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

Good afternoon, and welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok, and I'll be hosting today's session with UHS. Joining me today is CFO, Steve Filton. Welcome, Steve, and thanks for participating.

Thanks, Andrew.

Let's jump right in. There's an ongoing debate about how quickly utilization could rebound as COVID cases decline. Can you give us an update on the latest volume trends you're seeing? And is there anything different that you would note about the current drop in cases that would suggest an accelerated pattern for non-COVID utilization?

Yes. Look, so interestingly, we hit a peak. And I think like many other hospitals, virtually all of our acute care hospitals reached a peak of COVID cases, and particularly our acute care hospitals in early January, first or second week of January. And since that time, we -- again, I think as most hospitals have seen a dramatic decline in COVID cases, presumably because we were coming off the holidays when people sort of abandoned their sheltering in place and social distancing and everything else, and also because we're seeing a much wider and accelerated distribution of the vaccine. It's taken a while, I think, 5 or 6 weeks to see a rebound in the non-COVID volumes, particularly in scheduled and elective procedures on our acute hospitals. But certainly, in the last week or so, we have seen that as well. And I think our expectation is that, that trend will likely continue. Now could we see a resurgence in the virus as the restrictions are lessened or some of these variants, take hold, I'm not as smart enough public health policy expert to know that. But it certainly feels like we are on a downward trend of the COVID vaccine or the COVID -- excuse me, frequency, a return of non-COVID volumes and easing of labor pressures. How quickly all that occurs and at what pace, I think, remains to be seen, but that certainly seems to be the trajectory that we're in.

Where are your elective procedures trending relative to the pre-pandemic baseline?

So I think what we found after the very early precipitous declines where we saw a 65%, 70% decline in the March, April time frame of last year. We've been hovering in that sort of 85%, 90%, 95% of pre-pandemic levels. And I think what we find is that as COVID volumes spike, the elective surgeries sort of dipped down into the 80s. And as COVID volumes decline, elective volumes get back into the mid-90s. And I think that's kind of where we are right now. And the hope is if the trends continue, we'll get to pre-pandemic levels and maybe above pre-pandemic levels of elective and scheduled procedures.

Even though cases are declining, new variants are now reported to make up a greater portion of those cases. From your seat, has anything changed in the way your clinicians are treating patients with new variants that would suggest a change in acuity or length of stay?

Yes. And obviously, I'm a nonclinical person, so I'll caveat everything about that. But no, I mean, my answer would be no. I've seen no evidence of the new variants. And honestly, I'm not even sure I know how many of our patients really have the new variant, et cetera. So -- but I would say, no, I have not seen any difference.

Okay. On the vaccine front, close to 20% of the general population has received at least one dose. Can you give us more color on the vaccine progress for your clinicians?

Yes. I mean, it seems -- and look, I think we're making faster progress on the acute side because in most cases, we actually have the vaccine at our acute care hospitals, and we're administering it to our own employees. I think we're approaching kind of a 50%, 60% coverage, which I think we're pretty pleased with. It's probably a little bit lower on the behavioral side. Some of our behavioral hospitals actually have the vaccine and are administering it to their own employees. Others are having to have the employees vaccinated at acute care hospitals or retail clinics or whatever. And obviously, that's a bit more of a hurdle. So I think we're kind of at lower percentages there. But I think ultimately, feel like we can certainly get to that 50%, 60% mark, which I think will cover a good chunk of our employees.

On this topic, you've noted some labor pressures in both of your operating segments. Has the vaccine rollout provided some relief on the labor supply side?

I think it's a little too early to tell. It's a great question and certainly one that we're trying to monitor. We certainly believe that it will. But obviously, we're only 5 or 6 weeks out from, again, our peak COVID levels. So -- and honestly, I think some of our response to those peak COVID levels in December and January was a commitment to some of these temporary staffing, agencies, et cetera, that was more extended from a time frame, not just for a single shift, but for weeks at a time or months at a time, in order to be locked into these clinicians. So the lag between the decline in COVID cases and the improvement in our sort of labor situation may be a bit more extended than it might have otherwise been. But yes, I mean, certainly, our hope is that in March specifically, we'll see a real measurable impact in easing of those labor pressures.

Got it. Okay. Continuing with the acute segment. Prior to the pandemic, your acute hospitals regularly deliver industry-leading volume growth due to high exposure to urban markets. COVID has obviously brought about a number of changes to the way people think about these markets. At this point, has the pandemic changed your viewpoint at all in the types of geographies where you want to have a presence or whether you'll be able to reestablish that market-leading volume growth?

Yes. So look, I think UHS is placed on the sort of continuum of care in terms of urban at one end and rural at the other end. We're sort of in the middle. We're in these kind of midsize suburban, smaller urban communities. We have a presence in some large urban markets like Washington, D.C., but for the most part, we sort of occupy a place kind of in the middle. And what we focus on, really, quite frankly, more than the actual character of the markets was their level of growth and how fast the markets were growing. And I think to your point, the correlation between our industry-leading volumes and the markets was the fast-growing nature of the markets as much as anything. And obviously, some of our markets and most of the country, I think growth has been interrupted. But I think our sense is that nothing has fundamentally changed about the underlying character of our markets. And over the course of the next 4, 5, 6 years, they will grow at a pace faster than the national average. That's, I think, certainly true of Las Vegas, which is our biggest acute care market. Again, we may see a slower growth trajectory in the next 6 or 12 months. But I think over a more extended period of time, we expect the Vegas market to resume its above-average growth.

Okay. At any point in time, a hospital share of COVID cases will fluctuate due to underlying geographic exposure to spikes in cases. But I believe COVID cases as a percentage of total admissions through your hospitals, ranked consistently higher than peers throughout 2020. First, curious whether you share that viewpoint? And if so, is it your sense that you've captured a higher proportion of COVID cases within your markets? Or would you attribute the differences simply to the geographic footprint?

I think it's the latter. I mean, we've done some work based on our own metrics based on at least what our public peers have said publicly as well as there's quite a bit of COVID tracking data out there. One of the observations we have is that, for instance, Nevada, in which, obviously, we have a much bigger footprint, at least proportionally than any of our peers, is a state that has had a much greater-than-average COVID experience. Other states like California and Texas have had sort of an average COVID experience. But even within those states, like when you drill down to the county level, Riverside County in California, which is our biggest footprint in California, has had kind of a bigger exposure. And Florida, in which we probably have a smaller proportional presence or footprint than some of our peers like Tenet and HCA, has had, I think, lower than the national average COVID experience, which is kind of an interesting thing in and of itself. But yes. So when we do that work, it strikes us that our COVID experience is 25% to 30% higher than our -- than at least Tenet and HCA. And honestly, for no -- we certainly don't do anything to attract COVID patients or discourage them. I mean, we take what we get, which I think is what every hospital in the country has done. And so I think it's really just luck of the draw and the frequency of COVID in the market that really impacts that.

Okay. Got it. Let's shift to the behavioral segment. Labor issues had been a headwind in the behavioral business for several years leading up to the pandemic. But I think there was a general sense of optimism that you were turning a corner entering 2020 before COVID hit. How do you feel about the labor supply side of the equation coming out of COVID? And what initiatives are in place to ensure proper staffing levels to accommodate potentially elevated levels of demand?

So look, we certainly acknowledge that our behavioral business -- growth in our behavioral business has lagged our public peers. It's lagged our own expectations. We certainly have focused on this and talked about it for some time. The 2 biggest issues that have affected the behavioral business pre-pandemic were these labor shortages that I think really grew out of the rapid economic recovery emerging from the last recession after the financial crisis. Unemployment dropped, we're basically full employment, and there's a lot of competition for nurses, and we were certainly impacted by that. That actually started to improve, I think, in the sort of 2017, 2018 period. But then we started to feel pressure on length of stay reduction and particularly in our managed Medicaid population. The interesting thing is, I think both of those dynamics were really starting to -- at a minimum, anniversary. But probably even more so kind of improve and get better, as we got to late 2019, early 2020, January, February 2020. And then, of course, the pandemic hits and kind of creates a whole new set of issues. And the labor challenges during the pandemic are quite different because I think they're very much related to the pandemic itself. We've got a lot of nurses out with the virus. We've got nurses who are sort of suffering burnout because of the virus. We've got nurses on the other hand who were chasing premium dollars to work in other environments and make 4 or 5x their salary during the pandemic. So I think we have a view that we implemented a lot of initiatives back in 2016, '17 to increase the efficiency of our recruitment and retention of nurses. I think we felt like they were starting to gain real traction and then the COVID -- the pandemic hits. And I think a lot of those things sort of get paused. Honestly, I mean, we're still focused on those recruitment and retention initiatives. But at the end of the day, it's really relying on the virus itself receding. As the virus itself recedes, we presume we'll have fewer nurses out sick. We'll have fewer nurses sort of suffering burnout. We'll have fewer nurses chasing these dollars elsewhere because there really won't be those opportunities. And so while we continue to focus on the things we can do, some of it is just, quite frankly, we've got to wait for the virus to recede which it certainly seems to be doing.

When we think about some of those headwinds in the behavioral volume business in 2020, whether it's the quarantine impact on clinical staff or the isolation measures taken as a result of COVID patients themselves, when you take a step back and review 2020, what was the greater pressure point on volumes? Was it the COVID impact on the labor supply? Or the COVID impact on available beds?

So we've thought about it in the context of -- I'll call it, you have 3 factors really sort of muting our behavioral volumes during the pandemic. One is the patients themselves and the challenge of blending COVID and non-COVID patients on a unit in a hospital, et cetera. And we've had blocked beds because we've got 3 COVID patients on a 20-bed unit and really can't use the other 17 beds for non-COVID patients. Another 1/3 of the impact is the labor issue itself. So we got a 20-bed unit but we can only staff 5 of the beds because we only have one nurse. And then the other 1/3 is sort of, I think, a miscellanea of other factors. Some of them are a decline in referrals from acute care emergency rooms and schools and military bases because soldiers aren't traveling for care. That sort of thing. And then just sort of what I'll call normal competitive source of things. So -- but again, I would say 2/3 of the impact on our volumes is COVID-related in some form or fashion, either the effect on our patients or the effect on our staff.

When we think about some of those shifts in access on the behavioral side, referrals that may have been traditionally sourced from schools and ER volumes, what were some of the blocking and tackling measures that the company took to chase those volumes down?

Yes. So really, from the very beginning of the pandemic, when we realized in relatively short order that patients were reluctant, in some cases, to seek care in the more traditional ways that they had in the past. Going to a hospital emergency room, going to a community mental health center, going to a physician's office, we began an effort to really try and reach out directly to our patients through Internet advertising, through social media, on our own websites, on other social media sites. We were contacting patients who have already received care at our facilities in the past, contacting them directly. And basically just delivering the message that, look, we understand you may be reluctant to seek care in these sort of traditional settings. But if you feel like you're suffering from a mental health crisis of some sort, reach out to us, and we'll make sure that you talk to a clinician, via telehealth, via some other arrangement that you'll feel safer about. And so I think we had some amount of success in doing that and continue to do that. But again, challenged -- when we ultimately reach some of these patients, and we couldn't admit them because our beds were blocked for one reason or another.

Do you think you captured your fair share of those new referral sources?

Market share information in the behavioral space is not as sophisticated. It's not as timely as it is on the acute side. But all of the metrics that we have sort of suggest that we're not losing market share. And again, the challenge is the providers in a particular geography or market are struggling to meet the demand, and we're struggling along with them. But no -- I mean, obviously, with kind of individual one-off exceptions, we just don't have evidence that we've lost market share during this process.

Okay. That's helpful. One of the benefits of having a national footprint on the behavioral side is seeing how lessened restrictions at the state and local level flowed through to your business. I guess, in states where in-person learning or ER volumes are tracking ahead of national figures, are you seeing a corresponding uplift in your behavioral volumes?

Yes. I mean, look, it's interesting. I mentioned on the acute side, there has been some dispersion in the sense that we definitely have seen more -- the virus impact some markets more than others. But at the end of the day, like I was saying before, I mean, every single one of our acute facilities saw peaks in their COVID volumes in January as an example. So the dispersion wasn't all that wide. On the behavioral side, it is much more sort of diffused. We saw some facilities during the year that really seemed relatively unimpacted by the virus. There just wasn't a lot of virus in the community. It didn't affect our staff. It didn't affect our patients, et cetera. And then others had a much greater impact. So we definitely saw a correlation. The more virus there was in a market, the more our volumes were impacted. But because we're in so many more geographies on a behavioral basis, the difference in experience was quite different.

That's helpful. And then just wanted to touch on M&A. 2020 was a challenging year for the broader provider industry, and most will have to repay Medicare advances starting next month. Given that time line, are you starting to hear more from struggling health care systems that may provide M&A opportunities over the next 12 months on either the acute or the behavioral side?

So it's a very interesting question and certainly one that I think we would have believed in the sort of premise that you just described. I think our actual experience, however, was somewhat different. I mean I think what we found is that we were in some conversations at varying degrees of interest and seriousness with some not-for-profit acute care hospitals, and then the virus occurs. And look, at one level, I just think focus was diverted. The virus created sort of historical challenges to this industry that we've never had to face before. And everybody was focused on treating COVID patients and keeping their staff safe and their patients safe. And we understand all that. But I think also the infusion of government money, whether it was the CARES Act funds themselves, the grant funds or the Medicare accelerated payments, which I think is what you were alluding to, did provide kind of a respite for hospitals that might have otherwise been under some pressure. And I think we found that some of these hospitals were willing to sort of pause those conversations because they sort of have this cushion now. To your point, those funds need to start getting repaid almost momentarily in over the next 18 to 24 months. So we'll see whether that sort of helps to resurrect some of these conversations or what the impact is. But to be fair, I think we saw kind of a pause in the pipeline and a kind of a postponement in those conversations in the pipeline as a result of the infusion of -- not insignificant amount of government funds.

So do you think there's going to be an overhang towards the end of this year and into next year? Do you think we'll unpause that pipeline?

It sounds or it seems logical to me. But honestly, I have to be fair and say I predicted that before over the last 5 or 7 years. So I don't want to go too far out on a limb. But it certainly seems like a logical premise.

Got it. That's helpful. In closing, we're now 1 year into the pandemic. Can you speak to the lessons you've learned in managing through the crisis and how your organization is better prepared to deal with the next crisis?

Yes. Look, I mean, I think if you think about the things that the industry was unprepared for at the beginning. We didn't have -- or there were concerns that, let's put it this way, not having enough ICU beds or isolation rooms or ventilators, PPE, testing capacity. I think all those things have improved greatly. Physically, we've created more ICU beds. We've created certainly more isolation rooms in both our acute and behavioral facilities. We certainly have changed our supply chain practices so that I don't think we'll ever get caught quite as short as the industry did at the beginning of this and in terms of PPE. All those things, I think, have gotten better now. At the end of the day, I think that positions us better if there is another pandemic or virus of this nature, in terms of really improving our everyday sort of normative practices, I'm not sure that we've benefited so significantly. I mean, again, I think at the end of the day, hospitals did an extraordinary job in responding and being sort of nimble in their response. And I think our hospitals certainly foremost among them. But look, I mean, my hope is, certainly in my lifetime, we don't have to face this again at the same level or something at the same way. But certainly, I think a lot of the physical sort of capacity constraints have been improved. And if the industry were to face a similar crisis, we'd be much better positioned.

Okay. Well, we're just about up on time. I want to thank Steve for his time today. And thank you, everyone, for joining. Please enjoy the rest of the conference.

Thanks, Andrew.