Addiction Business Hurts Universal Health Services in Q3

Universal Health Services (NYSE: UHS) posted mixed results in the third quarter of 2019, with a large pain point being the hospital management company’s addiction treatment chain, Foundations Recovery Network.

Year-over-year, revenue was up 6% in Q3 while net income was down about 43% for UHS.

Based in King of Prussia, Pennsylvania, UHS has hundreds of behavioral health facilities in the U.S. and England, as well as 26 acute-care hospitals.


Specifically, UHS reported a revenue of $2.8 billion and a net income of $97.2 million in the quarter ended Sept. 30, 2019. During the same period a year earlier, the company posted $2.6 billion in revenue and $171.7 million in net income.

The mixed results were partially caused by an increase in admissions and low unemployment, which led to higher labor costs, UHS executives said Friday on a third quarter earnings call with investors.

But Foundations Recovery Network — and changes to the way addiction treatment is paid for — created the largest problem for UHS, executives noted on the call.


Specifically, UHS reported a $97.6 million asset impairment charge for Foundations in Q3.

UHS acquired Brentwood, Tennessee-based Foundations in 2015 for $350 million to bolster its addiction treatment services, which were already available in many of UHS’s general psychiatric hospitals.

“We were really just increasing our investment in the addiction treatment business and really acquiring a company that had a different model than what had been sort of our legacy model,” CFO Steve Filton said of the Foundations acquisition during the call.

Historically, Foundations advertised directly to consumers via the internet and other media, with patients coming to them. The resultant population was a mix of both in and out of network patients who did a “fair amount” of travel for treatment, Filton told investors on the call.

But over the past couple years, that model has become somewhat outdated, as federal laws have forced insurers to offer better coverage for addiction treatment services. That means fewer out of network patients for UHS — and lower in network payment rates.

On top of that, state laws are popping up to target travel practices as they relate to behavioral health care.

“It has really been almost now a turn to [a] largely in-network model,” Filton said. “There is much less travel for treatment. And there is more and more control by the payers, and less and less by the consumers themselves about where treatment can be rendered.”

As such, UHS plans to pivot the Foundations business model, executives said.

“For the first few years after the acquisition, we did very well in the business,” CEO Alan Miller said. “But then the nature of the business changed … and we are making adjustments to the change in the business.”

The plan is to either revise the model or “envelop the Foundations facilities more … into our legacy model,” which continues to do well, Filton said.

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