Universal Health Services, Inc. (UHS) Earnings Call Transcript & Summary

This is like a NASA countdown. We go on the second. Keep it tight. And there it was, blast off. Well, good afternoon. I hope you had a chance to enjoy some lunch and a little bit of a break. We're going to soldier on here. My pleasure to introduce Universal Health Services. UHS is one of the largest hospital management companies in the country, own or operate nearly 400 inpatient/outpatient facilities, including medical acute care hospitals, behavioral health, psychiatric hospitals, ambulatory surgery centers, freestanding ED, urgent care, 37 states plus D.C. as well as a presence in the U.K. The company will generate over $11 billion of revenue in 2019 by the time it's all said and done. And this afternoon, we have Steve Filton, who's the Chief Financial Officer, to do the presentation. We'll break out in Olympic, which will be 2 lefts out the door. Thanks.

Thank you, Gary. I will try and do this at a relatively fast pace and pausing to cover that -- I think that -- the issues that investors seem to be most interested in and then whatever doesn't get covered here, happy to cover in the breakout session. As Gary touched on, what really distinguishes the UHS strategy and has for many years is our 2-segment strategy, roughly equal presence in these 2 businesses, behavioral and acute with a revenue split that is relatively even and a geographic footprint around the country that is pretty diffuse. We operate in, I think, 37 of the 50 states as well as in Puerto Rico. And as Gary mentioned, in the U.K., you can see how our revenues break out by state. We have a very large presence. Our single biggest market is in Nevada, but also a significant presence in Texas and California and Florida as well. You can see from our sources of revenue that roughly half of our revenues come from government payers, Medicare and Medicaid payers skewed more to the Medicaid side in behavioral and more to the Medicare side in acute care. Probably what's most noteworthy about this slide is that over the last several years, more and more of our commercial business has moved to managed payers. So Medicare and Medicaid continues to effectively outsource more and more of their business to private sector, third-party payers, and that changes the dynamic some. As we think about the hospital business going forward over the next few years, I think we believe that our business -- both of our businesses generate from favorable demographics. These include the aging of the population. We've got a slide -- our next slide will show that the population in the U.S. continues to age and get older, and that benefits us from the perspective of both medical care. As people get older, they tend to require more medical care, but also psychiatric care. We're treating more and more illnesses, behavioral illnesses that appear in the elderly population, things like Dementia and Alzheimer's, et cetera, so we see more of that. And you can see here is the slide -- this is a decade's sort of a trend, not just a year or 2, but over the next several decades, the percentage of the population that is over age 65 just continues to increase and increase for the most part, as my generation, the baby boomers just age into their old age. Depressing for me, personally, but good for our business. The next few slides sort of deal with the revenue trajectories in the 2 business, and I'm going to actually -- sort of just get to same-store revenue growth because I think this encapsulates most of the issues that you can go back and look at the other slides to get the detail of. But you can see that our acute care revenue growth has really been quite strong for a number of years. And if you look at like the 2014 and 2015 levels of revenue growth and '16, in that 8% to 10%. Those are really sort of historically extraordinary same-store revenue growth levels. And I think that's due to a number of factors. 2014 is the year in which the Affordable Care Act was implemented. Clearly, the hospital, the acute hospital industry benefits from that. The economy is recovering in a significant way, unemployment's going down. People are going back to work. They're getting health insurance back through their employers. All those things are beneficial. In the last several years, acute care revenue growth, I think, has been sort of in a more normalized kind of 5%, 6% range, and that's been extremely helpful. Behavioral revenue has started to lag sort of prior to 2014, '15, behavioral revenue growth averaged very consistently, 5% to 7%, sometimes more than that. It begins to decline pretty significantly in 2015. And '16, we attribute much of that slowdown in revenue growth to an inability in our hospitals to hire sufficient numbers of clinical staff, mainly nurses, but to a degree, doctors as well. And the issue simply is, while patients are still being presented to our hospitals for admission, we simply don't have sufficient clinical staff to treat them, and so we're turning away more and more patients. That problem, obviously, is exacerbated in an environment where unemployment rates are very low, where full employment, nursing positions and nursing professionals are in high demand. But we've made some progress there. And you can see that revenue is recovering, albeit more slowly than we expected, but has been recovering from its lows in 2017. I'll talk a little bit more about the behavioral industry generally and about our behavioral business in the next few slides. There is a fair amount of behavioral illness and the rate and frequency of behavioral illness is growing in the U.S. We think that the behavioral industry is about a $50 billion industry. We are -- as Gary indicated, we're about $11 billion or $12 billion revenue company with that a little more -- around half of those revenues coming from behavioral. So we represent a relatively small portion of the overall behavioral industry, but a much larger percentage of the inpatient behavioral industry and a much larger percentage than that of the freestanding behavioral industry. There are a very large percentage of people in the U.S. with diagnosable mental illnesses. Now a lot of those people will never be candidates for inpatient care, but it's an indication of the breadth and depth of behavioral illness in the U.S. And I think a lot of the stigma has been reduced in terms of both identifying and treating behavioral illness and clearly, our industry and the demand for behavioral services has benefited from that. We are the leading inpatient behavioral health provider as a measured in any number of metrics by total hospitals, total beds, net patient revenue. And I think Gary mentioned, we've got 324 inpatient facilities and 21 outpatient facilities in 36 states, the District of Columbia and Puerto Rico. We've also got another 135 facilities in the U.K. Our hospitals operate at fairly high occupancy levels. The next chart will show that for the last 10 years or so, our occupancy rates have been in sort of the mid- to high 70s, 75%, 76%, 77%, very consistently, and that's been true despite the fact that we've added significant capacity during that time. Probably in that 10-year period, we've added in excess of 3,000 new beds to our behavioral hospitals, which means that in order for occupancy rates to remain fairly constant that we're filling those beds with patients, pretty much at the same rate that we're building them. And it's, again, an indication of the increasing demand in the business. We entered the U.K. behavioral market in 2014 with the purchase of a company called Cygnet. One of the challenges we have as the largest inpatient behavioral provider in the U.S. is that as we try and expand, particularly through M&A and through acquisitions, any sort of large-scale acquisition with multiple facilities is likely to create some amount of increased attention from the FTC on competitive pressures, et cetera. And so by getting into the U.K., we get access to a population, I think notably an English-speaking population of 65 million people, where we had no presence before. And we can really sort of employ many of the same strategies that we've employed here in the U.S., which is, once we've established a portfolio of hospitals, we can build out and add beds to those hospitals. We can build de novo facilities, we can do small acquisitions. We've done all that in the U.K. And I think for the most part, avoided some of the problems of our more high-profile or a high-profile competitor in the U.K. who has experienced some pressures on both the top line and on their wage rates. But in our sort of 5-year foray in the U.K., we've had pretty stable results. Both in the U.S. and the U.K., we've been embarked on a program, a pretty aggressive capital expansion over the last several years, adding a significant number of new beds. I would say, on average, 400 to 600 new beds a year, either at existing facilities or de novo developments. And this slide really speaks to some of the specifics. And obviously, when we're adding beds at new facilities, we're doing so because there's a demonstrated need. We're turning patients away because we don't have enough facilities, et cetera. And so generally, those projects where we're adding capacity, tend to have a very high rate of return because we are really very, sort of, confident in the need and the demand. We ramp up the demand very quickly. If we've got a facility that's operating at 95% occupancy and we add 20 beds, we tend to fill those beds very quickly. We've also done a decent number of de novo developments, meaning new hospitals and many of them in new markets. And more recently, we've had a lot more activity as this first bullet point illustrates with Inland Northwest Behavioral, these joint ventures that we're doing with acute care hospitals. So in the U.S. today, something like 50% or 55% of all the behavioral beds are owned and operated by acute care hospitals. So an acute care hospital will have a floor dedicated to behavioral treatment. They'll have 40 beds or 80 beds dedicated to behavioral treatment, or they'll have a freestanding facility on their campus dedicated to behavioral treatment. And what we have found, in more cases than not, is acute care hospitals not doing a terribly efficient job in running their behavioral health services. They tend to be focused on other things. And acute care hospital tends to be a complicated sort of place. They're doing things like oncology and orthopedics and cardiology and surgical services. And more often than not, we find that they have more focus on those sorts of services than they do on the behavioral piece, which tends to represent a much smaller part of their sort of overall services and overall revenue pie. And so when we come in as somebody who's really dedicated to behavioral health care, very often, I think we're able to drive efficiencies and more sophisticated business development, et cetera, than they're accustomed to. And so we have announced over the last few years, any number of joint ventures with acute care hospitals to continue to work with them. They want to remain in the behavioral business, they generate a lot of behavioral patients. Many of those patients come from their own acute care emergency rooms. Probably 1/3 of our behavioral patients in our freestanding facilities nationally come from acute care emergency rooms, they're probably the single biggest source of behavioral patients. And so when we partner with an acute care hospital, we're getting the benefit of those patients that are coming through their emergency rooms. So Inland Northwest Behavioral is a joint venture with Providence hospital, a large system in Washington state. We've got a joint venture with Lancaster Behavioral Health in Lancaster, Pennsylvania, which is a joint venture in and of itself with the University of Pennsylvania, a very large provider in Philadelphia. And we've got any number of other joint venture projects that are sort of either in discussion or in the process of building new facilities and expanding our capacity expansion. On the acute side of the business, we've seen, and I mentioned this before, very predictable and robust demand growth over the last several years, I think since the recession ended from a provider perspective in 2013 or so, our admissions or same-store adjusted admission growth has exceeded all of the publicly reporting acute care companies. And I think it's largely about the markets that we're in, faster-growing markets like Las Vegas and Riverside County, California, and the District of Columbia as well as the fact that in those markets, at the same time, that sort of the overall population is growing and the overall environment for demand and acute care demand is growing, we're also increasing and enhancing our market share. The way that I think the acute business is changing most fundamentally is in how we are paid for our patients. And those of you who follow the industry, sort of, I think, are used to hearing this described as a shift from traditional fee-for-service reimbursement to what's described as fee for value. The fee-for-service reimbursement is essentially the system that we've operated under for the last 30 or 40 years. And it's very simply just that. It's -- you're paid for the services you provide, so that every time something is done to a patient, every time a patient is admitted, every time a patient goes to a subacute facility, that facility -- every time a patient goes to a doctor, that doctor, that facility is being paid for the service that they're -- that's being rendered. We're moving, albeit I think slowly to a system of -- what's described as fee for value. I think it's more of a risk-based system, where the risk of utilization shifts from the payer, the government, the insurance company, the employer to the provider, to the hospital, to the doctor, sometimes to the patients themselves, where it sort of becomes now our responsibility not to treat the patient as much as possible, but to treat the patient as little as possible in the same sort of effective way with the same level, if not better outcomes. And so you're seeing more bundled payments where instead of paying every provider in a continuum, who treats a patient for a particular diagnosis, whether it's a hip implant or open heart surgery, there's a single payment made. And that payment is sort of divvied up, if you will, amongst the providers providing that service. We're seeing more ACO payments where an organization, usually a physician organization is being paid a fixed fee, a per member per month fee for treating a population sort of across the board. You're seeing more overall capitated payments where, again, an organization, a hospital, physician group has been paid per member per month fee to treat a population. And so all of a sudden, the whole incentive system has been turned upside down because instead of having an incentive to treat the patient as much as possible, sort of along the continuum, now the incentive is to treat the patient, again, as efficiently as possible as little treatment as possible with the same, if not better outcomes. That change is happening, but it's happening fairly slowly, but we are certainly doing a great deal to prepare for it in terms of our physician relationships, in terms of being able to provide services along the full continuum, inpatient, outpatient, urgent care centers, freestanding EDs, freestanding imaging centers, home health businesses, all that sort of stuff. We also, on the acute care side have been developing and expanding our facilities as well in many ways. We've announced a new hospital in Reno, Nevada. I mentioned before that we are the largest provider in Las Vegas by far. We've also historically had for decades, a small hospital in Reno. We're now building a much larger facility in Reno, which gives us a much broader and more effective statewide presence in Nevada. We've also expanded many of our Las Vegas facilities. You'll see in any number of these bullet points having to do with expansions in Las Vegas, the most notable of which and the most successful is which -- has been the building of Henderson Hospital in the Southeast Quadrant of Las Vegas. We opened that in October of 2016, it's our sixth inpatient full -- tertiary inpatient facility in Las Vegas. And 3 years into it, we are contemplating a significant expansion of that hospital already given its significant results -- significantly successful results. One of the things I mentioned before, as we sort of expand the continuum in acute care services is trying to find more access points for our patients. So historically, a great bulk of our patients found their way into our acute care hospitals through our acute care emergency room on the campus of our hospital. But today, we're finding more ways to create access points in the community. Freestanding emergency departments are one way, urgent care centers are another way, primary care physician offices are a third way. But you can see that we've got 13 freestanding EDS now in a portfolio that had 0 just a few years ago, 6 urgent care centers 2 more fEDs under development and 7 more additional sites that should be under development relatively soon in the next couple of years. This is a picture of our freestanding ED in Henderson, which is we're sort of built-in connection with our hospital in that market. And this has been an enormously successful entity in and of itself in addition to the hospital. UHS' strategy in the hospital business in both business segments has really been fairly consistent for the 30-some-odd years that I've been with the company and the 40 years that it's been in business, and that is to create market share leading franchises in faster-growing markets. We Generally want to be the #1 or #2 market share provider in any market in which we operate. And over time, to the degree that we're unable to accomplish that in a market and we're unable to develop strategies to do that, we have tended to exit those markets. So that the portfolio and the strength of the portfolio continues to sort of be refined and pruned so that there really are only sort of industry-leading market players in the portfolio. And the way you see that play out is that well over 90% of our earnings come from hospitals that are either the #1 or #2 market share providers in their markets. And another reason for that is that we tend to have hospitals that in our, sort of, mid-sized communities are among the largest hospitals, that 240-bed average size tends to be among the largest in our markets. This slide really speaks to the dynamic that I talked about before, being in faster-growing markets. This is using third-party projection data showing that over the next 5 years, the population growth in our markets, particularly in our acute care markets is projected to grow. And the population is projected to grow at about twice the rate of the national average. And so that's an enormous advantage to us is the sort of idea that a rising tide is lifting all the boats, or if you will, all the hospitals in a market. But at the same time, as I mentioned before, we tend to be enhancing and expanding our market share, and that's been very helpful. I'll [ give ] Las Vegas as an example because that -- we're going to talk specifically about that. But 10 years ago, our market share in the Las Vegas market was probably in the 26%, 27% range. And in 2019, with the addition of Henderson Hospital, our market share is now in sort of the mid-40s, 44%, 45%. So over a decade, we've almost -- we've almost doubled our market share in the market. We're the market leader. We've got 6 acute care hospitals and 2 behavioral facilities in the market. We continue to add new capacity, new beds, new OR, new surgical capacity and new ER capacity. I mentioned the fact that we opened Henderson Hospital very successfully just a few years ago. And the Vegas market itself, after sort of a rough sort of stretch during the recession when unemployment had reached almost 15% is really back to kind of kicking or hitting on all cylinders. Unemployment is down to 4%. There's a number of professional sports teams have moved into the market. There's a number of nongaming industries, and facilities that are headquartering in the market. So the Vegas market continues to grow rather robustly in the last several years. This is a picture of our newest hospital, Henderson. Talk a little bit about the South Texas market, which historically has been another large market for UHS. This is a market very close to the Texas Mexican border. Central for us is McAllen, Texas, but it also includes Laredo and Eagle Pass, Texas, which are within a couple of hours of McAllen. We've got about a 26% market share in this market, 3 acute care hospitals, including a dedicated children's hospital with almost 1,000 beds in what is a relatively mid-sized market. And one that I have mentioned in our last couple of quarterly calls has been -- after a few years of sort of -- a bit of sort of muted performance has been sort of on the rise again. Washington, D.C., where we own George Washington University Hospital in a partnership with George Washington University, has been extremely successful in the 25 years or so that we've owned the facility, operates in a very sort of attractive part of the district and runs at very high occupancy levels, and a facility that has earned a very significant return on investment since our acquisition. This slide sort of speaks to the way that we've allocated our capital over the last several years. And I'm going to switch to this next slide because I think it's even -- sort of more helpful. I mean the single biggest capital allocation for the use of capital has been in organic CapEx as we plow money back into the facilities. And this is a business that's very capital-intensive. I think you have to remain competitive from a state-of-the-art technology perspective and capacity-wise, et cetera. And we certainly have done that in all of our markets. We've also done a fair amount of acquisitions. We've returned a significant amount of capital to our shareholders through share repurchase and to a lesser degree, dividends as well. I think people are familiar with the financial results, so I'll end here and then answer any questions that haven't been addressed at the breakout session. And I look forward to speaking with you there. Thank you.