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

Hello, and welcome to the 2023 RBC Capital Markets Global Healthcare Conference. I'm Ben Hendrix, RBC's health care services and managed care analyst. We are pleased to host acute care and behavioral hospital operator at Universal Health Services. And with us this morning from management is Steve Filton, CFO.

We'll start with a question on the acute business. First quarter volumes came in well ahead of expectations with adjusted admissions growth of 10.5% and surgical volumes growth of 10%. On the call, you noted that recovery appears to be broad-based as non-COVID volumes are beginning to recover. How do you think about volume growth as you move through the balance of the year?

Yes. I would make a couple of comments. I mean, obviously, we were pleased by the robust acute care volume growth in Q1. I think throughout the pandemic, we've made this argument, we and collectively acute care providers, that certainly at the beginning of the pandemic, there was some significant amount of postponed and deferred procedures and surgeries, et cetera. And then at some point, those procedures would sort of be recaptured in the system. And again, collectively, providers sort of talked about getting back to pre-pandemic levels or getting close or maybe 101% or 102%. But I don't think ever at the point of recapturing a significant amount of it. It seemed like across the board in Q1, the acute care industry had pretty strong volumes. And while I think it's impossible for us to -- as providers to really parse out what would be sort of normalized and what would have been recaptured, I just think there's a sense that there was some amount of recapture volume in Q1. The other thing I think that we've made the point going into 2023 is that without significant COVID volumes in 2023, there's likely to be kind of a return to the more normal seasonality kinds of trends that we're accustomed to seeing in the business. So a bit of a step down in Q2 from Q1 sequentially, et cetera. But again, broadly, pleased with the volumes. But as you cited, 10% same-store adjusted admission growth in Q1 over the prior year. Hard to imagine that, that can be sustained at that level for an extended period of time.

Got you. And there's nothing from the first quarter into the second quarter that would kind of throw the EBITDA trajectory, as you mentioned, the slight -- maybe a slight step down in 2Q, weaker 3Q and then strong 4Q. That seems to be tracking pretty much to your expectations, or is there anything to call out differently from there?

Yes. I think we made the point in our fourth quarter earnings call back in February that 2023 would be kind of a combination of a return to normal seasonality, which I think is what you just ticked through, but also a bit of strengthening as the year progressed as both volumes returned and also as the labor situation eased, which had been really the kind of the 2 biggest headwinds for the business over the last few years. So again, I think when we look back on 2023, a year from now, we'll see kind of both that return to somewhat normal seasonality patterns or historical seasonality patterns, but also a progressive improvement as the year went on, particularly in the labor and then it's sort of intended impacts.

Within that growth we've seen on the volume side, can you talk about acuity and how we're seeing acuity evolve across the various categories within the acute side?

Yes. I mean, so acuity really is, I think, a function of a couple of important things. I mean, obviously, we see a significant drop in acuity year-over-year as the number or the percentage of COVID patients declines, and those patients tended to bring with them very high acuity diagnoses and high acuity stays. And then as we're replacing those COVID patients, we're sort of building up that acuity in part sort of naturally as patients return to, again, what I would describe to some of their pre-pandemic utilization patterns. They're going back to their primary care physicians for annual exams, and they're having their routine colonoscopies and cardiac visits and that sort of thing. And then ultimately, those things are resulting in sort of cascading follow-up treatment and diagnostics, et cetera, that you would expect. So I think the return to acuity is something that will occur naturally. I think now the other point that's -- and again, I think a lot of these issues have sort of kind of conflicting dynamics, I think one of the things that we're seeing is that a lot of the business that dropped off during the pandemic, by definition, was the less acute, lower -- less emergent, lower acuity sorts of procedures. And as they're returning, that tends to bring the overall acuity measures down some, they're weighted down some.

You attributed the strong 1Q volume growth to filling some permanent vacancies in the hospitals. With contract labor rates decreasing, can you talk about how hiring has improved and turnover and kind of what you're seeing on the staffing front there on acute?

Yes. I mean I think that's probably more true on the behavioral side. I mean, I think the point that we've made throughout the pandemic is that while there has been a labor scarcity challenge in both of the businesses, it has affected them differently. So on the acute side, the main impact has been higher levels of premium pay, amounts that we're paying to our own internal staff or overtime and shift differential as well as the amounts that we're paying to third parties for traveling and temporary nurses and that sort of thing. Obviously, as the COVID volumes have declined, we've made a significant amount of progress. We almost cut in half from the first quarter of 2022 to the third quarter, the amount of premium pay that we were incurring. Now for us, that amount of premium pay has kind of leveled off over the last several quarters, but it's still dramatically lower than it was a year ago during the COVID surge, whereas -- I know I haven't gotten to it yet, but on the behavioral side, the labor scarcity really manifested itself in an inability to simply fill positions at effectively any rate. And as a consequence, the labor scarcity on the behavioral side tended to result in more muted volumes rather than in higher wages.

Got you. And what you saw on the acute side from a contractor labor perspective, is that -- do you consider a sustainable run rate for -- in the guidance? Or do you think that we'll see some improvement from here? And have you kind of factored that into your numbers?

Yes. I mean -- so I'm doing this kind of ballpark, but I mean, I think our premium pay usage in 2022 was about [ $435 million ], a number, something like that. And our guidance was to a number, about 1/3 lower than that in that kind of [ $275 million ] range. We were probably in Q1, maybe [ $15 million, $20 million ] short of that guided goal, but I think that was largely a result of the higher volumes that you kind of kicked off talking about. I think our general view is that as volumes moderate some in the back half of the year, we should be able to get closer and kind of at least within shouting distance of that premium -- reduced premium pay goal that we had set for ourselves in 2023.

Just going back to the kind of the acuity side of things. We've heard everyone talk about migration to outpatient and that having somewhat of a revenue headwind on -- for the inpatient side. But can you talk about your ASC footprint, your HOPD footprint and how you're positioned for the migration of total hips, knees and what have you to the outpatient setting?

Yes. I mean, I think it's worth noting, and I'm sure just about everybody in this room knows, that this migration of procedures from an inpatient setting to an outpatient setting has been underway for a long time, certainly as long before the pandemic. Certainly, probably for the last 1.5 decades, maybe even 2 decades. I think it accelerated during the pandemic. I think it accelerated in -- particular in the orthopedic service line and total joint replacements, which I think you alluded to in your question. Certainly, during this period of a decade or 2, we've done a lot to adjust to those shifting patterns. We've increased the outpatient capacity in our own hospitals, the convenience to having procedures done on an outpatient basis for both our physicians and our patients, that sort of thing. We've also increased our footprint of ASCs, either stand-alone hospital-owned ASCs or ASCs in joint ventures with physicians, and we'll continue to do so. It does feel like, in particular, this really dramatic shift in orthopedic procedures. And again, in particular, in total joint replacements has really kind of run through the bulk of it itself over the last 2 or 3 years. We've gone from, 3 or 4 years ago, 20% of those total joints being done on an outpatient basis to probably now 80% 3 or 4 years later being done on an outpatient basis. But the upshot of that dramatic shift is, I don't know that there's a whole lot more to go. So I think we'll continue -- we're going to return to kind of that incremental shift from in to outpatient that we've been dealing with and adjusting to for many years that I think over the last couple of years had really accelerated.

And how significant would the next cardiac wave be for you guys? It seems like that's kind of the next shooter drop in terms of the migration.

Yes. I mean I don't feel like the cardiology service line is set for that same, again, dramatic acceleration and whether that's cardiac cats or other cardiac procedures being able to shift from in to outpatient in as quick a period of time, keeping in mind that the cardiac population tends to be older, more acutely ill, et cetera. I just don't think it's likely to happen at that same pace.

We've -- you've touched a little bit already on behavioral side and how staffing dynamics work there, and we've seen some solid volume growth over the last few quarters. Though occupancy remained slightly below pre-pandemic levels given the strong underlying demand for psychiatric care, when do you believe those occupancy will kind of return to -- I think you mentioned recently maybe we're still a couple of hundred basis points away from normalization. How do we see that trending?

Yes. I mean, so that discussion, I think, came up on the last earnings call a few weeks ago. I think as we return to something that we would consider to be relatively full staffing levels, and I think we're still short of that, but as we're able to do that and we're able to increase, to your point, the occupancy levels from the low 70s where we are now to kind of the mid-70s where we were pre-pandemic. I think that we are returning to the process of sort of real-time consideration of where capacity expansion is appropriate. I think I mentioned on the call, we've gone through a relatively recent exercise of looking at all of our behavioral facilities that are running at above 80% occupancy to see whether additional bed capacity expansion is warranted and how feasible that is, et cetera. But yes, I think we tend to view sort of the maximum efficient level of occupancy on the behavioral side as sort of in the mid-70s. So we're a couple of percentage points short of that. But as we get closer and closer, I think we probably resurrect in a more meaningful way the bed capacity plans and actions that we had in place pre-pandemic.

I got the question between meetings here about what -- why is it that kind of mid-70s is that -- is kind of that ideal occupancy? What kind of fills that 20 basis points -- or 25 percentage points of cushion there in occupancy? And what requires that to stay open in order to run efficiently?