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

Thanks. Good morning. I appreciate everybody being here at our second annual Wolfe Virtual Health Care Conference. Really pleased to have the CFO of UHS here with us, Steve Filton. We're going to kick it right off into Q&A. So Steve, why don't you spend a minute talking to us about -- you came out of the third quarter with a pretty solid set of fundamentals and results, right? You've done a good job on cost cutting [ acuities ] meet-up for some volume weakness. In the fourth quarter, we've seen this COVID spike again. I think a lot of people are wondering how this is affecting your business, what you're seeing in terms of behavior. Maybe compare and contrast it in some of the tougher markets versus the non, first, for COVID. I know it's so local. And then maybe compare it to the second quarter when we saw the big spike in what you're seeing from patient behavior.

Sure. So I'll just add kind of one nuance to that, which I think is specific to UHS. Obviously, at the very end of the third quarter, we were the subject or the target of a cyber attack, and that has certainly complicated things in the first few weeks of the fourth quarter. So I think we've seen some amount of volume impact in certain markets. It really varied where ambulance traffic might have been diverted or some elective procedures were canceled mainly because the hospitals went to manual input sets of procedures, which are perfectly adequate, but somewhat slower and particularly the younger generation of clinicians are unaccustomed to that. And so again, we saw some slowdown. One of the challenges we have, it's a bit of a Catch-22. People ask appropriately, what's the precise impact. And it's a little hard to say because we're still catching up on some of the data input and sort of recalibrating or reaccumulating some of those statistics, et cetera. What I think is important to know, at least from my perspective, is that within a month or so, by the end of October, I think we feel like we are entirely back to normal. And so it's not an enduring or ongoing kind of an impact. And at some point, we will make an insurance claim. We have a significant amount of cyber insurance, and we'll make an insurance claim for whatever our lost revenues and incremental expenses for that period were. So even to the degree there was a negative impact, at some point, we would hope to recoup and recover a lot of that. And hopefully, when we do our year-end call, we'll be able to be much more precise about what the various components of this are. As far as your broader question about what's happening with demand and the COVID surge, et cetera. I think like a number of our peers, at least for our hospitals and our acute care hospital portfolio, in particular, the second wave of COVID and the surge that we saw in the July time frame is actually worse than what we're experiencing today. Really, we have 2 hospitals that are really experiencing kind of record levels of COVID patients for them. Both of them are in Texas. And we're managing through even those couple of hospitals. But more broadly, I think across the portfolio, we're seeing an elevated level of COVID, but not necessarily higher than what we experienced at the beginning of the third quarter. And as best as we can tell, and again, it's a little bit complicated by our recovery efforts in the cyber attack, the metrics are largely the same, meaning that the somewhat slower or softer volumes will be offset on the acute side by higher acuity and on both sides of the business by some of the more aggressive cost cuts that we implemented earlier in the year in the March, April time frame to respond to the pandemic. So right now, we feel like we did in the third quarter, that we're managing through whatever COVID pressures there are. We hope that continues to be the case. Obviously, we're as sensitive as anybody to the idea that COVID cases are breaking records in most geographies or many geographies as our hospitalizations, et cetera. So hoping for the best, but also preparing for things to potentially get worse, at least in some markets.

Got it. So it doesn't sound like you're seeing anything too dramatic in terms of patient behavior or physician behavior. It sounds like people are -- understand it's become part of the normal fabric, and they still need to get their procedures done, to take care of their health. And so for now that's pretty good. And in terms of COVID and the benefit, there's been some debate about how much -- how profitable COVID is versus a typical admission. And I think you've all been -- you and the rest of the industry has been very clear that it's a higher revenue admission, but it also is a higher [ labor save ] for a longer [ labor save ]. And therefore, it sounds to me like it's average profitability from a margin perspective on that revenue. Is that in the right ballpark in terms of the way you would think about it as well?

Yes. So I would clarify and maybe nuance it a little bit more. So I think historically, we've always said and my sense is that this would be true for all hospitals that we find that procedural, surgical/procedural patients are more profitable than medical patients. COVID patients by definition are generally medical patients. They're not generally receiving any sort of procedural sort of care and surgeries or otherwise. And so I would say that on average, COVID patients are probably no different than the average medical patient. In fact, to your point, except that they had higher revenues and higher costs, but their margins and their overall profitability are not terribly different than the average medical patient. But I think they're going to be less profitable than surgical and procedural patients, so to the degree that we continue to experience this dynamic, which we have from the beginning, which is when a hospital experiences a higher level of COVID, they tend to experience somewhat muted or moderated volumes of non-COVID patients. Now that dynamic was very exacerbated and very pronounced in the March, April, May time frame, much less exaggerated in June, July, August until now time frame. So I think that's part of the reason we're managing through this. But certainly, in the markets and like in the hospitals that I mentioned before that have seen really elevated kind of record levels of COVID patients for them, yes, we definitely see fewer ER visits, some smaller -- slowdown in elective surgeries, et cetera. And then what we find is as the COVID volumes ease, inversely, in response to that, the non-COVID volumes increased. My guess is that, that relationship is now going to exist until we get to the, I'll call it, the other side or the post-vaccine side of the pandemic. But again, I think one of the things that has really helped the hospitals out is that, that dynamic is much less pronounced than it was, and that gap is much less pronounced than it was in the very beginning of the surge.

Got it. Got it. That's helpful. And then flipping over to the -- or actually, before I flip over to the behavioral side, Steve, when you look at you look at the dynamics, and I know you're only 6 weeks into the quarter and you don't have great visibility on October yet, is there anything that would -- that you'd point out to us that would take you off of that third quarter trajectory in terms of how the hospital business performed year-over-year?

Yes. So I think, again, the 2 variables are, there's been some speculation and question, and I think it's a legitimate question about the behavior that we're likely to see on patients -- or from patients in regards to elective surgery in the fourth quarter, specifically as it relates to the historical trend of patients who have exhausted copays and deductibles at the end of the year tend to sort of shift and kind of proactively get diagnostic, procedural, relatively minor elective stuff done at the end of the year and at the end of their benefit plan year, and they sort of shifted out of or away from the following year when their deductible and copay clock starts again. I don't know whether we'll see that dynamic, Justin. And I think it's too early to tell, and we're seeing other things going on to really be able to parse that whether we're seeing that dynamic again. I don't think it's a terribly impactful dynamic one way or the other, but there's that question. And then I think the only other question of what could change sort of the dynamic is simply the trajectory of the virus itself. Again, I mean, obviously, we read all the data that everybody else reads. Cases are rising virtually everywhere. Hospitalizations are rising in many places. At least at the moment, our hospital portfolio, in particular our acute hospital portfolio, is not seeing a ton of that or certainly more than we saw back in the early third quarter. But if that changes, that could certainly change the dynamic.

Got it. Got it. And anything you could share with us on cost cutting, Steve, in terms of the benefit of a hospital business? I think yourselves and really all of you -- you're probably looking to be a little bit in the summer and probably pulled a little harder on those levers than you might have in other periods of turbulence. And so it feels like it's been a pretty good benefit. How sustainable is it into the fourth quarter? And then as we think about into 2021, that's what I would have thought even in a normally tough environment, that's what -- I would say, hospitals is short term, more fixed cost; intermediate term, more variable. So there are probably other leverage you can pull into 2021 in terms of inflationary rates to suppliers, to even your own employees. Anything you can share with us there in terms of how much cost you think you've been able to take out of the business, how much of a contribution that's been and how to think about that into 2021?

Yes. So look, I think you framed the situation pretty well in your question. So if you think back to March, April, May, we begin to experience this COVID surge, we begin to experience a precipitous decline in non-COVID business, ER traffic, elective procedures, et cetera. And honestly, at the time, you described it as looking into new business, not a bad analogy. I mean I don't think any of us really knew what was going to happen and how prolonged this dynamic was going to be. And I think hospitals in general, but certainly I speak for UHS, we began to attack and to really take a hard look not at just our variable cost, which tends to be the focus of hospital operators in this sort of day-to-day operation of the business, adjusting to day-to-day changes in volumes. But we began to look pretty seriously at more of our fixed and semi-fixed costs. And we were eliminating not just the variable caregiver hours at the bedside, but lots of overhead and administrative departments like lab and pharmacy and radiology and billing and dietary, housekeeping, on and on and on. We also -- I think as you alluded to your question, we're going back to vendors and either seeking price freezes or some pricing concessions in the short run, et cetera. And in some cases, getting those sort of things. Well, the good news, obviously, is that volumes actually began to recover as early as April, but certainly into May. And by mid-June, I think volumes were probably almost completely back to pre-pandemic level right before this sort of second wave that we started to experience. But I think what happens is that when you make deep cost cuts and particularly the fixed and semi-fixed areas, their impact is a little more enduring. And I think we have -- our most recent experience with that was a decade ago coming out of the financial crisis and the great recession where we made similar kinds of deep cuts. And I think we found those cuts endured for -- and it varied by 2, 3, 4, 5 quarters beyond sort of the economic recovery because those costs get restored a little more slowly than the variable cost do. I think that's sort of the situation we're in. And I think you saw that in the third quarter where even though volumes came back and not completely, but came back in good ways from where they had declined earlier in the year, a lot of those costs remain somewhat muted and moderate. And my sense is we'll continue to get that benefit at least partially into 2021, if not for most of the year, probably a little too early to say with great precision. I don't think the cost cuts are permanent. But I do think the nature of and the sort of the cadence of the business is that don't last for at least a few quarters.

Got it. Got it. And let's move over to the behavioral business for a minute. Saw some good bounce back there, not just in volumes, but also in length of stay. Anything to note there that might have changed into the fourth quarter that we should consider?

So your observations, I think, are right on point. I think we have found already in 2019, pre-pandemic that length-of-stay pressures, which have been a real headwind for the segment had mitigated quite a bit in 2019 and I think had continued to mitigate into the very early parts of 2020. They've even further eased, I think, in the pandemic period for a variety of reasons. One is, I think the residential business volumes have actually held up a little bit better than the acute volumes and the length of stay is longer in that business. We are seeing, I think you alluded to this in one of your earlier questions or comments, a little bit of increased leniency on the part of payers in terms of some of their more aggressive utilization review, length of stay management kinds of practices. So I think we're benefiting from that. Again, I think those changes are relatively transitory and probably don't last beyond the pandemic recovery or long beyond that, but helpful at the moment. And again, I think the only variable that probably has a significant impact on the business going forward is that same COVID impact. We see, I think, for different reasons, but we see that same inverse relationship and behavior between elevated COVID activity and behavioral demand. So if we're in a market where there's a lot of elevated COVID activity, even if we in our behavioral hospitals, not actually see or taking a lot of COVID patients, we tend to see reduced ER activity where we're getting a hospital -- where we're getting referrals from acute care hospitals. We see reduced amounts of kids in school where we're getting referrals. We see reduced travel. And some of our programs, particularly our national programs, rely on kind of greater travel, airline travel with patients who are traveling some distance to get their care, all those things. And then the other complicating factor is the virus itself on the behavioral side in a market where there's elevated virus activity, and we do take patients, tends to be more inefficient in our behavioral hospitals. In other words, we take a patient or 2 or 3 and they're in a 10- or 15- or 20-bed unit, and now we're pretty much restricted from not admitting any non-COVID patients into that unit. Maybe in hospitals we've got 15-, 20- 25-, 30-beds units that are generally, if they're COVID units, they're fully occupied. So we don't have that same level of inefficiency. And then finally, we always face the challenge in a market with elevated COVID activity where we've got a cohort of our employee base that's out either because they've contracted the virus or they've been exposed to the virus. And I'll make the note, and it doesn't really matter in the end, but generally not because they've been exposed to contracting at the facility, but usually it's outside. And so the end result is the same.

Got it. Got it. Yes. I was saying to you before that we had some not-for-profit plans yesterday. We'll have some more not-for-profit calls today. And one of the things they talked about was an increase and need for behavioral health. And that's a place where they're really focused in terms of trying to deliver care. I think I saw an article in one of the papers today that said they did a survey of employers, and over 60% of them are most worried about behavioral health among their employees. Are your physicians, your psychiatrists that are in these facilities that are working with patients, are they seeing this pent-up demand? Are you hearing from inbounds from managed care? Is that giving you more leeway? Do you feel like this is just a COVID-related thing? Or do you think it's something that could be more sustainable in terms of greater access even from a medical management perspective going in over time?

Yes. So look, honestly, Justin, we could sort of -- I didn't talk about this issue exclusively for the balance of the time, which I know we're not going to do. But I'll just briefly try and address. Look, I think we were seeing those trends pre-pandemic. And I'm not enough of a social scientist to tell you exactly why it is, but suicide rates are rising around the country. Incidents of a lot of different behavioral diagnoses, whether they were autism or eating disorders or addiction, illnesses were rising. And so I think pre-pandemic, there was a greater need for behavioral care. And we were certainly, I think, late in '19 and early in '20, seen very robust volume growth in our behavioral business. And we're really very encouraged, quite frankly, that we were going to get back to these sort of growth -- revenue growth level targets that we have been talking about for a number of years, and then obviously, the pandemic came. The pandemic itself, I think, has also created now a layer of additional incremental demand. I mean the way clinicians sort of describe it to me is they say that we're in an environment where virtually every single individual is feeling more stress than they were feeling pre-pandemic, whether it's because they've got stress in their job or they've lost their job or they're under some financial pressure or their kids are at home or they're basically locked at home, and then all these things are stressful. And what I say is the average person, and I'll give you and I the benefit of the doubt, people like us, we'll manage our way through that. And maybe we need some help and maybe we need to talk to somebody, but we'll manage our way through that. But somebody who has chronic behavioral issues, they've got severe depression or schizophrenia or multiple personality disorder or a tendency for addiction issues, this sort of stress triggers those kinds of episodes, and we're seeing more of that. Now the challenge is making sure that those people who are experiencing these symptoms and these stresses are getting the care they need because these folks are also -- have the same psychology that everybody else does, which is many of them are afraid to leave the home, and they don't want to go to the hospital, and they don't want to go to the community mental health center. And we're certainly trying to provide them other outlets and other avenues and access points to do that. And then finally, I would just make one other point, and you talked about the payers. I think the payers are beginning, or maybe I should say, continuing to recognize that there's a greater role for behavioral care in the broader health care continuum. So there's been a lot written. And I think there's a lot of consensus that, for instance, patients who have chronic acute care illness, whether that's diabetes or chronic cardiac illness or pulmonary illness, often experience behavioral symptoms as well. They're depressed, all those sorts of related things. And as a result, they're often not nearly as compliant with their medical protocols and regimens as they would be if they weren't facing these behavioral issues. So I think there's a view that there's a greater role for behavioral care. And honestly, our Behavioral President, Matt Peterson, I think was starting to address that issue. He's got a managed care background. I think he had sort of been exploring those initiatives on the other side. And so when he got here, he had started to do that. But unfortunately, he started with the company last fall. So shortly after he started, he had to deal with the COVID issues and that tended to monopolize, I think, a lot of his time. But I think, certainly, we continue to have those conversations. And the more that the pandemic eases, the more we'll get into those conversations more seriously. So yes, I think there's a greater role for behavioral for all sorts of reasons, the stress of the pandemic, just the broader trends in behavioral and then the behavioral ability to impact other sort of nonbehavioral spend.

Got it. Let's talk a minute about how to think about framing 2021. You have your 2 peers. One has said, we think we can grow in line with our original 2020 forecast in 2021, right? So we'll do our 2020 EBITDA. The other has said, we're not sure we're even going to be in a position to give guidance on the fourth quarter. Might just tell you what we're going to earn on the third quarter. So as you look at the current environment, where do you kind of feel like 2021 shapes up from here in terms of how much visibility you have and how you think about it? I think everyone's kind of starting with a baseline 2019 earnings here and thinking about how you grow from that or if you grow from that. So can you give us a framework that we should think about for UHS?

Yes. So look, I think it's always hard to speak for the other companies, but my sense is that those who are willing to talk about and kind of think through 2021 guidance are making the assumption that our experience, which I think was relatively kind of similar for the hospital and the acute hospital industry in the third quarter, that we'll continue to operate as long as the pandemic is around with slightly lower volumes, but those will be offset to a large degree by higher acuity and the benefits of cost cuts that we talked about before. And at the end of the day, we'll be able to post bottom line EBITDA results that are not all that dissimilar from what we might have expected otherwise in 2020. I don't think that's an unreasonable position if you start with the premise that the third quarter trends are going to be representative of what we experienced in Q4 and the first half of next year. I think those who are reluctant to say that are probably looking at it and saying, if nobody really knows what is going to happen in the balance of this year and early next year in terms of the COVID trajectory and how omnipresent the virus is and what that means for non-COVID business, and I think that's true as well. So I think a little bit of it depends on how you want to land on making those projections over the next quarter or 2. I think we all, hopefully, are of the mind that once the buyer is -- excuse me, once the vaccine is more widely available, and again, I'm not an expert in forecasting exactly when that's going to be, but I think the general sense is that by the second half of next year, a good chunk of the population will have had access to it and hopefully avail themselves of it. And certainly, by the back half of next year, our business on both sides begins to look a lot more like our traditional metrics. So I guess I probably will end somewhere in between the 2 viewpoints, sort of agreement with the premise that if things continue as they did in the third quarter, 2021 is not that hard to project. But acknowledging that at the moment, that's not the easiest thing to do. So look, I would hope that we're in a position when we would normally give guidance for 2021, which would be in late February that we'll be able to do so. I would hope at that point, we'll have 3 or 4 months of experience and we'll also have a much better sort of view and insight into how the vaccine is going to play out.

Got it. And in this environment, I feel like there's going to be a lot of folks that are struggling out there in terms of health systems, hospitals, even behavioral facilities potentially that are going to take a hard look and think about life over the next 3 to 5 years. Are you seeing any more of a pipeline there? Or do you think it's just too early in terms of opportunities for M&A, either on the behavioral or the acute set?

So I think a bit of a mixed bag, Justin. I mean I think what you say is certainly true or there's certainly a significant element of anything in that I think that the pandemic has been a real financial stressor, if you will, on natural not-for-profit hospitals, particularly those that might have already had some level of stress to begin with. But I will also say that the government intervention with CARES Act, grant funds and Medicare accelerated payments certainly have eased the path of those not-for-profits over the course of the last few months. And so their strategic sort of imperatives or decision-making are not as urgent as they might have otherwise been. So I think we have a view that at some point, and particularly, as a lot of these funds have to be -- the accelerated payments have to be repaid, and we kind of get back to having to sort of eat what you kill kind of thing, that we may see a busier pipeline. I think at the moment, and I think Mark kind of articulated this on the third quarter call, like our phone is ringing off the hook or we're getting a ton of incoming or inbound calls, but certainly, we feel like we have the human resources and capital to respond to those inquiries when and if they do come. And obviously, from a financial perspective, I think we also have the capital structure and the financial wherewithal to respond to those opportunities as they arise, and we hope they do.

Got it. And then in terms of returning capital to shareholders via share repurchase specifically, I know that's something that we've put on pause. I know you haven't said, again, that it'll be -- if you're not -- you haven't said you're going to be returning that, the government money, anytime soon. I know the governments need a triple reversal and now seems to be a little bit more lenient in terms of what they're requiring to keep those funds in terms of the non-loan type. So as you think about that, is it one of those things where you feel like it's going to be tough to return capital until you give the government funds back or until you know that you've fully gotten through all of those disbursements and recognize them? Or do you feel like that's something that you could do in between?