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

Okay. I think we'll go ahead and get started. This is Whit Mayo. I'm UBS' healthcare facilities and managed care analyst. My pleasure this morning to have Steve Filton, the Chief Financial Officer of Universal Health Services, with us today. Thanks for taking time to join us, Steve.

Maybe just to kick -- yes, maybe just to kick things off, I know this is very dynamic, but just any updates around COVID-19, just the disruption on operations, just anything since your last call, just any data around volumes or census, anything that you may care to share with investors?

Yes. I think the way and the commentary that other hospital companies have given is similar to our experience. Obviously, we began to experience the COVID impacts in mid-March. Volumes weakened on both sides of the business, probably reached a trough in early to mid-April, have been improving since mid-April. And I think we said that on our earnings call at the end of April and gave that information in our 10-Q as well. And I think the only thing I would add is that we've seen that improvement continue gradually into early May in this first half of May. And the one thing I would add sort of specifically is on the -- in the acute business, in the area of elective and scheduled surgeries and procedures, most of our states and/or local geographies sort of reopen those either in late April and early May. So we're just seeing those begin to gain some traction the last week or 2 and expect those numbers to improve as well, although, obviously, like I think everybody else has concluded, we're certainly not back to normal, I think, particularly from an emergency room visit perspective on the acute side, but again, those numbers also continue to improve, just not at historical levels.

Yes. Any way to maybe frame the numbers, just like how much you're still down in the ER or surgeries or inpatient? Or is that not something that you have at your fingertips?

Yes. No. No, I would say that on the EOR side, at its worst. ER visits were down 50% to 55%, and they are probably now down in the most recent numbers, 35% to 40%. Scheduled surgeries or sort of scheduled procedures, I would say, we're down 70% to 75% at their worst and are now down 50%, 55%. I think on the behavioral side, our patient days were probably down 15% to 20% at worst and now down right around 9%, 10%, 11%.

Got it. Helpful. Any markets that you're seeing more impacted than others? Obviously, Vegas, we've got -- we'll sort of see how the economic recession will impact that. But as you look at each one of your markets, does anything stand out that you care to share?

No. I think that most of the dynamics that we've described, we've experienced pretty universally throughout the portfolio. I think the South Texas, the McAllen market was impacted by the virus sort of later and kind of volumes held up a little bit longer in that market. And maybe the flip side is in our Amarillo market, we've got one of those meat packing plants that have had some pretty negative experience that's created a lot of COVID and COVID-related business or COVID-suspected business. So we're a little bit slower to return to elective and scheduled procedures in that market. But for the most part, I think we've been feeling the impacts relatively uniformly throughout our portfolios.

The CARES Act, there's been a big focus from the investment community on understanding the money that's coming in and how each organization will be looking to record the revenue. I think there are different opinions. I don't know if you have an update from your auditors how you're going to respond to this and how you're -- I don't know if you've received any more money, so I didn't know if there's an update just on some of the stimulus funding.

So I think what we disclosed in the 10-Q is the most current information. I think the first $80 million -- $80 billion, rather, of that $100 billion of tranches in that first CARES bill have been distributed, and we have received roughly $240 million. I think our plan is at the moment that -- is when we can attest to the fact that we were entitled to those funds based on the criteria set out by CMS, which is basically that we've incurred those expenses to treat COVID or COVID-suspected patients and/or we lost revenue as a result of the COVID crisis. As soon as we're able to attest that, we'll be able to recognize that revenue. And I think in our minds, the vast majority of that revenue should be able to be recognized in Q2, and we should be able to meet that criteria and attest to it in Q2. Obviously, there is a significant amount of additional COVID funds, another $20 billion in the first CARES bill and another $75 billion in the subsequent bill that have not yet been distributed nor really has CMS laid out their criteria for how they'll be distributed, so it's impossible for us to know how many additional funds we may be entitled to. And then finally, as we disclosed in our -- in both our call and our 10-Q, we've received about $375 million of Medicare-accelerated payments. We've got applications for, and we believe are entitled to, a sort of another similar amount. But CMS has paused that program, and we're waiting for them to restart.

And that's helpful. I know this is an impossible question to answer, but I'll take a shot anyway. Just thinking about the shape and the timing of a recovery and thinking about long-term structural changes to the U.S. delivery system, I mean, what comes to mind? What do you think 2021 looks like? And just any high-level thoughts about just the long-term implications of COVID-19 on the hospital business.

Yes. I mean, so from my perspective, with the most significant dynamic in those last 2 months has been a reluctance of patients to get needed care, whether that's in the hospital emergency room, a hospital surgery facility or a behavioral -- inpatient behavioral facility or outpatient, I think we have a view that in time, and defining what that time is, can be difficult, and it's difficult to be precise about it. But in the near and intermediate term, the vast majority of that care will be rendered, and people will return to a pattern in which their need to have that care rendered and their concern about having that care rendered is not going to be outweighed by their concerns about the virus, et cetera. Now setting that exact time frame is difficult to do. So I don't know that -- again, in the short term, I think our task is to try and make sure that patients feel comfortable getting that care delivered in sort of the historical ways, whether that's coming to the emergency room or having a scheduled test lab or OR procedure, whatever it may be or finding alternatives if a behavioral patient has normally entered the system through an acute care emergency room and feels uncomfortable doing that today and trying to find ways to see if we can have the patient enter the system in some other way. But again, I think over the longer term, we'll see a return to sort of kind of more routine and historical patterns, but I think we will see -- we're seeing telehealth capabilities and -- becoming more prevalent in this crisis. Obviously, it fits the crisis in the sense that people can, in many cases, get the care or at least the assessment they need without having to be in an environment where they feel like they're exposed to the virus. But I think telehealth will get more traction. And depending on the adequacy of the reimbursement that payers attach to it, et cetera, I think we'll see more prevalent use of telehealth as we move forward. But again, for us, I think as a provider of inpatient and scheduled outpatient services, et cetera, telehealth is sort of just a component tool that enhances the care continuum. And while I think it will be more prevalent, I don't think in the end, it will dramatically change the ultimate care that we deliver.

Do you think about -- I mean, others have discussed maybe bolting on some dedicated telehealth service line as an extension of their physician groups. Is that something that you guys are exploring? Or is it not something that you're terribly interested in?

Look, I think it's a legitimate point, and I probably should have been more specific about it. On the acute side, certainly telehealth visits have replaced in person visits at many of our own physician practices and our urgent care centers, et cetera. Again, I think that as we return to a more normal sort of environment, people will, in many ways and in large numbers, return to the more familiar in-person visits with physicians, et cetera. And I think there's real efficacy reasons for doing so. But again, I certainly think telehealth will have a -- will gain more traction, and we're certainly working in all of our communities and in our delivery systems to make sure that we've got a product that is effective and can be used by those patients for whom it's appropriate. Again, I don't think we're looking at telehealth as we move forward as a stand-alone, real profit-generating line of business as much as we are looking for it to be an integral part of the continuum of care that we deliver in both of our business segments.

Okay. Yes. That's helpful. I want to spend just a second thinking about payer mix and obviously, we've got this recession underway. And reflecting back 2018, '19 -- or 2008, '09, '10, I don't know if that's terribly instructive given how different things will be with the ACA, and UHS fortunately has more than half of its volume and Medicaid expansion states. So how do you think about just payer mix in the cycle? And just how many of your commercial patients may go to Medicaid or to exchange plans? I know you've had a little bit of time to think about this dynamic, so any updates would be particularly helpful.

Look, I think with -- you framed the question correctly. The challenge that we have is there's really no precedent for answering the question or really creating a model or an expectation of how this is going to work. We know sort of in the last recession, as unemployment went up, we can sort of measure with each 100 basis points of unemployment, increase in unemployment how much payer mix was degraded and margins went down, et cetera. But I'm not sure, as you alluded to in your question, that, that model works a decade later when we've got the ACA in place. We've got Medicaid expansion. We've got commercial exchanges as an alternative for people, how we're not exactly sure how quickly the economy rebounds both nationally and in our markets. In this early period, I think a lot of workers, particularly from larger employers, have been furloughed and have kept their benefits. So we're not sure how long that will last. There's a lot of talk of potential cover subsidies in future COVID-relief bills or COVID-stimulus bills. So we'll see how that all plays out. I mean, what I've said, and I don't say this in a figurative way at all. We sort of look forward to getting through the COVID crisis where we've had this unprecedented decline in volumes and people staying away from hospitals and numbers that we've just never seen before and moving to kind of a more, call it, sort of traditional crisis of an economic downturn where it's really mostly a payer mix, a negative payer mix shift and that sort of dynamic because we know that the stress is from that sort of pressure. Even in the great recession were much less and much less severe than the pressures we're seeing from the actual COVID crisis right now.

Yes. Maybe just thinking about Medicaid sense. And by my math, it looks like 52% of your acute care discharges are in states that did expand Medicaid, and historically, 50% of the uninsured population was below that 140%, 139% federal poverty threshold trigger that would move you to Medicaid. So I'm just sort of thinking about presumptive eligibility and your ability to capture patients that present themselves, whether in the ER or some other access point within your network, to establish that they're in fact eligible for Medicaid. So I don't know, I guess, from a process standpoint, how do you feel about your ability to facilitate that, the enrollment of those into Medicaid that qualify?

Yes. It's a great question, Whit. But again, I just sort of fall back on the idea that this is something we've been doing all along. We certainly amped up those efforts during the recession, but we have got long-established procedures. We're in markets where in some of our markets, we have always had very high levels of uninsured or Medicaid. And in those markets, I think we're particularly adept at this. We've got third-party vendors who help us in sort of specialty areas to do this to qualify patients. But we've got a lot of skilled people throughout our hospital system to do that. So that doesn't mean that it's not a challenging environment when there's high unemployment and people are losing their commercial insurance to their employer, et cetera. But I think that's a playbook that we know how to run, and effectively, we run it all the time. But we'll amp it up as we move into what presumably will be a period of greater economic stress and higher unemployment. But I think all those things that you talked about, qualifying people for eligibility, finding the right sort of insurance for them, whether it's on Medicaid or a commercial exchange product or whatever, we're -- we've got people who are -- they are dedicated to doing that literally at the frontline admitting desk of the hospital.

Yes. Okay. Yes. So really no new processes around that. Can you maybe just spend a minute, we haven't focused a lot on bad debt in years since the -- at least to provision left the income statement, if you will. And just maybe remind us on pure self-pay and balance after, how much you're reserving today, how comfortable you are with reserves? It might just be helpful to get a refresher since it's not a number that investors spend as much time looking at as we used to.

Yes. I mean I think that -- and this goes back a decade, as you know, the hospital industry in general moved from -- and I think this is really largely in the last recession, from a long-standing sort of policy that was based on the aging of receivables to create reserves to one in which reserves were created in a much more real-time basis and didn't necessarily have to wait for kind of a deterioration in aging, et cetera, to recognize that. And so we've been operating in that mode for the last decade or so. We've got a lot of kind of enhanced and improved procedures that are designed to really capture revenue recognition or lack of revenue recognition, again, in a very sort of time-sensitive and real way even when -- and I think this is sort of the crux of your question, even in a period where the payer mix may be deteriorating and maybe deteriorating in sort of rapid fashion. So I think unlike, again, 10 years ago, when we started to go through the recession, our accounting systems are much more sensitive to that and built to sort of capture those real-time changes as they're occurring and not having to wait for a deterioration in aging to determine that, that's occurred.

That's helpful. Maybe just to shift to capital spending this year and maybe even thinking about 2021, but just maybe remind us just how internally you're reprioritizing where you're spending, how you're spending money, how you think about maybe revisiting that in 2021 and beyond.

So in our earnings call, I think we talked about a reduction in our CapEx plan for the year. I think the rationale for that or the motivation for that is sort of the obvious. As we look at a period in which our revenue streams and earnings streams and cash flow streams will be diminished, so pretty measurably over at least the next few months, we think it's certainly appropriate as we think about husbanding our cash and managing our cash most conservatively that we reduce all of our cash outflows, whether that's operating expenses or capital or share repurchase or dividends, et cetera, and we're attacking or addressing all of those cash outflows. How aggressively we do that, how long we do that, I think, is certainly premised on exactly how long and what trajectory this revenue recovery and volume recovery takes, the sort of thing that we were discussing at the outset of your questions. But at the same time, I mean, I think the other thing we're trying to accomplish, and I think we think it's a significant issue as well is we're really taking all of our large projects. And any project that has not begun or has just recently begun, we are going through the process of repricing or rebidding those projects because we feel like as a result of this broader economic crisis, the construction market and construction pricing will soften considerably. So even though, obviously, repricing and rebidding contracts almost always has the effect of slowing down the process and maybe will delay the time line on a project by 3, 4, 5, 6 months, I think we certainly feel like the benefit we'll get from reduced, an ultimately reduce cost, will outweigh any sort of time delay. And so we're going through that process for a very large number of projects at the moment.

Yes. That's helpful. And I've been trying to think through the mechanics of capital spending and market share and how you think we may see market share shift as a result of COVID-19. I mean one of the -- without capital, the business really doesn't grow. So do you feel like you're being a little bit more responsive to this than some of your local market peers? Or do you not think this has any intermediate to long-term impact on market share? Just any thoughts would be helpful.

I think in the short term, probably not so much only because I think that almost all hospitals are, and I think it's a prudent thing to do, tapping the brakes on their capital spending, et cetera. So I don't know that, however you want to look at that, that any particular hospital will be at a distinct disadvantage or any hospital will gain a distinct advantage by spending more in the short term. I think the more intermediate and longer-term potential impact is I think any time there's a period of financial stress, whether it was the recession, 2010, '11, '12, whether it's the sort of post-COVID downturn that we're presumably going to experience that. To a degree, there are hospital providers who are more permanently impacted and continue to underinvest and underinvest in capital in their facilities for an extended period of time. I certainly feel like there's always an opportunity to gain a competitive advantage in those situations because we certainly will not. I mean, obviously, like I said, we think it's perfectly prudent to be more CapEx-sensitive in the short term, but over the long term, we like our 2 businesses. We'll continue to invest in them aggressively. And to the degree that others can't compete with that, I think there's the potential that either there's market share to be gained or, alternatively, some of those who are struggling financially may be looking for an exit strategy, a capital partner, a joint venture partner of some sort, and we'll be in a position to respond to those opportunities as well.

Okay. I wanted to shift for a minute just to the behavioral business. Got a lot that I wanted to cover here. But just as you think about the impact of the recession on the business, you've got your traditional acute psych platform. You've got your residential treatment business, which is obviously impacted with schools. You've got the addiction business in the U.K. So maybe that was 4 businesses, not 3. How do you think about just the impact of the recession on each one of those?

Well, the interesting thing is when you go back, and again, you -- I think I said this in your comments and a preface to a question, that our experience as an industry in 2010, '11, '12 may not be entirely relevant. Although I think in your comments, we're designed to sort of acknowledge that the Affordable Care Act had been implemented in the interim. But if you go back and you look at the experience of our behavioral business again during that recession, really, volumes and revenues were impaired very little, if at all. It proved to be a pretty recession-resistant, albeit probably not recession-proof, but a pretty recession-resistant business. Now there were other benefits that I think the business was getting at that time and how parity legislation sort of get passed around that time. And that was helpful, and there were some other things as well. But I think we have learned in previous sort of economic downturns that the behavioral business is not necessarily as economically sensitive as the acute business or other health care services businesses. And I think in part or maybe in large part it's because the utilization decision is often being made by somebody else. So when you're a patient or a patient family member who is experiencing suicidal ideation or violent behavior, et cetera, you're not really going to have the choice of whether to seek an inpatient admission, and that choice is probably going to be made by somebody else for you. And therefore, it's not going to be as economically sensitive as somebody deciding whether to have a knee surgery or hip surgery or whatever it may be. So I think in that sense, we've looked at the business as historically being less economically sensitive. Obviously, I think the piece that in the last couple of months was difficult for us to predict. And I think what surprised us to a degree is how the overarching fear of the virus and of patients contracting the virus would keep so many patients out of the emergency, out of acute care emergency rooms, and as a consequence, I think we kept a lot of behavioral patients out of acute care emergency rooms and, ultimately, therefore, kept them out of our acute psychiatric hospitals. But I think we have a very clear view that, that sort of delay in deferral really can only last so long if these patients are not getting the treatment they need. They're not getting better without that treatment. And as a consequence, they will ultimately need to return in some form of fashion. Maybe they never return to the emergency room, and maybe this is an example where telemedicine has a role in assessing these patients, et cetera, and getting them into a behavioral facility, an inpatient behavioral facility without an emergency revisit as an example. But ultimately, I think we feel like economic downturn or not, those patients are going to require care and will receive that care in the future.

So if we're in a -- if we get to the fall and most schools don't reopen, what does this mean for your outlook for the residential treatment business?

Well, the interesting thing, Whit, and I'm not sure I would have predicted this 2 months ago, but the interesting thing is I don't think that the residential business has been impaired as much as the acute business even those schools are closed. And I'm not exactly sure why. Maybe we'll have a better sense of this after a few more months pass and we have some time to reflect back on it. But I think some of the feedback I get from our folks is that families who have these kids at home in a stressful situation have concluded that they really do need care and need to be somewhere else where it's not as stressful, et cetera. And so even without the schools playing their part, I think a lot of these adolescents are still getting the care they need in residential facilities. Residential facilities also tend to have a longer length of stay. And so the patients who are in those facilities, once they're in and the crisis hit, they were not necessarily being discharged, et cetera. So the longer length of stay, I think, kept that business more stable. So again, I mean, I think that the return to school and, just broadly, the return to normalcy in general will be helpful to the behavioral business. But probably, as we look back at our experience over the last 2 months, more than anything else, the return of normal emergency room patterns in acute care emergency rooms will help our hospitals return to their normal levels of volume. And we're certainly not waiting for that, as I sort of alluded to before. I mean I think we're doing what we can to interrupt that process to try and get these patients treated even if they don't go to an acute care emergency room. But I think that's probably the biggest variable at the moment for us.

Yes. I was just thinking, do you guys still have the EAP business that was part of the old Horizon Health? Is that still part of your behavioral business?

We do. Yes.

I'd be interested to see how that call center activity has presumably picked up. Can you maybe just spend a minute talking about just the evolution of your behavioral strategy? You've got some new leadership. Obviously, the segment has struggled to really generate sustainable progress. Just changes to your clinical staffing model, maybe just from a high level, how your -- how your strategy is evolving there.

Yes. So I don't think we talked about this much, obviously, on the end of the year call because it was so COVID dominated. But I think in the third quarter, maybe even the second quarter call, we talked a little bit about the impact that Matt Peterson was having. And I think in my own mind, I tend to sort of put it in 2 broad categories. I mean one is Matt comes from a largely a managed care background and I think has a good perspective on that and has a good perspective on the agenda and the motivations that many of our managed-care payers have and I think has done a better job at trying to make us a collaborative partner with them, and to make that more of a collaborative partner as well because this is absolutely a 2-way street, but to try and create care models that really accomplish the objectives of both parties so that they, on an overall basis, they're reducing medical spend and behavioral spend for the payers, which is in their interest, but at the same time where there is spend, steering that spend to our systems, to our hospitals where we think we're providing kind of effective care along the continuum and really sort of tying those 2 motivations together. I think unfortunately, Matt had done a lot of good work in that area, and I don't think it's wasted. But obviously, it's been interrupted to a large degree by the last couple of months. But I think we'll get back to that. And I think that's the sort of change that takes a little bit more time to implement and to gain some traction, et cetera. But I think we have started to, and I think we'll continue to once the business itself gets back to a little bit more semblance of normal. And then I think the other thing that Matt brings both from his managed care career as well as his extensive military career is just the rigor and the discipline to some of the processes that we've been working on, so some of the issues that we've talked about over the last several years in terms of length of stay, management and utilization review and the process of intake and assessing patients. I think, Matt -- not like we weren't addressing all those things before, but I think Matt has brought sort of a rigor and discipline to those processes that maybe we were missing before and I think are really helped by sort of an enhanced focus, et cetera. Again, I think a lot of those processes have been interrupted in the last 2 months as we just scrambled to respond to the COVID crisis itself. And I guess I would add, telemedicine is a great example of that, too. I mean I think we were already focused on expanding our telemedicine capabilities in the behavioral division. But certainly, over the last 2 months, that focus has really increased several-fold and I think will put us a good stead in the future as telehealth plays a more important role in the broader care continuum in behavioral.

Yes. That's helpful. As you look at your behavioral portfolio, I mean there's -- each year, you tend to reconfigure the portfolio, if you will, and there's always a handful of hospitals here or there that you either shut down or divest. Is this the right portfolio for you going forward? Do you ever think about getting smaller to get bigger? I mean I got to imagine that if I could look inside the entire segment, I would see that overwhelmingly, the majority of your hospitals are kind of growing and going up into the right. So just kind of wondering how you think about just maybe rationalizing the portfolio.

That's a good question, Whit, and I think as you indicated in the question, a process that really we've been -- we view as more of a continual process than something we're just starting right now or need to resume or anything like that. Because it's a larger portfolio or a portfolio with a larger number of smaller facilities, I think there's more of this sort of continual evaluation of does this facility have an appropriate place in its marketplace, does it have an appropriate level of market share, et cetera. And every year, I think, for the last decade, for a handful of facilities, we may have decided that they'd be better off closed, sort of collapsed into other facilities in our market, retooled to provide sort of different service lines, et cetera. And I think we continue to go through that evaluation all the time. So the sort of process you described where every year, we're closing or reconfiguring or repurposing a small number of facilities, I think, will likely continue in the future, just given the nature of the portfolio size, a large number of smaller facilities both here and in the U.K., I think that process has been ongoing for the last several years.

Something I was thinking about, just the employment situation of psychiatrists. I think if I asked you 10 years ago, the number of psychiatrists on your medical staff that were employed, it would be probably 0. And I think today, it's larger than that. Is there any difference in terms of the economics for you, employment versus nonemployment? Has that been a drag on your operations at all? Just any perspective would be great.

Yes. So I think that the dynamic of physician employment in the behavioral business is different than in acute care. The role of psychiatrists in a behavioral hospital is largely to assess and treat the patients who have been admitted to the facility. They're not really a referral source. They're not generating patients per se, the way that a primary care physician or a specialist in the acute business might be doing. And so the real issue is what does the psychiatrist want to do. If a psychiatrist wants to have an exclusive sort of inpatient practice, then I think we've always been open to the idea of employing them. If they want to maintain an office practice sort of outside and separate, often cases, they may not want to be employed, and there may be other ways to get that. But it's really sort of about the dynamic of what the individual psychiatrists wants to do and what he or she wants his practice and his sort of daily routine to look like. Again, I think, in many cases, we've got treating psychiatrists who have more than a sufficient patient load to be in the hospital for their full-time work, and they're happy doing that, and employment for those folks makes a lot of sense. To the degree that they have other interests and other income streams, employment may not be the best choice.

Got it. We've only got like a minute left. So just -- there's maybe one I wanted to cover quickly, and that's just some of the policy factors influencing the behavioral industry. From an investor standpoint, what do you think is the most impactful piece of regulation or policy that we should be paying attention to? Is it Medicaid waivers for substance-use disorders, the Support Act? There's always a number of topics that are impacting the business.

I mean I think from our perspective, and we certainly have talked about this on previous calls and in conferences, et cetera, we have a view that some payers are not treating behavioral care and treating behavioral care patients and claims in accordance with existing regulations like mental health parity and just sort of overall sort of fairness, dictums, et cetera. So again, the last couple of months have really interrupted that a little bit, but we're working very closely with many of our payers to try and make sure that there's a sufficient amount of adherence to policies and procedures to make sure that valid claims are paid and that valid treatment that's rendered is paid for.

Got it. That's super helpful. It's always surprising to me how little attention the United case got last year, but okay. Well, Steve, that's it. Why don't we go ahead and wrap things up? I know you've got a busy day. So if anyone has any questions, feel free to reach out to myself or my team, and we'll try to get all your questions addressed. And with that, we'll convene. And thanks a lot, Steve. Nice to talk to you, and we'll see you soon.

Thanks, Whit.