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

Okay. Great. Well, thanks to everyone for joining us. This is Frank Jarman. I'm Director of our high-yield research team here at Goldman Sachs and cover the health care sector on the credit side. And with me, I'm very pleased to have Steve Filton, who's the Chief Financial Officer of Universal Health Services. We're going to go through some questions for the next 40 minutes or so and hopefully, look forward to this being a productive conversation. So Steve, thanks very, very much for joining us today.

I guess I'd like to maybe start off just with some questions around what you guys are seeing in terms of the volume improvements since the volumes troughed basically back in late April. We're almost midway through June. So can you just help us quantify what we're seeing in terms of some of the volume trends through May and over the last few weeks? Thanks very much.

Sure. So just to put it in context, I think beginning mid-March, we began to see a surge in COVID and COVID-suspected cases, mostly in our acute care hospitals. But commensurate or coincident with that, we also began to see almost immediately a dramatic decline in non-COVID business. In the acute hospital side of our business, it was largely in a measured and a decline in emergency room volume of non-COVID cases as well as a large lease and mandated elimination or cessation of elective procedures and surgeries, et cetera. On the behavioral side, I think in many respects tied to some of the acute care ER slowdown. We also saw a decline in our patient days. The actual, I think, peak or trough, however, you want to look at it of those volumes occurred, actually, sort of in early April, I would say, right around April 10, were sort of the worst numbers we were putting up. And I think since then, the numbers and the metrics that I described have all been continually improving. Elective surgeries really didn't begin again, in earnest, until kind of the first week or 2 of May. So they've only been back for 3 or 4 weeks, but they've been steadily improving and I would say, in the most recent few days, are back to somewhere close to 85%, 90% of their pre-COVID levels. Behavioral patient days or census in our behavioral hospitals has gone from, again, a trough of maybe down 22% or something close to that in early April to, again, in the last few days, maybe down in the single digits, mid- to upper-single digits. So both of those metrics have improved pretty dramatically. ER visits and ER volumes have gotten better. They probably troughed at down 50% to 55% in early April. And they have improved more slowly, more incrementally and are down 30%, 35% in the last week or so. And I'll just sort of make a quick comment about that. I mean I think the ER volumes are down really for 2 reasons. One is the overall diminution in activity across the country, as the country entered into a stay-at-home restrictions and stay-at-home mentality, we saw dramatic declines in things like auto accidents and sports injuries and work injuries, et cetera. And that, I think, has slowly begun to recover and will recover more and more as we re-emerge or re-merge from the sort of stay-at-home restrictions and mentality. But the other piece is, obviously, a psychological fear kind of a factor and that we know that there are people who really require emergency room care, physical or mental, and are not getting it; their fear of contracting the virus outweighs whatever actual illness or injury they're suffering from. And in both of our business segments, we're doing our best to convince potential patients that it's a safe place to come. And if you don't want to come to an emergency room, there are alternatives to that. But it's most important that you get the care that you need. So we've obviously made some improvement there, but as I said, the ER piece of this is the slowest and sort of bulkiest, if you will, to recover.

That's really helpful context. And I guess maybe just as a follow-up. So you talked about the continued impact on emergent care. But I think you said we're now close to just down 15% or so on elective procedures relative to pre-COVID levels. And I'd be curious, as you think about the impact on revenues and specifically around the mix shift we're seeing in acuity, how do you think mix and acuity factors are kind of playing out in this post-COVID environment. Are we seeing, on average, higher or lower acuity based on the changes of some of these volumes?

Yes. So I think the challenge for acute care hospitals has not only been the dramatic decline in volume over the last few months but a fairly unfavorable service line mix. So the most profitable patients in an acute care hospital generally are those who are undergoing some sort of procedure or surgery, a cardiac cath procedure, an endoscopy procedure, et cetera. And the least profitable tend to be medical patients who are generally spending their days resting in bed, receiving drug therapy, potentially IV therapy, but generally not procedural sorts of therapy. And the challenge, of course, is that the COVID patient population overwhelmingly is a medical population. And this dynamic of more COVID medical patients and far fewer surgical/procedural patients really led to a decline in profitability that was even proportionally beyond just the decline in volume, which in and of itself was fairly dramatic. But the service line mix shift was very unfavorable. On the behavioral side, I don't know that we experienced that same volume decline, and that certainly hurt us but the service line mix doesn't change that much. And as a result, the behavioral profitability and margin decline has been less severe than it has been on the acute side.

Okay. Great. That's helpful. And then, I guess, more recently, as we've seen some of these geographic regions and states reopen, there's been some debate around what -- whether or not that could drive another round of increases in cases. And so I guess, first, have you guys seen any more immediate increases in cases where states have started to reopen? And then I guess, just secondly, as you think about managing your business for any type of potential larger second wave in the fall or the winter, what are you doing to sort of prepare for that right now?

Sure. So on the first question, and to be fair, I think the reopening in most states is pretty recent. I mean, it's within the last week or 2. And for the most part, I think in our facilities, we have seen, again, since mid-April or so, a relatively steady decline in COVID and COVID-suspected cases. There are some exceptions. The District of Columbia is a market where the incidental COVID remains high. The Amarillo market, which is home to one of these large meat processing plants, which have seem to have their own set of issues has had a fair amount of incidents. But for the most part, our acute care portfolio has experienced a diminishing amount of COVID cases. At least over the last couple of weeks, we haven't necessarily seen an uptick. That doesn't mean we have, in the grand scheme, a relatively small number of acute care hospitals compared to the country at large, et cetera. So we may not be the best barometer. As far as your second question, in terms of, I think, the preparedness of both UHS specifically and the industry, more generally, for a second wave, should it occur later in the fall or the winter, I think if you take a step back and you look at what the most profound concerns were when the crisis began in mid-March, it helps to put everything in context. So when the crisis began in mid-March, one of the reasons that elective surgeries were almost immediately shut down and were ceased was concerned over different kinds of physical capacity limitations. The concern was hospitals wouldn't have enough beds, specifically ICU beds, specifically isolation rooms, that there wasn't enough PPE, gowns and masks and gloves. That there wasn't enough testing capacity, et cetera. And I think that many of those concerns, at least at the outset were well founded. I think our hospitals, and to be fair, we didn't have any hospitals in New York or New Jersey that were at the epicenter of the crisis. But in our markets, we never really were pushing our capacity and occupancy of beds and ICU beds and ventilators and negative pressure rooms that sort of thing. But we certainly were struggling with issues related to PPE and testing, et cetera. Now I think both of those pipelines and supply chains have improved dramatically over the last several months. And I think as a result, our hospitals -- and my sense is the industry, in general, is much more prepared physically and from a physical capacity perspective for a second wave or a reemergence or resurgence of the virus, if it were to occur. So nobody is wishing for that, but we all hope for the -- prepare for the worst and hope for the best, I think, is where we are right now.

Okay. Great. That's really helpful. And maybe just a follow-up on that. From a staffing perspective, as you see volumes ramp back up, as you think about managing for any types of increases in COVID-related volumes, how have you evolved your staffing needs? Are there things that you've done differently than maybe you've done in the past from a staffing standpoint? Or is it pretty much just being driven purely by what the schedules look like in terms of procedures rolling back on?

No. Look, I think -- and I've made this point to a number of people over the last several months. I mean, hospitals, more than most businesses, I think are accustomed to tailoring their staffing needs to daily demand requirements, literally almost on a shift-by-shift basis. So this is an exercise that hospital and hospital operators are used to. What they're not used to, certainly, and then hopefully, they never get used to this incredibly sudden and dramatic decline and significant and material decline in volume, but we have flexed our staffing to respond to that. So we've reduced hours for a lot of staff. We've furloughed some staff, which really means reducing their hours to 0, but keeping them on their benefit plans, et cetera. And in some small number of cases, we've got to lay people off. But the reality is the expectation, I think, of our hospitals and the industry, in general, is that this decline in volume is somewhat temporary. And I emphasize with somewhat because it's been difficult for us as it's been difficult for virtually everyone to precisely predict when volumes are going to recover, they certainly have started to recover, but at what pace and what does the trajectory look like, and sort of what's the endgame, and do we get disrupted by a second wave as we were just discussing, all of those things are hard to know. But I think in large part, we're trying to keep our staff engaged as best we can, either by working at some level of productivity or by maintaining their benefits or whatever because our general sense is that in some relatively shorter, intermediate term, volumes and demand will return to something approaching normal pre-COVID levels.

Great. And then I guess just maybe stepping back, bigger picture and touching on some of the discussion around structural changes to hospital systems post-COVID. I'd like to maybe focus a little bit on any potential changes that you've thought about with regards to either your acute or behavioral businesses. And I guess, first, one of the themes we've heard a lot about is telehealth trends in the hospital. And so would you view this from a business standpoint, first of all, as a sort of long-term positive or negative with regards to the revenue and market opportunity? And then secondly, how much of a change to the care environment do you think this will play out as?

That's a great question. So obviously, from the perspective of inpatient hospital, both behavioral and acute, probably the most significant change that we've experienced in this -- these last few months has been a dramatic decline in emergency room visits. And that has a significant impact on the health care system, in general, because for many, many patients, the acute care emergency room has historically been the main, and in some cases, the sole access point, an entry point for many people, particularly people who don't have a regular primary care doctor, et cetera. So when we go through a period, which I think is unprecedented, where there's been a dramatic decline in people's willingness to use that entry point, I think it becomes critical for people to find other means of accessing the system. I think one of the real challenges is that there have not been a lot of substitute means. We know that physician office visits are down even more than ER visits in this period. Urgent care visits are down. Retail, pharmacy, clinic visits are down. Freestanding ED visits are down. So it's not like most potential patients are finding some other location to go to that they find more preferable, safer, more palatable than the hospital ER. Now I think there is an uptick in telemedicine. And we, I think, view that as a good thing because I think we have an absolute view that it is much worse for patients not to access the health care system when they need it than it is for them to access it somewhere other than the hospital emergency room. And so to the degree that people are using telehealth as a substitute for a physician office visit or an urgent care visit, I think that's generally a good development. And that percentage of people who will ultimately need hospital care, that's a perfectly effective way of them beginning that process. To the degree that people who really have acute or traumatic needs, they have heart attack symptoms, they have stroke symptoms, they have on the behavioral side, suicidal ideation or drug or alcohol overdose. To the degree that those folks are not finding an access point, et cetera, I think it's a real public health challenge and threat. And one of our focuses in both of our business segments is trying to reach and create an outreach to those folks to make sure they get the care they need, whether it's convincing them to go to the hospital emergency room and it's a safe place to reach out directly to our behavioral hospitals, but in some form of fashion, to reach out to a health care provider who can determine what their real health care needs are.

Great. And I guess just a follow-up on that with regards to pricing. Can you help us think about pricing per se, on an apples-to-apples basis, a telehealth visit versus a visit to the hospital? I get that there are immeasurable number of differences in ways to measure this. But as we're thinking about kind of the facility fee and the physician fee, is there a way to think about what the pricing looks like on a telehealth visit versus an in-person visit on an apples-to-apples basis?

It's a great question. And look, obviously, telehealth, which certainly had been gaining a substantive foothold in the health care system, prior to COVID, their penetration has increased dramatically post-COVID for 2 obvious reasons. One is they're the right technology for the current problem, which is, if people are afraid to have in-person contact, whether that's at a hospital emergency room or physician or office or an urgent care center, then talking to somebody basically on the phone is -- or through Skype or whatever is a very palatable and acceptable alternative. But the other issue is that I think one of the things that has muted telemedicines growth over the last couple of years is that in many cases, I think there has been a measurable discount on reimbursement from all payers, both government and private payers for telemedicine treatment. And I think one of the things that the payer is, at least, in large part, changed very quickly as a result of the pandemic was that policy. And to encourage telehealth, I think they began to bring telehealth reimbursement very quickly, in many cases, up to a par with in-person outpatient treatment of whatever kind or way that was, behavioral therapy or assessment or something on the acute side. It will be interesting to see what happens as time goes by and the crisis ameliorates to some degree. I think payers have been getting mixed signals. Some payers have said the telemedicine reimbursement will remain at these levels, at these elevated levels; others have said, maybe not, maybe that we consider, et cetera. But I think whether or not telehealth -- look, I think it will retain an elevated foothold just because people have gotten more comfortable with it, et cetera, it works. But the reimbursement aspect of it is going to be critical as well. And again, I think as a hospital provider, our basic hope is that payers do continue to keep the reimbursement at a competitive level because it increases our optionality to use telehealth as a tool to deliver a whole host of what would otherwise be outpatient services.

Great. Maybe just switching gears. Obviously, debate and discussion around the recession and its impact on individuals has been top of mind. And specifically, the impact on individuals that historically had had commercial insurance that now no longer have jobs are on furlough is a big debate around just revenue mix and payer mix. And so I'd be curious, I guess, just first of all, are you seeing any mix shift in terms of payers on the back of the current unemployment levels? And I guess, when I think about the fact that a number of folks who are out of work are actually furloughed, have the furloughed patients continued to retain their existing insurance or are we seeing a shift to other payer sources at this point?

Yes. So look, I think that -- and it's worth revisiting the last severe economic downturn, The Great Recession, and hospital experience during that period to put things in context. Hospitals, I think, experienced a negative payer mix shift in 2010 and '11 and '12, when technically, the U.S. economy in those years was already emerging from the recession and was recovering. But I think that the impact on the hospital industry tends to occur with some not insignificant lag. People are laid off very often, depending on the kind of job they have. Oftentimes, they keep their benefits for a while. People can exercise their cover alternative. They may be able to postpone care for a while, so even if they need care, they may postpone it for months at a time. Whatever it may be, we don't necessarily see that impact right away. So obviously, the U.S. economy started to soften pretty dramatically in mid-March, but we're only about 3 months into that softening. And so from a hospital perspective, I don't know that we're seeing that impact in terms of a really measurable profound payer mix deterioration just yet, and we may not, for a while. I mean, I think we've seen some incremental degradation, but it's not been severe. And I think it may -- if we use the last recession as a guide and that probably wasn't as sudden or dramatic, but it will take some time and then the effects you know. And then the other piece, obviously, and I think you alluded to a little bit of this is, there are some things in the current environment which we speculate will create a bit of a cushion for that downturn. One is the fact that a lot of people have been furloughed, which means that they may not be drawing a salary but they're probably keeping their benefits. That's helpful to us. But also, obviously, the one big development since the last recession has been the implementation of the Affordable Care Act. And so there's Medicaid expansion in at least half of the states for people who lose their jobs. There's commercial exchange products, often with a subsidy for people who lose their jobs. So we're hoping and thinking that the shift of commercial patients to uninsured maybe cushioned or ameliorated to some degree by more access to Medicaid or commercial exchange plans or people who are retaining their existing plans through furloughs, et cetera.

Great. And I guess you brought up the 2008 recession. As you think back on that time and what UHS did to sort of manage through that period, is there anything as you continue to surveil the landscape over the next 3, 6, 12 months, to the extent that this is maybe not as a sharper recovery, are there things from a strategic standpoint that you think UHS can do to potentially manage a more challenging operating environment from a payer perspective?

Sure. And I think people can sometimes conflate the 2 challenges that hospitals face or potentially will face. One is the COVID crisis itself and the dramatic declines in volumes that we've seen. Those are really unprecedented. Certainly, I've been in this industry and at UHS for in excess of 30 years, and I have never seen sort of an across-the-board reduction in revenue at these levels and at this speed, et cetera. The only remotely comparable sort of thing is in the face of a natural disaster, you will see hospitals lose revenue at these levels. But that's obviously in a particular geography and usually isolated to a small number of facilities. But if you look at what the recession challenge is, it was this trade-off or degradation in payer mix. And it's basically this idea of people lose their jobs, unemployment goes up, people lose their health insurance that came along with their jobs, and they convert to some lower-paying form of insurance, usually Medicaid or to having no insurance at all, but it's a small portion of the population. And effectively one -- the way it's not affected is that revenue growth slows. So if we go back to that period of 2010, '11 '12, acute care same-store revenue growth declined from 5%, 6%, 7% to flat, up 1% kind of thing, not an insignificant change but a change that certainly we could deal with. And we better managed our labor productivity, and we froze wages and we froze our 401(k) contributions. And I think if you go back and you look, there is some margin decline in that period. But for the most part, the business remained fairly stable, et cetera. What we're looking at, in this COVID crisis, are 30%, 40% drops in volume and revenues, at least at the -- in the initial stages in March and April. And these are just extraordinary. And there's just no way that we can cut our expenses at a rate fast enough or commensurate with that pace of revenue decline. Now I think our point of view is that those revenues will recover. They certainly have started to recover. We'll continue to be diligent about trying to keep our cost structure in line with the reduced revenues. But I think as we move, and believe me, I understand that it's not a perfect sort of an equation where the COVID crisis will end and the economic crisis will begin, and in fact, the 2 crisis may well have some time overlap. But the economic downturn crisis and challenge is way, way, way less severe than what we're experiencing with the COVID volume crisis.

Got it. That's really helpful. And I guess just one more question, I guess, around how to think about structural changes post-coronavirus. Yes, you talked about how patients have started to reschedule procedures, particularly on the elective side. Just structurally, as you think about managing your facilities, are there things that you, as a firm, are there steps you're taking basically to address patient concerns about coming back into the hospital to ensure that they understand it's safe? I'd say along those lines, are you considering building out any triage capabilities, for example? How are you handling the actual sort of evolution of the infrastructure-based on what we know about coronavirus today?

Sure. So look, I think the main thing that we did at the very outset -- and by the way, I think we always do this, obviously, when we suspect that somebody who comes to our emergency room, in particular, has an infectious or communicable disease is we're doing our best to identify those patients as quickly as possible and to isolate them from the rest of the patient population and vice versa. If there are patients who are coming into the hospital with symptoms that are clearly unrelated to the virus, we are separating them from any sort of patients that we might suspect to have the virus. So we were doing that really from the outset. I think in terms of this whole elective procedure sort of thing, et cetera, we're testing every patient who is -- has a scheduled elective procedure to make sure they don't have the virus before, and if they do, they're obviously going through a much stricter protocol with their physician about the dangers of having the procedure, and they're making those decisions together, plus, obviously, we're taking special precautions, et cetera. But the other point I'd make, obviously, people have said to me, our -- do we spend a lot more time in the ORs because of COVID, sterilizing in the ORs, et cetera. And the point that I make, of course, is that all ORs are among the most sterile places on earth. And so -- and they've always been that way, and maybe we've redoubled our sort of vigor and discipline around that. But I think people ought to feel, and I think they do feel reasonably safe in that sort of environment. I mean, I think if people are willing to go out to restaurants and bars, et cetera, they ought to be pretty [Technical Difficulty] going to a hospital because I think the hospital is going to be taking far more precautions than any other places. And look, it's incumbent upon us to reassure the hospital going public, if that's the case. And we've done a lot of work on social media and other advertising and sort of public service announcements, et cetera, to let people know what we do to keep the hospital safe, to keep them in these people coming to the hospital safe, et cetera. And I think slowly but surely the level of confidence is growing, but it's a process. It's a process.

Great. Maybe just shifting over to the balance sheet a little bit. I guess, first, after the significant response from the federal government around the Cares Act funds, have you seen any additional considerations with regards to federal liquidity support to the industry or to yourselves. And on that front, how do you think about your capital structure? I mean, we just sort of went through this very swift, severe downturn in volumes. I would be curious, kind of, post all of this, how does that inform your capital allocation priorities?

Sure. So the first question, I think, is sort of partly the government response. We've received, as we disclosed in our first quarter 10-Q, approximately $230 million of grants under the Care Funds distributions. We received a small amount since then, but still, it's only a little more than half of the allocated funds that Congress passed and then allocated to hospitals have been distributed. So there is a significant somewhere in the $85 billion, $90 billion range of funds still to be distributed. And we don't know exactly -- we don't know at all how CMS plans to do that or what the timing is, et cetera. So there is potentially significant more help for hospitals on the way. There obviously is also talk of another COVID relief bill at some point later in the summer. There's been definitely some talk that there would be another significant chunk for hospital relief as well as for state and local governments, which would also be helpful in terms of Medicaid reimbursement for hospitals, et cetera, but all those things remain to be determined. We are also waiting still on about $350 million of Medicare-accelerated payments, which were included in the Cares -- or in the COVID relief bills, which we applied for, we think we qualified for, but have not yet been distributed. So that's another sort of balance sheet help for us that we are awaiting for. At the end of the day, regardless of how any of this plays out, I think we felt like we entered into this difficult period very well capitalized, very conservatively capitalized and still feel that way despite the operating pressures. We certainly feel like we could survive and continue to operate very comfortably for an extended period of time under the existing dynamics, even if the government is not forthcoming as quickly as with those additional funds, et cetera. So we feel pretty good about our personal situation because we've spent a long time in many years putting ourselves in this more conservative, more comfortable position.

Great. And then I guess, just last question from my end, and we have a question or 2 from investors that have e-mailed in. But when you take all of this in, you think about your position from a financial standpoint, how do you think about consolidation across the industry? How do you think about opportunities here? Is there an opportunity to potentially take some strategic advantage? What's your perspective on consolidation across the industry, overall?

Yes. I think that historically, consolidation has often resulted from periods of financial stress on the industry whether that was 30 years ago, implementation of doing prospective payment systems or the emergence of capitation or just other Medicare cuts or Medicaid cuts. No, it doesn't happen immediately. I think people have asked if we're effectively spending time fielding inbound calls from hospitals that are looking for an acquisition partner or a JV partner immediately, and then I don't think that's the case. But I think as we progress over the next 6 and 12 and 18 months, I think it is much more likely that we have conversations along those lines with hospitals that have been sort of shaken by the experience in the last few months.

Great. And then we have a minute or 2. And so I wanted to ask you, actually 2 investors ask generally questions around the same area, and that's specifically around labor costs and staffing. And so the questions were, any thoughts around acute labor costs as we get back to normal, do you expect any changes in temporary staffing levels? And then on the behavioral staffing side, have you seen any changes in your ability to find or hire behavioral staff at this point?

Yes. So look, I think, just generally, the pressure, some of the labor pressure that we've been experiencing in both business segments over the last several years have been dramatically reduced because the demand for labor hours has been dramatically reduced over the last several months. So we're using far less overtime and far less temporary and registry nurses and far less traveling nurses. We are not having as many, we call capped beds in the behavioral business because of a lack of nurses or doctors, et cetera. Now there are sort of pockets still of issues. And the one sort of mitigating factor is that we've lost some of our labor force to the virus itself or a suspected virus. So we've got some employees on the sidelines, if nothing else, for at least for a few weeks, and so that's a bit of a problem. But just generally, obviously, the labor market has softened dramatically in the last few months. The demand for labor hours, nursing hours, in particular, has diminished pretty significantly.

Okay. Great. Well, Steve, that's all the time we have today. Thank you so much for your insights and thoughts. Really, appreciate it, and thanks to everybody else for dialing in. Hope you have a great rest of the day.

Thank you.