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

Okay. Looks like we're ready to go. Good morning, everyone. My name is Ben Hendrix. I'm the health care services and managed care analyst here at RBC. And with me here today is Steve Filton, Executive Vice President and CFO of Universal Health Services, ticker, UHS, the operator of behavioral and acute care hospitals.

And so we'll just start with a little conversation about the first quarter call. You noted consistent with your fourth quarter results, that labor headwinds impacted UHS' acute and behavioral businesses in different ways. Can you go into more detail about how the industry-wide nursing shortage is impacting your businesses?

Yes. I mean so the labor shortage, the sort of dissonance between labor supply and demand, I think, has really been present and, honestly, has sort of been exacerbating -- or been exacerbated as the pandemic has progressed. It clearly affects both of our business segments, although it has generally affected them in different ways. On the acute care side, for the most part, we have had success in filling the vast majority of our vacant positions during the pandemic. The challenge has been that, particularly during the COVID surges, we've had to fill those positions with very expensive what we would describe as premium pay labor. And that can include a whole variety of things, including overtime to our own employees, shift differential to our own employees, but also payments to outside agencies for temporary and traveling nurses, sign-on bonuses, all those sorts of things. And so what you see, I mean, the first quarter, I think was reasonably typical of what our experience has been in the sense that acute care same-store revenue growth in the first quarter was quite solid, quite robust, a little less than 10%. I think all other things being equal in any other period, we would be extremely pleased with that sort of revenue growth. But taking a look further down the financial statements, our salary expense -- same-store salary expense was up 16%. Obviously, with those set of numbers, putting significant pressure on earnings and margins, et cetera. And that premium pay or the amount of premium pay has just been steadily growing, particularly over the last year. I think once the large percentage of employees got vaccinated roughly a year ago, maybe 14, 15 months ago, I think many more employees felt more comfortable taking advantage of these really extraordinary premium pay sort of situations going to work as temporary traveling nurses elsewhere. In the behavioral space, the dynamic has been not just a little bit different in the sense that, in many cases, we've just been unable to fill our vacancies for nurses and sometimes therapists, psychologists, even sometimes nonprofessionals, the mental health techs or non-degreed folks. And as a consequence, while we've seen somewhat higher salary and other expenses in our behavioral segment, the real impact from the labor shortage for most of the pandemic has been more muted volumes. And so what you saw in our behavioral segment in the first quarter was, same-store adjusted patient day is probably the best measure of volumes, were down 1% from just a year ago. And historically, that number has generally been in the sort of low to mid-single digits. So that's the challenge for our 2 segments. And while I think as COVID volumes have eased, we're seeing some of those labor pressures ease, I think what you saw in the first quarter, certainly from our acute care peers was the relief that we would hope to get from declining premium pay is happening at a much slower pace than we imagined. Our ability to build back volumes on the behavioral side, also, I think while it's beginning to happen and incrementally improving is still occurring at a slower pace. And as we think about how things are going to unfold, I think that's the biggest question we have. I was just saying in an earlier meeting I had this morning, to me, the largest outstanding question as we recover from COVID is sort of the cadence of that recovery, how quickly can we backfill COVID volumes on the acute side, how quickly can we ease that premium pay, how quickly can we hire and fill those vacant positions on the behavioral side and increase our volumes.

Got you. And you noted on the call expectations for measurable relief in those premium pay in May. And then of course, since your initial guide, you've talked about significant stabilization in the second half. Are we still on track for that?

Yes. So look, honestly, Ben, I think that's the $64,000 question. So I think we were pretty candid in saying that in our call at the end of April that April had not seen a great deal of relief either on the premium pay issue or on the behavioral volume issue, but that we were hoping to see more measurable progress in May. I think we're seeing the signs of that, particularly in the behavioral space. But again, how quickly we get there, what the cadence and the trajectory looks like for the rest of the year, I think is still very much an open question. Again, what I've said to people is unlike lots of other kind of projections and predictions that we make, the challenge that we've had during the pandemic is that there's not kind of a prescriptive playbook. We can't look back and say, we know that this is the recovery to be expected. We've never really faced a labor disconnect between supply and demand to the level we're facing it now. So it's a little hard to understand and predict exactly how quickly that occurs. And I think we were very clear about that in our Q1 results. We were short of our own expectations. We were clearly short of the Street expectations. We didn't revise our guidance in Q1, but we -- we're very clear about the fact that if we're not properly predicting these trends, if they remain -- some of the issues remain stickier than we expect, we may well have to do that later in the year.

Yes. That was going to be my next question. We saw a surprise guide down from one of your peers or a couple of your peers, actually. And you guys have resisted a guide down. Just with potential for revisiting it later, and clearly, if things don't improve, but through May, do you think you're consistently on track with kind of where you would expect in -- at least on a trajectory to hit those numbers?

Yes. And again, this is just semantics, but I would say -- I don't know that I would even characterize it as we were resisting a change in guidance as just in our own minds thinking that it made sense to -- just wait and see, a little bit of time -- a little bit more time unfold. I think historically, we have resisted, using that characterization, changing guidance in Q1 or after Q1, either good or bad because I think we just generally feel like it's a little premature, I think in -- particularly in the current scenario, as I said, not really being able to predict these things with great certainty or great confidence. We were just asking for more time. So I wouldn't sit here and tell you we're on track to get back to our guidance. I think we'd like to see how May and June unfold, and we'll have a much better sense of it as the quarter progresses.

Can you talk briefly about your kind of length-to-stay progression? You've mentioned and a lot of your peers have mentioned throughput headwinds and difficulty discharging to downstream as kind of creating an additional cost element of the COVID pandemic. Can you talk about how that's gotten any better and how you expect that to play out?

Yes. I mean I think that was particularly challenging during the Omicron surge in December of '21 and in January of '22. I think as most people understand, the Omicron patients generally were less acutely ill than their sort of Delta variant predecessors. In theory, I think we should have seen length of stay go down for those patients. And the critical part of that from an acute care perspective is as length of stay goes down, your costs go down. You're generally getting paid the same amount for these patients, whether they stay 9 days or 10 days or 11 days. But obviously, if they stay a day less or 2 days less, there is that much less salary costs associated with their stay. There's that much less supply cost associated with their stay. But we weren't really seeing that decline in length of stay that we would have expected with a lesser acute or a lesser acuity population. And I think the reason was what you alluded to, we were having trouble discharging those patients to nursing homes and skilled nursing facilities and even to home health care because those businesses were facing the same labor shortages that we were facing. And we were trying to refer patients to nursing homes who had tens of beds closed or floor closed or whatever it may be as they were trying to fill their vacant positions. I think a lot of that pressure on length of stay has eased as COVID volumes have eased dramatically. COVID volumes, I think, broadly -- I mean there's large numbers of people testing positive for COVID, maybe greater numbers than we've seen in quite some time, but much, much fewer hospitalizations, I think, in April, if I'm remembering correctly. I think maybe 1% of our acute care revenues came from COVID-diagnosed patients, which was, by far, our lowest percentage since the beginning of the pandemic. So those sort of pressures are easing. And again, now the question becomes when does everything else sort of return to normal? When do we really start to backfill fully? Are scheduled the procedures, which tended to be somewhat muted during the pandemic? When does -- when do the labor pressures ease, et cetera? And again, I think we'll get a much better sense of that over the course of the next couple of months.

Can you talk a little bit about the payer mix trending in the acute segment relative to pre-COVID levels and acuity? Are you seeing a significant pickup in commercial mix in your markets related to the exchange subsidies, that 20% growth in exchange enrollment we saw for the year?

It's an interesting thing. I mean I think a number of our, again, public company, acute peers have talked about an improvement in payer mix during the pandemic. And I think their speculation or their rationale for that was that their commercial patients who tended to be younger were more willing to come to the hospital and get treatment and seek treatment than their older patients. I don't know that we really experienced that same phenomenon for whatever reason, and I think it's purely a kind of luck of a geographic draw. We tended, I think, throughout most of the pandemic to be in markets that had slightly higher COVID utilization than our peers. I'm not sure I've seen the most up-to-date numbers, but I think in a number of the surges where our COVID-diagnosed patients maybe made up 13% of our patients in a quarter. For some of our peers, that number was more like 10%. So we had like 1/3 more COVID patients on a relative basis than they did. And particularly in the beginning of the pandemic and with, I think, the exception of this most recent surge, those patients tended to skew older, tended to skew towards Medicare. So I don't think we saw that same improvement in payer mix than our peers have seen. Now again, I think our payer mix has generally been pretty consistent throughout the pandemic. And I don't think that's been a driver, positive or negative, but I just don't think we saw that same positive development that some of our peers have seen.

Yes. How are your markets positioned for the Medicaid redetermination? And can you discuss any strategies you might have in place for dealing with the patients that may fall out of Medicaid?

Yes. I mean we saw -- in our acute business, we don't have a huge Medicaid load. Somewhere around 13% to 15% of our acute revenues come from Medicaid utilization, and that's really centered in a couple of significant markets. On the behavioral side, we see greater Medicaid load. Something like 35% of our revenues on the behavioral side come from Medicaid. I think what we've talked about, and it's not specific to the whole redetermination dynamic, but just generally, I think we've taken a much different position in our behavioral business, I would say, especially over the last maybe 6 to 8 months. And that is as we think about a business that has clearly been capacity constrained mainly on the labor side of things, we have really taken, I think, a more discerning look at our payer mix, and particularly our lowest payers -- either our lowest payers on an absolute basis or our lowest payers in terms of our rate increases, et cetera, and have taken a more aggressive position with them saying, look, you've got to adequately compensate us for the rising costs that we're seeing, particularly on the labor side, but obviously also from sort of a general inflation perspective. And if you're unwilling to do that, then, quite frankly, given the fact that we have patients that we're turning away, we're more willing to work with payers who, we think, are giving us adequate rate increases. Again, focusing on the Medicaid side of things, but I think that's -- we're certainly taking a look -- a more discerning look at all of our payers. So I would say that the redetermination dynamic is not sort of relevant to us. It's just really looking for adequate rate increases from all of our payers as we think about an environment of elevated labor costs and just overall elevated inflation levels.

We consistently get questions from investors who are looking to draw parallels and read-throughs between your behavioral segment and your peer, Acadia. But it seems to be that whether it be volumes or cost pressure, we do see -- we see kind of scant correlation there, generally. Can you talk about what could be driving that? Is it markets? Is it patient mix or services? Or how would you characterize that?

Yes. I mean -- so it's always difficult to answer questions about direct comparisons with another company. We have limited -- probably no more information than you all have. I think I would point out a couple of things. I mean one is -- and I would suggest it's probably the single biggest difference between the company experiences than a much different portfolio configuration than we do. As an example, I forget exactly how they describe the business, but their methadone treatment business or medication-assisted treatment business, which I think makes up 15% to 20% of their revenues, I think, has proved to be, to their benefit, by the way, a pretty COVID-insulated or COVID-resistant business, not as reliant on our ends, demand -- not very sensitive to demand during the pandemic. I think in some ways, it's become an easier business to administer, not necessarily daily dosage for some of those patients during the pandemic, et cetera. They also have, I think, a bigger footprint in the residential business than we do. I think that's reflected in the higher length of stay than we have. Again, I think the residential business has been at least incrementally more COVID insulated and resistant, not as many RNs, et cetera. So I think that's been beneficial to them, although, again, I mean, the exact benefit, they would have to speak to -- I would say this, obviously, we're on the acute side of this. And so we know that there are labor issues on the acute side that are not necessarily the same as on the behavioral side, but the thematic sort of overtones are similar. And we've discussed and we've talked about it a little bit in terms of referrals to subacute businesses, whether that's nursing homes or home health or skilled nursing, and we've found that every one of those companies, public, private, for-profit, not-for-profit, are experiencing those same issues. So we don't really consider ourselves an outlier. And other than, again, the portfolio configuration, I don't know that Acadia is an outlier, but I don't know that there's anything fundamentally different about their approach than ours other than the portfolio differences.

In the last few minutes, I want to switch over to capital allocation strategy. And historically, over the last several years, you've strongly favored capital expenditures to share repurchases, much less focus on acquisitions and dividends. Can you discuss your capital spending strategy and how it's enhancing UHS' market franchise in growing the portfolio?

Yes. I mean -- so look, I think you described it accurately at least at a 20,000-foot level. So even though we have actively looked at external inorganic M&A opportunities, I think we have found them fairly limited over the last number of years, either -- because I think on the acute side, there's just not a great deal of not-for-profit sale activity to for-profits, which I think we would view as probably the most opportunistic or the best opportunity for us. On the behavioral side, although there are and have been a number of transactions, I think we view that as fairly pricey, expensive and not, therefore, necessarily all that economically compelling. And as a result, I think we've pursued, I mean, organic CapEx, rather, investing in our facilities, investing in de novo projects, investing on the behavioral side with these integrated joint ventures with acute care hospitals to build behavioral capacity. And that's been a significant opportunity for us. And obviously, I think in the last year or 2, especially, where I think we feel like the company's own shares have been sort of at a low end of valuation, we've been a much more aggressive acquirer of our own shares. And I think we'll continue to be so as long as we have that view that the market, I think, is focused on the, what we would describe as sort of temporary, immediate, even intermediate disruptions in the marketplace. But with the underlying -- our confidence in the underlying demand for both business segments is still rather bullish, I think we're very satisfied with being an aggressive acquirer of own shares now and at least for the foreseeable future as well.

One of your competitors talked about, well, their capital plans are still intact. They're very cautious around the current labor environment and how they expand. You've noticed a new -- or you have mentioned on your call a new hospital going up in Reno and then some facilities in Arizona, Michigan and Wisconsin. Could you discuss those facilities? And maybe is there a better labor environment there that's given you confidence and can go ahead with those?

Yes. I mean -- so when you talk about those projects as an example, those projects were probably contemplated and begun prepandemic. And so one of the challenges with capital investment is it tends to be -- in particular, in these larger new whole hospital builds, et cetera, they're 2, 3, 4-year projects, depending on whether it's acute behavioral, depending on the geography and the regulatory environment. And as a consequence, I think we may think about the current disruptions sort of -- and their impact from a timing perspective, maybe we've tried to slow down or tap the brakes on some of these projects, delay them for 6 months or 12 months. But I think ultimately, when we're evaluating a project, it's really based on fundamental, is there an unmet demand in this market for these services? And I think if we believe that, we're likely to pursue those sorts of opportunities because I think, again, we tend to view the current disruptions as temporary. Now -- temporary, may be in the eye of the beholder, temporary means 3 months or 6 months or 9 months. I don't think we feel like these disruptions are going to last for years and years. So again, I do think that some of the current disruptions inform the timing of these projects. But in terms of overall decisions to invest, I'm not sure they ultimately have a significant impact.

Great. And in the last couple of minutes here. Maybe this one is a little out of order, but maybe you could kind of talk us -- to us about your thoughts on the reimbursement environment for Medicare. We've got a rate update from our proposal from the IPPS in behavioral. If you could kind of give your overall thoughts on adequacy of those updates.

Yes. Look, I think it's sort of easy to say that. I think the industry was disappointed with the, at least preliminary published update from CMS. I think the industry -- and I think it would be hard to argue with the industry's position that CMS inadequately accounted for the elevated level of inflation that we've been seeing in the last few quarters. I think the challenge for CMS is that it's been so long since we've been in a high-inflationary environment that their underlying mechanics and underlying practices, which really rely on historical data that may be a year or 2 years old, is sort of proving, I think, inadequate in the current environment where so much has changed. For 30 or 40 years, we haven't really faced this level of inflation. So the fact that CMS would rely on data that was 2 or 3 years old, I don't think was a huge flaw. I think it's proving to be a huge flaw in the current environment. So certainly, there's an enormous amount of lobbying, I think, going on within the industry at both the federal and state level with Medicare and Medicaid programs trying to get CMS and also legislators to understand the flaws and sort of the CMS approach. It's always difficult for me to say, I'm not a political expert, even a regulatory expert. So we'll see whether that has any impact in the final rates that come out. But I've seen some pretty powerful presentations from the industry on what the impact of inflation is and what Medicare really needs to do to respond, et cetera. Again, we'll -- I think it's an open question to what degree Medicare will respond. But certainly, they're hearing a lot from the provider industry.

Got you. Well, I think that pretty much brings us right to time. I really appreciate you being with us here today, and please enjoy the rest of the conference.

Thank you. Thanks, everybody, for attending.