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

Thank you for joining us today. It's my pleasure to be introducing Universal Health Services, one of the largest providers of acute care hospital services as well as behavioral health services. Presenting today, we have Steve Filton, the CFO.

And I guess, Steve, I'm going to jump into the Q&A with the same question I'm asking everybody basically, which is how is it that hospitals and med tech companies seem to be having great volumes and managed care says that there's no problem? So is there any way to kind of reconcile how both of those things could be happening at the same time?

It's a great question. And I will say, and I'm sure you know this. This is not the first time this has sort of come up. I think that it's often -- and I think particularly sort of the shorter the time frame that you're talking about, the -- sometimes the more incongruous the sort of commentary coming from what I'll call sort of the opposite side of the spectrum seem to be. Some of this, I think, is an expectation sort of thing, which is we talk about increasing volumes and utilization compared to expectations and they talk about MLRs being in line with expectations, but that may be an expectation issue as much as an actual issue. Look, I also feel like managed care companies and then maybe this is a little bit of a provider bias, but I think they feel like they're in a position where they can control utilization when they have to through things like more aggressive utilization management and more aggressive denials and that sort of thing. And we certainly see that. So that's another piece of this, too, which is, while I think the raw data that providers may be reporting in terms of admissions or procedures or whatever it may be, I think at least my sense is that providers are finding the payment process to be more challenging. And that's sort of another way that I think another lever that the managed care companies feel like they're pulling.

Yes. So I guess -- when we think about -- on the acute care side, I mean the volume growth you guys showed in Q1 was just an incredible year-over-year growth. But is there a reason to kind of say why all of a sudden in Q1 then from your perspective? You've got expectations, but like it's just a big number you're aware, why now all of a sudden?

Yes. I mean the truth of the matter is that from the very beginning of the pandemic when volumes dropped precipitously, I think in those early months of the pandemic in the spring and summer of 2020, we saw 40% and 50% declines in our emergency room traffic. We saw 2/3 declines in our procedural and elective volumes. And I think we argued really from the beginning that fundamental demand really had not changed and that these procedures were really just being postponed or deferred and at some point, would be recaptured, for want of a better description. I think the truth is or the fact is that was slow to happen. And we talked about and I think our provider peers talked about getting back to pre-pandemic or 2019 volumes. And maybe at some point, we were at 102% or 103% of pre-pandemic volumes. And kind of we're counting that as a success, but the reality is, and I think the providers expected and I think many people in the audience expected, that at some point, providers were going to get back to 120% or 125% in a month of pre-pandemic volumes. And that never really happened. It seems to have occurred, maybe not to that magnitude, but it seems to have occurred in Q1 in a greater magnitude than we've experienced before. Now why exactly in Q1? That's, I think, a hard one to describe. But certainly, to your point, our volumes are great and probably led the industry. But the strength in the industry was pretty broad-based. So it just feels to me as if there's got to be some element of catch-up there or this recapture of these postponed and deferred procedures because, honestly, without that explanation, I'm not sure how or why you would say this has occurred.

So does that mean -- if there's a catch up, does that mean that there's a bolus that we have to work through and that by Q2, it goes back to normal or by Q3? Like how are you thinking about volumes?

Yes. So look, I think it's -- we had same-store adjusted admission growth in Q1 in excess of 10%. And I think that it's not a startling statement for me to make that I think that's not a sustainable level of growth. But to your point, like does it immediately diminish in Q2? Or do we -- does it remain strong for a couple of quarters? It's -- and I always make this point. Hospitals, I don't think have a tremendously long line of sight on volumes. Emergency volumes, by their nature and definition, occur when they occur. And non-emergent or elective volumes, we tend not to have a really precise view of that. We schedule elective and our scheduled procedures weeks in advance. Our physicians schedule them months, sometimes 6 or 8 months in advance, but they don't share that information with us, except anecdotally. Two or 3 weeks in advance, they give us the names of their patients that are scheduled over the coming weeks. And then we do preoperative testing and insurance verification and that sort of stuff. But other than what we hear from our physicians and also from our patient population, we know that I think there's a pretty healthy pipeline. I don't know that I would describe it as a backlog, but it's a pretty healthy pipeline because our physicians tell us they're booked and our patients who are frustrated, because they can't get in to see their physicians or get a procedure for a number of months, are frustrated. So in that sense, I don't think we're going to sort of fall off a cliff, but I certainly feel like the first quarter performance, 2 things, I mean it was against a pretty easy comparison but also has got to contain some element of catch up. I will say that going forward, the comparisons, I think, are going to become much more meaningful, apples to apples, both compared to the prior year and compared to the preceding quarter because they're not going to have any big COVID surges embedded in those numbers presumably.

Yes. So I guess to that point, because it seems like some of the managed care companies are saying is that Q1, in their view, was always going to be the highest year-over-year trend quarter. Wouldn't matter what they thought trend was going to be for the year. And I guess going back to how we talked about Q1, COVID spiked, then dropped, COVID -- non-COVID dropped and it didn't rebound. So did you see that dynamic in your volumes? Was there a different year-over-year trend through the quarter or into April? Or like is absolute utilization relatively stable, but the year-over-year kind of changed? Is that the way to think about it or...

Yes. So again, I think it's a bit of an incongruous comparison. I think the comment you made is absolutely true. The surprising thing about 2022 from our perspective is that -- and which was, I think, different than 2021 is that, in 2021, when COVID volumes declined in -- after January, February, they came back pretty quickly in the spring and early summer. And then there was another COVID surge. In 2022, that rebound seem to occur much more slowly even though the timing was very similar, meaning the COVID surge was in January, February, ended pretty quickly. And I think the difference, as best as I can tell and this is certainly true on the behavioral side, but also, I think, somewhat true on the acute side, is the labor situation was much tighter in 2022 than it was in '21. There was this huge increase in the first quarter of '22 in premium pay and the use of contract labor and all that kind of stuff. And I think that had a dampening or tempering effect on volumes, certainly, on the behavioral side but I think on the acute side as well. And so, again, I think that's an element of it, too. There are, I think, a number of factors at play here. I do think that another reason for the strong volume performance in Q1 is that the labor situation is getting better. And we're filling more of our full-time vacancies and that's allowing us to have more fulsome OR schedules and procedural schedules.

And I guess that is a bullish sign for continued volume growth as the labor market seems to be at least where it is, if not, continuing to get slightly better.

Yes. And honestly, I mean, if you try and -- and I'm -- Yogi bear said, "It's hard to predict things, especially the future." But I think that especially if there's not another COVID surge, which most people don't expect of a material nature and if there's any sort of softening, I think, in the overall economy, I think, historically, economic weakness usually tends to make things easier for us from a labor perspective. We see a greater supply of nursing and other labor hours in a recession. So that's -- in that sense, generally a good thing for us. Yes, I don't think there's anything on the horizon. Like I said, absent another COVID surge that would really provide a threat to the improving labor situation.

And then, I guess, maybe switching to the behavioral side of the business, kind of basically the same questions. Because it seems like there, demand -- it feels like demand maybe wasn't as depressed during COVID as it was on the acute care side, but your ability to treat that demand was restricted. So is that strength this quarter, last couple of quarters really just about labor getting better?

Yes. I think the behavioral story is kind of more straightforward, less complicated. We made the argument really from the outset of the pandemic except at the very beginning of the pandemic where you had the sort of lockdown dynamic and people weren't going to hospital emergency rooms and mental health clinics and that sort of thing. But once -- after, I would say, the initial 3 or 4 months, the major gating factor we had in building our behavioral volume was a lack of qualified staff, mostly nurses but including people like therapists and psychologists and counselors and even including some nonprofessional people. And the argument that we made and then the postulation that we put forth was that as we were able to fill more of those vacancies, and I would say for the last 12 months at least, we've had a very steady trend of net positive hires. We said that as COVID volumes declined, we would have more net positive hires. And as we had more net positive hires, we'd have more volume growth. We would simply be able to treat more patients. And you saw that in Q3 of last year and Q4 of last year. You saw that in Q1 of this year. We've suggested that's continued into the early part of Q2. So the challenge, I think, on the acute side is there's a few different sort of dynamics occurring all at once and going in different directions. So while you have improving volumes, you do have the loss of the COVID patients and their acuity and their additional reimbursement and you have the shift from inpatient to outpatient, which is generally a drag, et cetera. Whereas on the behavioral side, and again, we've made this argument from the beginning, the impact of COVID was only negative on the behavioral business. And as we emerge from it as a consequence, we always thought that, that would really be a pretty steady upward trajectory steeper than it would be on the acute side. And certainly, over the last 3 or 4 quarters, that's the way it's been playing out.

Yes. No, I think that, that makes sense. I guess there's 2 issues with that, I guess. The first one is from a labor market perspective, it seems like there's clearly year-over-year improvement, but it also feels like the labor market is still not good, right? It's still hard to find nurses. So is the labor market backdrop conducive to -- if it stayed at these levels, conducive to continuing the type of year-over-year growth? And if we want to see faster, it has to get better? Or it has to get better to continue this type of growth?

No, it's a great question, and I think it's perfectly fair. When I think back to late 2019 or early 2020, we certainly would have described the labor market at that time as tight and challenging. We were coming still several years out from the recession. We were, I think, something close to what economists thought was full employment, maybe definitely at full employment. Unemployment was kind of 3.5%, 4%. Things were tight. But the pandemic really exacerbated that to levels that we have never seen before. And it feels to me like we're sort of back to where we were in November, December '19, January, February '20, which, again, I think your description is perfectly fair. It's a tight labor market but kind of manageable, and we can work our way through that in a variety of ways, looking at different staffing models. So if RNs are a problem, we can hire more LPNs or more mental health techs to support kind of a smaller number of RNs and still provide the same level of quality of care and that sort of thing. There are just things that we can do that, during the pandemic, it was -- the shortage was so exacerbated, none of that really made any sort of material difference. So you're right. I mean I don't want to leave the impression, and I don't think people have it, but I don't want to leave the impression that we're able to hire anyone we want now, and therefore, the volume growth on the behavioral side is unlimited. I do think demand is very strong. And so it's more of the idea of to the degree that we can continue to hire, to the degree that we can find more effective and more efficient treatment models that rely less, for instance, on registered nurses. I think those things will all be helpful to us to continue this. And the other thing is what I -- people in the room know me and I've been doing this for a long time. I've been in the business for almost 4 decades. Every time there's been a nursing shortage in my previous experience, there's a market reaction to that. The market produces more nurses, which is what you would expect. I think in this current shortage, that didn't occur nearly to the same degree because of a shortage of nursing educators. And nursing schools will tell us all the time that they can increase their enrollment 50% or 100% tomorrow if they had a sufficient number of teachers. And they just don't. But again, the market will ultimately correct for all that, not necessarily in the next quarter, et cetera, but I think over time. And back to the point that I was making before, I don't see it getting any worse from here. And I think it just sort of continues to ease. I think your point or question is entirely appropriate to say it may not be a dramatic easing. I think that over time will continue to improve.

So I guess the second part, though, of that dynamic of like okay, labor is getting better and so volumes should improve is there's also a bed capacity, potential constraint at some point. You guys pulled back a lot on CapEx during COVID. So how quickly -- I guess how much capacity is there before you need to add beds? And how quickly can you add beds if all of a sudden labor becomes available and that's no longer a barrier?

Yes. So if you look at our behavioral numbers, our occupancy levels in the last year or so are running in the 72%, 73% range. And we've run in our behavioral business, it's been a while, but back in the mid-2000s, we've run occupancy levels consistently on average in the mid-80s. So certainly, we can increase our volumes pretty substantially without -- and still increase our occupancy levels. The reason that in the mid-2000s, we began to build beds and, frankly, our peers followed us in that, built new beds, is that we found that an 84%, 85% occupancy level was somewhat inefficient in the sense that we were turning a fair amount of patients away at those levels because we didn't have an available bed, et cetera. And it made sense for us to build new beds. And we think that sort of the maximum efficiency level to run the business, occupancy level is kind of in the mid-70s, 75%, 76% maybe. So the answer to your question is, I think we have a little bit of room in our existing infrastructure to increase volumes without really being constrained. We're turning a significant number of new patients away. But also, I think we're getting close to a point where building new beds is -- which we've been doing a little bit during the pandemic but certainly have slowed that pace down, is becoming kind of a real significant consideration again. I think I mentioned on our fourth quarter call a couple of months ago that we've recently gone through an exercise of identifying all of our facilities that run at occupancy levels over 80%. And to see whether there's a need and a case to be made for adding capacity to those facilities.

And how long does that take?

So -- and you and I were having this conversation yesterday. I mean I think that what we tried to do during the pandemic was continue the -- what I'll call the capacity expansion process without spending in a -- making a really enormous investment in it. So in other words, if we needed to apply for, in order to get new capacity, a CON in states that require a CON or local zoning where that's required, we continue to do that. Where we got those approvals, we would engage an architect to do the expansion plans. Where we stopped, I think, largely during the pandemic, wasn't actually letting construction contracts and going through the expense of the actual construction. But most of the time, the construction piece of that timeline is actually the shortest piece. If you're talking about adding 20 or 30 beds to a facility, most cases, that's going to be a 6- or 8-month process. So that can be resurrected and completed relatively soon. So I think if we decide that the labor environment continues to get better and we're able to staff these new beds, I think you could see the impact of at least some of those new beds coming online as early as the back half of 2024.

Right, 2024?