health Services’ (UHS) bed occupancy rate—a proxy for the quantity of services provided—for acute care services was one of the highest among its peers at 56%. It was followed by HCA Holdings (HCA) at 54.1%, Tenet Healthcare (THC) at 48.4%, and Community Health Systems (CYH) at 41.9%.

In the same time period, HCA Holdings and Universal Health Services earned EBITDA (earnings before interest, tax, depreciation, and amortization) margins of 19.3% and 16%. This was greater than Community Health Systems’ and Tenet Healthcare’s margins. They were 13% and 9.7%, respectively.

The occupancy rate and EBITDA margins aren’t directly related. Differences in the case mix index or complexity of services provided also affects revenues. A fee-for-service model benefited companies with a higher occupancy rate.

In case of behavioral health services, CMS uses a per diem type of fee-for-service payment method. Hospitals are reimbursed based on the length of a patient’s stay—adjusted for the complexity of services used. Historically, payers like Medicaid and commercial insurers have been exerting pressure on behavioral health patients to reduce their stays.

As a result, Universal Health Services’ behavioral health segment witnessed an average length of stay restricted between the range of 12.5 days to 13 days. This led to slow growth in the segment’s revenues.

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