The Fund continues to search for companies that will be long-term beneficiaries of the major changes impacting the U.S. healthcare system. During the past three quarters, we established a position in Universal Health Services, Inc. (UHS, Financial), a private hospital company with a unique business model. UHS is a leading operator of acute care hospitals, and it is also the nation's largest operator of behavioral health hospitals, which treat patients with mental illnesses. We believe UHS has an attractive business mix, with approximately half its revenues coming from acute care (i.e., traditional hospitals) and half coming from high-margin, low capital intensive behavioral health hospitals. We believe that both segments should benefit from expanded insurance coverage under healthcare reform.
UHS is the largest provider of behavioral health services in the U.S., with market share of approximately 35% – 40% of freestanding behavioral hospitals. We believe this is an attractive sector within the private hospital industry, which is currently undervalued by the market. This sector has benefitted from lack of additional capacity, the relative absence of consolidated competitors, a favor able reimbursement regime, and modest bad debt expense. We believe that demand for behavioral health services is economically insensitive, as evidenced by UHS's achieving same store revenue growth of approximately 5% in this segment throughout the recession. And, we believe that healthcare reform should lead to an expanded pool of potential paying patients. Broader healthcare coverage is also likely to uncover more previously underdiagnosed and undertreated mentally ill patients. Furthermore, current capacity at UHS's behavioral health facilities is running about 1,000 basis points below its peak, and the margin on incremental patients is high.
In the acute care segment, we believe that UHS should also benefit from lower bad debt expense and higher utilization from expanded insurance coverage. UHS' geographically dispersed acute hospitals benefit from being market share leaders in some of the country's fastest growing markets where population growth is expected to be approximately 9%, twice the national level. In fact, 97% of the company's EBITDA comes from hospitals that are #1 or #2 in their markets; these dominant franchises make UHS a "must have" provider for managed care contracts and positions the company well for narrow networks under healthcare exchanges. Lastly, UHS has the lowest leverage among its for profit peers, leaving flexibility for acquisitions and accretive share repurchases.
From Ron Baron's Baron Funds third quarter 2013 report.
UHS is the largest provider of behavioral health services in the U.S., with market share of approximately 35% – 40% of freestanding behavioral hospitals. We believe this is an attractive sector within the private hospital industry, which is currently undervalued by the market. This sector has benefitted from lack of additional capacity, the relative absence of consolidated competitors, a favor able reimbursement regime, and modest bad debt expense. We believe that demand for behavioral health services is economically insensitive, as evidenced by UHS's achieving same store revenue growth of approximately 5% in this segment throughout the recession. And, we believe that healthcare reform should lead to an expanded pool of potential paying patients. Broader healthcare coverage is also likely to uncover more previously underdiagnosed and undertreated mentally ill patients. Furthermore, current capacity at UHS's behavioral health facilities is running about 1,000 basis points below its peak, and the margin on incremental patients is high.
In the acute care segment, we believe that UHS should also benefit from lower bad debt expense and higher utilization from expanded insurance coverage. UHS' geographically dispersed acute hospitals benefit from being market share leaders in some of the country's fastest growing markets where population growth is expected to be approximately 9%, twice the national level. In fact, 97% of the company's EBITDA comes from hospitals that are #1 or #2 in their markets; these dominant franchises make UHS a "must have" provider for managed care contracts and positions the company well for narrow networks under healthcare exchanges. Lastly, UHS has the lowest leverage among its for profit peers, leaving flexibility for acquisitions and accretive share repurchases.
From Ron Baron's Baron Funds third quarter 2013 report.
