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

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

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

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

expansion, etc) Industry Outlook

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

industry MHCA/CRC partnership

Who is Cleveland Research?

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

Stock Market Research

What Sets us Apart?

Which Sectors Does CRC Cover?

Consumer

Industrial

Health Care

Technology

Who Do We Research? Hospitals

Universal Health Services

Psychiatric Solutions LifePoint HospitalsCommunity Health

Systems

Medical/Rx DistributionCardinal HealthMcKesson

CorporationAmerisource Bergen PSS World Medical

DentalHenry Schein Patterson CompaniesDentsply Sirona Dental

Pharmacy Benefit Management Express ScriptsMedco Health

SolutionsCVS/Caremark

How Do We Do Our Research?

We talk to: Management of Private CompaniesIndividuals In The Markets Where UHS and

PSYS OperateMedicaid Agencies & Insurance CompaniesReferral SourcesConsultants

Inpatient Behavioral Health Industry Overview

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

imbalance of supply/demand Solid pricing and admission growth trendsBad debt exposure is minimal Low competition from outpatient settingHealthcare reform and parity are both positive

regulatory developments

What Matters To Investors? Organic GrowthRevenue GrowthPricing GrowthVolume GrowthPatient Day Growth Length Of Stay

Profit Margin Expansion

Profitable Acquisitions

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

Managed care remains strong.

Payer % of Revenue FY08 Increase FY09 Increase FY10 IncreaseCommercial/Private/HMO 35% 7% 7% 7%Medicaid 29% 3% 2% 0%State Agencies 15% 3% 3% 3%Medicare 13% 9% 4% 2%Third Party 8% 5% 3% 3%

Total 100% 5% 4% 3%

Source: Company reports, Cleveland Research

Psychiatric SolutionsPricing Growth Trends

PPS Was A Positive For Freestanding Facilities But A Negative For Acute

Acute-Based Psychiatric Units Revenue Per Day & Operating Margin Analysis

$0

$300

$600

$900

$1,200

2004 2005 2006 2007 2008-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

Average Revenue Per Day Average Operating MarginSource: Cleveland Research

Pricing Growth (cont’d)

Note: Figures are slightly skewed driven by strong acute volume (higher revenue per patient day)

$520

$550

$575 $582 $593

$605

$552

$576

$599 $623

$639

$653

$520

$540

$560

$580

$600

$620

$640

$660

2006 2007 2008 2009 FY10E FY11E

PSYS UHSSource: Company Reports, Cleveland Research

Revenue Per Patient DayPSYS & UHS

Recent Trends – Admission GrowthDemand for inpatient services remains high

2.4% 2.2%

4.5%

6.8% 6.6%

5%

3.6%4.3%

6.4%

2.2%

4.1% 4.2%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

2006 2007 2008 2009 FY10E FY11EPSYS UHSSource: Company Reports, Cleveland Research

Admission Growth PSYS & UHS

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

expansion/demand

1.0%

-0.8%

-1.9%

-3.5%

-2.3%-2.0%

0.0%

-3.3%

-1.0%-0.2% -0.5% -0.5%

-4.0%-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%

2006 2007 2008 2009 FY10E FY11E

PSYS UHS

Length of StayPSYS & UHS

Source: Company Reports, Cleveland Research

Recent Trends – Revenue GrowthRevenue growth has trended down slightly due to pricing but

remains strong overall

8.9%

6.5%

8.0%

5.1%

5.9% 6.0%

8.1%7.4% 7.6%

3.9%

5.8% 5.8%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

2006 2007 2008 2009 FY10E FY11EPSYS UHSSource: Company Reports, Cleveland Research

Same-Facility Revenue Growth PSYS & UHS

Recent Trends – Profit Margins

Profit margin expansion has been robust

20.5% 20.8%21.6%

22.8%22.9% 23.3%

25.1%

26.7%

18.0%19.0%20.0%21.0%22.0%23.0%24.0%25.0%26.0%27.0%28.0%

2007 2008 2009 YTD-2010PSYS UHS

Profit MarginsPSYS & UHS

Source: Company Reports

Bed Expansion

Bed expansion initiatives are driven by high demand andcapacity constraints.

Psychiatric Solutions Annual Bed Expansion

104

380339

310

158

0

100

200

300

400

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

PSYS & UHS Are Merging

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

UHS outbid private equity UHS believes the industry provides compelling

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

The deal is highly favorable to UHS and its shareholders.

PSYS & UHS Are Merging (cont’d)

State# of

Facilities # of Beds% of Total Facilities

% of Total Beds

Florida 19 1,848 10% 10%Texas 14 1,668 7% 9%Pennsylvania 10 1,323 5% 7%Virginia 9 1,248 5% 6%Georgia 12 1,186 6% 6%Tennessee 11 930 6% 5%Illinois 5 902 3% 5%Utah 6 838 3% 4%California 14 613 7% 3%South Carolina 8 605 4% 3%Other 88 8,050 45% 42%TOTAL 196 19,211 100% 100%

Source: Company Reports

Behavioral Portfolio Analysis - Post PSYS Transaction Universal Health Services, Inc.

Florida, Texas, Pennsylvania and Virginia will be the company’s largest markets

PSYS & UHS Are Merging (cont’d)

From a revenue standpoint, we believe 70% of UHS pro forma behavioral revenue will be acute and its bed mix will be 54% RTC and 46% acute.

% of Revenue % of BedsAcute 70% 46%Residential Treatment Centers 30% 54%

Total 100% 100%

Source: Company Reports, Cleveland Research

Behavioral Revenue & Bed Mix Post PSYSUniversal Health Services

Industry Outlook. What Now?

State budget pressures are a riskThe inpatient industry relies significantly on

public fundingState Agency & Medicaid funding is 50%

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

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

2014

State Budget Cuts A Double Edged Sword?

0% 20% 40% 60% 80% 100%

Reduce Administrative Expenses

Hiring Freezes

Reduce Funds to Community

Reduce Services

Reduce number served

Employee Furloughs

Close hospitals/wards

Restrict population served

Close state hospitals

December-09 April-09

State Mental Health Associations Responses To Budget Cuts

Source: NASMHPD Research Institute

Mental Health Parity Viewed as a positive driver to commercial inpatient

demand. 113 million people currently have parity. The

incremental benefit to providers comes from self insured plans, where parity didn’t apply before. That is millions more lives.

Facilities typically have 30 inpatient days, 20 outpatient visits is the standard policy, whereas med/surg they don’t have those limits, so those limits will go away.

The law is intended to remove higher co-pay/deductible requirements

Healthcare Reform Reform is a meaningful positive for the industryElimination of charity careThe for profit market has very low exposure

to uninsured population currently, which will create volume upside.

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Newly Insured Population Medicaid & CHIP -1 -2 -3 10 15 17 16 16 16 Employer 3 3 3 4 1 -3 -3 -3 -4 Other -2 -3 -5 -5 -5 -5 Exchanges 8 13 21 23 24 24

Total Insured With Reform 217 220 221 222 244 251 256 257 259 258

Change vs. No Reform 0% 1% 0% 0% 9% 12% 13% 14% 14% 14%

Source: CBO, Morningstar

Increases To Insured Population Healthcare Reform

MHCA & Cleveland Research New collaboration aimed at gathering industry dataComplete confidentiality for MHCA members at all

times – the goal of the survey is to better educate industry participants about current trends, NOT gain insight into individual company performance

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

Actual anecdotal commentary from membersAggregation of data into a comprehensive report

which will be circulated to all MHCA members

Thank You!

Email: adeem@cleveland-research.comCall: (216) 649-7232