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

Good morning. We'll continue our next fireside chat with CFO Steve Filton from Universal Health Services. Good morning, Steve.

Good morning, Frank. How are you?

Good, good. Hey, I want to start out, it's been a couple of weeks now since your first quarter earnings call. And just wondering, could you discuss what you've been seeing in your markets since that time in the interim, with additional states lifting restrictions on elective procedures? So just maybe start there and maybe walk through some of those important states like Texas, Florida, Nevada and California.

Sure. So I think what -- as we discussed on our call, and we've included some of this information in our first quarter 10-Q, et cetera, I think the cadence of our COVID experience, and it seems relatively similar to other hospital commentary, is the virus hit kind of mid-March in most of our markets. We saw a pretty sudden and dramatic decline on the acute side in both ER volumes as well as elective and scheduled non-COVID sort of procedures and a decline in patient days on the behavioral side. That volume softness continued into early April. And by mid-April, we started to see certainly the ER volumes on the acute side and the patient days on the behavioral side start to rebound. The elective and scheduled procedures started to rebound a little bit later and mostly sort of consistent with or commensurate with, as you suggest, Frank, individual states and geographies lifting their bans on those procedures. We've definitely seen them improve as well since late April. But I would say really in the last week and really even few days, we've really seen those elective procedures gain some traction where in virtually all of our markets, the ban has been lifted, and in virtually all of our hospitals, we're doing some level of elective and scheduled work that we were not doing before. So it's fair to say that our volumes in neither business segment have returned to normal yet but definitely have been trending upward. And in the case of elective procedures, that pickup has accelerated pretty dramatically in the last few days and week.

Okay. And so that would be more so than at the time of the call 3 weeks ago? So it's accelerating more?

Yes. So again, I think the ER business and patient days on the behavioral side so I think just incrementally continue to get better and gradually since April. The elected procedures, because they were really subject to bans, if you will, from the authority, they've really accelerated since those bans have been lifted. And we've been working with our surgeons and proceduralists as to schedule and get their patient backlog sort of worked out. So that activity has really picked up just even in the last week or so.

Can you tell a difference where -- I mean I think -- I guess maybe Texas might have been one of the first ones to lift the ban. Can you give us any color or insights about how that ramp has looked and where the other key states for you are? Maybe a little color there would be appreciated.

Yes. I mean I think that the experience across geographies is relatively similar. I think what we find is that where there is still a high level of COVID patients, so Washington, D.C. has been a market where there's been a relatively high level and incidence of COVID patients and so the recovery in that non-COVID business is a little bit slower in that market. Even though generally, in Texas, we've not seen a significant amount of COVID patients in the Amarillo market, where there is one of these meat-packing plants that has had some really negative experience, that's a hospital that has seen more COVID business and therefore less non-COVID recovery. But in most of the rest of our markets, we've seen our COVID incidents of patients decline. And not surprisingly, sort of the non-COVID business has increased, and that's true of California. It's true of Las Vegas. It's really true, I think, in virtually all of our other markets.

Interesting. In terms of those procedures that are coming back, are they more -- is it more a function of maybe outpatient surgeries, something you can do in an outpatient or ASC setting? Or how do you characterize the surgeries that are coming back?

No. Surgery schedules are generally determined by the doctors, by the surgeons and the proceduralists themselves. And I don't think that this environment, even though it's different in many ways, is different in that respect. So I think our surgeons and proceduralists are prioritizing their patients. So they're scheduling their patients who, I think, they believe have at least a potentially life-threatening illness, so an arterial blockage or a malignant growth or whatever it may be. And we're doing those patients first, and then we'll get to patients who have severe pain or whatever it may be. But I think the ultimate point of view that we've had from the beginning is that the vast majority of our elective/scheduled procedures or procedures that are really not deferrable indefinitely and then at some point, they're going to get done in the near and intermediate term. And I think we continue to believe that although the exact schedule, the exact sort of clock of the recovery and trajectory of it is not easy to predict with precision at this point.

And I take it that the recovery on the surgery side has not been so much that you've had to kind of rethink how you schedule and block time off, is that true? Or is it -- are you finding yourself needing to expand hours of operations in days of surgeries?

Yes. I mean so -- again, I always make this point. I mean we tend to tailor our surgery schedules and staffing, et cetera, to physician needs. So we'll operate our ORs generally from early in the morning, 6 or 7 in the morning, until 2 or 3 in the afternoon. But if we've got surgeons that want to go until 5:00 at night or 7:00 at night or want to operate on Saturday or Sunday and have a reasonable amount of volume, we'll do that. We'll accommodate those surgeons, we'll provide the staff, we'll obviously provide the ORs and do that. And I think that's true in this environment as well. So I can't really generalize. But I think in every hospital, they're running their surgeries and their cath labs and their endoscopy suites to accommodate what the surgeons and proceduralists are willing to do. And that's true on how we always operate, but it's obviously especially true in this period of recovery.

I understand. And maybe kind of switching gears, one of the derivative effects of the COVID has been the concerns about the economic slowdown, the higher level of unemployment. So if we -- in fact, the theory would be that you would see a shift in your payer mix if you do have a recession. But just curious, your thoughts around if there is a shift in payer mix, do you have any history lessons that you could share with us with regard to how the payer mix dynamic changes and the differential in the rates that you see in some of those different payers?

Yes. I mean so the biggest challenge, I think, that we've always had in an economic downturn is, as you suggest, Frank, a negative shift in payer mix. And basically, we have a universe of commercially-insured patients who have their commercial insurance through their employer. They are laid off as unemployment rises, and their financial status shifts to either Medicaid or uninsured. And that's what -- either way, that shift is a degradation, although obviously, the shift to uninsured is much more unfavorable than the shift to Medicaid. What I think is a little bit unpredictable about the economic downturn that we're either just entering or about to enter is that there is, I think, a significant sort of cushion or floor that exists today that didn't exist 10 years ago during the last recession, and that is we've subsequently or in the interim had the Affordable Care Act implementation. We've got Medicaid expansion. We've got Medicaid expansion, in particular, in some of our most important geographies, Nevada, California, the District of Columbia, so that should be helpful. We've got commercial exchange alternatives for some patients who need them. Congress is talking about extending COVID subsidies potentially. So some of that negative shift that might have occurred a decade ago may not be quite as severe this time around. We have to see -- and we'll have to see how high unemployment goes, et cetera. But as I was saying to somebody recently, that's a playbook we know how to run. We know how to qualify people for whatever alternative insurances might be out there, whether it's commercial exchanges or Medicaid. We know how to manage to a degree the pressure of the uninsured, et cetera. So those are things we know how to do. An economic downturn is something we're accustomed to. We certainly don't look forward to it. But unlike the COVID crisis, it's not like we're sort of reinventing the playbook every day. So we sort of look forward to -- not that we look forward to the economic downturn, but we look forward to getting our volumes back to pre-COVID levels and then dealing with what I'll describe sort of as the more routine challenges of an economic downturn.

Got you. And do you see, in the past, between your 2 service lines, behavioral and acute, any -- does any respond well or behave better in an economic slowdown?

So I think certainly, if you look at the last recession, which I think from a hospital perspective really sort of reached its peak in 2010, '11, 12, the behavioral business weathered that economic downturn better than the acute volumes held up better. That negative payer mix shift is a little bit more manageable in the behavioral business because we are able to be a little bit more selective of the patients that we accept. We don't have that sort of dynamic of the acute emergency room taking all comers. I will say that I think the behavioral business was aided in that time period by other external factors like the implementation of the Mental Health Parity Act, et cetera. So it's impossible to define exactly how the business behaved just in response to the economic downturn. But I think we view the behavioral business as relatively inelastic to those economic sensitivities. And I think it's largely because the typical inpatient to a behavioral facility is not making a judgment and that's an economic judgment. So in other words, somebody who's suicidal is not making a judgment about inpatient admission based on their copay or deductible or their employee situation or whatever it may be, whereas a patient who may need some surgery, et cetera, may be making those decisions a little bit more in a discretionary way. So again, I'm going to say, historically, the behavioral business has been a little bit more recession-resistant, both from a demand and a payer mix shift perspective.

Got you. And just kind of staying with COVID, bouncing between recession and COVID, if we -- obviously, we're in this recovery mode right now, but if some people think could very well happen, a COVID 2.0 either in the fall or the winter, what do you think you've learned? And how do you think it would be when you do the redo for COVID 2.0 based on what you've learned this time?

Yes. I mean so if you take a step back and sort of reflect on, I think, what the biggest operating challenges were for hospitals during these last 2 months, I think broadly the 2 biggest challenges were a scarcity of testing and a delay in testing results and scarcity of PPE and maybe a third item was sort of, I'll call it, just sort of physical capacity concerns: not enough beds, not enough ventilators, not enough isolation rooms. I think for us and in our markets and in our hospitals, we were sort of able to meet all those concerns without really ever facing a crisis. We always had an excess of ventilators. I don't think we ever got to a point where we were using more than 50% of our ventilators across the system. We converted a lot of our patient rooms to adequately identified isolation rooms. We certainly struggled, as I think all hospitals did, with having an adequate supply of PPE but I think feel now like we're -- we do have it. So I think if there's another surge, all those physical elements, we're far more prepared for than we were, let's say, in mid-March. I think we've also got -- and I think we had policy procedures in place to identify and isolate patients, but they certainly are more firmly established. Everybody has gotten accustomed to them. So if we have to go through this drill again, I think we'll do so in a more routine way. So in that sense, I think we're largely prepared in a way that -- I don't want to say we were unprepared in the middle of March, but it certainly came upon us very quickly.

And as you go through this recovery, this ramp back up, obviously, there were -- your labor workforce had to go through some adjustments. I believe you had some furloughs and -- but as you go back through this process on the ramp-up, are you -- have you seen any challenges or issues with sort of phasing the workers back up? And then for the acute side and then on the behavioral side, which seems to always have been an issue of shortage in staffing, are you better off? Do you think that from that standpoint, the labor market would be better?

Yes. So look, I think in the short term, the challenge, quite frankly, has been with the dramatic decline in volumes in both businesses. We have too much labor and excess labor hours. And we've tried to deal with that in the most responsible way possible, managing headcount and reducing hours where appropriate, et cetera. But for the most part, keeping our employee workforce in place, keeping their benefits in place because we had the perspective that ultimately, volumes would rebound and we'd want that workforce back sort of at full force. And we're at least starting to see the green shoots of that activity and reinforcing the idea that, that was the right way to look at this. I think over the longer term, I've made the point a lot over the last several quarters that if there was an economic downturn, some of the labor pressures and wage pressures that affected -- have affected both of our businesses over the last several years would likely ease some. Now I wasn't rooting for a downturn and certainly was not anticipating a downturn of the magnitude that at least some people are speculating we might see, but I think all that's true. As unemployment goes up, what we -- what has been our historical experience is that the supply of labor hours, nursing hours and other clinical hours, especially goes up. People are willing to work more shifts. And it's just -- it's an economic reality that as spouses are laid off or have their hours reduced, our employees are willing to work more hours and more shifts. And that's always helpful in terms of the supply of labor hours. I would expect all those same dynamics to occur in a situation in which unemployment rates go up. And as you know, unemployment rates have been rather low, very low for quite some time now, so that will be a change in the dynamic. And while we don't look forward to it, I think it will make our labor situation on both sides of the business easier.

Got you. And obviously, from a liquidity and a balance sheet standpoint, you have one of the strongest balance sheets of the industry. And yet there has been a lot of capital made available -- capital infusion by the government, by the federal government on the CARES Act. One of the buckets of money in particular that I'm curious about are the grants. And it seems like -- it seemed like a great idea at the time, and everybody seemed to be more than happy to get the check in the mail. But as time has passed, it seems like there's some kind of growing concerns about this money and some of the strings attached to it. So I guess I'd love to get your take on this money now that you've got it. And what are your thoughts about keeping it? And any concerns about any strings attached for taking it?

Yes. So as we read the regulations, I mean the vast majority of the CARES grant funds that we've received, basically, the criteria are that you've got to be able to validate and attest to the idea that you've incurred costs to treat -- incremental costs to treat COVID and COVID-suspected patients or you've lost revenue because of COVID and COVID-suspected patients. We feel for the vast majority of the dollars we've received and in the vast majority of facilities that have received dollars, that attesting to that and validating that is going to be relatively straightforward and relatively easy. I think -- and I haven't paid a lot of attention to the world outside UHS over the last couple of months, but I think that the companies who have expressed concerns about the funds and whether they meet those criteria are more, in my mind, on the periphery of the COVID crisis. And it's not so clear that they've really been impacted by COVID patients or loss of revenue. So I think those are the companies that are suggesting that maybe the funds need to be returned, et cetera. I just don't feel that at the hospital level, we have what I would call any sort of extensive and measurable concerns. There may be a random facility here or there that's not going to meet the criteria. But the vast majority of our facilities, I think, will meet the criteria and we will comfortably keep the funds and feel like we've received them very appropriately.

Good point. And then I guess staying on your balance sheet, obviously, you are in an enviable position with the strength that you have in terms of the low leverage, the cash flow and the liquidity. Do you -- does this, in any way, change your thoughts around capital allocation? I know I'm assuming that those grants don't require you -- or limit your ability to buy back stock. But maybe as we start to get close to the end of our time, maybe talk a little bit about your -- any changes, incremental thoughts or changes around your capital allocation strategy in light of COVID, in light of a recession and any of the opportunities that might bring?

Yes. Look, I think that as the crisis emerged, and there was a great deal of uncertainty, we made a decision that in sort of the -- in the utmost sort of level of caution that we would make significant adjustments to our cash outflows. And that included operating expenses and some of the things that we briefly talked about as well as capital expenditures as well as share repurchases and buybacks. I think it's the right thing to do and the prudent thing to do. We certainly have seen in the last couple of months a very dramatic decline in our revenues and obviously EBITDA and the cash flows. We had an expectation, and I think we're starting to validate that expectation that the business and the volumes and the demand that we lost was, for the most part, not permanently deferrable, that business was not going elsewhere. Those patients were not being treated in other settings, et cetera. And then ultimately, the vast majority of them would come back and the business would return. I think we still have that view. It's difficult to predict the pace and the arc of that recovery with great precision, but I think we have a view that over the near and immediate term, a lot of that volume will return, et cetera. But what that sort of intervening impact is going to be and how much cash will be -- we'll lose in the interim, that's, again, all tough to say. And I think until we have a better sense of greater certainty, greater predictability for those cash flows, et cetera, we'll continue to be very prudent, and we'll husband our cash and just be as we typically have been conservative about these sort of things. I think as the certainty increases and the uncertainty decreases, we'll return to a much more kind of normalized environment in which we'll be more comfortable in spending money on capital, on share buyback, on dividends, et cetera, but we'll have to see when that occurs. I don't think we're there yet by any stretch, and I think it's difficult to predict. But I don't think we view our capital deployments and strategies have changed in any sort of permanent way. We just like some great -- like to see some greater certainty in the near term.

Sure. And I guess dovetailing on that from a -- moving from a capital allocation strategy, any other just basic business strategic shift that you would envision needing to make either in the near term or long term as a result of COVID or the likelihood of another COVID?

Yes. I mean so those are really 2 different questions, Frank. I mean I think during the COVID crisis and if there's second wave, et cetera, the biggest challenge that we have is in convincing patients that the policies and procedures we have in place at our hospitals, both behavioral and acute, are such that they can feel safe coming to the hospitals and that the risk essentially of coming to these hospitals is less than the risk of not treating their underlying illnesses, which may be severe and may be threatening for them. And again, in the near term, while the COVID crisis exists, that dynamic will continue to exist and we'll have to address it. And we certainly feel like we're doing so, both in a substantive way with our policies and procedures at the hospitals and in a sort of cosmetic way as we reach out to patients and let them know that they can come to the hospitals, et cetera. I think once the situation is more normalized, and that's probably post-vaccine, if you will, then I think we have a view that the hospital business, in particular, has really not changed fundamentally, that the vast majority of care that we render to patients in both our acute facilities and our behavioral facilities is necessary, is not really postponable over any sort of indefinite period of time, really cannot be rendered in other settings. And as a consequence, we believe that our demand and our volumes will return to normalized levels. Again, the pace and the trajectory of that recovery is not all that easy to predict. But I think particularly once the COVID crisis passes and there's much less risk of transmissibility, et cetera, I think we will see the fundamentals of our business return to what I would describe as historic norms.

Got you. We're close to the end, but I guess when I think back on our discussion, a couple of points: Number one, elective surgeries are accelerating and specifically over the last week or so. You've seen even more noticeable really acceleration there. A recession this time around might be a little bit different given the benefits of Medicaid expansion in some of your key markets and the ability to put people in the public exchanges. The behavioral business weathered -- would likely weather a recession better based on past history. You seem to be prepared better for a COVID 2.0, whether it's testing, PPE, and that capital allocation strategy really doesn't sound like it's changed in the long term. So great catching up with you, Steve. Thank you so much for your time, and that concludes our fireside chat. Thank you.

Thanks, Frank.