the behavioral health industry from wall street’s point of view
DESCRIPTION
These are the slides from my presentation at the MHCA 2010 Summer Conference in August.TRANSCRIPT
The Behavioral Health Industry From Wall Street’s Point Of ViewMHCA 2010 Summer ConferenceAugust 19, 2010
Anthony DeemMarket Research AssociateHospitals, Medical/Rx Distribution, Dental, Pharmacy Benefit [email protected]
Key Points Of Discussion Overview of Cleveland Research Company Overview of freestanding inpatient behavioral health
market How do investors track the performance of the market? Recent trends and outlook on performance. Inpatient providers are growing (acquisitions, capacity
expansion, etc) Industry Outlook
State budget issues – pros and cons. Mental Health ParityHealthcare reform is a significant positive for the
industry MHCA/CRC partnership
Who is Cleveland Research?
In June 2006, 43 of us started a new equity research firm to form CRC (original firm started in 1996), and we now have ~70 employees (over 45 in research).
Stock Market Research
What Sets us Apart?
Which Sectors Does CRC Cover?
Consumer
Industrial
Health Care
Technology
Who Do We Research? Hospitals
Universal Health Services
Psychiatric Solutions LifePoint HospitalsCommunity Health
Systems
Medical/Rx DistributionCardinal HealthMcKesson
CorporationAmerisource Bergen PSS World Medical
DentalHenry Schein Patterson CompaniesDentsply Sirona Dental
Pharmacy Benefit Management Express ScriptsMedco Health
SolutionsCVS/Caremark
How Do We Do Our Research?
We talk to: Management of Private CompaniesIndividuals In The Markets Where UHS and
PSYS OperateMedicaid Agencies & Insurance CompaniesReferral SourcesConsultants
Inpatient Behavioral Health Industry Overview
Inpatient Market Is Highly Attractive $20 billion domestic market 73 million people with diagnosable mental illnessesCapacity rationalization in early 1990’s created
imbalance of supply/demand Solid pricing and admission growth trendsBad debt exposure is minimal Low competition from outpatient settingHealthcare reform and parity are both positive
regulatory developments
What Matters To Investors? Organic GrowthRevenue GrowthPricing GrowthVolume GrowthPatient Day Growth Length Of Stay
Profit Margin Expansion
Profitable Acquisitions
Recent Trends – Pricing GrowthMedicare/Medicaid pricing growth has leveled off.
Managed care remains strong.
Payer % of Revenue FY08 Increase FY09 Increase FY10 IncreaseCommercial/Private/HMO 35% 7% 7% 7%Medicaid 29% 3% 2% 0%State Agencies 15% 3% 3% 3%Medicare 13% 9% 4% 2%Third Party 8% 5% 3% 3%
Total 100% 5% 4% 3%
Source: Company reports, Cleveland Research
Psychiatric SolutionsPricing Growth Trends
PPS Was A Positive For Freestanding Facilities But A Negative For Acute
Acute-Based Psychiatric Units Revenue Per Day & Operating Margin Analysis
$0
$300
$600
$900
$1,200
2004 2005 2006 2007 2008-100.0%
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
Average Revenue Per Day Average Operating MarginSource: Cleveland Research
Pricing Growth (cont’d)
Note: Figures are slightly skewed driven by strong acute volume (higher revenue per patient day)
$520
$550
$575 $582 $593
$605
$552
$576
$599 $623
$639
$653
$520
$540
$560
$580
$600
$620
$640
$660
2006 2007 2008 2009 FY10E FY11E
PSYS UHSSource: Company Reports, Cleveland Research
Revenue Per Patient DayPSYS & UHS
Recent Trends – Admission GrowthDemand for inpatient services remains high
2.4% 2.2%
4.5%
6.8% 6.6%
5%
3.6%4.3%
6.4%
2.2%
4.1% 4.2%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%
2006 2007 2008 2009 FY10E FY11EPSYS UHSSource: Company Reports, Cleveland Research
Admission Growth PSYS & UHS
Recent Trends – Length of StayLOS is under pressure due to Medicaid and acute
expansion/demand
1.0%
-0.8%
-1.9%
-3.5%
-2.3%-2.0%
0.0%
-3.3%
-1.0%-0.2% -0.5% -0.5%
-4.0%-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%
2006 2007 2008 2009 FY10E FY11E
PSYS UHS
Length of StayPSYS & UHS
Source: Company Reports, Cleveland Research
Recent Trends – Revenue GrowthRevenue growth has trended down slightly due to pricing but
remains strong overall
8.9%
6.5%
8.0%
5.1%
5.9% 6.0%
8.1%7.4% 7.6%
3.9%
5.8% 5.8%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
10.0%
2006 2007 2008 2009 FY10E FY11EPSYS UHSSource: Company Reports, Cleveland Research
Same-Facility Revenue Growth PSYS & UHS
Recent Trends – Profit Margins
Profit margin expansion has been robust
20.5% 20.8%21.6%
22.8%22.9% 23.3%
25.1%
26.7%
18.0%19.0%20.0%21.0%22.0%23.0%24.0%25.0%26.0%27.0%28.0%
2007 2008 2009 YTD-2010PSYS UHS
Profit MarginsPSYS & UHS
Source: Company Reports
Bed Expansion
Bed expansion initiatives are driven by high demand andcapacity constraints.
Psychiatric Solutions Annual Bed Expansion
104
380339
310
158
0
100
200
300
400
2006 2007 2008 2009 2010Source: Company reports, Cleveland Research
PSYS & UHS Are Merging
UHS distinguishes itself in the market differently than other for profit publicly traded operators given the presence in behavioral health, which will only get bigger from here.
UHS outbid private equity UHS believes the industry provides compelling
growth opportunity which is why they made a $3.1 billion acquisition
The deal is highly favorable to UHS and its shareholders.
PSYS & UHS Are Merging (cont’d)
State# of
Facilities # of Beds% of Total Facilities
% of Total Beds
Florida 19 1,848 10% 10%Texas 14 1,668 7% 9%Pennsylvania 10 1,323 5% 7%Virginia 9 1,248 5% 6%Georgia 12 1,186 6% 6%Tennessee 11 930 6% 5%Illinois 5 902 3% 5%Utah 6 838 3% 4%California 14 613 7% 3%South Carolina 8 605 4% 3%Other 88 8,050 45% 42%TOTAL 196 19,211 100% 100%
Source: Company Reports
Behavioral Portfolio Analysis - Post PSYS Transaction Universal Health Services, Inc.
Florida, Texas, Pennsylvania and Virginia will be the company’s largest markets
PSYS & UHS Are Merging (cont’d)
From a revenue standpoint, we believe 70% of UHS pro forma behavioral revenue will be acute and its bed mix will be 54% RTC and 46% acute.
% of Revenue % of BedsAcute 70% 46%Residential Treatment Centers 30% 54%
Total 100% 100%
Source: Company Reports, Cleveland Research
Behavioral Revenue & Bed Mix Post PSYSUniversal Health Services
Industry Outlook. What Now?
State budget pressures are a riskThe inpatient industry relies significantly on
public fundingState Agency & Medicaid funding is 50%
of PSYS’s revenue A weak economy and mental health parity are
both near term positives for the industry Reform is a meaningful tailwind beginning in
2014
State Budget Cuts A Double Edged Sword?
0% 20% 40% 60% 80% 100%
Reduce Administrative Expenses
Hiring Freezes
Reduce Funds to Community
Reduce Services
Reduce number served
Employee Furloughs
Close hospitals/wards
Restrict population served
Close state hospitals
December-09 April-09
State Mental Health Associations Responses To Budget Cuts
Source: NASMHPD Research Institute
Mental Health Parity Viewed as a positive driver to commercial inpatient
demand. 113 million people currently have parity. The
incremental benefit to providers comes from self insured plans, where parity didn’t apply before. That is millions more lives.
Facilities typically have 30 inpatient days, 20 outpatient visits is the standard policy, whereas med/surg they don’t have those limits, so those limits will go away.
The law is intended to remove higher co-pay/deductible requirements
Healthcare Reform Reform is a meaningful positive for the industryElimination of charity careThe for profit market has very low exposure
to uninsured population currently, which will create volume upside.
2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
Newly Insured Population Medicaid & CHIP -1 -2 -3 10 15 17 16 16 16 Employer 3 3 3 4 1 -3 -3 -3 -4 Other -2 -3 -5 -5 -5 -5 Exchanges 8 13 21 23 24 24
Total Insured With Reform 217 220 221 222 244 251 256 257 259 258
Change vs. No Reform 0% 1% 0% 0% 9% 12% 13% 14% 14% 14%
Source: CBO, Morningstar
Increases To Insured Population Healthcare Reform
MHCA & Cleveland Research New collaboration aimed at gathering industry dataComplete confidentiality for MHCA members at all
times – the goal of the survey is to better educate industry participants about current trends, NOT gain insight into individual company performance
Ongoing time series data that helps to identify key inflection points and address important issues
Actual anecdotal commentary from membersAggregation of data into a comprehensive report
which will be circulated to all MHCA members
Thank You!
Email: [email protected]: (216) 649-7232