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

All right. Great. I want to thank everyone for joining us today at the BofA Virtual Health Care Conference. It's my pleasure to introduce Universal Health Services. UHS is one of the largest providers of acute care hospitals as well as behavioral health services across the country. Presenting today, we have Steve Filton, who is the Chief Financial Officer. And with that, I'll jump right into questions.

So Steve, thanks for coming. But I guess one of the kind of biggest surprises, I think, from Q1 was just the discrepancy between the volume pressure you saw in your site business and what Acadia saw in its site business. You were down about 25% versus down about 7% at Acadia. I don't know if you've had a chance to look at that or think about maybe what -- from your perspective, what the differences might have been.

So it's always a little difficult to answer these kind of questions, Kevin, because obviously, while I have a significant amount of data and detailed data on the UHS experience, it's a little -- I'm speculating to a degree on what's happening with a peer or elsewhere. But my gut reaction and based on our own experience and sort of different lines of businesses, I think that Acadia, we know that they are more exposed, and exposed meaning just that they have more exposure, not in a risk way, to the U.K. where the length of stay tends to be longer to the residential business here in the U.S. where the length of stay tends to be longer. And I think a couple of things are worth noting that -- what we found, as the COVID crisis hit, is that patients who were in the hospitals tended to stay and in fact, length of stay actually seemed to lengthen a little bit during the crisis, there was not quite the urgency to get patients out of the hospitals quickly. So I think to the degree that you're in longer length of stay businesses, that was helpful. I think the other issue that we found, and I think we're at least somewhat surprised that -- is that in the acute behavioral business, it was impacted more than we expected by the experience at acute care emergency rooms where we're experiencing -- acute care emergency rooms [Technical Difficulty] I think given our exposure to that business, we tend to, I think, to have -- we were more sensitive, I guess, to that dynamic than Acadia was. And then finally, they have the exposure to the Methadone business, which we really don't have at all. And again, based on their commentary, that business didn't seem to be much impacted. But then -- but as best as I can tell, those are probably the biggest differences.

Okay. That makes sense. Do you have any kind of update as to how volumes have trended so far in April and into May?

Yes. I mean so we've actually -- in our 10-Q, we gave a little bit of that information on our earnings call. At the end of April, we gave, I think, in a little bit more detail in the 10-Q. I mean, I think roughly the trajectory in both businesses had been -- we clearly saw this fairly dramatic decline in volumes in the last 2 weeks in March that continued into the early part of April. And then by mid-April, the end of April, both businesses started to stabilize and, in some cases, improve. I think on the acute care business, aided by the fact that at least in early May, some of that elective and surgical sort of procedures that have been delayed and deferred are coming back. That's not so much of an impact on the behavioral business. But I think we're seeing the behavioral business start to at least see a rebound trajectory. We're certainly not back to normal, but we're seeing that rebound trajectory.

And I guess, to the extent that your volumes on the psych side were hit a little bit more than what Acadia was seeing, I guess what gets it coming back? Are there any kind of leading indicators, I guess, to that, that's just states reopening? Or is there something in particular that you look at?

So I think it's a couple of things. I mean one, sort of from a -- like a broader perspective, I think as acute care emergency room volumes return to more normalized levels, I think that will be extremely helpful. I think the pure passage of time is also just helpful in the sense that one of the things that we've really tried to explore in the last couple of months is what is happening to these behavioral patients who are not seeking inpatient treatment. And I think we've concluded both -- I think both objectively and subjectively is they're not really being treated in alternative settings or sites. They are like most of the rest of the world. They're sheltering at home for the most part, but they're not getting better. They remain -- the patients who are -- the bulk of our patient population are sort of chronically ill mental health -- chronically ill from a mental health perspective. They have diseases like schizophrenia and multiple personality disorder and severe depression. These are not things that just sort of heal themselves. Many of those illnesses are quite dependent on prescription drugs. And therefore, if they're not getting their prescription drugs, that's problematic for them, et cetera. So I think -- and I'm not a clinician, so I'm largely repeating what I am told by clinicians that there is a view that these patients still need treatment, they will ultimately get treatment that effectively, their need for treatment will ultimately outweigh their fear of leaving home going into a more institutional setting, et cetera. And so I think we're believing that some of this is going to -- some of this rebound will occur naturally. We're also doing, obviously, what we can to accelerate and make that process more efficient to the degree that we can offer alternatives to things like outpatient treatment through telemedicine, et cetera. We're focused a lot on being able to provide those alternatives. We're also trying to reach out to patients through things like social media, et cetera, to make them know that if they are struggling, if they have issues and problems, that they can reach out directly to our facilities even if they're unwilling or they're reluctant to go to an acute care emergency room, we're trying to provide those alternatives as well. So I think both through things that I think will occur naturally through the resumption of more normal ER patterns through just the passage of time and through those sorts of initiatives that we can take on our own, our expectation is we can help move the needle back to something approximating normal.

Okay. That makes sense. I guess on the acute care side then, there's at least a portion of that volume, which is elective. And my guess is that you've probably been rescheduling volumes. And how much of that volume that's been deferred do you think actually comes back into the system? And how much have you been able to successfully reschedule so far?

Yes. So that also is a difficult question to answer. I mean if you would ask me how -- a month or 2 ago or 2 or 3 months ago, how much of our elective/scheduled surgical/procedural volume was elective, I would have answered not much. To me -- and I guess that's sort of a layman's sort of response. And to me, cardiac patients who have arterial blockages and need potentially stents or pacemakers or ultimately open heart surgery or catheterizations, those are procedures that I think both physicians and patients are reluctant to defer or postpone for very long. Same thing with heavy-duty orthopedic procedures, hip implants and knee implants, et cetera. But certainly, at least when the COVID crisis first hit, I think what we learned is that the fear of the virus and the fear of going into a hospital setting was outweighing the risks that might come from deferral of those procedures. Again, my ultimate view is that the vast majority of procedures that we do in the hospital setting are not sort of indefinitely deferrable. If you need a cardiac catheterization, I think ultimately, you will get one. If you need hip implant or knee implant surgery, you will ultimately get it. And whether that's determined by the risk of deferral, the real medical risk or the pain sort of tolerance of deferral, whatever it may be, I just think that you're going to ultimately get those procedures. And again, we're in the very early stages of the resumption of those elective procedures. But I think at least early indications are physicians are willing to perform those procedures. And my sense is that most patients are willing to follow their doctors' advice and have those procedures done. We'll know more, I think, in the next couple of months. But my sense is that the vast majority of -- because I think the vast majority of truly deferrable procedures, elective colonoscopies and other GI procedures and elective EMT sorts of surgeries, those procedures moved out of the hospital setting years ago. So we just don't do a lot of those truly deferrable and truly elective procedures anymore.

Okay. That's helpful. And I guess it's too early to kind of tell what the patient response is as far as acceptance to kind of come back into the health care system at this point.

I mean, again, I think in a lot of our states, the resumption of elective procedures has really just started in the last week or so. And not surprisingly, the first patients who are coming back in are those with the sort of most urgent needs. And so they're certainly showing, I think, a willingness to do that. I think we need to run through this for another 4, 6, 8 weeks to really get a sense of the willingness of patients to return to the setting. And we talk a lot internally about we need -- it's incumbent upon us to make our patients feel safe to come back in this environment. And we're going through a lot of procedural sort of moves to make that happen. We're testing all the patients before they come back in. Our employees are being tested, et cetera. So we can assure patients to the best of our ability that if they come in, they should be safe, they shouldn't be at a really elevated risk of exposure to the virus, et cetera. And I think the more patients who have these sort of procedures, the more the patients who are in the pipeline will feel comfortable about that.

Yes. I think that makes sense. So I mean when you -- do you guys have any sense of your best guess? I mean, obviously, a lot of variables, but best guess as to when you think volumes return to normal?

Yes. So look, I think our initial conversations are mostly with our own physicians. And certainly, I think our physicians have shown -- again, I'm making a broad generalization, but I think it's largely true, a real willingness to work through the backlog. I think, both clinically and financially, they feel that's the right thing to do. And I think they're anxious to do it. And we have the physical capacity in our ORs, we've got the labor capacity in terms of our support staff to, I think, accommodate that. And we'll see that happen. Early indications, again, is that the patient population is also willing, but I think that has to play out a little bit more. But I think our sense is that by the end of the summer, early fall, we ought to be back to something resembling a normal sort of trajectory. Now again, it's dependent on the continued availability of PPE, which I think at the moment is not a significant obstacle. I think it presumes that there's not a resurgence of the virus in a significant way in our markets. And those are things that we certainly can't predict with absolute certainty. But at least at the moment, we don't feel like that there are huge obstacles to getting there.

Okay. That's really helpful. And as you think about bringing that volume back on, is there anything that you're doing, I guess, with your safety precautions that might slow down the ability to bring surgeries back, for example, have you maybe had to disinfect OR rooms or put other measures in place that kind of slow down the turnover of operating room? Are any of those things gating factors to volumes coming back?

Well, I think -- and I alluded to this a little bit, but just to be more specific. To us, I think the 2 biggest gating mechanisms potentially are testing capacity because we're going to test every patient who is scheduled to come in for an elective procedure 48 hours or so before they do so. So it's clear to us that they're safe to come in the hospital and then to be exposed to others. We're testing our own employees to the degree that they show any sort of symptoms, and everybody -- anybody who's been to a medical facility over the last couple of months know, people come in, your temperature is taken before you get in the hospital and you're asked a bunch of questions. So hopefully, we're identifying people who could be at risk of having the virus and testing those right away. So right now, I think testing capacity is not an issue, at least for our hospitals, and we're getting the appropriate turnaround. So I don't think that's a gating mechanism. Early on in the crisis, it was, but I think it's largely been resolved, at least for our hospitals and our procedures. And then I think the availability of PPE, same thing. If at some point, surgical masks and surgical gowns become in short supply again as they were maybe early on in this crisis, you'll remember, I think the reason why elective surgeries were generally stopped by the regulatory authorities in the beginning was a concern that there wasn't sufficient PPE, et cetera. I don't think that's an issue at the moment, again, at least in most of our markets and most of our facilities. But should it arise again, should there be some other significant disruption of the supply chain, that could be the issue. But I think those we view as the 2 gating mechanisms. And at least at the moment, we feel like if they haven't been resolved, they're at least certainly within a controllable range.

Yes. I guess one of the bigger impacts of COVID is the recession that it seems to be pushing us into. How do you think about the ability of UHS to grow during a recession? In both -- maybe break that answer down into the acute side and the behavioral side.

Yes. I would tell you, historically, I think our view was that in an economic downturn, the biggest impact that we would see would be a deterioration of our payer mix. So unemployment would rise, people who were commercially insured through their employer would lose their jobs and would convert to either Medicaid or uninsured, in either event, would have a -- there'd be a lower sort of reimbursement for us. Historically, I don't think we saw a tremendous impact on volumes during a recession. In fairness, in the last recession, which obviously was more severe than anything we had seen in quite some time, we did see more of an impact, particularly in the acute business. Now it's interesting that in the Great Recession in 2000 -- I'll call, '11, '12, '13, our behavioral volumes actually held up pretty well. And I think the behavioral business generally proved to be more recession-resistant than the acute business. The dynamics in the early stages of the COVID crisis, I think, have been a little bit different. Now again, I don't think that's really an economic sort of view as much as it's the psychological fear of going to a hospital, et cetera. But I think as those fears allay, I think we still have the view that behavioral demand should be pretty strong. And I think we have a view that acute care demand will be strong. Now again, we'll have those same issues with payer mix risk, although obviously, we'll be going through this recession with the infrastructure of ObamaCare in place, Medicaid expansion, in particular, in some of our biggest states, like California and Nevada, I think will be helpful. Commercial exchange availability being somewhat helpful. There obviously is talk legislatively of increasing the benefits of temporary coverage, et cetera. So we'll see how all that plays out. But I think we're in a better position to withstand some of these recessionary pressures today than we were even a decade ago when we went through it with the Great Recession.

And are there offsets like on the cost side to help mitigate the recession?

Yes. Look, we've made -- and when we go through the release of our second quarter financials, obviously, everybody will be able to see this. But I'm sure, like most hospitals, we've made significant cuts across all of our functional expense categories, including labor efficiencies and headcount reductions and furloughs and reduction in hours, et cetera, where appropriate. Also across all of our other functional expense categories, we've made, I think, significant cuts to anything that we view as sort of nonnecessary expenses, et cetera. Now to be fair, I think, and we said this on our earnings call, we need to see some improvement in our volumes and our revenues. If revenues are down 30% as I think they were sort of at the peak of the crisis, it's just extremely difficult, as I would say, well-nigh impossible to cut expenses at that level. But if volumes start to rebound, we'll certainly be aggressive about our expense efficiencies. And hopefully, we'll be able to mitigate, at least to a degree, some of that impact of the volume and revenue decline.

Okay. Great. And I guess, in particular when you think about a recession, how do you think about Vegas? From the outside, it feels like maybe the market most exposed to a recession broadly, but even the recession, in this case, it seems to be hitting hospitality and travel more than average. But obviously, it's a market that served you well over time. So how do you think about that?

Yes. Look, I do think that Las Vegas has diversified itself. Even since the last recession, it is certainly still heavily reliant on the gaming industry, but there's a lot of non-gaming companies now headquartered in the market and some of the sports teams and things that may or may not come back fast and the gaming industry, not sure. Look, I think the gaming industry and the gaming properties are preparing to get back online, literally, I think, within the next few weeks. And not just to get back online, but to get back online sort of prudently with appropriate social distancing sort of policies and procedures in place. Most of these properties are big corporate sort of run institutions that I think are prepared to deal with all this sort of issue. What's difficult to predict, obviously, is what's the psychology of the gaming tourists. Are they going to return? And I'm not sure I know. I will say that one of the things I've learned over the last 3 decades that I've been at UHS is that Las Vegas has been -- proved to be extremely resilient as a market and through any number of crises, whether that's been crises with terrorism or recession or other sort of epidemics. People have traveled to Las Vegas and have wanted to travel to Las Vegas. Now I don't know if we're going to repeat that pattern and what level we'll keep that pattern here. But certainly, I think the -- it's a -- the gaming industry is a sophisticated one, and they are prepared to deal with whatever they have to do to make people feel safe and welcome back in these places and we'll see. On a direct basis, we rely very indirectly on the gaming industry in the sense that the vast majority of our revenues -- 95-plus percent of our revenues in that market come from locals, people who live there, not from tourists. Obviously, there's a significant indirect impact that we have to the degree that the industry is really down and unemployment goes up and that sort of thing that affects the local residents. But again, we're hoping that the market proves as resilient as it has in the past. Difficult for us to predict, however.

Yes. So it sounds like here, like you were saying at the recession, just broadly speaking, that the impact is going to be less about volumes and more about mix. I mean, how do we think about rate differential between commercial and Medicaid on the acute care and the psych side of the business?

So I think our sort of perspective has always been, if you think about reimbursement as sort of the standard dollar of reimbursement being a Medicare dollar, the commercial dollar on the acute side is maybe $1.35, $1.40. The Medicaid dollar is maybe $0.75, $0.80. That same relationship exists on the behavioral side, although I think the range is a little bit more compressed. So there's certainly a diminishment in the reimbursement when a commercial patient becomes a Medicaid patient or an uninsured patient. But to the degree that they have coverage of some sort, whether it's through COBRA, whether it's through a commercial exchange, whether it's through Medicaid, those patients are still generally going to be profitable and reasonably profitable. It's really only when they become uninsured with no other form [ or things ] that the real challenge occurs.

Yes. So one of the things that's been a nice, I don't want to say surprise, I kind of always thought the government would step in if things got so disruptive. But the government has been supporting providers and hospitals, in particular. I think you guys highlighted about $230 million between first $50 billion sequestration. Have you gotten any payments on the next round, the high-impact areas or the low-income areas?

Yes. So I think and we disclosed in our 10-Q that we -- probably in the next 2 tranches of hotspot and rural reimbursement, we've received another roughly $35 million -- $35 million to $40 million of government reimbursement as well as much smaller, but a few localized or local sort of government reimbursement in a few places, et cetera. So we are receiving some help through that. And as I said, I think there's -- obviously, there's another $75 billion of -- to be reimbursed, and the government has not been clear about how that's going to work. And there are potentially deferrals of things like social security taxes, et cetera, and income taxes, that should be helpful at least from a liquidity perspective as we go through the next several quarters.

Okay. I got a question coming in through Veracast about how much revenue -- when you think about being able to flex your cost structure, how much of a revenue drop can you kind of offset from a cost basis? At what point does it become kind of difficult to grow EBITDA?

So I think that the nature of the hospital business model has always been similar in the sense that it is largely a fixed and semi-fixed cost business. And hospitals, I think, generally, and for-profit hospitals specifically and UHS more specifically, are very good about flexing those variable costs even for relatively small changes in volumes and revenues. But when there are larger changes, whether they're positive or negative, much more difficult to sort of flex. And particularly, as revenues decline, your -- the cost that you're sort of required to cut become much more heavily weighted to the fixed and semi-fixed costs and become more difficult. So again, sort of repeating what I said on our earnings call just a few weeks ago, when you're talking about things like a 30% drop in volumes and revenue, there's really just no way we can cut our costs at that level. Now we can certainly cut our costs measurably and mitigate some of that decline. But what really turns the business around is a return of those particularly elective volumes and elective procedures on the acute side and some of that deferred volume, I would say, on the behavioral side. So when we get to a point where volumes and revenues are down 5% or 10%, we can deal with that. When they're down 30% as they've been, that's a much more difficult challenge for a business like ours.

Yes, that makes sense. Not that I want to think about it, but if COVID does come back in the back half of the year, how are you guys prepared for it versus kind of what happened the first time around?

Yes. Look, I mean, again, I think at a minimum, where we've now been through this so we know what we have to do to react. There's not going to be a delay in the sort of procedures that we use to triage patients and isolate patients, et cetera. I think I mentioned on the behavioral side, I think we'll have put telemedicine procedures in place and direct sort of reaching out to patients to try and suggest alternatives to them to going to a hospital emergency room if they're concerned about that. So I think purely from the idea that we've now been through this, and we know the sort of things that we need to do to respond, a second surge or resurgence, we'll be able to deal with it more efficiently. But at the end of the day, it certainly still is a significant sort of interruption and will affect people's behavior. I'm not going to diminish that in any way. And we will deal with that as it occurs, if it occurs.

And then maybe just the last question as it's coming up to time here. Is there anything about COVID that you see now and how you're providing care, how you're acting as a company or how people are accessing care or anything in the health care system that is COVID related but that you think is going to actually persist over a long term even after COVID is behind us?

Yes, sure. I mean I think, again, in both segments of the business, there's been a sort of building up of this infrastructure of telemedicine. And so I think that there is a sense that more things can be done efficiently and effectively through telemedicine, and I think that will persist. And I don't necessarily think that's a bad thing. Now again, at the end of the day, I think most people are still ultimately going to be more comfortable once we pass the fear of the virus to being at a doctor's office and having a face-to-face conversation or a therapist's office, whatever that may be. But yes, I mean, I think that probably, the growth and the presence of telemedicine is probably the single biggest dynamic that persists even afterwards. And then I think there's nothing wrong with that. And I think that to the degree that telemedicine makes it easier for people to be assessed and treated and referred to hospitals, I think, ultimately, that's a good thing for hospitals. So I view that as, over the long term, a positive development.

All right. Great. Well, thanks for taking the time. I appreciate it. I think that's all we have time for. And hopefully, we can do this in person in Vegas next year.

Looking forward to it. Thanks, Kevin.

Sure.