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Changes in Behavioral Health Business May Boost UHS’s Valuations

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Regulatory changes

Universal Health Services (UHS) expects that the Centers for Medicare & Medicaid Services (or CMS) may issue a new ruling related to the Medicaid Institution for Mental Diseases (or IMD) exclusion in 2016.

According to CMS, “The IMD exclusion prohibits Medicaid from making payments to IMDs for services rendered to Medicaid beneficiaries aged 21 to 64.” If the IMD exclusion is removed, it will boost Universal Health Services’ behavioral health revenues in 2017. To know more about the IMD exclusion, please refer to Universal Health Services’ Behavioral Health Business in 3Q15.

Universal Health Services’ behavioral health revenues rose by 9.7%, from $4 billion in 2014 to $4.4 billion in 2015. Its compound annual growth rate from 2011 to 2015 has been approximately 5.9%.

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Future growth drivers

In 2016, the company expects to witness a year-over-year (or YoY) revenue growth rate of about 5% for its behavioral health business. The company, however, expects to face margin pressures for this business due to a shortage of psychiatrists in the market and subsequent increases in recruitment costs.

To partly counter this problem, Universal Health Services has trained physician extenders, clinicians, and nurses to do some of the psychiatrists’ tasks, especially in markets where regulations permit such actions. The company is also witnessing a fall in payer pressures to reduce the length of stays of mental health patients, a trend which is expected to contribute significantly to the company’s future revenues and profit margins.

If Universal Health Services manages to realize the projected revenue growth for its behavioral health business, it will help to boost share prices of the Health Care Select Sector SPDR ETF (XLV). Universal Health Services makes up about 0.4% of XLV’s total portfolio holdings.

Market expansion

Universal Health Services expanded its behavioral health business in the United Kingdom by acquiring Cygnet Health Care in September 2014. The company also announced its acquisition of Alpha Hospitals, which was included in the Cygnet group of hospitals, on August 19, 2015.

The average occupancy rate for Universal Health Services’ behavioral health beds in the United Kingdom has been in the low-90% range, significantly higher than the occupancy rate in the United States, which has been at about 74%. Other hospital companies such as HCA Holdings (HCA), Acadia Healthcare (ACHC), and DaVita Healthcare Partners (DVA), have also been involved in overseas acquisitions in order to boost profitability.

In the next article, we’ll explore Universal Health Services’ acute care business and study the factors that are expected to contribute to the company’s future growth.

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