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

Yes. So again, I think there's a couple of different issues. So Matt Peterson when he joined. I do think he really sort of created an initiative to centralize a lot of our contractual negotiations on the behavioral side, which were not as centralized as they were on the acute side. And I think that centralizing the process, making it to the more rigorous and discipline allowed us to go back to some payers who perhaps we were somewhat remiss in really pressing for rate increases over a number of years, et cetera. And again, I think early returns, we were getting some benefit from that. I think the other big initiative that Matt has and I think you've heard of talk about this at least once, A.J. I think he has a perspective, having worked in on the payer side for a long time but the last decade at Optum, that there are ways that we can work collaboratively with payers in which again, I'm going to broadly describe this, but we can sort of help them reduce their medical loss payments, which is what certainly their main goal is, but also help us by ensuring that when there is utilization that we capture the great majority of it and so that's the trade-off. And unfortunately, I think he really began to have those conversations in earnest late in 2019 and the early in 2020. And I think while some of them continue, I think, in large part, they've been interrupted on both sides of the conversation by the virus. But I think, Matt, is certainly very focused on resuming those as soon as everybody starts to settle out a little bit. And hopefully, that's not years away, but a quarter or 2 away.

On the volume side, pre pandemic, I think the goal was to sort of be in the 2% to 3% volume growth range. Where are you at on getting back to pre pandemic at least baseline on the behavioral side? And to the extent that there are some aspects of the volume that haven't come back, what types of patients or what referral sources are not coming back to you at this point?

Got it. So the frustrating thing in that segment, A.J., has been that late in 2019 and I think early in 2020, we felt like we were getting really close to getting back to those target levels that, candidly, we've been talking about for several years now. But we really felt we had made some progress, and we're sort of within striking distance. And then, of course, the pandemic hits and the bottle sort of falls out to a degree, at least in the short term. I think what we're finding -- so if you look at our behavioral results in Q3, our behavioral patient days are about 3% below where they were in last year's third quarter, not very far off. When we have looked through the portfolio and really try and sort of analyze where we're sure, invariably, it is COVID related in some form of fashion, which I don't necessarily think is the intuitive response. It certainly wasn't my sort of intuitive thought. But what we have found, even though we don't have a great deal of coving patients in our behavioral hospitals, not nearly the same percentage that we have in our acute hospitals. What we have found pretty consistently is in a market or in a geography where there's an elevated level of COVID incidents in the market that our behavioral volumes go down and they go down because we're getting fewer ER referrals. We're getting fewer referrals because there's less in-person schooling, and we're getting fewer adolescent referrals. Our national programs that we reply more on airline travel, et cetera, are off. And then the COVID itself, as we get a COVID patient in one of our behavioral hospitals, it's a much less efficient sort of an exercise when we get one in our acute care hospitals. So we create a COVID unit in our behavioral hospitals. But now we've got a 10 bed unit or a 15 bed unit or a 20 bed unit and we've got 1 or 2 COVID patients. And then we really can't accept non cavitations in that unit. Whereas in our acute care hospitals, we're running, in many cases, large COVID units with 25, 30 COVID patients, and that's much more efficient. And then, of course, there's always -- there's the issue of when we -- in a lot of these COVID markets, we've got nurses or other employees who are out with the virus or being quarantine if they've been exposed. And in some cases, we've got what we describe as a block bed because we just don't have enough staff to set those beds. So I think our experience has been in all -- virtually all of our markets as the volume of COVID goes down, the volume of our -- behavioral volumes goes up. But unfortunately, we have a much wider geographic footprint in our behavioral business, and we've got a bunch of markets that are experiencing that third wave, et cetera, and I think it has been impairing our volumes. Now I think we have a point of view that if we are at 97% of pre-pandemic volumes with all these headwinds that as the pandemic eases and as the virus is, we're going to see sort of a natural pickup in our basal volumes. And I think we're seeing that and we're being able to prove that to ourselves in our markets that are not seeing a second or third wave.

And that incremental volume, I was going to ask you about that because we hear so much about depression and all this stuff in the light of the lockdowns on the COVID crisis. Are you seeing those types of die? I know you have schizophrenics in there, I'm assuming that this doesn't give rise to more schizophrenics, but it would give potentially more rise to severe depression, suicidal issues and so forth? Is that place where you're seeing maybe other areas have a bounce back completed, but you're seeing a pickup in those types of diagnosis?

Yes. So look, it's a little difficult, maybe more than a little difficult to really be able to identify the percentage of admission or emission growth that's coming from what I would describe as COVID-related stress. But I would extend what you said a little bit more because I think it's more of what I think a clinician will tell you, and I'm not a clinician, but talked to a bunch of clinicians during this period is, no, I mean, in theory, the COVID crisis doesn't necessarily create schizophrenia or exacerbated schizophrenia or multiple personality disorder or addiction disorders. Certainly, depression, it's easier to understand. But I think their point is it's a very stressful environment for virtually everybody, whether it's just being constrained at home or having your kids at home or having lost a job or income pressures or whatever, what they always say to me is, look, the most well adjusted sort of mentally healthy person is probably feeling a fair amount of stress and maybe an elevated level of depression, et cetera, in this sort of environment. So people who are predisposed to mental health issues across the [indiscernible] are more likely to suffer some of a more dramatic kind of reaction. So that's sort of what our population is. It's people who are chronically ill. These are not people who sort of suffer a particular issue and then all of a sudden, they're in the behavioral hospital. People who are chronically ill and something triggers a traumatic episode, loss of a job, loss of a spouse, whatever may be, and they react, unfortunately, more severely than sort of the average person who might have greater coping scale. So I think we see more of that. And I think, again, I guess our sense is that when all these other obstacles are lifted and these people are more willing to go to hospital ERs or mental health centers or private psychiatrists or we're not blocking beds or we're not having to quarantine COVID patients. But we're going to really be able to satisfy a lot more of that pent-up demand, which we don't have any evidence as being exhausted or satisfied anywhere else.

Right, right. I mean, at the risk of going way off the rails in a question here, I've noticed that all of a sudden and maybe it's a by park of the pandemic that we're seeing more advertisements of drugs related to schizophrenia on TV, you maybe have seen that too. Has there been a change in drug regimen? And I mean, I don't think of behavioral health is something where there's a lot of technological new developments and new changes. But is there anything happening there that is having an impact on your business in any way that you're aware of in terms of drug development?

Yes. So to be honest, [indiscernible] what I've seen, my own personal experience, maybe it's just here in the Philadelphia market is a ton more advertising addiction facilities. And I do think there is a notion that, again, even people who are sort of predisposed to having addition problems, will tend to be more inclined to have a problem in periods of stress, et cetera, which I think, again, this is but again, it's this idea when using the schizophrenia example, it's the idea that patients who are chronically ill can often be treated and be, quite frankly, perfectly well for extended periods of time, on a particular drug regimen and therapy regimen, et cetera. When they then are confronted with some sort of traumatic stress, which, again, could be any number of things on the financial side, on the lots of evidence that there's more spousal abuse and use within families. During this period, all those things really continue. And what happens in a lot of cases, the first thing that a chronic patient will do is they sort of get off their drug routine or their medication routine. And now they're sort of -- they begin this downward spiral, which really requires some intervention for them to get back on track.

No, that makes sense. This is something we've been talking about for the last few years, which is pressure, particularly on length of stay, even more so than rate from managed Medicaid being a bigger player in the space. Sounds like this year, there's been a little easing of that pressure, a little easing on utilization review, maybe even a little help on the rates. Is that just totally pandemic related? Or can we say that maybe we finally gotten to the point where that headwind is easing up and probably will sustain itself coming out of the pandemic?

Yes. And just to contextualize a little bit more. In 2017 and '18, we saw a reduction in our length of stay. And we primarily attributed it to the continued migration of traditional Medicaid patients into managed Medicaid plans where the length of stay tended to be lower. I think in 2019, pre pandemic, we already saw that start to stabilize. I think in part because the bulk of that migration has already taken place. There was still some to go, but it seemed to slow down, et cetera. But I think we had a point of view that there was not a ton more to go. And then to your point, I think in 2020, the situation even eased further for a variety of reasons. One is, I think we saw less pressure on our volumes in our residential business than we did in our acute business and the residential business, by definition, has a longer length of stay. I think we saw some easing of length of stay pressures in utilization review and denials on the part of Managed company, which I think to your point is probably mostly pandemic related and not likely to be sustainable, but we're getting some short-term benefit from that. And we are getting these rate increases that I talked about before, which obviously do have an enduring effect. So it's a bit of a mixed bag. But I think that lower length of stay -- or excuse me, the stabilizing length of stay trend was already beginning in '19, a little bit better in '20. But my sense is it will remain relatively stable going forward, even post pandemic.

And you referenced earlier on some of the cost reduction activity. There's also been discussion around labor, whether on the one hand, we're hearing nurses maybe facing burnout, given everything they've been through in the last 6 months. On the other hand, it seems like wage increases are not really materially different than they have been in previous years, maybe that's economy spillover. What are you seeing in labor generally? And is there anything worth highlighting on your some of the cost initiatives you alluded to earlier, cost cutting initiatives?

Yes. I mean, so I think this has been true for the last several years that the biggest pressure on labor. There's been certainly an increased wage rate pressure, but I don't think it's huge. By far average wage rates 4 or 5 years ago, we're going up 2.5%, 3%. Today, maybe they're nowhere up 3.5%, 4%. I mean, a measurable increase, but not wildly changed. I think what really tends to fluctuate is the use of what we describe as premium pay. So as your nursing hours, in particular, but other labor categories as well become in shorter supply, we're replacing that with over time or shift differentials, shift premiums or tech travel nurses or registry nurses. And at the beginning of the pandemic when volumes declined so precipitously, the amount of premium pay and premium hours declined pretty precipitously as well. Those are the first hours, if you will, to go. And as the demand has recovered and the labor market has tightened, and you expressed the notion that some nurses are suffering burnout. And I think there's an element of that, some nurses are seeking to work and what they would consider to be less risky environments than the hospital setting. And honestly, some nurses are chasing in the short-term these premium dollars, if you're willing to travel and depending on the geography, maybe you're not going to have to travel that far, there are some pretty significant dollars that nurses can earn working in COVID unit to whatever in some hospitals. And you see some of that as well. So it's a challenge, I think, in the third quarter, what we were able to demonstrate in both of our segments is that at least at the moment and in the third quarter, it was a pretty manageable challenge, and I think our expenses looked pretty well managed in that period. The more of the virus -- or the longer the virus continues, I think the more pressure will get, which is honestly one of the reasons why, at least from my perspective, the news of the vaccine in the last day or 2 is so welcome. And particularly, the idea that the vaccine may become available to health care workers, specifically and the most prioritized health care workers, which I think would be hospital workers in maybe late this year or early next year. I think that will be a significant relief to our business.

Interesting. When you think about the balance sheet, relative to health care hospital operators, for sure, maybe even health care services players, you are relatively modestly levered, conservatively, leveraged, let's say, conservative balance sheet. Obviously, we've got the CARES Act money and the relief funds that the industry got. So maybe that clouds the picture. Everyone's sort of pulled their buyback activity earlier in the year and all. But as we come out the other end of that, what's the company thinking about given its modest leverage and throwing off a lot of cash flow in terms of how you might use that -- what you might use the capital for?

Yes. Look, I think, A.J., that we were very encouraged by our third quarter results. Despite the fact that COVID was with us and with us in a relatively significant way in both of our business segments. We managed -- what we were able to manage through that. And again, I think we're very encouraged by that. Now as you know, there is a lot of uncertainties and as we now go into the fourth quarter and early next year as a result of colder weather and a potential complication from the flu and people may be getting a lot more lax about their social distancing during the holidays. And look, I don't think any of us here are smart enough to know exactly how that's all going to play out. So I think we would like to go through the next couple of months and maybe the first month or 2 of next year. And then sort of reevaluate where we are. It's that same sense of stability, I think, exists in February that I think existed in October, I think it's highly likely resume our share repurchase and our dividend activity early next year. And quite frankly, I think if the stability exists -- or we sense that exists, and to your point, given our strong balance sheet, given our leverage levels, I think there's a reasonable chance we become even a more active participant in those programs.

And then maybe as we wind up here, thinking about next year, I know it's way early for you guys to provide formal guidance. But when you think about the big puts and takes, I'm sure just what we're dealing with a vaccine and all is probably number one. But what would you highlight? If I was to ask, as you're starting the budgeting process for next year, what are the big puts and takes in your mind and thinking about next year?

Yes. So I think the most difficult aspect of sort of predicting 2021 and modeling it is the COVID virus and the trajectory of the virus itself. I think what we -- as I was just getting back to what I said previously, I think what we were able to prove in Q3 was that at current levels of the virus, we're able in both sides of the business to largely manage through it. And our expectation would be that would be true for 2021 as well. But as we start to think about the components of what we would normally provide as components to guidance, admissions, pricing costs that sort of thing, a little more difficult to do when it's hard to sort of predict the trajectory of the virus? And particularly because on the acute side, especially, but I think maybe even on the behavioral side as well. We just have tended to have more incidents of the virus than some of our peers. That's just sort of the unknown. Again, I think we feel pretty good generally about the business and our better ability as the pandemic eases, et cetera, to return to pre-pandemic levels of operating income or basically stay there because I think we're there now. And I think even on the behavioral side potentially exceed that as we sort of talked before. We just don't exactly know the timing of that. It certainly seems like by the second half of next year, 2021, there should be a pretty substantial impact from the easing of the pandemic. But again, we'd also like to see that develop a little bit with a little bit more certainty before we make those predictions.

I think at the close of the day, people are feeling a lot better than they were a month ago about the ACA case. It sounds like the overall arguments went pretty well. But just -- you haven't sized that in quite a while, I think, and you probably stopped sizing it quicker than many of the other ones did. But order of magnitude of the ACA exposure exchanges and Medicaid, just for anybody that's still thinking about that mid-single-digit EBITDA on the acute side, not as much on the behavioral, I would say. Does that sound right?

Yes. So again, you're right, A.J. I think we generally size that back in 2014, the first year of the ACA. We've sort of -- our best guess was we had about a $35 million to $50 million favorable impact, almost exclusively on the acute care business. And I think we generally thought that, that number would remain pretty much the same and maybe grow a little bit as the years past, but I don't think we have a different point of view. I think the reason we stopped sort of giving that number or calculating is it became, I think, in our minds, harder to sort of precisely parse out the impact as time went on, particularly because the economy was improving, and we were seeing more insurance and it was a little hard to identify how much of that was because of the economic improvement, how much was because of the ACA. But at the end of the day, it was not -- it's not an insignificant number, but I also don't think it was a landscape changing number. And over the last 5 years, our business has grown some. So I think it probably has become even less significant.

Interesting. All right. Well, thanks, Steve, for the update. I think we covered a lot of the waterfront. And I appreciate Universal, once again, participating in our conference, and I appreciate all those who dialed in. We will be happy to speak to you soon.

Thanks. Looking do in Scottdale again someday.

Yes, exactly.

Thanks, A.J.

Take care.