The healthcare industry, represented by the Healthcare Select Sector SPDR (XLV), reduces its revenue risk by diversifying across different locations and across different service lines.
Universal Health Services’ (UHS) strategy focuses on markets with above-average population growth in the US. While the total US population is expected to rise by 4.6% from 2012 to 2017, the population in the company’s key markets is expected to increase by 6.8% in the same timeframe.
Universal Health Services’ hospitals are primarily located in high-growth urban markets in the US, where economic and employment conditions have been better than in rural parts of the country. HCA Holdings (HCA) also concentrates on urban markets, while Community Health Systems (CYH) and LifePoint Hospitals (LPNT) focus mainly on non-urban communities.
The company earns a significant portion of its revenues from its facilities in Nevada, Texas, and California. Universal Health Services enjoys a market-dominant position in these markets, ensuring the company’s sustainable profits.
Universal Health Services has a diversified business model consisting of acute care hospitals and behavioral health centers. Behavioral health is concerned with treatment of patients with mental and stress-related ailments and also people suffering from substance abuse. Though behavioral health contributes about 51% of the total company revenues, it shares a disproportionately high 71% of the company’s total earnings before interest, tax, depreciation, and amortization (or EBITDA).
The inpatient behavioral market in the US is worth $20 billion, with 73 million people in the country suffering from diagnosable mental illness. Behavioral health service is one of the few service lines that benefit from economic downturns. As unemployment levels increase, more people suffer stress-related and other mental ailments. With acute care hospital performance depending on economic conditions, behavioral health has been an effective risk management policy for the company. It has even boosted the company’s average revenues earned per patient.