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

[Audio Gap] in the acute care segment, but also on the behavioral side as well.

Sure. So I'd start out by saying that the current and cumulative impact so far, as you might expect, has been pretty minimal. We have, I think, across our acute care portfolio, probably a total of a couple of hundred suspected COVID-19 cases. I think about half of those have been tested. We have had 2 confirmed cases in our hospitals. About half of the other tests have come back negative and the other half are pending. In our behavioral hospitals, we've had less than a handful of patients who are suspected. I don't think we've had any confirmed cases. And those hospitals are either working with local acute care emergency rooms or local county health departments to make sure those patients are properly tested and treated, although they're certainly being isolated and separated until -- pending the outcome of those tests. I think as everybody has generally pointed out, the concern -- I think we're prepared for influx of patients who are not totally unlike normal flu patients, et cetera. But obviously, the concern is that if the traffic becomes so severe and the concerns become so high that we'd see a crowding out, for want of a better word, of other procedures, particularly elective procedures. Certainly, to date, we have not seen anything like that based on all the data that I've seen through yesterday. Our ER activity, our admissions activity, our surgical activity really seems about as normal as we could or would expect. We're prepared in any number of our hospitals, if the level of volumes increases and the demand increases, to create separate entrances and screening and triage areas for COVID-19 patients, both because we think that's efficient, but also to sort of assure our patient population that if you want or need to come to the hospital for other reasons, you should feel safe in doing so. So we feel like we're as prepared as we possibly can be. Obviously, this is an unfolding story that changes every day. So we'll see how it plays out. But at least so far, I'd have to say that the impact has been minimal, and I think our preparations are pretty robust.

Okay. That's great. And you just kind of touched on this a little bit. But as the case numbers potentially rise, you just spoke about some of the things you'd have to do in order to treat the virus at scale. But also in relation to that, are you able to speak about any supply inventory constraints, whether it's gloves or masks or just anything else? And what are you doing to have enough inventory for potential larger patient base?

Yes. So again, I imagine that my response is not going to be unlike the other companies', and if people talk to other hospitals, I'd suspect it's all the same. We certainly, obviously, have had several weeks of notice of this. And so we've tried to increase our inventory of the items that you mentioned. Obviously, I think the manufacturers and the distributors are conscious of that, and I think they're doing a responsible job of properly allocating their supplies to their customers so that you can't have a customer who's really hoarding supplies. But we're doing our best to make sure we have an adequate inventory. We're talking with alternative supply sources, which by the way, I think, are sort of, in a market-based economy, cropping up every day, newer suppliers, et cetera. So that I think over the coming weeks, the supply of these sorts of, call them, commodity items will increase as well. Certainly, I feel like today we're prepared not only for the current volume, but for a significant increase in volume over the coming days and weeks. Obviously, if it increases at a tenfold or twentyfold level, I suspect the system will be stressed, but I think we're a long way from there.

Okay. And if we think about similar situations historically, whether it's SARS or MERS or Ebola, you name it, does the COVID-19 situation so far compare more closely to any one of these historical situations more than others? And what can we learn from these historical situations as it relates to your acute care hospital operations?

So I think the challenge is that for those more extreme diseases that you mentioned, SARS and MERS and whatnot, we really had a very small number of cases. There was a relatively great concern but a relatively small number of cases. I think we tend to think about the ultimate COVID-19 impact as being a bit more akin to a severe flu season, which we have certainly seen examples of as recently as a couple of years ago. Obviously, I think what again may be different about this dynamic is certainly the public level of anxiety and concern that I think is a little bit different. I will say that in the 2017-'18 severe flu season, we were often asked about whether we saw a crowding out of other procedures. And I will say that again in that experience and example, we didn't really see a crowding out of procedures. And as I said, we're prepared to do what we can to satisfy our patient base that there's no need for that. Again, if it's anything like a severe flu season, I think we're well prepared for that. If it's something at elevated levels above and beyond that that's hard to imagine, then I think it may be different. But we're certainly prepared for at least that level of activity.

Okay. Great. Last question around coronavirus, and I recognize upfront this is definitely politically sensitive and last thing anybody should be thinking about right now. But since UHS is a for-profit hospital operator, I mean, if there is an abundance of coronavirus patients that may eventually work their way through your acute care hospitals, is this a patient population, the way you see it right now, that could be treated profitably when you add up all the puts and takes? And are there billing codes that are already established around this?

Yes. So I think CMS established a billing code specifically for COVID-19, literally within the last week or so. I would answer the question again in much the same way that I have answered the flu question over the years, and that is I think flu patients are profitable. We get paid a sufficient amount of money for those patients to make a profit, whether they're Medicare patients or commercial or Medicaid. They are generally medical patients. They're not undergoing surgical or diagnostic treatments of significance, et cetera. So they're less profitable than the average surgical patient, let's say. As long as these patients are incremental, I think they should be a slight tailwind for our business from a financial perspective. That's what we said about the 2017-'18 busy flu season. I think we, at that time, quantified as best as we could favorable tailwind in that season at $9 million or $10 million of incremental EBITDA. Again, I think the risk that people are focused on is this idea that if the volume of these patients becomes so significant and so severe, they will crowd out better-paying patients. To be honest, we've never really seen that dynamic with flu patients or a flu season, at least in my 3-plus decades in the business. Could this dynamic be different? Sure. But at least, certainly, at the moment, it doesn't have that feel to it.

Okay. That's some very helpful color. Okay. Let me turn it over to Andrew Mok for some additional questions, maybe tie it a bit more to your operations. Andrew?

Yes. Thanks, Steve. Moving on to your normal operations. Let's start with the behavioral side of the business. Your length of stay has been relatively stable for several quarters now, which is certainly encouraging, but behavioral volumes are still running a bit below where you'd like them to be. First, is the length of stay stabilization a sign of a slowdown in the shift to your -- of your Medicaid business towards managed care? And can you give us an update on where that penetration rate stands today?

Yes. So the latter part of the question is sort of easier to answer. We know that about 70% of the overall Medicaid patients that we're seeing in our behavioral hospitals today are covered by some managed Medicaid plan. So in theory, there's another 30% of those patients that at some point could shift to a managed Medicaid plan. We've always believed that there probably is a portion, maybe 10% to 15%, of our total Medicaid population that, for a variety of reasons, probably would never shift. So there's a small universe of patients that I think, we believe, are still left to shift to some sort of managed Medicaid program. The challenge that we've had, and I think we've been pretty transparent and candid about it over the last several years, is that it's been difficult for us even sort of knowing where the broader market is in a particular state or county in which we're operating to predict and project exactly how quickly those patients will shift and how quickly the utilization review practices of the payers will shift, et cetera. So to your point, I think 2019 turned out to be a year of relative stability, where we didn't see a significantly incremental shift of traditional Medicaid patients to managed Medicaid. We still think that, that -- again, there's 10% or 15% of our Medicaid population that remains to shift. We don't know whether that will be in 2020 or 2021, but we think that the vast majority of our patients have shifted and that the incremental shift is not going to be terribly significant.

Okay. So if length of stay is stabilizing, is it safe to say that the shortage in nursing labor is the more pressing item at the moment? Are you seeing that labor pressure concentrated in a few markets or more broad-based across the portfolio?

Yes. So I think, Andrew, that our -- the things that we've talked about as being hurdles or headwinds that have been muting our behavioral admissions for the last several years remain the same. I mean you've certainly cited one that I think is real and that we've talked about at some great length over the last several years, and that is a shortage of clinical professionals. In some cases, psychiatrists, probably in a greater number of cases, nurses, and even in some cases, nonclinical -- or nonprofessional personnel, rather, people that we call mental health technicians. That's an issue. And to your point, it is an issue, I think, only in selected geographies and in selected hospitals. But it certainly is an issue that I think has been muting those admission numbers for some time. In some cases, we see greater competition for patients that has more capacity, and particularly more competition for, I'll sort of call it, the more attractive demographics of commercial patients in certain specialties like eating disorders or autism, et cetera. We're dealing with those sorts of things. We're also dealing, I think, with more aggressive behavior on the part of our payers. Those are both commercial payers and managed Medicare and Medicaid payers who are trying on a continual basis, I think, to find alternatives to the inpatient setting for their patients, whether that's outpatient or group homes or something else. So I think those probably 3 broad categories are those that have put the most pressure on behavioral admissions in the last several years. I don't think any of that is new. I don't necessarily think any of it is kind of incrementally more significant or increased, but we're certainly continuing to deal with those 3 broad issues.

Okay. That's helpful. On the 3Q earnings call, you noted a few strategies in place to drive behavioral volumes higher in 2020. Can you give us a little more color on what those programs are and how they were factored into your 2020 guidance?

Yes. So I think what we've talked about, and I think really -- I believe it was in the context of a question about our new behavioral President and sort of what kind of new initiatives he was bringing to the table. I think we talked about, in my mind, 2, again, very broad approaches. One is in the areas that I sort of already touched on, in terms of recruiting and retaining clinical personnel, in terms of dealing with our payers from an intake and assessment perspective on the front end of patient qualification, et cetera, I think our new behavioral President, Matt Peterson, has brought a level of rigor and discipline to those processes that we're, again, applying across our portfolio in a way that I don't think changes our approach fundamentally, but again, just brings a level of process discipline to it that, I think, we believe over the intermediate and longer-term will be extremely helpful. I think the other issue that we talked about or the other initiative that we talked about is that coming from a background in the managed care industry, I think Matt is more open and receptive to this idea that we should be able to find collaborative and sort of partnership opportunities with some of our payers to both help control their medical loss utilization, while at the same time, directing their patients that require care in either qualified in- or outpatient setting to our locations and our facilities. And I think those conversations are sort of in the relatively early and preliminary stages that I think we, again, have a view that over the intermediate and longer term, we're in a better position than almost any of our competitors to offer both a geographic as well as a sort of functional breadth and width of services that most of our competitors are unable to do. And that ultimately, we'll be able to reach the sort of mutually beneficial partnerships and collaborative arrangements with many of our payers that should be helpful to us.

Okay. Going a little further on that collaboration with the payers. Are you able to share some examples of what you're exploring on that front at this stage?

Yes. And again, to be fair, I think these conversations are still, for the most part, in preliminary stages. But again, I stress that it's this idea that we understand -- going into these conversations, we understand that the goal of the payer is to, very frankly, reduce their spend on behavioral care. We understand that and are trying to offer alternatives where we can help them do that with the quid pro quo for us being when there is appropriate utilization, again, whether that's inpatient or outpatient or somewhere along the continuum, that it is done in our hospitals. So the trade-off is lower overall utilization but higher utilization rates and percentages at our facilities.

Okay. Got it. Let's move on to your capital deployment. The midpoint of your CapEx guidance is up about $165 million or 25% year-over-year. What does that elevated level of CapEx say about the M&A pipeline?

Well, I mean, I think over the last several years, we certainly have made a conscious decision, as reflected in our capital spend numbers, to devote more of our free cash flow to internal investment and CapEx and capacity increases in both acute and behavioral than we have to M&A. Now I think we've said many times, and we'll continue to make the same point, that it's not like we've abandoned our analysis and assessment of M&A opportunities. We continue to look at a large number of opportunities in both business segments. But it's certainly been true that over the last several years, we've not found a great many that have been terribly compelling, in our mind, from an investment return perspective. Whereas I think we have found more opportunities on a kind of an internal CapEx standpoint. So we've elevated our CapEx for opportunities in both behavioral and acute. But I don't think that means that we've given up on the idea that we could find compelling investments on the external M&A side. We continue to look at those.

Within the behavioral segment, are there strategic paths you can pursue via CapEx or M&A to increase your presence in the outpatient side to capture some of the behavioral volumes that are diverted away from the facilities that you mentioned, like the group homes?

Yes. I think the reality is in investment in outpatient and more of a presence in outpatient, isn't so much a CapEx investment. I mean as you might imagine, I mean, you're basically seeing patients in what amounts to kind of an office setting. So again, it's -- I don't think it requires that much. I think what it requires is an investment in programming, clinical programming, and I'm not a clinician so I don't want to dive too deeply into this. But the notion that you've got a clinical programmatic continuum that really goes, and it goes in sort of a bidirectional way, so that you can see patients in the inpatient setting. And when they get better and are suitable for less intensive care, they can migrate to the outpatient setting and vice versa, patients that are in an outpatient setting but are more severely ill and are not necessarily making the appropriate progression in the outpatient setting can move to the inpatient setting. So you've got to have appropriate programmatic clinical programs. Again, the physical investment is usually generally a leased space, et cetera. It's not a -- I don't think that's the big gating issue. So again, I think we're developing in most of our markets just more and more of a presence along the outpatient continuum.

Got it. That's helpful. Shifting to share repurchase. You accelerated buybacks to $800 million in 2019, and there's another $800 million in the guide for 2020. Would you characterize that as a fair run rate that we should expect going forward?

Yes. I mean, look, obviously, Andrew, that was the run rate that we set a month or 2 ago as we thought about 2020 as kind of, for want of a better word, it's sort of a normal year. Obviously, things have changed dramatically. We, I think, have a point of view right now that the earnings power of our business has changed very little in the last month or 6 weeks even though our market valuation has declined dramatically, along with so many others. So I think we certainly view the current situation as a buying opportunity. But also, we acknowledge that this is a pretty uncertain period. So we'll continue to evaluate how this plays out. But, yes. I mean that was -- we certainly put that number out there as a run rate in kind of a normal environment and with an acknowledgment now a month or so later that this environment, there's a lot of things other than normal. But I think in our minds, if anything, it has created more of a buying opportunity for us.

Got it. Okay. Going back to the acute segment. After being out-of-network for over a decade, HCA is now back in-network with Sierra-United in Las Vegas, which has been of your best-performing hospital markets. You noted on the last call that you expect the earnings impact to be somewhat neutral since the lower volumes would be offset by better payment rates, which is obviously a great outcome for you. Can you talk through that dynamic a bit? How are you able to secure better pricing with the largest payer at a time when more hospitals are entering its network?

Well, so I think the issue has been that our pricing with United for the last 12 years or so has been based on the fact that we were a narrow network provider. And as such, we were willing to take a lower rate as a narrow network provider. I think now that the network has essentially become kind of a full open network again, the notion always was contractually that we would negotiate -- or renegotiate rates if that were to occur. And those rates would necessarily be higher because we were not getting a -- we're not, I guess, I would describe it as not getting a premium or a discount for being a narrow network provider. So those rates have been renegotiated. We have a new contract with United with higher rates effective January 1, 2020 and an increased rate scheduled to go into effect over the course of the next 6 and 12 months as well. So we -- and we negotiated those rates based on our best guesses at what the decline in volumes would be. So obviously, we'll have to see how this plays out. But based on, again, our best guesstimates, which are based on experience in the market, et cetera, we feel like the increased negotiated and contractualized rates should be sufficient to offset the expected decline in volume that we're going to see.

Okay. Well, we are just about out of time. So let's end it there. Once again, I'd like to thank Steve for his time and participation today. And that concludes our conference.

Okay. Thank you.