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

All right. Moving on to our second panel of the session. Thank you all for joining. We've got UHS up next and Steve Filton, CFO of the company. Thank you for joining.

My Pleasure.

Let's start with labor. I know this is topical for hospitals these days. On the acute care side, you've described it as kind of more of a cost problem on the behavioral, more of an availability problem. Let's start with the acute care side and contract labor has been -- the biggest driver seems recently. What are you seeing right now in terms of your use of contract labor utilization and also the rate side? Are you starting to see contract labor rates come down?

So I think it's fair to say, and obviously, there's been a lot of commentary, not only from the handful of private-public acute care hospital companies. But I've read quite a bit of commentary in the last 4 to 6 weeks from the not-for-profit side of the business. And it seems to be reasonably consistent in the sense of -- I think there's a general consensus that the demand for temporary premium labor, probably peaked for acute care hospitals, sometime late in March or early in April. And I think has continued to decline since then, and I think both from a rate and a volume perspective. But I also think it's fair to say that, that peak occurred later than most people anticipated with COVID volumes declining pretty precipitously back in January. And I think that the continued decline after the peak in late March or early April has also been somewhat slower than expected. So I think the commentary from the acute hospital industry broadly, and I think we would echo it is improvement on the labor front, lower premium dollars beginning very late in the first quarter, but not necessarily continuing at the pace that we would have originally anticipated.

Okay. And -- It seems like the entire industry right now, the acute care industry is trying to get rid of labor, premium labor. Are you seeing those types of efforts result in lower demand broadly? Do you think that would -- is a longer-term trend that the industry can get more efficient and utilize less nurses and therefore, less premium labor.

I've always sort of put forward the argument that for our acute care business, the fact that the vast majority of our competition, the vast majority of acute care hospitals in the U.S., probably 80% of the hospitals in the U.S. are not-for-profit has generally been a good thing. I think that not-for-profit hospitals operating at higher margins. They're more efficient. They're more flexible. They tend to be more nimble. But I think during the pandemic, and particularly as it relates to this labor issue and the payment of premium pay and excessive pay for things like sign-on bonuses and willingness to pay premium rates, et cetera. I think that the -- our not-for-profit peers were more generous more aggressive. I'm not sure what the best characterization is, but they were willing to pay higher rates kind of across the board for labor during the pandemic. Now part of that is they are customs operating at lower margins. So I think their focus is somewhat different, but I also think that they were sort of operating, if you will, with the courage of a significant amount of government subsidies behind them, CARES Act funds and Medicare accelerated payments, et cetera. And I give all that background, and I apologize, going to get back to your question. I mean, I do think in some of this commentary that we've seen in the last 4, 6 weeks is the not-for-profit hospitals are incurring pretty sizable losses and very difficult operating environment in this first part of 2022. And back to your point. So in long story short, I mean, I do think that they are mitigating or rationalizing their behavior, they're not entering into those long-term contracts. They're not offering these really what I would describe as excessive sign-on bonuses and willing to pay some of these extraordinary rates. So I do think in the long run, that should be helpful to bring back sort of a labor supply-demand equilibrium to the industry. But I also think it's taking some time. And as I said in my original comment, I think it's taking longer than the industry anticipated.

And you've given some numbers on this $150 million in costs in the first quarter. You said you expect that to be around 75% for the fourth quarter, so 50% reduction. Some of the agency, public staffing companies have described 35% cost reduction or price for them. By the fourth quarter, that would imply 10% to 15% utilization reduction. Is that the right framework that you're thinking about? Or is it -- are you expecting more reduction in utilization? How would you kind of...

So just to clarify, I mean what we said in the first quarter, our acute care segment, incurred about $150 million of premium pay. What we further said was that our original guidance, which is still the guidance that we have in place, presume that, that number would come down to about $75 million in the fourth quarter. And we sort of said that the guidance presumed that, that would occur relatively ratably. Again, I'm going to go back to what I think, we've been saying, and I think for the most part, our hospital peers have been saying is that reduction is taking place, I think a bit more slowly than we originally anticipated. And again, I think what you're saying is that's what at least one of the staffing companies is suggesting as well that maybe the reduction is not going to be as dramatic. I think the truth of the matter is, and I say this to investors in response to a lot of questions that I get in these days, none of us have a playbook or a historical precedent that we can really rely on for a lot of these dynamics. The issues that we're facing, the trends and then the landscape that we're operating in is really kind of unprecedented. And I've been doing this for a long time. So I have a lot of historical perspective, but this is really very different. So -- and one of the reasons, as people already know that we chose not to revise our guidance after our full year guidance after the first quarter was we had the perspective that another couple of months of operating experience would give us or allow us a greater visibility into the back half of the year. But the truth of the matter is it's a pretty volatile situation. And hopefully, we will be in that position at the end of this month, the end of next month. But I think the fact of the matter is, is that anybody who's making projections 6 months out or even further about things like labor supply-demand situation is really -- I don't want to say they're guessing completely, but I think they're speculating quite a bit. I think we're facing issues and dynamics that I don't know that any of us have really faced before. And so we're not exactly sure what this cadence, what this trajectory looks like. Long answer to your question, especially a long answer to really not sort of say anything definitive. But I think that's the truth. I just think it's a very kind of fluid situation at the moment. And other than making the comment that I've now made a couple of times that I think this is this process of labor supply demand getting back to equilibrium is taking longer than most people expected, the cadence and the trajectory is tough to predict.

And on full-time labor, what are you seeing there just in terms of your own experience with turnover as you measure it and hiring trends, are there green shoots? Or is the environment still pretty consistent with what you described on the first quarter call?

Yes, I think it's true that by the metrics that we measure, which are the rate of hiring, the rate of turnover on a combined basis, therefore, the rate of net hiring that we're improving. And again, I think that's consistent with the commentary that I think the broader hospital industry has made that the use of temporary labor peaked already maybe a couple of months ago, 8, 10 weeks ago. But again, the issue, I think, is not -- I think we generally all agree that, that demand has peaked. The question, I think, that's more relevant at the moment is where is it going to go from there? How quickly is it going to decline further? Is it going to decline to prepandemic levels? Is it going to decline to something above prepandemic levels? And if it's above prepandemic levels by how much. And again, I think those are the questions that are still outstanding at the moment, and then we're all trying to grapple with.

Okay. Let's move on to the behavioral side. Again, this is more of an availability issue that you've described. What's your visibility to nurses returning to that setting? Are you seeing any traction there? And what are you basing that expectation off of just your prior experience the last few waves? Or is it something more tangible that you're starting to see?

Yes. I mean -- so again, and I think that -- and look, I think it's worth noting that the recovery, both of our business segments is really premised broadly on 2 things. We're talking about the labor issue at the moment. But very much connected and interrelated is the return of volumes to prepandemic and quite frankly, above prepandemic levels. And again, I think both of those processes and again, I think this is not just for UHS but consistent with hospital commentary broadly, both of those issues are taking place at a slower pace than was originally anticipated. So in behavioral, you're right. And I think we've said this, our rate of hiring, I think, has been setting sort of records every month since I'm going to say the summer of 2021, July or August of 2021, although during a lot of those months, we would see just as many nurses leaving on the back end as we would see coming on the front end now encouraging to us in the last few months is our net hires, the hires less the people were losing on the back end, have actually been positive. And again, I think that's consistent with the notion that use of premium labor broadly in the hospital industry has peaked and volumes have increased a little bit. Again, I think in both cases, more slowly than we thought. And part of it is as an industry and certainly as a company, we've been operating at productivity levels that are extraordinarily and I think historically high. And when we talk about productivity, we're talking about the number of people, the number of staff, the number of hours that we need or we're using to generate our volumes and our revenue, et cetera. And these numbers have been extraordinarily high during the pandemic, and I would say, especially during the last 6 or 12 months, not necessarily because we're so efficient, but because we're struggling so much to find adequate numbers of staff. And as a consequence, that productivity level has really increased in a way that, quite frankly, I think, is not so great for our employee base because they're working very hard to burn out. You read about all these things. And so I think one of the reasons why even though as volumes -- excuse me, even though as temporary labor declines and we're hiring more people, volumes haven't necessarily returned as quickly because in part, we're trying to manage the business to more reasonable levels of productivity so that we're not asking too much of our existing staff.

Okay. That's helpful color. Let's move to the volume side, specifically. We've gotten some data points into quarter and you seem to suggest it's going a little bit slower than expected in terms of the recovery. What additional color can you give us in terms of what you're seeing recently? Let's start with the acute side just in terms of non-COVID volume returning.

Yes. And again, I think this is a pretty broad phenomenon. There have been a lot of sort of explanations offered as to why volumes are recovering more slowly. Some people point to the 1 million COVID deaths that we've experienced here in the U.S. and the notion that, that population was probably a sicker, heavier utilizer of services than the population at large. I think that's probably true. I also don't think, I'm not in any way trying to minimize 1 million COVID deaths, but I don't think in the grand scheme of a 350 million population in the U.S., that that's probably enough to make a measurable difference. But could it be contributing sure. We've talked a little bit about trying to manage back to sort of more normalized productivity levels, so we're not overwhelming our own staff. But I think the broadest issue and maybe the issue that I think it's overlooked a lot is what we would describe as physician capacity. So as COVID volumes decline and the COVID patients or medical patients, generally nonprocedural patients, they're not having surgery, they're not generally having other significant diagnostic test cath -- catheterizations, that sort of thing. As COVID volumes decline, the challenge for us is to replace them with non-COVID volumes. What we need in order to do more non-COVID volumes or increase our non-COVID volume is more activity from our surgeons or proceduralists. At the end of the day, we don't really control their productivity or essentially the hours that they're willing to work. And I think the fact of the matter is, is that most surgeons and proceduralists are sort of working the same hours and the same schedule they were today as they were pre-pandemic. And as a consequence, it makes it challenging to catch up on the backlog to increase demand, et cetera, because at the end of the day, can't do cardiac surgery without a cardiac surgeon. And so I think that's an issue. Again, I think we're trying to do our best to work with our physicians to do the things that we can do to incrementally increase that without really asking the physicians to make huge changes in their schedule, their lifestyle. Can we turn our ward rooms over more efficiently? Can we schedule block time more efficiently, that sort of thing. But at the end of the day, I do think we are limited. And the manifestation of that from my perspective is the vast majority of our surgeons and proceduralists tell us that they've got huge backlogs in their practice that they've got their schedules running at 6 months, 8 months, 12 months, whatever it is. And we hear that same feedback from our patients who tell us that they're trying to schedule colonoscopy, hip implants, whatever they may be, and they're unable to get an appointment for 8 months or 12 months or whatever. So we get that feedback, I think, in a few different ways, sort of confirming that that's a challenge.

And what about the category? It sounds like there's been a generally soft recovery. Are there any categories that stand out as softer than you'd expect? Is it Medicare as a payer mix? Is it inpatient in terms of acuity? Any color?

Yes. I don't know that we've really seen that in our analysis. I've had some people tell me that the payers have highlighted kind of a greater shift from inpatient to outpatient during the pandemic. Certainly, the shift from inpatient to outpatient broadly has been occurring for a decade, 1.5 decades. So I think we see it continuing, but I don't think we've seen it accelerate during the pandemic, at least within our own data. I've heard sort of to your point, Jamie, that others have said that there are certain service lines that have recovered, more maybe cardiologist recovered more slowly. I don't think that we've really noted that. And again, every hospital sort of has a little bit of a different nuance, but I don't think we're seeing any patterns broadly other than this sort of idea that we tend to -- and when we get away from the COVID surges, our non-COVID volumes tend to recover to something pretty close to pre-pandemic or 2019 volumes, but sort of cracking that ceiling, if you will, or getting above that has really been the challenge. And I'm going to get back to -- I think a big chunk of that is our, I'll call it, position capacity or availability.

Okay. One medium-term question, I'll sneak in here because you were talking about it. Are you incrementally investing in outpatient capacity to the extent that, that transition has accelerated? How are you positioning on the outpatient side for the medium term?

Yes. So in both of our business segments, and again, this is not related to the pandemic or has been going on for quite some time. I think we have had a view that we really are trying to build out our capabilities and our service offerings so that we're able to offer kind of the most robust, more most fulsome continuum of care that's available because I think we believe that one of the advantages. So let's say, on the acute side, an ambulatory surgery center, a provider that I would describe as a niche provider offering a very specific service. And I think, generally, doing a good job, doing it. They do it, they do it efficiently. They do it in a patient convenience sort of way. But what they don't do is in the broader perspective of being able to offer a payer, an employer, the government kind of fluid and continuous continuum of care, then they were unable to do that. So if you're talking about somebody with chronic illness or somebody who's going to need after care or ongoing care, it's very difficult for an ASC to offer that. It's much easier for us with a much more fulsome array of services and network to do that. And so yes, that's been a real goal of ours. And we've certainly talked about it in a variety of ways. I think we've said and disclosed that we've opened 20 or 25 freestanding emergency departments around the country. We have a number of our own a number of our own freestanding imaging centers, certainly a significant number of physician practices owned physician practices, both primary care and specialties. So on the acute side, doing all those things on the behavioral side, especially during the pandemic, we've increased our telehealth capabilities but also increased all of our outpatient capabilities, whether that's partial hospitalization or intensive outpatient offerings. So yes, I mean, we certainly acknowledge and I don't, in any way, mean to when I was saying that there's been an inpatient to outpatient shift. We just don't think it's accelerated. We've been a part of that process for a long time. We acknowledge that it's happening. We acknowledge that both patients and payers want to see it happen. And so we're sort of trying to put ourselves in the best position to respond to those needs.

Okay. Let's change gears. We're in this inflationary environment. On one hand, you've got med-tech companies experiencing their own cost pressures trying to pass this on to you. You were trying to pass on some cost to your managed care partners. Let's start with the med-tech side, it's probably easier to tackle. We'll spend more time on the payers. Are you incrementally trying to do things like vendor consolidation or extract more price from your medical suppliers?

So the interesting thing is, I think if you look at our first quarter financials, the supply line of our 3 expense lines, which is salaries, wages, supplies and then other operating expenses, the supply line increased the least. And I think the salary and frankly, the other line increased mostly because of labor pressures. There are things in the other expense line that are labor costs that if we're paying to a third party, we're recording as other expenses. But I think the supply costs are increasing sort of at a slower rate, number one, because a lot of those contracts are longer-term contracts and multiyear contracts, so you don't get to that immediate inflation. But at the moment, I would make the point that I think we -- that's an area that given the other issues that we've discussed, salaries, volumes, et cetera, is much less challenging at least at the moment. That's not to say that the next few years are not going to see increased challenges because of inflation. But I think at the moment, our focus is clearly in other areas. Now to your point, as those inflationary pressures increase, what sort of options or optionality that we have available to us. First of all, I make the point that a lot of our supply purchases are made through our group purchasing organization as is the case with most hospitals. There's a lot of purchasing power that resides with the group purchasing organizations. So there's a lot of leverage that they have. Again, it doesn't mean that we're immune to price increases, et cetera. But I think at the moment, our point of view is if we can make progress in the labor area, we can reduce premium pay, increase filling of our vacancies, if we can recover more of our pre-COVID volumes, I think we feel like the inflation challenges are more manageable than these other issues.

Okay. Let's tackle the payer side, how are those conversations going generally on the behavioral side, you don't have a demand problem. It's a capacity problem. You've described being able to maybe switch out some suboptimal contracts with better contracts. How is that progressing?

So I think the best manifestation of that is if you look at our revenue per adjusted day in the behavioral segment, which is the best measure of pricing and there's not much of an acuity factor in the behavioral side. So that revenue per adjusted day was increasing, I think, pretty consistently on an annual basis, maybe 2% or 3% a year, pre-pandemic, during the pandemic, it's been increasing more like 5% or 6% a year and some periods even more than that. I think that's reflective of the fact that the strategy that you alluded to, which is in an environment where we're turning patients away because we don't have enough staff we're going back to our most problematic contracts, our lowest-paying contracts and saying, you've either got to give us a more reasonable increase or we'll terminate the contract and effectively in a figurative way. We've got patients lining up outside our door whose payers or insurers are willing to pay us more, we'll add for that. And so I think we're having some degree of success there. The question sort of often gets asked how sustainable is that? Is that likely to continue? I think the answer is sort of absent any other changes, I think it's likely to continue if -- and this would be good news, I think, if we make more progress on the labor side, if we fill more of our labor vacancies, if as a consequence of filling more of our labor vacancies, we're able to increase our patient day growth, et cetera. I think we might see those numbers come down a little bit because our optionality will decline a little bit. But I think the overall net result will be a good one.

Okay. On the acute side, it sounds like it's more challenging to walk away from contracts there, understandably slow. Are you seeing changes in the conversation payers being receptive to the obvious inflation pressures out there? And are you getting any sense that payers are incorporating that into their expectations for how they price for next year?

So it's difficult, I think, in a lot of cases, to answer these questions about payer dynamics and payer negotiations with kind of a broad generic answer general answer because I think it really does vary pretty significantly by payer, by market, by contract. And look, we're making -- I don't often make the point when I say we're terminating contracts even on the behavioral side, it's a very judicious process. We're making a judgment in every case and every contract that we're considering a termination, what is our leverage? What's our market share in that particular instance, what's the payers market share? What's the amount of available capacity in the market because, quite frankly, at the end of the day, the ultimate threat in the payer provider negotiation is termination. And the provider or the hospital, I think, is much more likely to threaten termination if they feel the payer doesn't have a place to put their patients if they don't have us in their network. And the payer, I think is much more likely to pursue termination or accept it if they do have a place to put their patients. So that available capacity in the market, I think, is an important point as well. So again, I think we've had some success. I think we've also -- we've had some kind of legal -- we've gone down the legal road with some of our payers on issues like the classification of patients as inpatient versus observation, which is, I think, kind of a big issue in the acute care space. And we've had some success with that. So again, I think we look at every payer situation and payer dynamic separately and discretely, is there an opportunity here? Is it in contractual pricing? Is it in contractual terms like, again, patient classification. Do we have more leverage here than the payer does? How do we make that judgment?

And so on that point, just the relative market share between payers and providers in a given market, where would you rank UHS business in terms of having more power than your payers and being able to flex that power?

Yes. I mean, so it has long been part of our strategy to have a significant market share in any market in which we operate. And this is true of, I think, acute and behavioral. We have a slide in our investor presentation that talks about doing this a little bit off the top of my head, I think getting pretty close, something like 93% of our hospital providers are either the #1 or #2 market share providers in that market. So I think we have pretty good leverage. But again, the other dynamics do matter as well. So I'll talk about Las Vegas, we're the largest market share provider in Las Vegas. But our biggest payer is United and they have a significant market share. So there's sort of a standoff there. I do think we benefited in a market like Las Vegas because there is limited excess capacity in that market. So again, it really varies. And I think we feel like our market share is generally pretty strong in most of our markets. But I'll get back to what I was saying before that we're making that judgment very specifically, very judiciously based on the facts and circumstances in a market about a contract, et cetera.

Okay. Let's turn to margins. There's some obvious headwinds over the past couple of years, some obvious tailwinds. And which of those headwinds and tailwinds do you see a sustainable maybe cost cutting, acuity versus the -- on the negative side, some of these inflationary pressures, particularly around wages. Where does that leave us as things get to this new normal? Can you get back to 2019 levels? Or does the balance of things that are sustainable leave you below 2019 levels?

Yes. So I think we've largely touched on this. And again, I think there were certainly nuances beyond kind of the very high-level sort of description of the dynamic that I've provided so far, but I think it's largely correct. And that is there's 2 very broad issues that I think are challenging us and the industry, the hospital industry generally. One is the labor shortage and whether that's manifested more as it is on the acute side through the payment of premium pay and excessive labor dollars or more as it is on the behavioral side with just a simple inability to fill vacancies and therefore, more muted volumes, we've got to make progress there. And on the behavioral side, I think these 2 are very closely tied together, but we've also got to continue to recover our volumes because at the end of the day, sort of if your goal is to get back to 2019 margins and nothing concerned all, but I mean, the way you frame the question, it's difficult to do if we just get back to 2019 volumes. We have to get back to some growth level above 2019 volumes. And that's been difficult to do during the pandemic. I think we've had a view that as we emerge from the pandemic and the labor situation eases, that will be easier to do. I don't necessarily see us getting back to 2019 volumes in quarter or 2 quarters, but I don't necessarily think it's a 3- or 5-year process either.

Just on the next few years in Street's modeling a 13.5% to 14% margin at a high level, I mean, is that reflective of how you think the margin progression from this recent low watermark will be? I mean that's still 200 basis points or so below 2019 levels? Do you think Street's missing something? Or is that the right kind of starting...

Yes. And again, I'm going to go back to the comment that I just made. I think the shorter of the period that you want to focus on, if you're focused on the balance of this year or even 2023, I think that, that's sort of an expectation is probably not wildly awful though, again, I still think even when we're talking about 2023, I don't know that anybody has what I would describe as really clear visibility into how much progress we can make on these issues. But I think, again, the longer you're willing to go out and think about 2024, 2025, I think that -- and again, the reason for my thinking on this, and I think the company is thinking is, ultimately, we believe that the underlying demand for these 2 business segments has not really changed very much. And if anything, and I think on the particularly the behavioral side, it has increased actually during the pandemic. And I think that the view being that if the volume is there, we will get over these other issues, we've got to find a way to execute or to satisfy the volume, but we will. And the market, market forces will respond as well, and that will make it easier. I think if there is further economic uncertainty and recession, et cetera, well, I don't necessarily view that as a good thing broadly. I think it actually would be helpful from a labor perspective. So again, I think all these things have to play out. And I get it that I think the current view that the market and the investor community seems to have is pretty negative. And I think, again, in the short run, I don't know that that's justified. I think the more that you're willing to extend out that outlook, I think it improves quite a bit.

Okay. Your guidance was left unchanged after the first quarter, you said you were looking for more time to assess and you may need to lower it later in the year. How should investors be thinking about your approach to guidance going into the second quarter?

Yes. I think it's important -- this is the message that we tried to deliver and I hope that it was delivered properly was not that at the end of April, when we announced our earnings, now on the heels of some of our peers who did reduce their guidance, it wasn't our view that we sort of disagreed or quarreled with their outlook, I mean, look, I think it was pretty clear. We all underperformed in Q1. I think we were acknowledging that Q2, certainly through April seemed difficult. I think, like I said earlier, commentary that others have made, particularly not for promise they've made subsequent seems that April and May are equally as challenging. What I think we were saying, and I think you alluded to it is, we just felt like with the benefit of another couple of months or a quarter of experience, we might have a better perspective on what the balance of the year look like. And we just felt that, that was a more meaningful trade-off that, not changing our guidance at the time made sense so that if and when we took the opportunity to change our guidance, we just have kind of a greater visibility. Now in all fairness, it's been a pretty in volatile and fluid environment. And honestly, I'm not sure that we will have a whole lot more perspective or visibility in the back half of the year, but that was the thought at that time. Not that I think we were in any way disagreeing with the challenges or the description challenges that any of our peers had made at the time. I think we were fully in agreement with all that.

All right. Well, with that, I think we're out of time. Thank you, Steve.

Okay. Thank you. Appreciate it.