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

All right. So welcome to another afternoon session of the BMO Healthcare Conference 2020. Thank you for being with us. And I'd like to give a special welcome to Steve Filton, the long-time Chief Financial Officer and industry veteran at Universal. And we're delighted to have them back for another year of this conference. We would have preferred to have them in person, but we're grateful to be able to do this conference on a virtual basis.

And I guess I'm going to start off with really the obvious upfront question, which is, if you could update us on the types of trends that you're seeing amidst all the pandemic disruption and where you see that going? Thank you, Steve. And anything else you wanted to introduce. I don't mean to cut, to not leave room for if there was something you wanted to say, introduction.

No. That's fine. Happy to jump right into it, Matt. So look, I think as most people who follow the story know, hospitals, in general, began to experience a surge in COVID patients in mid-March or so. We saw a relatively dramatic increase in COVID and COVID-suspected patients. But I think almost more importantly, from at least a financial impact perspective, we saw a commensurate and coincident decline and dramatic decline in non-COVID patients during those first few weeks, probably reaching their low point in these non-COVID volumes sometime in early April, the first or second week of April. I think since that time, for the most part, volumes in both of our business segments have been improving. Elective procedures, I think, for the most part, in and around most of the country began to resume in early May. So we've had about 6 weeks of that. And I think most of our volume metrics have been steadily improving. Elective procedures are back to, I think, about 90% or so of pre-COVID levels. Elective inpatient days on the acute side or -- not elective or inpatient days on the acute side are probably at 85% to 90% of pre-COVID levels. I think the one lagging indicator, specifically on the acute side, has been ER visits. They've been the sort of slowest volume metric to return to normal. They're still down probably in the 25%, 30% range. On the behavioral side of the business, I think behavioral census, patient days are back to, again, I'm going to say mid-90s, 92% to 95% of pre-COVID levels.

Steve, in there, do you see any of that, that you can attribute or maybe you don't know, but that would be, whatever you want to call it, pent-up demand, things that were canceled in March and April coming or in May perhaps coming through now?

Yes. So I always make the point that it's difficult for us to really parse out our elective activity or elective surgeries and other procedural activity in the way that you're sort of framing the question, how much of it exactly is backlog and how much of it is new business, et cetera, because that history and that level of detail really resides at the physician office and at the physician sort of patient relationship level. We certainly are in constant contact with our physicians, et cetera. And I think our sense is that the elective activity that we've seen over the last 4 to 6 weeks is a combination both of working through the backlog that was created in the 4 to 6 weeks when we weren't doing elective procedures as well as newly created patients and patients who are new to the pipeline. And I think to a large degree, it's because physicians have basically returned to their practice routines. So if there's a surgeon who used to do surgeries 2 days a week and have office hours 3 days a week or surgeries in the morning and office hours in the afternoon, I think he or she has generally returned to that routine. And so I think that they're producing -- they're working through their backlog at the same time that they're seeing new patients and scheduling new procedures, et cetera. So I think it's a combination. I think it's largely a combination because that's the way the physicians themselves are working.

Right. So the capacity constraints are sort of unchanged, and that puts a check on how much gets done in terms of working through the backlog?

Yes. The capacity constraints in the sense that I think they are anxious to do both. I mean, they're anxious to work through their backlog, but they also want to see patients and make sure that they're prioritized correctly and make sure that their sort of surgical schedules are durable and sustainable, et cetera. So there's that -- people think about it in the context, I think, of hospital capacity, and that's a factor, although I don't think a really limiting factor. But I think the surgeon's personal and physical -- physically personal capacity is a big piece of this as well.

Right. Okay. And coming back to your comment about the ER visits, that makes sense, I guess. And well, it certainly dovetails with what we've heard anecdotally from other sources. I'm just curious if you've been able to make any determination about what types of ER visits are being avoided. I mean, presumably, the most traumatic cases are not going to be avoided, I would imagine. But is it visits that are sort of borderline unnecessary in the first place? I'm just trying to envision, and obviously, you've taken steps to make the emergency rooms conducive to the extent possible the COVID-19 environment. I'm just wondering if you have any detail there.

Yes. So I think there's a few dynamics at play here. I think one is that you speculated properly. I think what we're seeing is a higher level of our ER visits being converted to inpatient admissions, which suggests that the more serious patients, the cardiac patients, the potential heart attack and strokes and oncology patients and neurosurgical patients, are still making their ways to the ER and are working through the system. Although we certainly hear anecdotal stories of patients who have those kinds of symptoms and are choosing, I think, unwisely, unfortunately, to stay home. But I think broadly, we're seeing more severely ill or severely injured patient on average in the emergency room, which is, I think, relatively consistent with what you'd expect. I think the other issue is that part of the decline in emergency room activity and visits is a function of the broad reduction in activity that we see around us. So fewer people are out and driving, and so we see fewer traffic accidents and injuries as a result of traffic accidents and fewer work injuries and fewer sports injuries. And that's certainly, I think, adding an impact on the level of ER activity as well. And presumably, as the country emerges from the stay-at-home restrictions and gets back to a more normalized level of activity, some of that ER activity will just sort of naturally restore itself.

Right. I guess you don't injure yourself streaming Netflix, although that would create the need maybe for more behavioral treatment.

We haven't seen any of those injuries yet, maybe at some point.

Right. But actually, in all seriousness, could you touch on the behavioral volume impact? And I'm sorry if I missed it. Did you say that was sort of coming back now to 85%, 90%?

Yes. I think maybe even 90%, 95%.

Okay.

Look, I think we had this point of view that as far as our behavioral, potential behavioral patient population went, these folks were not going to get -- to your point and joking aside, they were not going to get better just sitting at home. And in fact, I think people who chronically suffer from some chronic mental illness, severe depression, schizophrenia, severe addiction disorders, I think they're more likely to have issues in this sort of environment, which is, I think, stressful to the average person. And if they've lost their job or they're under financial pressure or just the sheer pressure of being home and being alone in many respects without normal social relationships, I think we had the view that those folks were going to need more care, not less care. And the issue was, they were just not accessing the system. They weren't going to acute emergency rooms. But we didn't have any evidence that they were doing anything else either. They weren't seeing private psychiatrists. They weren't going to community mental health centers. They weren't getting treatment elsewhere. So I think we had a point of view that naturally, as time elapsed, they would wind up seeking care elsewhere. And we certainly tried to play a role in that we were on social media, we were in regular media trying to say to people, if you're struggling, if you're having issues, call our 800 number. We can assess you without you having to come to the hospital, those kinds of things. We reached out to our former patients, people who had been in our facilities before with those kinds of messages. And I think over time, those messages have gotten some traction and have reached people who needed the help. And so I think just naturally, those behavioral volumes are returning to a more normalized level because these are people who, I think, really need care and then have not been getting it fully over the last several months.

Yes. I think that totally makes sense because I think all of us have felt some impact from it even if we're not struggling with those issues in the first place and even if we haven't lost our jobs. So that will be interesting to see how that unfolds. I wanted to ask though related to that. Certainly, there's been a lot of telemedicine on the acute care side. Well, obviously, you can't telemedicine a heart operation. But on the behavioral side, have you seen much uptake of telemedicine? And again, there's only a certain amount that can replace.

Yes. Look, again, I think on the behavioral side, telemedicine is often a very appropriate and viable replacement for a 50-minute outpatient therapy session, for a session of that length where a patient is being assessed by a psychiatrist or social worker, a psychologist because they've expressed some suicidal thoughts or whatever it may be. And so to the degree that telehealth can replace an in-person visit for somebody who's concerned about an in-person visit, we think it's a good thing. And we're trying to stand up and increase our penetration and our capabilities and infrastructure in that regard. Now when a person, I think, needs more care than when they need inpatient care or more intensive outpatient care, I don't think telemedicine is generally a good substitute for that. So it's really that access point. And I think telemedicine has definitely created much more of a presence in that ability to be an access point or a portal into the behavioral system over the last few months, and our telemedicine capabilities have certainly done that.

Okay. Okay. Fantastic. Let me ask you from the standpoint of your workforce from a couple of dimensions. How many people have been -- what proportion have been furloughed? How you're handling those people, if any of your workforce in that situation. And just curious on a separate dimension, the employment and supply of psychiatrists, whether all of this has impacted your approach or your progress on that front?

Yes. So I mean, again, as you would expect, as our inpatient demand, all the things that we talked about, as ER visits declined and elective surgeries declined and behavioral patient days declined, our need for labor declined, and we were reducing hours across the board, cutting back schedules, furloughing some people, which means really reducing their hours to 0, at least temporarily, but keeping them on benefits. And then a few, I think, a small number of cases actually laying people off. Part of the reason why we didn't lay a lot of people off and why mostly we tried to accomplish this through some level of hourly reduction is the notion that we had that in relatively short order, we would be starting to recover that demand, and then we would need a lot of those hours back, and that certainly is proving true. So what we've done is obviously, we've eliminated a lot of the most expensive hours that we have, which are things like overtime and temporary nurses and registry nurses and traveling nurses. We've cut back people's schedules. So maybe they're not working a 40-hour week, but a 32-hour week or a 24-hour week, whatever it may be. And again, I think in a lot of our facilities and in a lot of our service areas, many of those employees have returned to their sort of pre-COVID levels of work hours. Psychiatrists, again, because we're at a level of demand that is still somewhat under the pre-COVID level, I don't think we have a greater demand for psychiatrists. But I think one of the things, and we talked about this in our telehealth conversation just before, one of the things that we've been trying to do for a number of years now is, to the degree that we have psychiatrists performing tasks that other clinical professionals could perform, psychologists, social workers, RNs, we were trying to supplement that because there certainly is a shortage of psychiatrists, particularly in certain geographies. And the reality is, that problem can't be fixed overnight. It requires more psychiatrists coming to the system, graduating from medical school, et cetera. But in the short term, doing our best to have other professionals sort of supplant and supplement the work that psychiatrists are doing and also using tools like telemedicine to help make the delivery of those services more efficient.

So some of that has been furthered along by the impact of the pandemic, if I understand you correctly. And do you think that will be sustained beyond when we get to the point where the pandemic is really behind us?

Yes. So look, I think it's been furthered for 2 reasons. I mean the obvious reason is that in an environment where people are reluctant to necessarily go through the traditional modes of entering the system, going to a hospital emergency room or a physician's office or a community clinic, telehealth seems to be the ideal sort of solution for that. But I think the other reason that telehealth has gotten a lot more traction in the last few months is that from the perspective of those providing telehealth services, it's become more attractive because payers, I think, over the course of the last few months, have generally brought telehealth payment levels and reimbursement levels to a par with they're comparable in-person sort of treatment levels. And I think prior to that, in many cases, payers were reimbursing telehealth services at levels measurably below what inpatient services of the same sort of magnitude were being reimbursed for. We're going to see whether, I think, post pandemic the 2 dynamics continue, whether people are going to feel just as comfortable getting treatment through a telehealth tool or an assessment or whether they'd rather do that in-person. And I'm not sure. And my guess is, it will be a mix. And then secondly, whether payers continue to pay at these elevated levels post pandemic. Some payers have already committed to doing that, but others have been a little more circumspect and not as committal about it.

Well, that makes sense. Okay. Well, that will be something interesting to watch there. Maybe if I could step back and ask a high-level question here. As you think about the way that your company is structured, meaning the combination of acute and behavioral psychiatric access and capabilities you have, what process do you go through periodically to examine whether that makes sense or maybe not make sense, but is that the best configuration for your company and are there alternatives to that, which I'm not making any criticism of the configuration. It's just that it's unique among public companies, and I'm just thinking about how you periodically re-examine that.

Sure. So look, I think we have -- and your question sort of is premised on this. I mean, we've had a long-standing commitment to this 2-segment strategy, I think, for a variety of reasons. I mean, the sort of the most obvious is that we think they are both very viable businesses whose services will be in demand not only in the near term, but the intermediate and the long term. And so we believe that providers of services in both the acute and behavioral segments who have strong, high-quality, low-cost, efficient providers will both not only survive, but prosper even as the health care landscape changes over the next decades or so. But as we think about sort of growing the businesses, I think we think about doing it on a very opportunistic basis, meaning we really don't enter into a year or a 5-year period or any period in which we sort of set goals for ourselves to say that we're targeting the behavioral business to be 60% and acute 40% at the end of 5 years or vice versa. That's never really been our approach. Our approach is much more, these are 2 very viable businesses. Let's examine our existing franchise in these businesses. Let's think about how to enhance them to grow them, whether that's through investment in CapEx or through further acquisitions, through physician partnerships, all those kinds of things. And we look, obviously, in the opposite way, are there compelling areas where we ought to be reducing our footprint or our service? Is a particular franchise no longer viable in a particular geography? And we have certainly pruned, I think, in particular, our behavioral portfolio over the last few years around the edges to respond to those sorts of issues, and I think we continue to do that. Now again, I don't think there's anything about the last few months or the pandemic itself that has fundamentally changed our view of either of these businesses. And I think the fact that they're both rebounding and recovering after a very difficult period of dramatic revenue declines but recovering relatively quickly, I think, in our mind, reinforces the idea that they're both very viable, robust businesses that we are anxious to continue to invest in over the next several years and several decades.

That makes sense. Just one more question on that note. To the extent they're both attractive, well-positioned businesses, it makes sense to keep them. Do you see them as synergistic?

So I think historically, the businesses have not operated with a great degree of synergy, meaning geographic synergy. I mean, obviously, as we kind of discussed in some earlier comments, acute behavioral facilities, in particular, get a lot of patients from acute hospital emergency rooms. And so it certainly makes sense for there to be a relationship between a behavioral hospital and the acute hospitals in its market. And certainly, in those markets where we operate facilities in both segments, we have that relationship. We have it in McAllen and in Manatee, Florida and in Amarillo, Texas. All those markets, we do that. But in the vast majority of our markets, we don't necessarily overlap. I don't think it is necessary to own both facilities in a market to have that relationship work. I think we've certainly demonstrated over the years that we can have very strong, long-time relationships between our behavioral hospitals and unrelated acute care hospitals in our markets. So again, I mean, there's been a certain amount of synergy. I think that as we see more value-based purchasing, as we see more capitated arrangements, as we see more ACOs, I think that providers who may be able to offer a broader continuum of services that include both acute and behavioral in a market may have an advantage, and we'll certainly try and take advantage of that. So I think we may see more synergies in the future. But to be fair, the historic dynamic has been a relatively limited amount of operating synergies between the 2 segments.

Let me pivot to another question, which is, as far as the impact on other providers and maybe discussions that you have periodically with some of those providers that find themselves struggling operating in this environment, certainly, and maybe for some of them is sort of close to the last straw, have you had any exposure to that? Have there been opportunities coming out of that where you could help by potential acquisition in the last few months?

So I think our experience has been, and as you know, I've been doing this for 3-plus decades. I think our experience has been that when there are financial shocks to the, and particularly to either the acute care or the behavioral systems, whether that's as a result of economic downturns or regulatory changes that very often, that will prompt a period of an elevated M&A activity because providers are not exactly sure how they're going to continue to operate and survive and prosper. And if they are under some financial stress, that just exacerbates the process. I think that this period that we're in certainly may have that impact. It seems like it's been going on forever, but it's obviously only been a few months. And so it's not like we're seeing, we're having a million conversations with a bunch of different hospital systems because I think it's pretty early for that to be happening. But do we have an expectation that there'll be more of that over the course of the next 3, 6, 9, 12 months? I think so. I think because this has been a significant and will continue to be, quite frankly, a significant shock to many hospitals and hospital systems. One thing I will say is, our conversations with acute care hospitals about joint venturing in some fashion their behavioral service offerings, we've talked about that for a couple of years now, but I will say that those conversations have really continued on during the pandemic. Even though a lot of other activity has really kind of ground to a halt, those conversations have continued for the most part. And I think that's reflective of the desire, the level of desire and the strength of the desire of acute hospital to do something with their behavioral businesses in conjunction with a provider who they view as more expert in that field, et cetera. So those opportunities continue to be front and center for us.

Is there something about the pandemic situation and impact that is focusing them on that in particular as opposed to other areas where things seem to be getting wiped off the table temporarily just because they've got this emergency or semi-emergency to deal with?

I think it's really 2 issues. I mean one is, hospitals around the country have been faced with this idea of, do I have enough physical capacity? Do I have enough beds? Do I have enough ICU beds? Do I have enough isolation rooms in a pandemic or a future kind of event like this? And so to the degree that getting out of the behavioral business can help solve that problem for hospitals that may have those concerns, I think that's an issue and drive them to a degree. The other issue is the behavioral business, as we've discussed, has suffered some in this interim period. And while I think we have a lot of ideas and a lot of initiatives about how to work our way out of that, how to recover, et cetera, again, I think acute care hospitals are sort of generally engaged with and focused on other things. And so I think it just reinforces the notion to them that it's better to have somebody running this behavioral business who really views that as their main business rather than as their 14th or 15th priority as I think many acute hospitals do.

Well, we're just about out of time. I have one question. I hope you don't think it's obnoxious, but it's about terminology. I'm just curious, I've sort of felt that the term behavioral is perhaps inappropriate given, to me anyway, it suggests that the conditions that the patients struggle with are in large ways, voluntary. Is that something you come across in the industry? Is there just sort of something that's gotten stuck in the nomenclature and there's just not any particular urgency of changing that?

Yes. I mean, so look, the interesting thing is, I think, I'm not sure the exact chronology, but 5 or 10 years ago, it was referred to more as psychiatric hospital, psychiatric care. And I think there was a -- people perceive there was this sort of a negative connotation that went along with that, and I think behavioral is a more benign term. But I get your point, and I think there are clinicians and others who tend to use the term mental health, both because it has sort of a more positive connotation and I think just sort of tends to distinguish it from physical health. But no, I don't think it's an obnoxious question. I think actually the change took place originally and sort of meant to be a positive thing, but I understand that people still think it has a bit of a negative connotation to it.

All right. Well, Steve, it's always great to talk to you. You are a master of everything, and you have the history down on every single thing in the industry, and we really appreciate it. Thank you for joining us.

Thanks.