Cover and table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-10765

UNIVERSAL HEALTH SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware		23-2077891
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

UNIVERSAL CORPORATE CENTER

367 SOUTH GULPH ROAD

KING OF PRUSSIA**,** Pennsylvania 19406

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (610) 768-3300

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class B Common Stock, $0.01 par value	UHS	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer		☒	Accelerated filer		☐
Non-accelerated filer		☐	Smaller reporting company		☐
				Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common shares outstanding, as of April 30, 2023:

Class A		6,577,100
Class B		62,928,899
Class C		661,688
Class D		14,100

UNIVERSAL HEALTH SERVICES, INC.

INDEX

		PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Income – Three Months Ended March 31, 2023 and 2022		3
Condensed Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2023 and 2022		4
Condensed Consolidated Balance Sheets – March 31, 2023 and December 31, 2022		5
Condensed Consolidated Statements of Changes in Equity – Three Months Ended March 31, 2023 and 2022		6
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2023 and 2022		8
Notes to Condensed Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		54
Item 4. Controls and Procedures		54
PART II. Other Information
Item 1. Legal Proceedings		55
Item 1A. Risk Factors		55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		55
Item 6. Exhibits		56
Signatures		57

This Quarterly Report on Form 10-Q is for the quarter ended March 31, 2023. This Report modifies and supersedes documents filed prior to this Report. Information that we file with the Securities and Exchange Commission (the “SEC”) in the future will automatically update and supersede information contained in this Report.

In this Quarterly Report, “we,” “us,” “our” “UHS” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries. UHS is a registered trademark of UHS of Delaware, Inc., the management company for, and a wholly-owned subsidiary of Universal Health Services, Inc. Universal Health Services, Inc. is a holding company and operates through its subsidiaries including its management company, UHS of Delaware, Inc. All healthcare and management operations are conducted by subsidiaries of Universal Health Services, Inc. To the extent any reference to “UHS” or “UHS facilities” in this report including letters, narratives or other forms contained herein relates to our healthcare or management operations it is referring to Universal Health Services, Inc.’s subsidiaries including UHS of Delaware, Inc. Further, the terms “we,” “us,” “our” or the “Company” in such context similarly refer to the operations of Universal Health Services Inc.’s subsidiaries including UHS of Delaware, Inc. Any reference to employees or employment contained herein refers to employment with or employees of the subsidiaries of Universal Health Services, Inc. including UHS of Delaware, Inc.

PART I. FINANCI****AL INFORMATION

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share amounts)

(unaudited)

	Three months ended March 31,
	2023				2022
Net revenues	$	3,467,518			$	3,292,956
Operating charges:
Salaries, wages and benefits		1,753,335				1,692,270
Other operating expenses		878,951				820,934
Supplies expense		379,989				371,073
Depreciation and amortization		141,621				143,784
Lease and rental expense		34,922				32,038
		3,188,818				3,060,099
Income from operations		278,700				232,857
Interest expense, net		50,876				21,673
Other (income) expense, net		13,723				11,201
Income before income taxes		214,101				199,983
Provision for income taxes		51,726				48,962
Net income		162,375				151,021
Less: Net income (loss) attributable to noncontrolling interests		(740	)			(2,892	)
Net income attributable to UHS	$	163,115			$	153,913
Basic earnings per share attributable to UHS	$	2.31			$	2.05
Diluted earnings per share attributable to UHS	$	2.28			$	2.02
Weighted average number of common shares - basic		70,535				75,030
Add: Other share equivalents		952				1,011
Weighted average number of common shares and equivalents - diluted		71,487				76,041

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEM****ENTS OF COMPREHENSIVE INCOME

(amounts in thousands, unaudited)

		Three months ended March 31,
		2023				2022
Net income		$	162,375			$	151,021
Other comprehensive income (loss):
Foreign currency translation adjustment			4,198				(18,470	)
Other comprehensive income (loss) before tax			4,198				(18,470	)
Income tax expense (benefit) related to items of other comprehensive income (loss)			(424	)			(944	)
Total other comprehensive income (loss), net of tax			4,622				(17,526	)
Comprehensive income			166,997				133,495
Less: Comprehensive income (loss) attributable to noncontrolling interests			(740	)			(2,892	)
Comprehensive income attributable to UHS		$	167,737			$	136,387

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDA****TED BALANCE SHEETS

(amounts in thousands, unaudited)

	March 31, 2023				December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	109,969			$	102,818
Accounts receivable, net		2,032,184				2,017,722
Supplies		216,236				218,517
Other current assets		200,710				198,283
Total current assets		2,559,099				2,537,340
Property and equipment		11,251,315				11,085,852
Less: accumulated depreciation		(5,297,174	)			(5,167,394	)
		5,954,141				5,918,458
Other assets:
Goodwill		3,913,906				3,909,456
Deferred income taxes		90,918				68,397
Right of use assets-operating leases		458,189				454,650
Deferred charges		5,987				6,264
Other		573,719				599,623
Total Assets	$	13,555,959			$	13,494,188
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt	$	96,235			$	81,447
Accounts payable and other liabilities		1,636,102				1,760,588
Operating lease liabilities		73,189				67,776
Federal and state taxes		57,858				4,608
Total current liabilities		1,863,384				1,914,419
Other noncurrent liabilities		532,080				487,669
Operating lease liabilities noncurrent		396,488				395,522
Long-term debt		4,707,321				4,726,533
Redeemable noncontrolling interests		4,269				4,695
Equity:
UHS common stockholders’ equity		6,012,108				5,920,582
Noncontrolling interest		40,309				44,768
Total equity		6,052,417				5,965,350
Total Liabilities and Stockholders’ Equity	$	13,555,959			$	13,494,188

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months ended March 31, 2023

(amounts in thousands, unaudited)

																														Accumulated				UHS
		Redeemable																												Other				Common
		Noncontrolling				Class A				Class B				Class C				Class D				Cumulative				Retained				Comprehensive				Stockholders'				Noncontrolling
		Interest				Common				Common				Common				Common				Dividends				Earnings				Income (Loss)				Equity				Interest				Total
Balance, January 1, 2023		$	4,695			$	66			$	637			$	7			$	0			$	(604,127	)		$	6,533,667			$	(9,668	)		$	5,920,582			$	44,768				5,965,350
Common Stock
Issued/(converted)			—				—				3				—				—				—				3,092				—				3,095				—				3,095
Repurchased			—				—				(7	)			—				—				—				(85,819	)			—				(85,826	)			—				(85,826	)
Restricted share-based compensation expense			—				—				—				—				—				—				4,494				—				4,494				—				4,494
Dividends paid and accrued			—				—				—				—				—				(14,199	)							—				(14,199	)			—				(14,199	)
Stock option expense			—				—				—				—				—				—				16,225				—				16,225				—				16,225
Distributions to noncontrolling interests			(750	)			—				—				—				—				—				—				—				—				(3,395	)			(3,395	)
Comprehensive income:																															—
Net income (loss) to UHS / noncontrolling interests			324				—				—				—				—				—				163,115				—				163,115				(1,064	)			162,051
Foreign currency translation adjustments, net of income tax			—				—				—				—				—				—				—				4,622				4,622				—				4,622
Subtotal - comprehensive income			324				—				—				—				—				—				163,115				4,622				167,737				(1,064	)			166,673
Balance, March 31, 2023		$	4,269			$	66			$	633			$	7			$	0			$	(618,326	)		$	6,634,774			$	(5,046	)		$	6,012,108			$	40,309			$	6,052,417

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months ended March 31, 2022

(amounts in thousands, unaudited)

																														Accumulated				UHS
		Redeemable																												Other				Common
		Noncontrolling				Class A				Class B				Class C				Class D				Cumulative				Retained				Comprehensive				Stockholders'				Noncontrolling
		Interest				Common				Common				Common				Common				Dividends				Earnings				Income (Loss)				Equity				Interest				Total
Balance, January 1, 2022		$	5,119			$	66			$	698			$	7			$	0			$	(545,487	)		$	6,604,089			$	30,291			$	6,089,664			$	103,389			$	6,193,053
Common Stock
Issued/(converted)			—				—				5				—				—				—				3,640				—				3,645				—				3,645
Repurchased			—				—				(27	)			—				—				—				(365,478	)			—				(365,505	)			—				(365,505	)
Restricted share-based compensation expense			—				—				—				—				—				—				3,442				—				3,442				—				3,442
Dividends paid and accrued			—				—				—				—				—				(14,963	)			—				—				(14,963	)			—				(14,963	)
Stock option expense			—				—				—				—				—				—				15,202				—				15,202				—				15,202
Distributions to noncontrolling interests			(650	)			—				—				—				—				—				—				—				—				(4,639	)			(4,639	)
Purchase (sale) of ownership interests by (from) minority members			—				—				—				—				—				—				—				—				—				(1,307	)			(1,307	)
Comprehensive income:
Net income (loss) to UHS / noncontrolling interests			(155	)			—				—				—				—				—				153,913				—				153,913				(2,737	)			151,176
Foreign currency translation adjustments, net of income tax			—				—				—				—				—				—				—				(17,526	)			(17,526	)			—				(17,526	)
Subtotal - comprehensive income			(155	)			—				—				—				—				—				153,913				(17,526	)			136,387				(2,737	)			133,650
Balance, March 31, 2022		$	4,314			$	66			$	676			$	7			$	0			$	(560,450	)		$	6,414,808			$	12,765			$	5,867,872			$	94,706			$	5,962,578

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED S****TATEMENTS OF CASH FLOWS

(amounts in thousands, unaudited)

		Three months ended March 31,
		2023				2022
Cash Flows from Operating Activities:
Net income		$	162,375			$	151,021
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization			141,621				143,784
(Gain) loss on sale of assets and businesses			(295	)			1,084
Stock-based compensation expense			20,964				19,055
Changes in assets & liabilities, net of effects from acquisitions and dispositions:
Accounts receivable			(15,723	)			(15,073	)
Accrued interest			(662	)			180
Accrued and deferred income taxes			46,576				47,548
Other working capital accounts			(119,605	)			63,308
Medicare accelerated payments and deferred CARES Act and other grants			136				250
Other assets and deferred charges			24,727				26,042
Other			7,030				(4,020	)
Accrued insurance expense, net of commercial premiums paid			42,545				41,685
Payments made in settlement of self-insurance claims			(18,936	)			(29,431	)
Net cash provided by operating activities			290,753				445,433
Cash Flows from Investing Activities:
Property and equipment additions			(168,752	)			(200,002	)
Proceeds received from sales of assets and businesses			9,259				10,232
(Outflows) inflows from foreign exchange contracts that hedge our net U.K. investment			(18,818	)			20,710
Decrease in capital reserves of commercial insurance subsidiary			0				100
Net cash used in investing activities			(178,311	)			(168,960	)
Cash Flows from Financing Activities:
Repayments of long-term debt			(16,489	)			(11,966	)
Additional borrowings, net			11,300				117,400
Financing costs			(292	)			-
Repurchase of common shares			(85,039	)			(365,505	)
Dividends paid			(14,214	)			(14,875	)
Issuance of common stock			2,988				3,503
Profit distributions to noncontrolling interests			(4,145	)			(5,289	)
Sale of ownership interests from minority members			0				(1,307	)
Net cash used in financing activities			(105,891	)			(278,039	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			1,650				(2,232	)
Increase (decrease) in cash, cash equivalents and restricted cash			8,201				(3,798	)
Cash, cash equivalents and restricted cash, beginning of period			200,837				178,934
Cash, cash equivalents and restricted cash, end of period		$	209,038			$	175,136
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	50,279			$	20,388
Income taxes paid, net of refunds		$	2,360			$	4,423
Noncash purchases of property and equipment		$	61,341			$	90,730

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLID****ATED FINANCIAL STATEMENTS

(1) General

This Quarterly Report on Form 10-Q is for the quarterly period ended March 31, 2023. In this Quarterly Report, “we,” “us,” “our” “UHS” and the “Company” refer to Universal Health Services, Inc. and its subsidiaries.

The condensed consolidated interim financial statements include the accounts of our majority-owned subsidiaries and partnerships and limited liability companies controlled by us, or our subsidiaries, as managing general partner or managing member. The condensed consolidated interim financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments (consisting only of normal recurring adjustments) which, in our opinion, are necessary to fairly state results for the interim periods. Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although we believe that the accompanying disclosures are adequate to make the information presented not misleading. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements, significant accounting policies and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Many of the factors that could affect our future results are beyond our control or ability to predict, including, but not limited to:

The nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issue facing us and other healthcare providers. In some areas, the labor scarcity is putting a strain on our resources and staff, which has required us to utilize higher‑cost temporary labor and pay premiums above standard compensation for essential workers. These factors, which had a material unfavorable impact on our results of operations during 2022, could continue to have an unfavorable material impact on our results of operations for the foreseeable future.

The impact of the COVID-19 pandemic, which began during the second half of March, 2020, has had a material effect on our operations and financial results since that time. The length and extent of the disruptions caused by the COVID‑19 pandemic are currently unknown; however, we expect such disruptions to continue into the future which could materially affect our financial performance.

A significant portion of our revenues are derived from federal and state government programs including the Medicare and Medicaid programs. Payments from these programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions. Changes to these programs, if adopted, could materially affect program payments which could materially impact our results of operations.

The increase in interest rates has substantially increased our borrowings costs and reduced our ability to access the capital markets on favorable terms. Additional increases in interest rates could have a significant unfavorable impact on our future results of operations and the resulting effect on the capital markets could adversely affect our ability to carry out our strategy.

(2) Relationship with Universal Health Realty Income Trust and Other Related Party Transactions

Relationship with Universal Health Realty Income Trust:

At March 31, 2023, we held approximately 5.7% of the outstanding shares of Universal Health Realty Income Trust (the “Trust”). We serve as Advisor to the Trust under an annually renewable advisory agreement, which is scheduled to expire on December 31st of each year, pursuant to the terms of which we conduct the Trust’s day-to-day affairs, provide administrative services and present investment opportunities. The advisory agreement was renewed by the Trust for 2023 at the same rate in place for 2022, 2021 and 2020, providing for an advisory fee computation at 0.70% of the Trust’s average invested real estate assets. We earned an advisory fee from the Trust, which is included in net revenues in the accompanying consolidated statements of income, of approximately $1.3 million and $1.2 million during the three-month periods ended March 31, 2023 and 2022, respectively.

In addition, certain of our officers and directors are also officers and/or directors of the Trust. Management believes that it has the ability to exercise significant influence over the Trust, therefore we account for our investment in the Trust using the equity method of accounting.

Our pre-tax share of income from the Trust was approximately $300,000 during each of the three-month periods ended March 31, 2023 and 2022 and is included in other income, net, on the accompanying consolidated statements of income for each period. We received dividends from the Trust amounting to $563,000 and $555,000 during the three-month periods ended March 31, 2023 and 2022, respectively. The carrying value of our investment in the Trust was approximately $8.1 million and $8.4 million at March 31, 2023 and December 31, 2022, respectively, and is included in other assets in the accompanying consolidated balance sheets. The

market value of our investment in the Trust was $37.9 million at March 31, 2023 and $37.6 million at December 31, 2022, based on the closing price of the Trust’s stock on the respective dates.

The Trust commenced operations in 1986 by purchasing certain properties from us and immediately leasing the properties back to our respective subsidiaries. The base rents are paid monthly and the bonus rents, which as of January 1, 2022 are applicable only to McAllen Medical Center, are computed and paid on a quarterly basis, based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The leases with those subsidiaries are unconditionally guaranteed by us and are cross-defaulted with one another.

On December 31, 2021, we entered into an asset purchase and sale agreement with the Trust, which was amended during the first quarter of 2022, pursuant to the terms of which:

a wholly-owned subsidiary of ours purchased from the Trust, the real estate assets of the Inland Valley Campus of Southwest Healthcare System located in Wildomar, California, at its fair market value of $79.6 million.

two wholly-owned subsidiaries of ours transferred to the Trust, the real estate assets of the following properties:

o

Aiken Regional Medical Center (“Aiken”), located in Aiken, South Carolina (which includes a 211-bed acute care hospital and a 62-bed behavioral health facility), at its fair-market value of approximately $57.7 million, and;

o

Canyon Creek Behavioral Health (“Canyon Creek”), located in Temple, Texas, at its fair-market value of approximately $26.0 million.

in connection with this transaction, since the fair-market value of Aiken and Canyon Creek, which totaled approximately $83.7 million in the aggregate, exceeded the $79.6 million fair-market value of the Inland Valley Campus of Southwest Healthcare System, we received approximately $4.1 million in cash from the Trust. This transaction generated a gain of approximately $68.4 million for the Trust, our share of which (approximately $4.0 million) is included in our consolidated statement of income for the year ended December 31, 2021.

Also on December 31, 2021, Aiken and Canyon Creek (as lessees), entered into a master lease and individual property leases (with the Trust as lessor), as amended, for initial lease terms on each property of approximately twelve years, ending on December 31, 2033. Subject to the terms of the master lease, Aiken and Canyon Creek have the right to renew their leases, at the then current fair market rent (as defined in the master lease), for seven, five-year optional renewal terms. The aggregate annual rental during 2022 pursuant to the leases for these two facilities, amounted to approximately $5.7 million ($3.9 million related to Aiken and $1.8 million related to Canyon Creek). There is no bonus rental component applicable to either of these leases. On each January 1st through 2033, the annual rental will increase by 2.25% on a cumulative and compounded basis.

As a result of the purchase options within the lease agreements for Aiken and Canyon Creek, the asset purchase and sale transaction is accounted for as a failed sale leaseback in accordance with U.S. GAAP. We have accounted for the asset exchange and substitution transaction with the Trust as a financing arrangement and, since we did not derecognize the real property related to Aiken and Canyon Creek, we will continue to depreciate the assets. Our Consolidated Balance Sheet as of March 31, 2023 and December 31, 2022 reflects a financial liability of $80.0 million and $80.9 million, respectively, which is included in debt, for the fair value of real estate assets that we exchanged as part of the transaction. Our monthly lease payments payable to the Trust will be recorded to interest expense and as a reduction to the outstanding financial liability. The amount allocated to interest expense is determined using our incremental borrowing rate and is based on the outstanding financial liability.

The aggregate rental for the leases on the four wholly-owned hospital facilities with the Trust (excluding Clive Behavioral Health Hospital which is discussed below) was approximately $5 million during each of the three months ended March 31, 2023 and 2022.

Pursuant to the Master Leases by certain subsidiaries of ours and the Trust as described in the table below, dated 1986 and 2021 (“the Master Leases”) which govern the leases of McAllen Medical Center and Wellington Regional Medical Center (each of which is governed by the Master Lease dated 1986), and Aiken Regional Medical Center and Canyon Creek Behavioral Health (each of which is governed by the Master Lease dated 2021), we have the option to renew the leases at the lease terms described above and below by providing notice to the Trust at least 90 days prior to the termination of the then current term. We also have the right to purchase the respective leased hospitals at their appraised fair market value upon any of the following: (i) at the end of the lease terms or any renewal terms; (ii) upon one month’s notice should a change of control of the Trust occur, or; (iii) within the time period as specified in the lease in the event that we provide notice to the Trust of our intent to offer a substitution property/properties in exchange for one (or more) of the hospital properties leased from the Trust should we be unable to reach an agreement with the Trust on the properties to be substituted. In addition, we have rights of first refusal to: (i) purchase the respective leased facilities during and for a specified period after the lease terms at the same price, terms and conditions of any third-party offer, or; (ii) renew the lease on the respective leased facility at the end of, and for a specified period after, the lease term at the same terms and conditions pursuant to any third-party offer.

In addition, we are the managing, majority member in a joint venture with an unrelated third-party that operates Clive Behavioral Health, a 100-bed behavioral health care facility located in Clive, Iowa. The real property of this facility, which was completed and

opened in late, 2020, is also leased from the Trust (annual rental of approximately $2.7 million and $2.6 million during 2023 and 2022, respectively) pursuant to the lease terms as provided in the table below. In connection with the lease on this facility, the joint venture has the right to purchase the leased facility from the Trust at its appraised fair market value upon either of the following: (i) by providing notice at least 270 days prior to the end of the lease terms or any renewal terms, or; (ii) upon 30 days' notice anytime within 12 months of a change of control of the Trust (UHS also has this right should the joint venture decline to exercise its purchase right). Additionally, the joint venture has rights of first offer to purchase the facility prior to any third-party sale.

The table below provides certain details for each of the hospitals leased from the Trust as of March 31, 2023:

Hospital Name		Annual Minimum Rent				End of Lease Term		Renewal Term (years)
McAllen Medical Center		$	5,485,000			December, 2026			5		(a)
Wellington Regional Medical Center		$	6,477,000			December, 2026			5		(b)
Aiken Regional Medical Center/Aurora Pavilion Behavioral Health Services		$	3,982,000			December, 2033			35		(c)
Canyon Creek Behavioral Health		$	1,800,000			December, 2033			35		(c)
Clive Behavioral Health Hospital		$	2,701,000			December, 2040			50		(d)

(a)

We have one 5-year renewal option at existing lease rates (through 2031).

(b)

We have one 5-year renewal option at fair market value lease rates (through 2031). Upon the December 31, 2021 expiration of the lease on Wellington Regional Medical Center, a wholly-owned subsidiary of ours exercised its fair market value renewal option and renewed the lease for a 5-year term scheduled to expire on December 31, 2026. The annual rental will increase by 2.5% on a cumulative and compounded basis on January 1st of each year through 2026.

(c)

We have seven 5-year renewal options at fair market value lease rates (2034 through 2068). On January 1st of each year through 2033, the annual rent will increase by 2.25% on a cumulative and compounded basis.

(d)

This facility is operated by a joint venture in which we are the managing, majority member and an unrelated third-party holds a minority ownership interest. The joint venture has three, 10-year renewal options at computed lease rates as stipulated in the lease (2041 through 2070) and two additional, 10-year renewal options at fair market value lease rates (2071 through 2090). In each January through 2040 (and potentially through 2070 if three, 10-year renewal options are exercised), the annual rental will increase by 2.75% on a cumulative and compounded basis.

In addition, certain of our subsidiaries are tenants in several medical office buildings (“MOBs”) and two free-standing emergency departments owned by the Trust or by limited liability companies in which the Trust holds 95% to 100% of the ownership interest.

In January, 2022, the Trust commenced construction on a new 86,000 rentable square feet multi-tenant MOB that is located on the campus of Northern Nevada Sierra Medical Center in Reno, Nevada. Northern Nevada Sierra Medical Center, a 170-bed newly constructed acute care hospital owned and operated by a wholly-owned subsidiary of ours, was completed and opened in April, 2022. In connection with this MOB, which was substantially completed during the first quarter of 2023, a ground lease and a master flex lease was executed between a wholly-owned subsidiary of ours and the Trust, pursuant to the terms of which our subsidiary will master lease approximately 68% of the rentable square feet of the MOB at an initial minimum rent of $1.3 million annually. The master flex lease could be reduced during the term if certain conditions are met. The ground lease and master flex lease each commenced during the first quarter of 2023.

Other Related Party Transactions:

In December, 2010, our Board of Directors approved the Company’s entering into supplemental life insurance plans and agreements on the lives of Alan B. Miller (our Executive Chairman of the Board) and his wife. As a result of these agreements, as amended in October, 2016, based on actuarial tables and other assumptions, during the life expectancies of the insureds, we would pay approximately $28 million in premiums, and certain trusts owned by our Executive Chairman of the Board, would pay approximately $9 million in premiums. Based on the projected premiums mentioned above, and assuming the policies remain in effect until the death of the insureds, we will be entitled to receive death benefit proceeds of no less than approximately $37 million representing the $28 million of aggregate premiums paid by us as well as the $9 million of aggregate premiums paid by the trusts. In connection with these policies, we will pay/we paid approximately $1.0 million, net, in premium payments during 2023 and 2022.

In August, 2015, Marc D. Miller, our President and Chief Executive Officer and member of our Board of Directors, was appointed to the Board of Directors of Premier, Inc. (“Premier”), a healthcare performance improvement alliance. During 2013, we entered into a new group purchasing organization agreement (“GPO”) with Premier. In conjunction with the GPO agreement, we acquired a minority interest in Premier for a nominal amount. During the fourth quarter of 2013, in connection with the completion of an initial public offering of the stock of Premier, we received cash proceeds for the sale of a portion of our ownership interest in the GPO. Also in connection with this GPO agreement, we received shares of restricted stock of Premier which vested ratably over a seven-year

period (2014 through 2020), contingent upon our continued participation and minority ownership interest in the GPO. During the third quarter of 2020, we entered into an agreement with Premier pursuant to the terms of which, among other things, our ownership interest in Premier was converted into shares of Class A Common Stock of Premier. We have elected to retain a portion of the previously vested shares of Premier, the market value of which is included in other assets on our consolidated balance sheet. Based upon the closing price of Premier’s stock on each respective date, the market value of our shares of Premier was approximately $72 million and $78 million as of March 31, 2023 and December 31, 2022, respectively. Any change in market value of our Premier shares since December 31, 2022 was recorded as an unrealized gain/loss and included in “Other (income) expense, net” in our condensed consolidated statements of income for the three-month period ended March 31, 2023. Additionally, Premier declared and paid quarterly cash dividends during each of the first quarters of 2023 and 2022. Our share of the cash dividends amounted to approximately $500,000 and $400,000 for the three-month periods ended March 31, 2023 and 2022, respectively. The dividends are included in “Other (income) expense, net” in our condensed consolidated statements of income.

A member of our Board of Directors and member of the Executive Committee and Finance Committee is a partner in Norton Rose Fulbright US LLP, a law firm engaged by us for a variety of legal services. The Board member and his law firm also provide personal legal services to our Executive Chairman and he acts as trustee of certain trusts for the benefit of our Executive Chairman and his family.

(3) Other Noncurrent liabilities and Redeemable/Noncontrolling Interests

Other noncurrent liabilities include the long-term portion of our professional and general liability, workers’ compensation reserves, pension and deferred compensation liabilities, and liabilities incurred in connection with split-dollar life insurance agreements on the lives of our chief executive officer and his wife.

As of March 31, 2023, outside owners held noncontrolling, minority ownership interests of: (i) approximately 7% in an acute care facility located in Texas; (ii) 49%, 20%, 30%, 20%, 25%, 48% and 26% in seven behavioral health care facilities located in Arizona, Pennsylvania, Ohio, Washington, Missouri, Iowa and Michigan, respectively, and; (iii) approximately 5% in an acute care facility located in Nevada. The noncontrolling interest and redeemable noncontrolling interest balances of $40 million and $4 million, respectively, as of March 31, 2023, consist primarily of the third-party ownership interests in these hospitals.

In connection with the two behavioral health care facilities located in Pennsylvania and Ohio, the minority ownership interests of which are reflected as redeemable noncontrolling interests on our Condensed Consolidated Balance Sheet, the outside owners have “put options” to put their entire ownership interest to us at any time. If exercised, the put option requires us to purchase the minority member’s interest at fair market value. Accordingly, the amounts recorded as redeemable noncontrolling interests on our Condensed Consolidated Balance Sheet reflects the estimated fair market value of these ownership interests.

(4) Treasury

Credit Facilities and Outstanding Debt Securities:

In June, 2022, we entered into a ninth amendment to our credit agreement dated as of November 15, 2010, as amended and restated as of September, 2012, August, 2014, October, 2018, August, 2021, and September, 2021, among UHS, as borrower, the several banks and other financial institutions from time to time parties thereto, as lenders, and JPMorgan Chase Bank, N.A., as administrative agent, (the “Credit Agreement”). The ninth amendment provided for, among other things, the following: (i) a new incremental tranche A term loan facility in the aggregate principal amount of $700 million which is scheduled to mature on August 24, 2026, and; (ii) replaces the option to make Eurodollar borrowings (which bear interest by reference to the LIBO Rate) with Term Benchmark Loans, which will bear interest by reference to the Secured Overnight Financing Rate (“SOFR”). The net proceeds generated from the incremental tranche A term loan facility were used to repay a portion of the borrowings that were previously outstanding under our revolving credit facility.

As of March 31, 2023, our Credit Agreement provided for the following:

a $1.2 billion aggregate amount revolving credit facility that is scheduled to mature in August, 2026 (which, as of March 31, 2023, had $875 million of aggregate available borrowing capacity net of $322 million of outstanding borrowings and $3 million of letters of credit), and;

a tranche A term loan facility with $2.32 billion of outstanding borrowings as of March 31, 2023 (including the $700 million increase provided for by the ninth amendment in June, 2022).

The tranche A term loan facility provides for installment payments of $15.0 million per quarter during the period of September, 2022 through September, 2023, and $30.0 million per quarter during the period of December, 2023 through June, 2026. The unpaid principal balance at June 30, 2026 is payable on the August 24, 2026 scheduled maturity date of the Credit Agreement.

Revolving credit and tranche A term loan borrowings under the Credit Agreement bear interest at our election at either (1) the ABR rate which is defined as the rate per annum equal to the greatest of (a) the lender’s prime rate, (b) the weighted average of the federal funds rate, plus 0.5% and (c) one month SOFR rate plus 1%, in each case, plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 0.25% to 0.625%, or (2) the one, three or six month SOFR rate plus 0.1% (at our election), plus an applicable margin based upon our consolidated leverage ratio at the end of each quarter ranging from 1.25% to

1.625%. As of March 31, 2023, the applicable margins were 0.50% for ABR-based loans and 1.50% for SOFR-based loans under the revolving credit and term loan A facilities. The revolving credit facility includes a $125 million sub-limit for letters of credit. The Credit Agreement is secured by certain assets of the Company and our material subsidiaries (which generally excludes asset classes such as substantially all of the patient-related accounts receivable of our acute care hospitals, and certain real estate assets and assets held in joint-ventures with third parties) and is guaranteed by our material subsidiaries.

The Credit Agreement includes a material adverse change clause that must be represented at each draw. The Credit Agreement also contains covenants that include a limitation on sales of assets, mergers, change of ownership, liens, indebtedness, transactions with affiliates, dividends and stock repurchases; and requires compliance with financial covenants including maximum leverage. We were in compliance with all required covenants as of March 31, 2023 and December 31, 2022.

On August 24, 2021, we completed the following via private offerings to qualified institutional buyers under Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended:

Issued $700 million of aggregate principal amount of 1.65% senior secured notes due on September 1, 2026, and;

Issued $500 million of aggregate principal amount of 2.65% senior secured notes due on January 15, 2032.

On September 13, 2021, we redeemed $400 million of aggregate principal amount of 5.00% senior secured notes, that were scheduled to mature on June 1, 2026, at 102.50% of the aggregate principal, or $410 million.

As of March 31, 2023, we had combined aggregate principal of $2.0 billion from the following senior secured notes:

$700 million aggregate principal amount of 1.65% senior secured notes due in September, 2026 (“2026 Notes”) which were issued on August 24, 2021.

$800 million aggregate principal amount of 2.65% senior secured notes due in October, 2030 (“2030 Notes”) which were issued on September 21, 2020.

$500 million of aggregate principal amount of 2.65% senior secured notes due in January, 2032 (“2032 Notes”) which were issued on August 24, 2021.

Interest on the 2026 Notes is payable on March 1st and September 1st until the maturity date of September 1, 2026. Interest on the 2030 Notes is payable on April 15th and October 15th, until the maturity date of October 15, 2030. Interest on the 2032 Notes is payable on January 15th and July 15th until the maturity date of January 15, 2032.

The 2026 Notes, 2030 Notes and 2032 Notes (collectively “The Notes”) were initially issued only to qualified institutional buyers under Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). In December, 2022, we completed a registered exchange offer in which virtually all previously outstanding Notes were exchanged for identical Notes that were registered under the Securities Act, and thereby became freely transferable (subject to certain restrictions applicable to affiliates and broker dealers). Notes originally issued under Rule 144A or Regulation S that were not exchanged in the exchange offer remain outstanding and may not be offered or sold in the United States absent registration under the Securities Act or an applicable exemption from registration requirements thereunder.

The Notes are guaranteed (the “Guarantees”) on a senior secured basis by all of our existing and future direct and indirect subsidiaries (the “Subsidiary Guarantors”) that guarantee our Credit Agreement, or other first lien obligations or any junior lien obligations. The Notes and the Guarantees are secured by first-priority liens, subject to permitted liens, on certain of the Company’s and the Subsidiary Guarantors’ assets now owned or acquired in the future by the Company or the Subsidiary Guarantors (other than real property, accounts receivable sold pursuant to the Company’s Existing Receivables Facility (as defined in the Indenture pursuant to which The Notes were issued (the “Indenture”)), and certain other excluded assets). The Company’s obligations with respect to The Notes, the obligations of the Subsidiary Guarantors under the Guarantees, and the performance of all of the Company’s and the Subsidiary Guarantors’ other obligations under the Indenture, are secured equally and ratably with the Company’s and the Subsidiary Guarantors’ obligations under the Credit Agreement and The Notes by a perfected first-priority security interest, subject to permitted liens, in the collateral owned by the Company and its Subsidiary Guarantors, whether now owned or hereafter acquired. However, the liens on the collateral securing The Notes and the Guarantees will be released if: (i) The Notes have investment grade ratings; (ii) no default has occurred and is continuing, and; (iii) the liens on the collateral securing all first lien obligations (including the Credit Agreement and The Notes) and any junior lien obligations are released or the collateral under the Credit Agreement, any other first lien obligations and any junior lien obligations is released or no longer required to be pledged. The liens on any collateral securing The Notes and the Guarantees will also be released if the liens on that collateral securing the Credit Agreement, other first lien obligations and any junior lien obligations are released.

On its December, 2022 maturity date, our $20 million accounts receivable securitization program expired and was not renewed or replaced.

As discussed in Note 2 to the Consolidated Financial Statements-Relationship with Universal Health Realty Income Trust and Other Related Party Transactions, on December 31, 2021, we (through wholly-owned subsidiaries of ours) entered into an asset purchase

and sale agreement with Universal Health Realty Income Trust (the “Trust”). Pursuant to the terms of the agreement, which was amended during the first quarter of 2022, we, among other things, transferred to the Trust, the real estate assets of Aiken Regional Medical Center (“Aiken”) and Canyon Creek Behavioral Health (“Canyon Creek”). In connection with this transaction, Aiken and Canyon Creek (as lessees), entered into a master lease and individual property leases, as amended, (with the Trust as lessor), for initial lease terms on each property of approximately twelve years, ending on December 31, 2033. As a result of our purchase option within the Aiken and Canyon Creek lease agreements, this asset purchase and sale transaction is accounted for as a failed sale leaseback in accordance with U.S. GAAP and we have accounted for the transaction as a financing arrangement. Our lease payments payable to the Trust are recorded to interest expense and as a reduction of the outstanding financial liability, and the amount allocated to interest expense is determined based upon our incremental borrowing rate and the outstanding financial liability. In connection with this transaction, our Consolidated Balance Sheets at March 31, 2023 and December 31, 2022 reflect financial liabilities, which are included in debt, of approximately $80 million and $81 million, respectively.

At March 31, 2023, the carrying value and fair value of our debt were approximately $4.8 billion and $4.5 billion, respectively. At December 31, 2022, the carrying value and fair value of our debt were approximately $4.8 billion and $4.4 billion, respectively. The fair value of our debt was computed based upon quotes received from financial institutions. We consider these to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments.

Foreign Currency Forward Exchange Contracts:

We use forward exchange contracts to hedge our net investment in foreign operations against movements in exchange rates. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within accumulated other comprehensive income and remains there until either the sale or liquidation of the subsidiary. In connection with these forward exchange contracts, we recorded net cash outflows of $19 million during the first quarter of 2023 and net cash inflows of $21 million during the first quarter of 2022.

Derivatives Hedging Relationships:

The following table presents the effects of our foreign currency foreign exchange contracts on our results of operations for the three-month periods ended March 31, 2023 and 2022 (in thousands):

	Gain/(Loss) recognized in AOCI
	Three months ended
	March 31,				March 31,
	2023				2022
Net Investment Hedge relationships
Foreign currency foreign exchange contracts	$	(22,144	)		$	17,112

No other gains or losses were recognized in income related to derivatives in Subtopic 815-20.

Cash, Cash Equivalents and Restricted Cash:

Cash, cash equivalents, and restricted cash as reported in the condensed consolidated statements of cash flows are presented separately on our condensed consolidated balance sheets as follows (in thousands):

	March 31,				March 31,				December 31,
	2023				2022				2022
Cash and cash equivalents	$	109,969			$	105,999			$	102,818
Restricted cash (a)		99,069				69,137				98,019
Total cash, cash equivalents and restricted cash	$	209,038			$	175,136			$	200,837

(a) Restricted cash is included in other assets on the accompanying consolidated balance sheet.

(5) Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following fair value hierarchy classifies the inputs to valuation techniques used to measure fair value into one of three levels:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These included quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The following tables present the assets and liabilities recorded at fair value on a recurring basis:

	Balance at			Balance Sheet	Basis of Fair Value Measurement
(in thousands)	March 31, 2023			Location	Level 1			Level 2			Level 3
Assets:
Money market mutual funds		114,892		Other assets		114,892
Certificates of deposit		2,200		Other assets					2,200
Equity securities		72,272		Other assets		72,272
Deferred compensation assets		39,029		Other assets		39,029
Foreign currency exchange contracts		184		Other current assets					184
	$	228,577			$	226,193		$	2,384			-
Liabilities:
Deferred compensation liability		39,029		Other noncurrent liabilities		39,029
	$	39,029			$	39,029			-			-
	Balance at			Balance Sheet	Basis of Fair Value Measurement
(in thousands)	December 31, 2022			Location	Level 1			Level 2			Level 3
Assets:
Money market mutual funds		113,649		Other assets		113,649
Certificates of deposit		2,200		Other assets					2,200
Equity securities		78,099		Other assets		78,099
Deferred compensation assets		38,032		Other assets		38,032
Foreign currency exchange contracts		3,142		Other current assets					3,142
	$	235,122			$	229,780		$	5,342			-
Liabilities:
Deferred compensation liability		38,032		Other noncurrent liabilities	$	38,032
	$	38,032			$	38,032			-			-

The fair value of our money market mutual funds, certificates of deposit and equity securities with a readily determinable fair value are computed based upon quoted market prices in an active market. The fair value of deferred compensation assets and the offsetting liability are computed based on market prices in an active market held in a rabbi trust. The fair value of our interest rate swaps are based on quotes from our counter parties. The fair value of our foreign currency exchange contracts is valued using quoted forward exchange rates and spot rates at the reporting date.

(6) Commitments and Contingencies

Professional and General Liability, Workers’ Compensation Liability

The vast majority of our subsidiaries are self-insured for professional and general liability exposure up to: (i) $20 million for professional liability and $3 million for general liability per occurrence in 2023, 2022 and 2021; (ii) $10 million and $3 million per occurrence in 2020 (professional liability claims are also subject to an additional annual aggregate self-insured retention of $2.5 million for claims in excess of $10 million for 2020); (iii) $5 million and $3 million per occurrence, respectively, during 2019, 2018 and 2017, and; (iv) $10 million and $3 million per occurrence, respectively, prior to 2017.

These subsidiaries are provided with several excess policies through commercial insurance carriers which provide for coverage in excess of the applicable per occurrence and aggregate self-insured retention or underlying policy limits up to approximately $165 million in 2023; $162 million in 2022; $155 million in 2021 and $250 million during each of 2014 through 2020. In addition, from time to time based upon marketplace conditions, we may elect to purchase additional commercial coverage for certain of our facilities or businesses. Our behavioral health care facilities located in the U.K. have policies through a commercial insurance carrier located in the U.K. that provides for £16 million of professional liability coverage, and £25 million of general liability coverage.

As of March 31, 2023, the total net accrual for our professional and general liability claims was $392 million, of which $55 million was included in current liabilities. As of December 31, 2022, the total net accrual for our professional and general liability claims was $372 million, of which $74 million was included in current liabilities.

As a result of unfavorable trends experienced during the last three years, our results of operations included pre-tax increases to our reserves for self-insured professional and general liability claims amounting to approximately $16 million during 2022 and $52 million during 2021. Our estimated liability for self-insured professional and general liability claims is based on a number of factors including, among other things, the number of asserted claims and reported incidents, estimates of losses for these claims based on recent and historical settlement amounts, estimates of incurred but not reported claims based on historical experience, and estimates of amounts recoverable under our commercial insurance policies. While we continuously monitor these factors, our ultimate liability for professional and general liability claims could change materially from our current estimates due to inherent uncertainties involved in making this estimate. Given our significant self-insured exposure for professional and general liability claims, there can be no

assurance that a sharp increase in the number and/or severity of claims asserted against us will not have a material adverse effect on our future results of operations.

As of March 31, 2023, the total accrual for our workers’ compensation liability claims was $128 million, $55 million of which was included in current liabilities. As of December 31, 2022, the total accrual for our workers’ compensation liability claims was $125 million, $55 million of which was included in current liabilities.

Although we are unable to predict whether or not our future financial statements will require updates to estimates for our prior year reserves for self-insured general and professional and workers’ compensation claims, given the relatively unpredictable nature of these potential liabilities and the factors impacting these reserves, as discussed above, it is reasonably likely that our future financial results may include material adjustments to prior period reserves.

Property Insurance

We have commercial property insurance policies for our properties covering catastrophic losses, including windstorm damage, up to a $1 billion policy limit, subject to a per occurrence/per location deductible of $2.5 million as of June 1, 2020. Losses resulting from named windstorms are subject to deductibles between 3% and 5% of the total insurable value of the property. In addition, we have commercial property insurance policies covering catastrophic losses resulting from earthquake and flood damage, each subject to aggregated loss limits (as opposed to per occurrence losses). Commercially insured earthquake coverage for our facilities is subject to various deductibles and limitations including: (i) $150 million limitation for our facilities located in California; (ii) $100 million limitation for our facilities located in fault zones within the United States; (iii) $40 million limitation for our facilities located in Puerto Rico, and; (iv) $250 million limitation for many of our facilities located in other states. Our commercially insured flood coverage has a limit of $100 million annually. There is also a $10 million sublimit for one of our facilities located in Houston, Texas, and a $1 million sublimit for our facilities located in Puerto Rico. Property insurance for our behavioral health facilities located in the U.K. are provided on an all risk basis up to a £1.5 billion policy limit, with coverage caps per location, that includes coverage for real and personal property as well as business interruption losses.

Legal Proceedings

We operate in a highly regulated and litigious industry which subjects us to various claims and lawsuits in the ordinary course of business as well as regulatory proceedings and government investigations. These claims or suits include claims for damages for personal injuries, medical malpractice, commercial/contractual disputes, wrongful restriction of, or interference with, physicians’ staff privileges, and employment related claims. In addition, health care companies are subject to investigations and/or actions by various state and federal governmental agencies or those bringing claims on their behalf. Government action has increased with respect to investigations and/or allegations against healthcare providers concerning possible violations of fraud and abuse and false claims statutes as well as compliance with clinical and operational regulations. Currently, and from time to time, we and some of our facilities are subjected to inquiries in the form of subpoenas, Civil Investigative Demands, audits and other document requests from various federal and state agencies. These inquiries can lead to notices and/or actions including repayment obligations from state and federal government agencies associated with potential non-compliance with laws and regulations. Further, the federal False Claims Act allows private individuals to bring lawsuits (qui tam actions) against healthcare providers that submit claims for payments to the government. Various states have also adopted similar statutes. When such a claim is filed, the government will investigate the matter and decide if they are going to intervene in the pending case. These qui tam lawsuits are placed under seal by the court to comply with the False Claims Act’s requirements. If the government chooses not to intervene, the private individual(s) can proceed independently on behalf of the government. Health care providers that are found to violate the False Claims Act may be subject to substantial monetary fines/penalties as well as face potential exclusion from participating in government health care programs or be required to comply with Corporate Integrity Agreements as a condition of a settlement of a False Claims Act matter. In September 2014, the Criminal Division of the Department of Justice (“DOJ”) announced that all qui tam cases will be shared with their Division to determine if a parallel criminal investigation should be opened. The DOJ has also announced an intention to pursue civil and criminal actions against individuals within a company as well as the corporate entity or entities. In addition, health care facilities are subject to monitoring by state and federal surveyors to ensure compliance with program Conditions of Participation. In the event a facility is found to be out of compliance with a Condition of Participation and unable to remedy the alleged deficiency(s), the facility faces termination from the Medicare and Medicaid programs or compliance with a System Improvement Agreement to remedy deficiencies and ensure compliance.

The laws and regulations governing the healthcare industry are complex covering, among other things, government healthcare participation requirements, licensure, certification and accreditation, privacy of patient information, reimbursement for patient services as well as fraud and abuse compliance. These laws and regulations are constantly evolving and expanding. Further, the Legislation has added additional obligations on healthcare providers to report and refund overpayments by government healthcare programs and authorizes the suspension of Medicare and Medicaid payments “pending an investigation of a credible allegation of fraud.” We monitor our business and have developed an ethics and compliance program with respect to these complex laws, rules and regulations. Although we believe our policies, procedures and practices comply with government regulations, there is no assurance that we will not be faced with the sanctions referenced above which include fines, penalties and/or substantial damages, repayment obligations, payment suspensions, licensure revocation, and expulsion from government healthcare programs. Even if we were to ultimately

prevail in any action brought against us or our facilities or in responding to any inquiry, such action or inquiry could have a material adverse effect on us.

Certain legal matters are described below:

Knight v. Miller, et. al.

In July 2021, a shareholder derivative lawsuit was filed by plaintiff, Robin Knight, in the Chancery Court in Delaware against the members of the Board of Directors of the Company as well as certain officers (C.A. No.: 2021-0581-SG). The Company was named as a nominal defendant. The lawsuit alleges that in March 2020 stock options were awarded with exercise prices that did not reflect the Company’s fundamentals and business prospects, and in anticipation of future market rebound resulting in excessive gains. The lawsuit makes claims of breaches of fiduciary duties, waste of corporate assets, and unjust enrichment. The lawsuit seeks monetary damages allegedly incurred by the Company, disgorgement of the March 2020 stock awards as well as any proceeds derived therefrom and unspecified equitable relief. Defendants deny the allegations. We filed a motion to dismiss the complaint and the court granted part and denied part of our motion. During the third quarter of 2022, we have reached a preliminary settlement, which will not have a material impact on our consolidated financial statements. The settlement is currently pending final court approval. We are uncertain as to potential liability or financial exposure, if any, which may be associated with this matter in the event the settlement is not finalized and approved by the court.

Disproportionate Share Hospital Payment Matter:

In late September, 2015, many hospitals in Pennsylvania, including certain of our behavioral health care hospitals located in the state, received letters from the Pennsylvania Department of Human Services (the “Department”) demanding repayment of allegedly excess Medicaid Disproportionate Share Hospital payments (“DSH”), primarily consisting of managed care payments characterized as DSH payments, for the federal fiscal year (“FFY”) 2011 amounting to approximately $4 million in the aggregate. Since that time, certain of our behavioral health care hospitals in Pennsylvania have received similar requests for repayment for alleged DSH overpayments for FFYs 2012 through 2015. For FFY 2012, the claimed overpayment amounts to approximately $4 million. For FY 2013, FY 2014 and FY 2015 the initial claimed overpayments and attempted recoupment by the Department were approximately $7 million, $8 million and $7 million, respectively. The Department has agreed to a change in methodology which, upon confirmation of the underlying data being accepted by the Department, could reduce the initial claimed overpayments for FY 2013, FY 2014 and FY 2015 to approximately $2 million, $2 million and $3 million, respectively. We filed administrative appeals for all of our facilities contesting the recoupment efforts for FFYs 2011 through 2015 as we believe the Department’s calculation methodology is inaccurate and conflicts with applicable federal and state laws and regulations. The Department has agreed to postpone the recoupment of the state’s share for FY 2011 to 2013 until all hospital appeals are resolved but started recoupment of the federal share. For FY 2014 and FY 2015, the Department has initiated the recoupment of the alleged overpayments. Starting in FY 2016, the first full fiscal year after the January 1, 2015 effective date of Medicaid expansion in Pennsylvania, the Department no longer characterized managed care payments received by the hospitals as DSH payments. We can provide no assurance that we will ultimately be successful in our legal and administrative appeals related to the Department’s repayment demands. If our legal and administrative appeals are unsuccessful, our future consolidated results of operations and financial condition could be adversely impacted by these repayments.

Boley, et al. v. UHS, et al.

Former UHS subsidiary facility employees Mary K. Boley, Kandie Sutter, and Phyllis Johnson, individually and on behalf of a putative class of participants in the UHS Retirement Savings Plan (the “Plan”), filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against UHS, the Board of Directors of UHS, and the “Plan Committee” of UHS (Case No. 2:20-cv-02644). In subsequent amended complaints, Plaintiffs dropped the Board of Directors and the “Plan Committee” as defendants and added the UHS Retirement Plans Investment Committee as a new defendant. Plaintiffs alleged that UHS breached its fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) by offering to participants in the Plan overly expensive investment options when less expensive investment options were available in the marketplace; caused participants to pay excessive recordkeeping fees associated with the Plan; breached its duty to monitor appointed fiduciaries and: in the alternative, engaged in a “knowing breach of trust” separate from the alleged violations under ERISA. UHS disputed Plaintiffs’ allegations and actively defended against Plaintiffs’ claims. During the third quarter of 2022, the parties reached a preliminary settlement, within the policy limitations of our commercial insurance coverage after satisfaction of specified deductibles, for which the court granted preliminary approval. The court has granted final approval of the settlement and an order of dismissal has been entered.

Other Matters:

Various other suits, claims and investigations, including government subpoenas, arising against, or issued to, us are pending and additional such matters may arise in the future. Management will consider additional disclosure from time to time to the extent it believes such matters may be or become material. The outcome of any current or future litigation or governmental or internal investigations, including the matters described above, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time

regarding the matters described above or that are otherwise pending because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the matter is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties, or; (vii) there is a wide range of potential outcomes. It is possible that the outcome of these matters could have a material adverse impact on our future results of operations, financial position, cash flows and, potentially, our reputation.

(7) Segment Reporting

Our reportable operating segments consist of acute care hospital services and behavioral health care services. The “Other” segment column below includes centralized services including, but not limited to, information technology, purchasing, reimbursement, accounting and finance, taxation, legal, advertising and design and construction. The chief operating decision making group for our acute care services and behavioral health care services is comprised of our Chief Executive Officer and the Presidents of each operating segment. The Presidents for each operating segment also manage the profitability of each respective segment’s various facilities. The operating segments are managed separately because each operating segment represents a business unit that offers different types of healthcare services or operates in different healthcare environments. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2022. The corporate overhead allocations, as reflected below, are utilized for internal reporting purposes and are comprised of each period’s projected corporate-level operating expenses (excluding interest expense). The overhead expenses are captured and allocated directly to each segment, to the extent possible, based upon each segment’s respective percentage of total operating expenses.

		Three months ended March 31, 2023
		Acute Care Hospital Services				Behavioral Health Services (a)				Other				Total Consolidated
		(Dollar amounts in thousands)
Gross inpatient revenues		$	11,401,491			$	2,627,990							$	14,029,481
Gross outpatient revenues		$	7,296,116			$	272,371							$	7,568,487
Total net revenues		$	1,973,532			$	1,490,489			$	3,497			$	3,467,518
Income/(loss) before allocation of corporate overhead and income taxes		$	133,296			$	266,356			$	(185,551	)		$	214,101
Allocation of corporate overhead		$	(67,262	)		$	(46,642	)		$	113,904			$	0
Income/(loss) after allocation of corporate overhead and before income taxes		$	66,034			$	219,714			$	(71,647	)		$	214,101
Total assets as of March 31, 2023		$	6,001,135			$	7,343,276			$	211,548			$	13,555,959
		Three months ended March 31, 2022
		Acute Care Hospital Services				Behavioral Health Services (a)				Other				Total Consolidated
		(Dollar amounts in thousands)
Gross inpatient revenues		$	10,239,231			$	2,436,474				-			$	12,675,705
Gross outpatient revenues		$	5,775,539			$	257,113				-			$	6,032,652
Total net revenues		$	1,912,316			$	1,366,467			$	14,173			$	3,292,956
Income/(loss) before allocation of corporate overhead and income taxes		$	148,680			$	205,787			$	(154,484	)		$	199,983
Allocation of corporate overhead		$	(62,284	)		$	(45,001	)		$	107,285			$	0
Income/(loss) after allocation of corporate overhead and before income taxes		$	86,396			$	160,786			$	(47,199	)		$	199,983
Total assets as of March 31, 2022		$	5,645,352			$	7,260,870			$	238,224			$	13,144,446

(a)

Includes net revenues generated from our behavioral health care facilities located in the U.K. amounting to approximately $168 million and $176 million for the three-month periods ended March 31, 2023 and 2022, respectively. Total assets at our U.K. behavioral health care facilities were approximately $1.265 billion and $1.320 billion as of March 31, 2023 and 2022, respectively.

(8) Earnings Per Share Data (“EPS”) and Stock Based Compensation

Basic earnings per share are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share are based on the weighted average number of common shares outstanding during the period adjusted to give effect to common stock equivalents.

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):

		Three months ended March 31,
		2023				2022
Basic and Diluted:
Net income attributable to UHS		$	163,115			$	153,913
Less: Net income attributable to unvested restricted share grants			(129	)			(249	)
Net income attributable to UHS – basic and diluted		$	162,986			$	153,664
Weighted average number of common shares - basic			70,535				75,030
Net effect of dilutive stock options and grants based on the treasury stock method			952				1,011
Weighted average number of common shares and equivalents - diluted			71,487				76,041
Earnings per basic share attributable to UHS:		$	2.31			$	2.05
Earnings per diluted share attributable to UHS:		$	2.28			$	2.02

The “Net effect of dilutive stock options and grants based on the treasury stock method”, for all periods presented above, excludes

certain outstanding stock options applicable to each period since the effect would have been anti-dilutive. The excluded weighted-average stock options totaled 5.1 million for the three months ended March 31, 2023 and 5.7 million for the three months ended March 31, 2022. All classes of our common stock have the same dividend rights.

Stock-Based Compensation:

During the three-month periods ended March 31, 2023 and 2022, pre-tax compensation costs of $16.2 million and $15.2 million, respectively, was recognized related to outstanding stock options. In addition, during the three-month periods ended March 31, 2023 and 2022, pre-tax compensation cost of approximately $4.5 million and $3.4 million, respectively, was recognized related to restricted stock awards, restricted stock units and performance based restricted stock units. As of March 31, 2023 there was approximately $226.0 million of unrecognized compensation cost related to unvested options, restricted stock awards, restricted stock units and performance based restricted stock units which is expected to be recognized over the remaining weighted average vesting period of 3.0 years. There were 1,885,756 stock options granted during the first three months of 2023 with a weighted-average grant date fair value of $41.79 per option. There were an aggregate of 279,317 restricted units granted during the first three months of 2023, including 93,606 performance based restricted stock units, with a weighted-average grant date fair value of $117.65 per share.

The expense associated with stock-based compensation arrangements is a non-cash charge. In the Condensed Consolidated Statements of Cash Flows, stock-based compensation expense is an adjustment to reconcile net income to cash provided by operating activities and aggregated to $21.0 million and $19.1 million during the three-month periods ended March 31, 2023 and 2022.

(9) Dispositions and acquisitions

Three-month period ended March 31, 2023:

Acquisitions:

During the first three months of 2023, there were no acquisitions.

Divestitures:

During the first three months of 2023, we received $9 million from the sales of assets and businesses.

Three-month period ended March 31, 2022:

Acquisitions:

During the first three months of 2022, there were no acquisitions.

Divestitures:

During the first three months of 2022, we received $10 million from the sales of assets and businesses.

(10) Dividends

We declared and paid dividends of $14.2 million, or $.20 per share, during the first quarter of 2023 and $15.0 million, or $.20 per share, during the first quarter of 2022. Included in the amounts above were dividend equivalents applicable to unvested restricted stock units which were accrued during 2023 and 2022 and will be, or were, paid upon vesting of the restricted stock unit.

(11) Income Taxes

Our effective income tax rates were 24.2% and 24.5% during the three month periods ended March 31, 2023 and 2022, respectively. The decrease in our effective tax rate during the three months ended March 31, 2023, compared with the same period in 2022, was primarily due to the decrease in net loss attributable to noncontrolling interests during the first quarter of 2023 as compared to the first quarter of 2022.

The global intangible low-taxed income (“GILTI”) provisions from the TCJA-17 require the inclusion of the earnings of certain foreign subsidiaries in excess of an acceptable rate of return on certain assets of the respective subsidiaries in our U.S. tax return for tax years beginning after December 31, 2017. An accounting policy election was made during 2018 to treat taxes related to GILTI as a period cost when the tax is incurred. We recorded a GILTI tax provision of zero for the three months ended March 31, 2023 and 2022.

As of January 1, 2023, our unrecognized tax benefits were approximately $2 million. The amount, if recognized, that would favorably affect the effective tax rate is approximately $2 million. During the three months ended March 31, 2023, changes to the estimated liabilities for uncertain tax positions (including accrued interest) relating to tax positions taken during prior and current periods did not have a material impact on our financial statements.

We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of March 31, 2023, we have less than $1 million of accrued interest and penalties. The U.S. federal statute of limitations remains open for 2019 and subsequent years. Foreign and U.S. state and local jurisdictions have statutes of limitations generally ranging from 3 to 4 years. The statute of limitations on certain jurisdictions could expire within the next twelve months. It is reasonably possible that the amount of uncertain tax benefits will change during the next 12 months, however, it is anticipated that any such change, if it were to occur, would not have a material impact on our results of operations.

We operate in multiple jurisdictions with varying tax laws. We are subject to audits by any of these taxing authorities. Our tax returns have been examined by the Internal Revenue Service (“IRS”) through the year ended December 31, 2006. We believe that adequate accruals have been provided for federal, foreign and state taxes.

(12) Revenue

We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Our estimate for amounts not expected to be collected based on historical experience will continue to be recognized as a reduction to net revenue. However, subsequent changes in estimate of collectability due to a change in the financial status of a payer, for example a bankruptcy, will be recognized as bad debt expense in operating charges.

The performance obligation is separately identifiable from other promises in the customer contract. As the performance obligations are met (i.e.: room, board, ancillary services, level of care), revenue is recognized based upon allocated transaction price. The transaction price is allocated to separate performance obligations based upon the relative standalone selling price. In instances where we determine there are multiple performance obligations across multiple months, the transaction price will be allocated by applying an estimated implicit and explicit rate to gross charges based on the separate performance obligations*.*

In assessing collectability, we have elected the portfolio approach. This portfolio approach is being used as we have large volume of similar contracts with similar classes of customers. We reasonably expect that the effect of applying a portfolio approach to a group of contracts would not differ materially from considering each contract separately. Management’s judgment to group the contracts by portfolio is based on the payment behavior expected in each portfolio category. As a result, aggregating all of the contracts (which are at the patient level) by the particular payer or group of payers, will result in the recognition of the same amount of revenue as applying the analysis at the individual patient level.

We group our revenues into categories based on payment behaviors. Each component has its own reimbursement structure which allows us to disaggregate the revenue into categories that share the nature and timing of payments. The other patient revenue consists primarily of self-pay, government-funded non-Medicaid, and other.

The following table disaggregates our revenue by major source for the three-month periods ended March 31, 2023 and 2022 (in thousands):

	For the three months ended March 31, 2023
	Acute Care							Behavioral Health							Other				Total
Medicare	$	329,446			17	%		$	76,544			5	%						$	405,990			12	%
Managed Medicare		344,032			17	%			75,077			5	%							419,109			12	%
Medicaid		110,009			6	%			206,473			14	%							316,482			9	%
Managed Medicaid		192,298			10	%			398,951			27	%							591,249			17	%
Managed Care (HMO and PPOs)		654,795			33	%			391,297			26	%							1,046,092			30	%
UK Revenue		0			0	%			167,789			11	%							167,789			5	%
Other patient revenue and adjustments, net		120,957			6	%			121,677			8	%							242,634			7	%
Other non-patient revenue		221,995			11	%			52,681			4	%			3,497				278,173			8	%
Total Net Revenue	$	1,973,532			100	%		$	1,490,489			100	%		$	3,497				3,467,518			100	%
	For the three months ended March 31, 2022
	Acute Care							Behavioral Health							Other				Total
Medicare	$	337,109			18	%		$	79,512			6	%						$	416,621			13	%
Managed Medicare		332,248			17	%			63,850			5	%							396,098			12	%
Medicaid		155,836			8	%			175,403			13	%							331,239			10	%
Managed Medicaid		171,637			9	%			334,165			24	%							505,802			15	%
Managed Care (HMO and PPOs)		638,895			33	%			365,205			27	%							1,004,100			30	%
UK Revenue		0			0	%			176,092			13	%							176,092			5	%
Other patient revenue and adjustments, net		92,110			5	%			120,733			9	%							212,843			6	%
Other non-patient revenue		184,481			10	%			51,507			4	%			14,173				250,161			8	%
Total Net Revenue	$	1,912,316			100	%		$	1,366,467			100	%		$	14,173			$	3,292,956			100	%

(13) Lease Accounting

Our operating leases are primarily for real estate, including certain acute care facilities, off-campus outpatient facilities, medical office buildings, and corporate and other administrative offices. Our real estate lease agreements typically have initial terms of five to ten years. These real estate leases may include one or more options to renew, with renewals that can extend the lease term from five to

ten years. The exercise of lease renewal options is at our sole discretion. When determining the lease term, we included options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Five of our hospital facilities are held under operating leases with Universal Health Realty Income Trust with two leases expiring in 2026, two expiring in 2033 and one expiring in 2040 (see Note 2 for additional disclosure). We are also the lessee of the real property of certain facilities from unrelated third parties.

Supplemental cash flow information related to leases for the three-month period ended March 31, 2023 and 2022 are as follows (in thousands):

	Three months ended March 31,
	2023				2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	32,043			$	31,325
Operating cash flows from finance leases	$	967			$	1,006
Financing cash flows from finance leases	$	882			$	803
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	24,256			$	19,037
Finance leases	$	-			$	1,066

(14) Recent Accounting Standards

From time to time, new accounting guidance is issued by the FASB or other standard setting bodies that is adopted by the Company as of the effective date or, in some cases where early adoption is permitted, in advance of the effective date. The Company has assessed the recently issued guidance that is not yet effective and believes the new guidance will not have a material impact on our results of operations, cash flows or financial position.