The Behavioral Health Industry From The Behavioral Health Industry From Wall Street’s Point Of ViewWall Street’s Point Of ViewMHCA 2010 Summer ConferenceMHCA 2010 Summer ConferenceAugust 19, 2010August 19, 2010

Anthony DeemMarket Research AssociateHospitals, Medical/Rx Distribution, Dental, Pharmacy Benefit Managementadeem@cleveland-research.com

Key Points Of DiscussionKey Points Of Discussion Overview of Cleveland Research CompanyOverview of Cleveland Research Company Overview of freestanding inpatient behavioral health Overview of freestanding inpatient behavioral health

marketmarket How do investors track the performance of the market? How do investors track the performance of the market? Recent trends and outlook on performance.Recent trends and outlook on performance. Inpatient providers are growing (acquisitions, capacity Inpatient providers are growing (acquisitions, capacity

expansion, etc)expansion, etc) Industry Outlook Industry Outlook

State budget issues – pros and cons. State budget issues – pros and cons. Mental Health ParityMental Health Parity Healthcare reform is a significant positive for the Healthcare reform is a significant positive for the

industryindustry MHCA/CRC partnership MHCA/CRC partnership

Who is Cleveland Research?Who is Cleveland Research?

In June 2006, 43 of us started a new equity research In June 2006, 43 of us started a new equity research firm to form CRC (original firm started in 1996), and firm to form CRC (original firm started in 1996), and we now have ~70 employees (over 45 in research).we now have ~70 employees (over 45 in research).

Stock Market ResearchStock Market Research

What Sets us Apart?What Sets us Apart?

Which Sectors Does CRC Cover?Which Sectors Does CRC Cover?

ConsumerConsumer

IndustrialIndustrial

Health CareHealth Care

TechnologyTechnology

Who Do We Research?Who Do We Research? HospitalsHospitals

Universal Health Universal Health Services Services

Psychiatric SolutionsPsychiatric Solutions LifePoint HospitalsLifePoint Hospitals Community Health Community Health

SystemsSystems

Medical/Rx DistributionMedical/Rx Distribution Cardinal HealthCardinal Health McKesson McKesson

CorporationCorporation Amerisource BergenAmerisource Bergen PSS World MedicalPSS World Medical

DentalDental Henry ScheinHenry Schein Patterson CompaniesPatterson Companies DentsplyDentsply Sirona DentalSirona Dental

Pharmacy Benefit Pharmacy Benefit ManagementManagement Express ScriptsExpress Scripts Medco Health Medco Health

SolutionsSolutions CVS/CaremarkCVS/Caremark

How Do We Do Our Research?How Do We Do Our Research?

We talk to: We talk to: Management of Private CompaniesManagement of Private Companies Individuals In The Markets Where UHS and Individuals In The Markets Where UHS and

PSYS OperatePSYS OperateMedicaid Agencies & Insurance CompaniesMedicaid Agencies & Insurance CompaniesReferral SourcesReferral SourcesConsultantsConsultants

Inpatient Behavioral Health Industry OverviewInpatient Behavioral Health Industry Overview

Inpatient Market Is Highly AttractiveInpatient Market Is Highly Attractive $20 billion domestic market$20 billion domestic market 73 million people with diagnosable mental illnesses73 million people with diagnosable mental illnesses Capacity rationalization in early 1990’s created Capacity rationalization in early 1990’s created

imbalance of supply/demandimbalance of supply/demand Solid pricing and admission growth trendsSolid pricing and admission growth trends Bad debt exposure is minimalBad debt exposure is minimal Low competition from outpatient settingLow competition from outpatient setting Healthcare reform and parity are both positive Healthcare reform and parity are both positive

regulatory developmentsregulatory developments

What Matters To Investors?What Matters To Investors?

Organic GrowthOrganic GrowthRevenue GrowthRevenue Growth

Pricing GrowthPricing GrowthVolume GrowthVolume GrowthPatient Day Growth Patient Day Growth Length Of StayLength Of Stay

Profit Margin Expansion Profit Margin Expansion

Profitable Acquisitions Profitable Acquisitions

Recent Trends – Pricing GrowthRecent Trends – Pricing GrowthMedicare/Medicaid pricing growth has leveled off.Medicare/Medicaid pricing growth has leveled off.

Managed care remains strong. 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 PPS Was A Positive For Freestanding Facilities But A Negative For AcuteFacilities 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)Pricing Growth (cont’d)

Note: Figures are slightly skewed driven by strong acute volume (higher revenue per patient day)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 GrowthRecent Trends – Admission GrowthDemand for inpatient services remains highDemand 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 FY11E

PSYS UHSSource: Company Reports, Cleveland Research

Admission Growth PSYS & UHS

Recent Trends – Length of StayRecent Trends – Length of StayLOS is under pressure due to Medicaid and acuteLOS is under pressure due to Medicaid and acute

expansion/demandexpansion/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 GrowthRecent Trends – Revenue GrowthRevenue growth has trended down slightly due to pricing but Revenue growth has trended down slightly due to pricing but

remains strong overallremains 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 FY11E

PSYS UHSSource: Company Reports, Cleveland Research

Same-Facility Revenue Growth PSYS & UHS

Recent Trends – Profit MarginsRecent Trends – Profit Margins

Profit margin expansion has been robustProfit 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-2010

PSYS UHS

Profit MarginsPSYS & UHS

Source: Company Reports

Bed ExpansionBed Expansion

Bed expansion initiatives are driven by high demand andBed expansion initiatives are driven by high demand and

capacity constraints. capacity constraints.

Psychiatric Solutions Annual Bed Expansion

104

380

339310

158

0

100

200

300

400

2006 2007 2008 2009 2010Source: Company reports, Cleveland Research

PSYS & UHS Are MergingPSYS & UHS Are Merging

UHS distinguishes itself in the market differently than UHS distinguishes itself in the market differently than other for profit publicly traded operators given the other for profit publicly traded operators given the presence in behavioral health, which will only get presence in behavioral health, which will only get bigger from here. bigger from here.

UHS outbid private equity UHS outbid private equity UHS believes the industry provides compelling UHS believes the industry provides compelling

growth opportunity which is why they made a $3.1 growth opportunity which is why they made a $3.1 billion acquisitionbillion acquisition

The deal is highly favorable to UHS and its The deal is highly favorable to UHS and its shareholders.shareholders.

PSYS & UHS Are Merging (cont’d)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)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 PSYS

Universal Health Services

Industry Outlook. What Now? Industry Outlook. What Now?

State budget pressures are a riskState budget pressures are a risk The inpatient industry relies significantly on The inpatient industry relies significantly on

public fundingpublic fundingState Agency & Medicaid funding is 50% State Agency & Medicaid funding is 50%

of PSYS’s revenueof PSYS’s revenue A weak economy and mental health parity are A weak economy and mental health parity are

both near term positives for the industry both near term positives for the industry Reform is a meaningful tailwind beginning in Reform is a meaningful tailwind beginning in

20142014

State Budget Cuts State Budget Cuts A Double Edged Sword?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 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 ReformHealthcare Reform Reform is a meaningful positive for the industryReform is a meaningful positive for the industry

Elimination of charity careElimination of charity care The for profit market has very low exposure The for profit market has very low exposure

to uninsured population currently, which will to uninsured population currently, which will create volume upside.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 ResearchMHCA & Cleveland Research New collaboration aimed at gathering industry dataNew collaboration aimed at gathering industry data

Complete confidentiality for MHCA members at all Complete confidentiality for MHCA members at all times – the goal of the survey is to better educate times – the goal of the survey is to better educate industry participants about current trends, NOT industry participants about current trends, NOT gain insight into individual company performancegain insight into individual company performance

Ongoing time series data that helps to identify key Ongoing time series data that helps to identify key inflection points and address important issues inflection points and address important issues

Actual anecdotal commentary from membersActual anecdotal commentary from members Aggregation of data into a comprehensive report Aggregation of data into a comprehensive report

which will be circulated to all MHCA memberswhich will be circulated to all MHCA members

Thank You!Thank You!

Email: Email: adeem@cleveland-research.comadeem@cleveland-research.com

Call: (216) 649-7232Call: (216) 649-7232