These are the slides from my presentation at the MHCA 2010 Summer Conference in August.

1. The Behavioral Health Industry From
Wall Street’s Point Of View
MHCA 2010 Summer Conference
August 19, 2010
Anthony Deem
Market Research Associate
Hospitals, Medical/Rx Distribution, Dental, Pharmacy Benefit Management
adeem@cleveland-research.com

2. 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 Parity
 Healthcare reform is a significant positive for the
industry
 MHCA/CRC partnership

3. 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?

4. Which Sectors Does CRC Cover?
 Consumer
 Industrial
 Health Care
 Technology

5. Who Do We Research?
 Hospitals  Dental
 Universal Health  Henry Schein
Services  Patterson Companies
 Psychiatric Solutions  Dentsply
 LifePoint Hospitals  Sirona Dental
 Community Health
Systems  Pharmacy Benefit
Management
 Medical/Rx Distribution  Express Scripts
 Cardinal Health  Medco Health
 McKesson Solutions
Corporation  CVS/Caremark
 Amerisource Bergen
 PSS World Medical

6. How Do We Do Our Research?
 We talk to:
 Management of Private Companies
 Individuals In The Markets Where UHS and
PSYS Operate
 Medicaid Agencies & Insurance Companies
 Referral Sources
 Consultants

7. Inpatient Behavioral Health Industry Overview
 Inpatient Market Is Highly Attractive
 $20 billion domestic market
 73 million people with diagnosable mental illnesses
 Capacity rationalization in early 1990’s created
imbalance of supply/demand
 Solid pricing and admission growth trends
 Bad debt exposure is minimal
 Low competition from outpatient setting
 Healthcare reform and parity are both positive
regulatory developments

8. What Matters To Investors?
 Organic Growth
 Revenue Growth
Pricing Growth
Volume Growth
Patient Day Growth
Length Of Stay
 Profit Margin Expansion
 Profitable Acquisitions

9. Recent Trends – Pricing Growth
Medicare/Medicaid pricing growth has leveled off.
Managed care remains strong.
Psychiatric Solutions
Pricing Growth Trends
Payer % of Revenue FY08 Increase FY09 Increase FY10 Increase
Commercial/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

10. PPS Was A Positive For Freestanding
Facilities But A Negative For Acute
Acute-Based Psychiatric Units
Revenue Per Day & Operating Margin Analysis
$1,200 0.0%
$900 -20.0%
-40.0%
$600
-60.0%
$300 -80.0%
$0 -100.0%
2004 2005 2006 2007 2008
Source: Cleveland Research Average Revenue Per Day Average Operating Margin

11. Pricing Growth (cont’d)
Revenue Per Patient Day
PSYS & UHS
$660
$653
$640
$639
$620
$623
$600 $605
$599 $593
$580
$576 $575 $582
$560
$552 $550
$540
$520 $520
2006 2007 2008 2009 FY10E FY11E
Source: Company Reports, Cleveland Research
PSYS UHS
Note: Figures are slightly skewed driven by strong acute volume (higher revenue per patient day)

12. Recent Trends – Admission Growth
Demand for inpatient services remains high
Admission Growth
PSYS & UHS
8.0%
6.8% 6.6%
7.0% 6.4%
6.0%
5%
5.0% 4.5%
4.3% 4.1% 4.2%
4.0% 3.6%
3.0% 2.4% 2.2%
2.2%
2.0%
1.0%
0.0%
2006 2007 2008 2009 FY10E FY11E
Source: Company Reports, Cleveland Research PSYS UHS

13. Recent Trends – Length of Stay
LOS is under pressure due to Medicaid and acute
expansion/demand
Length of Stay
PSYS & UHS
1.5% 1.0%
1.0%
0.5%
0.0%
0.0%
-0.5%
-0.2% -0.5% -0.5%
-1.0%
-0.8% -1.0%
-1.5%
-2.0%
-1.9% -2.0%
-2.5%
-2.3%
-3.0%
-3.5%
-3.3% -3.5%
-4.0%
2006 2007 2008 2009 FY10E FY11E
Source: Company Reports, Cleveland Research PSYS UHS

14. Recent Trends – Revenue Growth
Revenue growth has trended down slightly due to pricing but
remains strong overall
Same-Facility Revenue Growth
PSYS & UHS
10.0%
8.9%
9.0%
8.1% 8.0% 7.6%
8.0% 7.4%
6.5%
7.0% 5.9% 5.8% 6.0%
5.8%
6.0%
5.1%
5.0%
3.9%
4.0%
3.0%
2.0%
1.0%
0.0%
2006 2007 2008 2009 FY10E FY11E
Source: Company Reports, Cleveland Research PSYS UHS

15. Recent Trends – Profit Margins
Profit margin expansion has been robust
Profit Margins
PSYS & UHS
28.0%
26.7%
27.0%
26.0% 25.1%
25.0%
24.0% 23.3%
22.9% 22.8%
23.0%
21.6%
22.0%
20.5% 20.8%
21.0%
20.0%
19.0%
18.0%
2007 2008 2009 YTD-2010
Source: Company Reports PSYS UHS

16. Bed Expansion
Bed expansion initiatives are driven by high demand and
capacity constraints.
Psychiatric Solutions
Annual Bed Expansion
400 380
339
310
300
200
158
104
100
0
2006 2007 2008 2009 2010
Source: Company reports, Cleveland Research

17. 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.

18. PSYS & UHS Are Merging (cont’d)
Florida, Texas, Pennsylvania and Virginia will be the company’s
largest markets
Universal Health Services, Inc.
Behavioral Portfolio Analysis - Post PSYS Transaction
# of % of Total % of Total
State Facilities # of Beds Facilities 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

19. 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.
Universal Health Services
Behavioral Revenue & Bed Mix Post PSYS
% of Revenue % of Beds
Acute 70% 46%
Residential Treatment Centers 30% 54%
Total 100% 100%
Source: Company Reports, Cleveland Research

20. Industry Outlook. What Now?
 State budget pressures are a risk
 The inpatient industry relies significantly on
public funding
 State 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

21. State Budget Cuts
A Double Edged Sword?
State Mental Health Associations
Responses To Budget Cuts
Close state hospitals
Restrict population served
Close hospitals/wards
Employee Furloughs
Reduce number served
Reduce Services
Reduce F unds to Community
Hiring Freezes
Reduce Administrative Expenses
0% 20% 40% 60% 80% 100%
Source: NASMHPD Research Institute December-09 April-09

22. 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

23. Healthcare Reform
 Reform is a meaningful positive for the industry
 Elimination of charity care
 The for profit market has very low exposure
to uninsured population currently, which will
create volume upside.
Healthcare Reform
Increases To Insured Population
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

24. MHCA & Cleveland Research
 New collaboration aimed at gathering industry data
 Complete 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 members
 Aggregation of data into a comprehensive report
which will be circulated to all MHCA members

25. Thank You!
Email: adeem@cleveland-research.com
Call: (216) 649-7232