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

Okay. So maybe moving on in trying to just bring this up to maybe putting this in a little bit more of a longer-term framework. Interested in your latest thinking, Steve, just around what you expect will be the more enduring impacts of the pandemic on your acute and behavioral businesses? What type of the normal sort of historical business do you think just reverts back to business as usual? Or where do you think things are going to have permanently changed? And importantly, for you, how does it influence your thoughts on future maybe changes around capital allocation?

So I think that broadly, the most kind of fundamental observation that we've made during the pandemic is that either the business fundamentals of neither of our 2 business segments have really changed, again, fundamentally. And when I say that, I mean that the care that we're providing, as best as we can tell, is really not being provided alternatively anywhere else. So while we know that there's been a measurable decline in emergency room visits, we're not necessarily seeing it obviously being picked up in another setting. So doctor office visits aren't necessarily up and urgent care center visits, at least to a degree that we're able to track these things, are not necessarily up. We have freestanding EDs, their volumes are not necessarily up, et cetera. Same thing on the behavioral side, where we've seen a decline to a degree in our patient days, although they've rebounded pretty significantly from the beginning of the pandemic, no real evidence that they're being replaced in competitive facilities or alternative sites, et cetera. We do know that, to some degree, access points have changed, I think. And that's mostly been, I mean, most obviously, telehealth has stepped in and provided an access -- a means of access to patients and again, both behavioral and acute. That definitely exists at a much higher level today than it did pre-pandemic. Whether that changes post pandemic and people are going to continue to use telehealth more aggressively and frequently than they did post pandemic, I'm not sure. I think we're prepared to deal with that either way. We’ve certainly stood up our own telehealth capabilities. And again, at the end of the day, telehealth for us is mostly about access to other services that we offer. So if you're going to be evaluated or assessed in an emergency room visit or in a community mental health center or in a doctor's office, and now you're going to be done so in a telehealth visit. At the end of the day, I think the end result for us and for the way you proceed to get care along the continuum does not change all that dramatically. So we'll see about that. To me, the greater sort of penetration of telehealth is probably the most enduring aspect of this. I don't know that it ultimately changes our business model a great deal. I think we've become more adept at offering telehealth services kind of throughout our continuum, but I don't think it's a huge change. Other than that, again, I think fundamentally, while we've seen some people more reluctant to access the system, we assume that, again, post vaccine sort of as we get to the other side of the pandemic, those things will sort of return to a much more normal trajectory.

Okay. And Steve, I did get one question in from an investor here. It looks like I think it relates to just the vaccine dynamics. And the question is, does UHS have cold storage, negative 60 degrees, in place for the treatments, for other treatments? Is there anything else that needs to be done around those types of logistics?

So I tried to elicit this before. I mean, I think we're in the process of acquiring that capacity. And we'll be proactive about it, even though we don't exactly know to what degree we’ll be distributors of the vaccine. But I think other than the physical storage kinds of issues and presumably training -- and I'm not a clinician, so I don't know exactly how much training is required for those who will give the vaccine -- I think we'll be prepared to distribute the vaccine if we're called upon to do so.

Okay. And again, for investors listening, feel free to email me any additional questions you have. Steve, maybe just sticking on the topic of capital deployment. And one thing I think that's been notable for UHS during 2020 is that we really haven't seen the types of cuts to CapEx from your company that we've seen from a lot of other health care providers, especially other acute care hospitals and actually, I think CapEx year-to-date is up around 14% year-over-year versus the same period last year. So can you discuss with us the main -- first, the main drivers of the increased CapEx spending in 2020? And also how that's been balanced between capital investments and acute care relative to behavioral? It looks like your organization has just made the commitment to continue to sort of focus on the CapEx that's needed, but interested if you can give us a little more details on that. Obviously, it's been something that's been differentiated for UHS.

Sure. So Scott, when the pandemic began, we certainly had a point of view that our volumes and our revenue streams and our commensurate cash flow was going to be reduced, and at least out of the gate has been reduced pretty significantly. And as a consequence, we’ve suspended our share repurchase program. We’ve suspended our dividend program. We were applying the brakes pretty aggressively on our CapEx program. Within a period -- a relatively short period of time -- 6, 8, 10, 12 weeks -- most of our volumes began to be restored and recover, if not fully, to something close to pre-pandemic levels. And I think we began to develop a point of view, which I think I tried to articulate in response to your earlier question, that fundamentally, the pandemic was not really going to change the underlying sort of business dynamics, the demand metrics of these businesses. And so our capital projects, which tend to be longer term in nature and sort of have a 3 to 5 to 7 year point of view out in the future, I think we began to think those projects that made sense back in March and April, now in May and June and July look like they still make sense and not much has changed. And as the pressures of the pandemic, at least on revenues and cash flows, et cetera, ease some, we began to sort of restore and sort of put back in the queue some of these projects that had been deferred. And I think that's why -- ultimately, I think we'll probably spend $75 million, $100 million less than our original projections for 2020 implied. But otherwise, we'll come close to spending what we thought in 2020. And I think when we get to 2021, absent another major change, we'll be back to sort of on track to spend what we would have otherwise spent in 2021. And in terms of what those things are, it's mostly capacity expansion. On the acute care side, it’s building a new hospital in Reno. It's new capacity, new OR capacity, ER capacity in many of our hospitals, and in some cases, new beds. In the behavioral space, it's new beds in some of our existing facilities. It's joint ventures with acute care hospitals who were building new joint venture behavioral facilities with acute care, not-for-profit providers in many of our markets. Again, no real change. These are all things that we talked about in 2019 and going into 2020, and we're just sort of resuming those projects after a delay of 2 or 3 months.

Okay. And you mentioned 2021 and the trajectory that you're on in terms of CapEx. I guess really the one swing factor for 2021, and it could change, but -- would be that the Medicare advanced payments will need to be start to repaid. Obviously, that could be impacted if there is another stimulus and it's decided that those -- the extensions could be continued or maybe forgiven. I guess sequestration, the special sequestration is another thing that probably is sort of up in the air as a discussion piece right around future stimulus and whether that's -- I know that many provider groups are lobbying right now to have the freeze and the sequestration cuts continued into next year. Just remind us, for UHS, just around the Medicare Advanced payments piece, how we should be thinking about modeling that for next year? And how meaningful, I guess -- obviously, that was something that, as we know right now, we should be modeling in and should be one headwind just to operating cash flow for next year.

Yes. So I mean, the practical reality is that, given our other aggressive responses to the pandemic, a reduction in operating costs, a suspension of our dividend and share repurchase program, at least a modest reduction in our CapEx plan spending -- the fact of the matter is we've received a little less than $700 million in Medicare accelerated payments. We really have not used those for the -- basically, they're sitting on our balance sheet. And again, unless things change, we probably will not use them. And I think -- particularly if we resume our share repurchase and dividend programs early next year, I think we would likely return those dollars to CMS and to the federal government because I think we don't want to be viewed in sort of a light of using those monies to return capital to shareholders. That's not our intent, and we don't want any confusion about that. So at the moment, we're basically just sitting on those funds, not really using them. If I think things continue in much the same way that they've been going, they probably get returned early next year, particularly before we resume share repurchase and dividends.

Okay. Understood. So it sounds like even if there was a legislative extension at this point, you may be inclined just to return those funds given your overall liquidity and cash flow, I guess, accessibility that you have right now?

Yes. And again, I do just want to make sure that people understand the distinction between those Medicare accelerated payments, which were always meant to be an advance, and the CARES funding, which I think we have every intent of keeping to the degree that we are able to justify under the CMS requirements, as you described, that we’ve earned those.

Yes, yes, important to make that distinction. Okay. A couple of questions on the behavioral business and just some of the trends in the third quarter. First was -- I know it's not a huge part of the business, but the U.K. business did show very strong revenue growth, both sequentially and year-over-year. And just interested, first, just if you've seen some real improvements in the business. And then going forward, there's been several media articles in the U.K. recently. I think the Financial Times, for example, had one recently, talking about some real support for some meaningful expansions of funding to the NHS for Mental Health Services. So it seems like there could be more dollars on the way. So maybe give us an update on the U.K. in terms of that growth in revenues you experienced in the 3Q. And then thoughts on the outlook given some of these indicators around future funding.

Yes. So I think in the short term, our U.K. operations were aided by 2 sort of newer developments in the quarter. One is there were about $5 million of what I'll describe as the U.K. version of CARES funds that we received. We didn't separately disclose those because they were not material. But I think that helped the U.K. revenue numbers. Now I will say that we think there were $2.5 million, $3 million of incremental COVID expenses that offset that to some degree, so not all of that flows to the bottom line. And then we did get a couple of percentage points of price increases from some of our NHS contracts. And that was probably another $5 million or $6 million of kind of incremental help in the quarter in terms of revenue. Broadly, I think your commentary is right. I mean, I think there is kind of a -- kind of consensus view that -- in the U.K. that greater support for behavioral providers is probably a relatively bipartisan sort of an issue in the U.K., et cetera. Now they're still having to balance that out against their COVID pressures as well as some of the pressures created by Brexit, et cetera. So we'll see how that plays out. But I would agree with your broad commentary that the sort of underlying kind of legislative environment for behavioral in the U.K. is pretty positive.

Okay. And then just another element just around payer mix. I thought one thing that was interesting in your financials for the behavioral business is that we definitely saw a meaningful growth in managed Medicaid revenues in the third quarter, and that bumped up in terms of payer mix. Obviously, more broadly, we know that Medicaid enrollments have expanded significantly since the pandemic, mostly due to just the suspension of redeterminations. With that said, when we heard from companies more broadly on the acute care side, we really haven't heard sort of that growth in Medicaid enrollments really being called out as a meaningful feature of payer mix shifts, but it did look like that was more notable in the behavioral business. So maybe give us an update there in terms of whether there were anything specific that were driving that managed Medicaid mix? Maybe just to start with and then I’ll have a follow-up around that business.

I think for us it's a continuation of a trend that we've been talking about now for several years, which is that more of our traditional Medicaid population has been migrating or evolving to managed programs in a variety of states and counties, et cetera. And I think you just saw a little bit more of that. I think the other piece of that is because I think the residential behavioral business has held up a little better during the pandemic than the acute behavioral business. That business, I think, has more exposure to managed Medicaid. So I think you're getting a little bit of that dynamic as well.

Okay. That makes sense. And just interested, I know that sort of one long-running feedback that you've been providing just around managed Medicaid, and we've seen the financials for a number of years has been some of the pressures on length of stay and behavioral and due to the more aggressive utilization management that we see from managed Medicaid relative -- often a fee-for-service Medicaid. Just interested in an update there in terms of just post pandemic. And I know that MCOs more broadly have relaxed a certain sort of normal protocols, those do seem to be coming back in certain areas, not coming back in others. What would you sort of say in terms of right now post pandemic with the Medicaid MCOs in terms of the behavioral business and utilization management, how aggressive or relaxing they've been around some of their approaches?

Yes. I mean, I think in 2019, pre-pandemic, we were seeing a bit of a stabilization in our length of stay, in part because the shift to managed Medicaid had slowed down a little bit, in part because I think MCOs were becoming a little bit less aggressive in that regard. And I think then during the pandemic, some of that leniency maybe would be even exaggerated a little bit more. I don't necessarily think that's an enduring dynamic. I think that post pandemic, the MCOs will return to whatever their sort of prior practices had been. But I think we're getting a little bit of a benefit from that in the short-term during the pandemic, I think as payers are making some incremental efforts not to be seen as having excessive profits, et cetera, in the midst of the pandemic.

And then from, I guess, the big picture just on the behavioral business, just as it relates to volume. Initially, when the pandemic hit, we saw a more significant impact on behavioral volumes for UHS as it relates to the impact on the acute business relative to the residential business mix, let's say, of one of your large peers, for example, in the U.S. Just interested, more recently on the acute care side, in particular, what you've been seeing in terms of the velocity of converting acute patients back into the behavioral facilities. I think, obviously, everyone would agree that there's going to be -- there was already a lot of growing demand for behavioral services pre-pandemic and that's only going to be exacerbated. So I'm interested, I guess, first part, sort of real time, what you're seeing. And then second part, I guess, how you're thinking about bed additions or other investments sort of thinking about either accelerating them or just sort of maintaining the pace you had been thinking about previously just as -- certainly, this is going to be an area where there's going to be demand going forward.

Yes. So look, I think we've made really largely the same comments really from the beginning of the pandemic. At the outset of the pandemic, our behavioral volumes declined pretty precipitously as we saw our emergency room referrals come down because emergency room traffic was down considerably and adolescent referrals were down because in-person schooling was I think diminished significantly. And some of our national programs, which rely on people traveling to them, often at some distance, were down. We've also talked, I think, earlier in this conversation about some of the labor shortages and some of our employees being out with the virus or suspected. That's been a bit of a dampening impact. However, despite the fact that all those elements have been there from the beginning, behavioral volumes have been recovering pretty gradually and pretty steadily from the outset. So we're overcoming all those other issues, which continue to exist, quite frankly, in not an insignificant way. And I think the reason we continue to recover is the commentary that you made, that underlying behavioral demand remains rather strong. And so I think our point of view is that, at whatever point the virus pressures begins to ease and we see fewer COVID patients, and more of a return to normal for things like ER traffic and airline travel and in-person schooling, et cetera, that behavioral volumes will also naturally continue to grow. And it really gets back to the point that I was making before then about our capital spend. I think we have a point of view, look, we don't think we're necessarily any smarter than anybody else in terms of saying whether that's going to happen in Q1 or Q2. But I think we have a point of view that it’s going to happen in the next year or so and it's not going to be 3 or 4 years down the road. So as we think about places where new beds in existing facilities or new beds in de novo facilities are going to be required, we're pursuing those projects, if not at the exact same pace as we were pre-pandemic, at something close to that pace. Because I think we feel like this interruption in demand may have lasted or may or maybe it will last for a year or 18 months or 2 years, and we're already well into that, but it's not going to last for multiple, multiple years.

Okay. Great. Well, I think we're pretty much up at time here. So I'm not going to try to get another question in. I think this is probably good. I guess, Steve, just want to throw it over to you. Was there any final comments or anything you wanted to add before we, I guess, break the session?

Yes. I think we covered the gamut of important issues. So I appreciate that, and I appreciate the opportunity.

Well, thanks, Steve. And so do we, again, on behalf of Stephens, really appreciate you joining us for the conference, and hope the rest of your meetings today are productive. And with that, we'll wrap the session. Thank you.

Thanks, Scott.