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

Good morning, and thank you for joining us today. My name is Steve Tuekam, I am Associate in JPMorgan health care group. I am pleased to welcome you to the 40th JPMorgan Healthcare Conference. Before we start, please note that this presentation will be followed by a Q&A session. So, please feel free to submit your questions using the blue 'ask a question' button on your screen. With that, I am pleased to introduce you to Steve Filton, Chief Financial Officer of Universal Health Services. Steve?

Thank you, Steve, and welcome to everybody who had the fortitude to join us early in the morning on what, at least in suburban Philadelphia, is a very frigid morning. So, we had anticipated a few weeks ago, that we would sort of present our normal kind of traditional slide deck which is kind of a more generic picture background of the company. And given the fluidity of the situation in the hospital industry, I thought it would be more meaningful, more timely to just try and give an update of sort of where we've been in the last quarter or 2, where we are today and how that's affecting our outlook going forward. I've put up the slide that just shows the 2 business segments of the company. And as we talk, I'll remind everybody that while the COVID pandemic has certainly impacted both of the businesses, and in some ways, in similar fashion in other ways, in fairly distinct ways. So, if I go back to our last, sort of, public earnings announcement at the end of the third quarter, we talked about having a fairly busy third quarter from a COVID infection perspective. We had a relatively quiet second quarter with some of our lowest COVID volumes since the pandemic began. And then, in late June, and certainly in July and for most of the third quarter, we saw COVID volumes rising in almost all of our markets, both acute and behavioral. And the impact on the 2 businesses was quite different. On the acute side, the impact of COVID was, I think, largely positive COVID patients, and these were mostly of the Delta variant at the time, were acutely ill at a length of stay that was generally quite a bit longer than our average patient. So, this high acuity was resulting in more revenue and higher profitability, despite the fact that those patients, those COVID patients were incurring significantly higher costs, especially on the salary side. And on the acute -- in the acute division, we clearly -- the rise in COVID was challenging us with much larger amounts of premium pay, over time and shift differential for our own employees, payments to traveling nurses and temporary nurses and then, registry companies, et cetera. But generally, the higher acuity was overwhelming and the higher acuity and higher revenue was overwhelming those higher costs, both in the salary and on the supply side. And acute care results were ahead of our own expectations. And on the behavioral side, it was a bit of a different story. In many cases, we were losing employees, particularly nurses, but other employees as well to the acute care industry in general, as I think where many subacute providers during this year. I've had many conversations with colleagues in the nursing home business and the long-term care business and hear the same, sort of, refrain from them that employees have been chasing these COVID premium, I'll call, COVID premium dollars more and more. And I think, in particular, we saw that dynamic in the third quarter, probably more than we had seen than ever before in the pandemic, because it was the first surge, during which, many of our employees were fully vaccinated and I think, felt safer and more comfortable in chasing those dollars and working in COVID-intensive environments. And again, on the behavioral side, while we were willing to pay those premium dollars in overtime and shift differential and temporary and traveling nurses, we often just simply couldn't find the nurses and other employees to do that. And as a consequence, we struggled with vacant positions and that had the impact of muting our volumes and our patient days in cases where we couldn't find enough qualified clinical staff to treat all the patients that were being presented to us. And so, we had a third quarter in which, generally, our acute care performance exceeded our own expectations, our behavioral performance lagged. And we were trying to sort of project out how we thought the rest of the year would play out. Towards the end of the third quarter, I would say, mid-September, from a time frame perspective, we started to see COVID volumes decline in most of our markets. And that was consistent with our previous experience, where most of the COVID surges have lasted approximately for 2, 2.5 months. And so, as we sort of talked about the fourth quarter and talked about 2022, it was with the idea that COVID volumes have started to decline in mid-September, would continue to decline through the end of the year. As they declined, the labor market would stabilize, there would be more of a supply-demand equilibrium in the labor market. We would face a labor market that was still tight but resembled the sort of the second quarter more than the first or the third quarter that is some amount of wage pressures, some amount of difficulty in filling vacancies, but not the exacerbated or exaggerated issues we had in Q1 and Q3. Sort of COVID volumes continued to decline from mid-September when we did our third quarter conference call at the end of October, we reported that continued to be the case. I would say, the beginning in early November, COVID volumes began to sort of level off in a way that was a little unanticipated in our minds, the trajectory did not continue downward. And then, by the end of November, of course, we entered the phase that I think we're in currently, which is the appearance of the Omicron variant and yet another COVID surge. And we are certainly smack in the middle of that dynamic as we speak. And I think, I'll talk about our current experience, but I think, it's largely what we all have been hearing about and reading about elsewhere and that is a much more highly transmissible variant of the virus. Patients, generally, are not being hospitalized at the same rate. We are probably about 60% of the level of COVID patients today that we were just about a year ago in January of 2021. But at the same time, our hospitals are still -- and hospitals, I think, around the country, are being overwhelmed, in large part because the virus is so transmissible and is affecting both vaccinated and unvaccinated people through breakthrough cases. We're having more and more of our employees sidelined and unable to work either because they have tested positive for the virus, so they may be symptomatic or asymptomatic or someone in their family is tested positive for the virus and they're quarantining, et cetera. But we certainly have more employees on the sidelines currently than we've ever had before in the pandemic, and that is creating all sorts of challenges, I believe, as it is for hospitals around the country. And I believe as it is for businesses, in general, around the country. And that's sort of where we stand today. We're dealing with that. We're hopeful, and they are the earliest signs, certainly, the experience in other countries, I'm thinking about South Africa and the U.K., specifically, has been that the surge in the Omicron virus has been very dramatic and sudden, but the decline has also been fairly dramatic and sudden. And the hope is that -- and I know some of the, sort of the, expert projections are that by the next few weeks, by the end of this month, by early February, we'll start to see a pretty significant decline. I will say, that one of the few bright spots about the current situation is because people and because, our employees in general, are not getting nearly as ill as they have before they're returning to work, obviously, more quickly. So, they may be up 5, 6, 7 days, a week or 2, and that's challenge, of course, and it's a challenge, particularly because the dynamic really changes day to day. New employees calling out sick every day. But the good news is they are generally returning to work relatively quickly. So, that is a positive. And I think it sort of points to the ability to recover at least from this current, really, sort of crisis situation a little more quickly. We've made the point, I think, throughout the pandemic, and I would certainly reiterate it this morning, that we don't believe that demand has really changed the underlying and fundamental demand for both of these business segments hasn't really changed during the pandemic. Obviously, in the very early months of the pandemic, in March and April and May of 2020, when people were literally just hunkering down in their homes and children weren't in school, and people weren't going into offices, et cetera, we did see a significant decline in some of our normal traffic and volumes. Far fewer people were going to the emergency rooms, all elective surgeries were down by significant amounts, behavioral patient days were down significantly, et cetera. But really, beginning in the summer of 2020, we started to see most of our non-COVID volumes returning to something close to pre-pandemic levels. And I would say, until this most recent surge, we've been running 95% to 100% of pre-pandemic levels of all those metrics that I mentioned. Behavioral patient days, acute care emergency room visits, acute care elective procedures, et cetera. I will say, that in the last few weeks with the current surge, those volumes have dipped again. Some below those sort of, I'll call them, 95% levels. But throughout every indication that we've had both from a micro perspective, that is those that we can track internally as well as those that are being reported externally on a more macro perspective, indicate that demand is going up, I would say, particularly in the behavioral business. I just continue to read and we continue to get indications that more and more -- if anything, there's more and more demand for behavioral services. People are stressed more and more during the pandemic, children are suffering by not being in school and some of their regular activities, et cetera. So, the expectation that we've had all along is that as COVID volumes decline to a more manageable level as they did in Q2, that we would experience, kind of, a recovery and a rebound in demand as we did in Q2. And that was the way we were thinking about 2022. As I said, back at the end of October, when we gave our third quarter guidance. So, we had this expectation that as the third quarter progressed -- excuse me, as the fourth quarter progressed, COVID volumes would decline. The labor situation would take a few months to sort of settle out as it did back in Q1 and Q2, when COVID volumes declined in January 2021 pretty dramatically. It took a few months, maybe till the beginning of the second quarter before we really started to feel that relief on the labor front in terms of premium pay and wage pressures, et cetera. And we were expecting the same thing so that we were expecting that by the end of 2021 or early 2022, we'd be in that environment of, kind of, more manageable COVID volumes and have more stable labor market. Obviously, that has not occurred and like the year, the fourth quarter has played out differently than our expectations. And obviously, we're starting 2022 with very different expectations. I think, as we think about 2022 and while we're not and we never really give formal guidance at this time of the year at the JPMorgan Conference, we do it at the end of February when we release our year-end earnings. But as we think about 2022, we sort of feel like our overall view of the businesses has not changed dramatically, but the timeline has been elongated and the recovery that we thought was going to occur throughout the fourth quarter has now been postponed to sometime in the first quarter. And so, maybe, we are 3, 4, 5, 6 months kind of delayed from what our projections were and our expectations were back at the end of October. I get a lot of questions and may get more questions today about what sorts of permanent changes there are to the business, particularly to the labor market. Again, I think I've addressed the issue from a top line and demand perspective. I think we really believe that there has not been any fundamental alterations in the demand sort of equation. And if anything, I think we feel that there remains a fair amount of pent-up demand in both of our business segments. And again, as COVID volumes decline, we'll be able to satisfy that demand as the labor market settles out. Then the question becomes, are there permanent changes to the labor market. And the answer to that, again, I mean, I think there are obviously 2 schools of thought. One is that the labor market has been disrupted. The hospital labor market, in particular, has been disrupted by the presence of COVID. And again, the notion that employees, but particularly nurses, but other clinicians as well, are chasing these premium dollars and that has been quite disruptive. What we did find back in Q2 is that when COVID volumes declined considerably, the labor markets settle down. Those opportunities to make premium dollars just didn't exist. People returned to more -- sort of more to their routines, et cetera, and we found it to be a much more stable work environment. Now, are there some permanent changes? Or are there nurses who have retired early as a result of the pressures of the pandemic? Are there nurses who have shifted out of the direct patient care environment to nonpatient care activities? Are there some younger nurses without families who have chosen to sort of pursue that kind of temporary traveling nurse professional path longer than they might have before? Sure. That's entirely possible. Honestly, I don't know that there's anybody who's able to sort of quantify that in a precise and meaningful way at the moment. And we're prepared for that. And I think we've talked, I think, in some of our previous calls, about the idea that we're looking at patient care models that are less reliant on registered nurses at least in the short term and more reliant on LPNs and CNAs and techs, et cetera. And one of the things I think that we're doing is, as we're hiring those people, we're also encouraging them to be trained as -- so, we hired ENTs to work in our emergency rooms, or we hire LPNs, we hire techs, even. We're encouraging them to get the education they need to get the more advanced degree, et cetera. So hopefully, this pipeline of more experienced, more qualified clinicians, we're helping to fill that in this interim too. So, we're not just sort of sitting on our hands, waiting for the situation to improve on its own. So, I think that's largely where we stand at the moment. I'm going to pause and Steve, if there are questions that I can answer from him, I tried to give, I think, a sort of concise and sort of relevant update, but I'm sure people have other questions.

Thank you, Steve. We do have a couple of questions already. The first one is about the impact of Omicron on the average length of stay for patients. And if you could also talk a little bit about contract labor utilization across both businesses.

Yes. So again, as I sort of alluded to in my opening remarks, I think that the Omicron virus is sort of manifesting itself as we're sort of reading about patients tend not to be quite as ill. I think, the way that we measure that, most notably, is that we have much less proportional ICU utilization of patients who have the Omicron variant than we did of the Delta and earlier variants. That is so fewer patients are in the ICU. But I think we are -- and fewer patients are being admitted. As I said earlier, even though we're reading about a COVID surge and certainly, virtually all of our hospitals are experiencing a COVID surge, the number of patients, the number of COVID patients admitted to the hospital is still considerably less than it was a year ago, which was our previous high. But I will say, and I understand the question, I think the idea was, and I think, quite frankly, we were hoping maybe and expecting a similar dynamic that with less acutely ill patients, we'd see a lower length of stay. And in turn, that would ease a little bit of the labor pressure because, obviously, to the degree that patients are less ill and they're not in the hospital as long, they don't require as much nursing care. I think what we're finding in actuality, and again, let's -- I'll remind everybody, there we're only 4, 6, 8 weeks into this Omicron experience. So, it's a little difficult to draw broad conclusions. But what we're seeing is that, while the patients are not as acutely ill, the overall length of stay is not declining that much. And as I go through the numbers and talk with our hospitals, I'd suggest that one of the big challenges we have is that, as we look to discharge our patients into downstream settings, that's just all of our patients, many patients who are discharged from an acute care hospital depending on their diagnosis and prognosis, et cetera, often are being discharged into another care environment. It could be a nursing home, it could be a skilled nursing facility. It could be a rehab facility. Again, depending on the course of treatment. We're finding, I think, almost across the board, difficulties in discharging patients on a timely basis because the facilities to which we're referring, are experiencing all the same issues that we have. So, in whatever the community is, the nursing home's got 20% of their beds closed and the rehab center has 2 floors closed or whatever because they can't find enough folks and they've got all the same issues that I described in the beginning. They've got employees on the sideline, et cetera. Now, again, our hope and expectation is that, as the Omicron situation starts to stabilize and volumes go down that, that stabilization will occur throughout the continuum. It will be easier for us to discharge patients and we'll get, I think, the sort of relief of the questionnaire, obviously, I'm not sure what was in the mind of the questionnaire, but I've gotten that question a number of times more recently. And I think, that's generally what people are thinking, and I'll be honest, and so we were thinking, but have not yet really experienced that and have not really benefited from a lower length of stay. As far as, I think, your second question was about temporary nursing?

Yes, contract labor utilization.

Yes. So, the fact of the matter is, we continue to use a significant amount of contract labor. I think the point that we made in the third quarter, and I would say it is largely relevant in the fourth quarter is, the amount of temporary labor we're using is increasing some, but I think the real impact on our business is that the rates that we're paying for that temporary labor have really increased significantly in the last 3 to 6 months. We saw it in the third quarter. We certainly see it -- saw it in the fourth quarter. Now, we see it continuing into the early part of 2022. And part of the issue is, obviously, it's a supply-demand kind of dynamic, but there's a fixed supply of nurses. So, this incredibly high demand for nurses, which is being exacerbated by the fact that a portion of the working nurse population is now on the sidelines at any point in time. And there's been various estimates. It's 5% to 10% of sort of active nurses are sidelined at any point in time in the last few weeks. The system is not producing new nurses to sort of fill in for them. And so, the -- what you have to pay for that smaller population of nurses, those rates just keep going up and up. And again, that's the current challenge that we're facing. We faced it in Q3. To some degree, we faced it in a more exacerbated way in Q4. And right now, we're facing it probably the worst we've seen from a rate perspective.

Maybe, a further question there. So, you mentioned some of the nurses being sidelined in the last few weeks. And as you mentioned as well in there, you struggle on the behavioral side, to fill some physicians. When an employee or staff get [indiscernible], how long are they sidelined for?

So, we have been following the CDC guidelines in terms of return to work and appropriate quarantine periods, et cetera. And I don't want to misquote them. So, going to be careful, but I think, generally, what we're finding is, employees of any kind, but we're specifically focused on nurses, et cetera, who either have tested positive or have been symptomatic or been exposed to people who are symptomatic. Generally, we're asking for them to be asymptomatic for a period, I think, of 5 or 6 days, as well as have a negative test. And then, once they are, they're welcome to come back to work. Again, I think one of the dynamics that we're facing is, even nurses who sort of meet that criteria, we're finding are somewhat sometimes reluctant to come back to work because they're concerned about the transmissibility to a family member or somebody's home sick or kids are sick now or maybe not in in-person learning, et cetera. So, there's all those dynamics that sort of complicate the issue. But as I did say in my opening remarks, we are finding, even in this Omicron crisis, that some of the employees who have gotten the Omicron variant and have not been terribly ill or have been asymptomatic are back at work. And we definitely didn't see that same, sort of, relatively rapid return to work with previous variants of the virus.

So, we have several questions on guidance. So, just want them together. So is it safe to say that 4Q 2021 and 1Q '22, will be or have been negatively impacted by staffing shortages? And as a result, are you reiterating guidance for full year 2021? And what about guidance for 2022?

Yes. So, what we had talked about, and again, I tried to address this in my opening remarks, I think what we had said at the end of the third quarter was, that we expected the fourth quarter to largely be a repeat of the third quarter, and that is relatively, sort of an incremental decline in COVID volumes, but still a fair amount of labor pressures. And a lot of that expectation and sort of projection was informed by our experience earlier in 2021. I'll remind people that we saw what had previously been, I think, the most significant COVID surge, and actually, I think, remains the most significant COVID surge back in December of 2020 after people really started traveling for the first time for the holidays, Thanksgiving and Christmas in 2020 and into January of '21. And I think, our COVID volumes peaked at some point during those first 2 weeks of January of '21. COVID volumes declined pretty rapidly from that point and continued to decline through the rest of the first quarter, through the rest of the second quarter and all the way until, I think, late June, we began to see yet another COVID surge. But what we didn't see in the first quarter was an immediate relief on the labor side. And I think, there's a bunch of reasons for that. As COVID volumes go up, hospitals are making longer and longer-term commitments for these traveling and temporary nurses. And in order to appropriately staff their hospitals and be in a position to treat patients properly, et cetera. And a lot of those longer-term commitments, months, 2 months, 3 months, remained in place even as COVID volumes continued to decline. We expected the same thing to happen in Q4. The other issue, I think, is on the employee side. Employees who had gone and left, even temporarily, to seek out these premium COVID positions or COVID positions with premium pay were sometimes slower to return to work. They were going to wait till the end of the holidays, they had made a significant amount of money. They sort of had the luxury of being able to take some weeks off. We were anticipating that sort of dynamic. But again, the fourth quarter didn't play out the way that we originally anticipated. We saw more COVID. We saw sort of a flattening out of the decline in November. We saw a dramatic rise in December. We saw continued labor pressures. So, certainly, I think our expectation is that our original expectations for Q4 are -- we're unlikely to meet those original expectations because the operating environment has been somewhat different. I still think we should be within our guidance for -- that we set for the full year or we revised back in midyear, particularly with the help of some additional special reimbursement programs, et cetera. And as far as 2022 goes, again, we had in the third quarter, talked about in very broad terms, 7%, 8%, 9% EBITDA growth over 2019, our last pre-pandemic period. And as I was saying earlier, I think we still have a view that, that's the kind of more intermediate term, appropriate growth level. I think that our ability to get there has probably been set back 4 to 6 months. How that's going to translate into precise numbers, we're still working on. But I think that, again, the broad comment that I'd make is, clearly, the operating environment in Q4 and obviously, certainly at the very beginning of Q2 is far more challenging than we originally anticipated, even just a few months ago when we were last speaking during our Q3 earnings release.

Got it. Maybe one last question on that [indiscernible] you get from wages and pressures there. How do you expect wages to revert to sustainable levels? And how much of the increase is from wage paid versus bonuses?

Yes. So, this is the question that I tried to address before, in the sense of there's been this debate over how much of this temporary or how much of this labor disruption is temporary and how much of it is more permanent and more structural. I think, we continue to believe that the vast majority of it is temporary and has been caused by the incremental demand associated with the COVID surges to date. Again, we all read the same thing. Hospitals are being overwhelmed with patients. Even in this surge, even though there are not as many patients being admitted, I think, hospital emergency rooms, et cetera, are being overwhelmed. And again, the labor market is being disrupted as is. I think the labor market, all over, by more and more employees on the sidelines, quarantining with the virus, et cetera. I think, as -- and this was our experience in Q2. As the volumes, as COVID volumes decline, the labor market will likely, I think, settle down and these wildly expensive premium rates that we've been paying the amount of overtime, the amount of temporary nurses and traveling nurses that we're using, the rates that we're paying for temporary and traveling nurses that I alluded to before are higher than, certainly, I've ever seen in my tenure in this business. I do think all those things will settle out because that incremental demand for the treatment of COVID patients, which has really been creating that, will diminish fairly dramatically. Again, are there some elements of this labor market or labor disruption that are more permanent, higher levels of retirement, some nurses that are no longer willing to do patient care, some nurses that are more willing to pursue the traveling or temporary nurse career path? Sure. Do we think that labor inflation could be 100 basis points or 125 basis points higher than it was pre-pandemic? Sure. I think that's entirely possible. But I think, those are sort of manageable kinds of challenges, particularly if we see the demand in our 2 businesses and particularly, in the behavioral business, if we see demand return to anything close to pre-pandemic levels and start to build upon those pre-pandemic levels. I think that the wage inflation that we're anticipating post-pandemic is certainly a sustainable kind of manageable from an economic model perspective.

Understood. Shifting gears a little bit here. I think there's been a couple of statements saying that, both hospitalization rate and the average length of stay in hospital for Omicron patient is much lower than some previous variants. Is there -- have you seen any of that in your markets in terms of price utilization, for example? And do you see any variances or differences across markets?

Yes. So, I made some of these comments earlier. Certainly, ICU utilization is lower over the last 4 to 8 weeks during this Omicron surge. The Omicron patients are not being hospitalized at the same rate. On the other hand, I will make the point that which I think, again, we've all been reading about. Even though they tend not to be sicker, even though they tend not to be hospitalized at the same rate, there are so many more of them and the positivity rates are so much higher, that hospitals are being filled. Now, again, I don't think any of our hospitals are at capacity. From a physical perspective, we have beds, we have ventilators, we have ICU rooms, et cetera. The biggest challenge that we're facing from, sort of, a capacity constraint perspective is on the labor side. And again, we're not finding that the Omicron or the length of stay of Omicron patients is terribly lower than the COVID patients before them, even though they're not as ill. And I speculate, or I think we speculate collectively, that some of that or a significant part of that is the difficulty in getting these patients discharged on a timely basis because our downstream referral sort of and their referral sites, the long-term care, skilled nursing facilities, nursing homes, et cetera, are struggling with all the same issues that we're struggling with and are unable to take some of those patients. So, they're staying longer than really is clinically justified or clinically necessary. And that's, again, exacerbating the labor issues from our perspective.

A question on share repurchases. So, when you think about them going forward, do you expect share repurchases at deferring [ probably ] run rate? Or you plan to step up, step down? And would you consider levering up to do more of it if the stocks is trading at lower revenues?

Yes. So, beginning, we had suspended our share repurchases for about a year from the spring of 2020 until the spring of 2021. We resumed share repurchases in Q2 and Q3. We repurchased a little bit less than $400 million of shares in each of the 2 quarters, Q2 and Q3 of this year. We talked about in Q3, continuing to repurchase. Approximately, those rates may be accelerating those rates some that's obviously somewhere in a little bit over $1 billion, somewhere between $1 billion, $1.2 billion of annual repurchases. We don't generate that sort of operating cash flow. So, by definition, we'll be levering up to repurchase shares at those levels. And obviously, if we choose to accelerate from that point, again, I will just sort of go back and repeat a couple of the themes that I've already articulated. And that is, given the environment of what we believe is fundamentally sound demand, which will rebound and will recover as it did back in Q2 to not only pre-pandemic levels, but to levels above pre-pandemic levels, given the fact that when that occurs, when COVID volumes sort of get to this endemic stage of the pandemic rather than the pandemic, and we think the labor situation will stabilize to a large degree. We're very bullish about the prospects of our 2 businesses, et cetera. Predicting the exact arc or trajectory of the recovery over the next couple of months and how quickly COVID volumes decline, et cetera, is difficult to do with a great deal of precision. But I think our broad view of the 2 businesses remains fairly bullish. And therefore, I think we'll continue to be a fairly aggressive acquirer of our own shares over the course of at least the next year or so.

I think we are about to -- we are 1 minute away from closing. So, maybe, if you have any closing thoughts, I'll let you run on.

Yes. No, just I thank everybody for their time. And just hope everybody stays safe. Thank you.

Thanks again for the presentation, Steve, and thank you, everyone, for joining us today. Have a great day.