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

All right. Good afternoon, everyone. We're going to start our next panel here, close out the first day of the Goldman Sachs Healthcare Conference. We've got UHS with us and Steve Filton, Chief Finance Officer. Thank you for joining.

Thank you.

Let's start with acute care volumes. That's probably most topical on a lot of people's minds. I'm going to start with just the first quarter and try to tease apart if there's anything unique about it. Do you gauge where the recovery is? And then we'll see if we can get any color on current trends. So first, how would you describe the first quarter? I think there's a view that something changed in some way. It was an easy comp. How would you just describe what the recovery looked like in the first quarter?

Yes. And to your point, Jamie, I mean, I think whatever was happening seemed to be reasonably consistent among all the public acute care hospital companies, all of whom I think recorded pretty strong volumes in Q1. To your point, there were -- it was an easy comparison to the extent that the first quarter of last year was a quarter that had very high COVID volumes, still at high COVID volumes. We were going through the Omicron surge at the time. Although replacing those COVID volumes certainly was a bit of a challenge. It felt to us as if there was some amount of catch-up or pull through as some people have described it in Q1. Now we say that I think with some relative lack of precision, it's difficult for us to really sort of tell the history of a patient who comes to our hospital, whether they're there because they postponed the procedure or deferred some sort of care or treatment for a period of time, et cetera. But overall, I mean, our acute care, same-store adjusted admissions were, I think, approximately 10-plus percent over the prior year quarter. And that certainly is sort of a historically very large number. So it's just our gut reaction, which I think we've articulated in our first quarter call and since then, is that we certainly had a sense that there would be some moderation in volumes. On the other hand, I mean, I think we've said and continue to say elective procedures, elective and scheduled surgical and other procedural volumes have been reasonably strong as we would have expected they'd be as COVID volumes would go down. So I think it's a bit of a mixed bag. I think we had probably some amount of catch-up in Q1 and some moderation in Q2, but I think there's still pretty encouraging volume trends from our perspective, at least.

Okay. That's helpful. When you say catch up, I get that it's not precise, but is this just there were things on the schedule in the fourth quarter. Flu, COVID, whatever it was, disrupted that, and you saw that come back in the first quarter, or you also talked about pull forward. Is that economic uncertainty and people are kind of rushing in to get things done? I mean...

Yes, I think it's the idea that we certainly know that at the beginning of the pandemic people were postponing all but the most emergent of procedures. They weren't going to the hospital. But beyond that, they weren't seeing their primary care physicians for their annual visits or for more minor ailments. They weren't having sort of routine diagnostics, colonoscopies, that sort of thing. And as we've emerged from the pandemic, I think late in '22 and into '23, more and more people have returned to those sort of normal patterns back to having an annual physical, back to their routine colonoscopy, et cetera. And then those activities, by their sort of nature and definition, translate into sort of a cascade of other follow-up procedures, et cetera. So I think you're seeing some of that. And honestly, I think providers and other observers of the industry have been predicting that all along. And I think to some degree, we've been a little bit surprised that it's taken as long as it's taken. I think some of that is the sheer capacity in the system, meaning we hear from our own physicians, we hear from our own patients that once they wanted to get back to their regular routines, it took them some time to get an appointment in their primary care practice. And then if there's a follow-up colonoscopy or whatever, now it takes 6 months or 8 months before that's on the schedule. We have our doctors telling us the same thing about the backlog in their schedule. So I think you see that dynamic at work as well.

The other thing you said is you expected some moderation into 2Q, that growth rates and what aren't sustainable. I get the growth side just given the comp, 10%. But from a level perspective and normal seasonality, did you expect more seasonality into 2Q, more of a decline? Just from a level perspective, forget growth.

Yes. I mean I think we went into 2023 with a bit of a mixed view in the sense that the normal seasonality that I think we've come to expect in this business tended to be absent during the COVID years. So again, in a traditional year or historically traditional year, Q1 tended to be the strongest quarter, lots of respiratory ailments, that sort of thing. Q2 would sort of moderate a little bit. Q3 tended to be the softest quarter when in the summertime people and physicians are on vacation, and then Q4 rebounded a little bit. And we did expect, I think, to some degree a return to those seasonal patterns. People are definitely taking vacations again, and the kids are back in school, and they're on that sort of school schedule, that sort of thing. But I think what we're also finding and what we expected and we talked about, I think, in our year-end call and subsequent to that, is this continued recovery in volumes for the reasons that I talked about. So a little bit of both, and I realize that's not necessarily the easiest thing to follow or to sort of fit into a model. But I do think you're seeing both. You're seeing some element of that return to normal traditional seasonality, but also this incremental, and I think sustainable, recovery in volumes that I think we've been expecting ever since the pandemic began.

Can you give any color on just what you're seeing in April, May, June so far? I mean are -- is that recovery piece kind of evidence in what you're seeing in any way?

Yes. And again, the comment that I made is not necessarily. I think we talked about an expectation that overall volumes, largely on the acute side, measured and adjusted admissions would likely moderate in Q2. But I think we expected that procedural elective surgeries and other procedural cases, would continue to recover as they have been, I would say, since at least the second half of last year and certainly into the first quarter.

Okay. Last 1 on this. I mean we talked a moment ago about catch-up from 4Q into 1Q. Did a similar dynamic happen last year, 1Q to 2Q? I mean we had the big Omicron wave in the first quarter. Is 2Q kind of a tough comp? I know it doesn't look like it necessarily, but do you think there was some impact in 2Q last year from a similar dynamic of...

Yes. I mean I think -- and again, the problem -- you know I'm not suggesting all your questions aren't perfectly legitimate and good questions, but there's -- I think there are a number of different dynamics affecting all these periods. I think what we saw in Q2 of last year was, as you suggest, I think some recovery in those non-COVID procedures after we saw COVID volumes decline from their highs in January and February 2022. So by April, May of last year, we were definitely seeing some recovery. On the other hand, what we were seeing last year, I think, was still a pretty significant pinch in the labor force and some labor scarcity that I think was muting some volumes as well. So again, I think, and there's a bit of sort of ups and downs in terms of the comparisons to last year.

Okay. Okay. That's helpful. Let's turn to acuity. It's been a huge driver for all the hospitals over the last couple of years. How should we think about just core acuity? I know a big difference in level of COVID in the first quarter and into this year. But in terms of just core acuity ex COVID, is it at sustainable levels, do you think? Where to from here?

Yes. I mean I think our expectation is that beginning in Q2, the acuity comparisons, whether they're to the prior year second quarter or they took sequentially in the first quarter of this year, begin to be more meaningful in that they're really becoming apples-to-apples comparisons. Because we're comparing essentially, I'm going to call it a non-COVID period or an endemic period in Q2 of this year to a similar period in Q2 of last year or a similar period in Q1 of this year. And I think what we've talked about is in that environment, our expectation, not necessarily immediately in Q2, but over the course of the next several quarters, is that we return to kind of a more normal trajectory for the acute care business, which is something in the mid-single-digit top line growth range, 5%, 6% growth, that would be split pretty evenly between price and volume. And price includes a number of things, including sort of real pure price, but also acuity.

As you -- as this recovery piece plays out and you get the incremental volume that's maybe been on the sidelines, a deferred, it's sort of a theoretical question but what is the acuity of that missing piece look like as it starts to come back in? Does that pressure that half of the revenue component on an incremental basis?

Yes. I mean and again, I feel like I'm never giving anybody a very straight answer to any of your questions. But I think you get a little bit of both. I mean I think as I talked about, we're getting a return of that elective and surgical volume that had largely been crowded out particularly during the various COVID surges. Those patients are not necessarily the highest acuity patients. They may be, frankly, lower acuity than the COVID patients themselves who are very high acuity patients. But I also feel like the profitability of those patients, both from a payer mix and a procedural sort of perspective, tend to be better than the COVID patients they're replacing. So I think that's a plus on, I'll call it the pricing side, not specifically the acuity side. On the other hand, I think what you saw, again, during the pandemic particularly, I would say, the first half of the pandemic was a really dramatic decline in the lower acuity procedures. Again, people deferring routine sorts of things, et cetera. They were still obviously coming to the hospitals for a heart attack or stroke or whatever. But for neuro arthroscopy, et cetera, something that could be deferred, that sort of thing was being deferred. So to the degree that those procedures, those sort of lower acuity procedures are coming back, I think that dampens acuity a little bit. But again, in the end, I think our expectation is that over the next several quarters, absent another COVID surge, which I don't think too many people are expecting at this point, I think you're going to see sort of a return to that kind of more traditional trajectory and model of, again, I'm going to call it mid-single-digit same-store revenue growth.

Okay. Let's turn to reimbursement and payers. On the commercial side, I think you said 150 basis points of reimbursement above prior trend lines. I guess what I want to know here is, is the first quarter a good -- like have you renewed enough contracts that that's a good baseline from here or are you still renewing enough contracts that we should see incremental benefit from reimbursement, commercial reimbursement as the year progresses that momentum building?

Yes, I think it's reasonable to expect. And I think we now have enough of a track record. Because I would say we've seen these increased contractual pricing concessions, if you will, from our managed care payers. I'm going to say the middle of last year, maybe July of last year when it became apparent that inflation had really taken hold was not likely to moderate or reduce anytime soon. And so I think in the bulk of the contracts that we've been renewing since then, we're getting, as you alluded to, 150, 175 basis points more in increases than we had been getting pre-pandemic. I think, again, unless there's a really dramatic change in the sort of economic arc that we're in right now, that that's likely to continue and sustain as we continue to renew contracts. And the average length of our contract is somewhere between 2 and 3 years, so I think you're looking at, at least another 12 or 18 months of relatively elevated contractual price increases.

And these contracts all have escalators in them so you're locking in what the rates look like over the next few years. Are the escalators also going up by that similar magnitude? Or are those closer to trend?

No, no. I think the escalators are anticipating the fact that this inflation is likely to be somewhat sticky or stubborn. So I mean, there might be a little bit of moderation, but it's certainly not like we're getting 150 basis points more in the first year and then it just is regressing back to where it was.

Okay. We can be quick on this next question. Medicare, I mean, good rate update for fiscal '23, a little over 4%. The proposed rate went right back to trend line. Do you have a view on that? Again, they're just going to tell us the rates. We don't have to spend too much time.

Yes. No, look, I think the industry has lobbied hard. I think that the fact of the matter is that the industry went broad, including the 80% of the industry that's not for profit. It has really struggled through the last several years. So I do think there's a lot of pressure on CMS to acknowledge that and acknowledge the pressures that providers, again, went broader under. And we'll see. I think last year, if you recall, the preliminary rate was lower and then the final rate was about 100 basis points higher. There's certainly no guarantee we're going to see that same pattern in the future. But certainly there's, I think, a lot of pressure on CMS to acknowledge that.

Okay. What are you seeing on payer mix and the new variable being introduced here as redeterminations? Do you have any early data points on what you're seeing in your markets in terms of people losing coverage, and how that's impacting what's walking through the door?

I think it's still pretty early in the process. I think we've been a little more sanguine about redeterminations than some of our peers. There's, 7:58 AM I think, been a lot written and a lot of analysis done. And I think most of it suggests that ultimately, redeterminations are likely to turn out to be maybe a modest positive, maybe a little bit more of a positive for providers because in the end, there will be a sufficient number of people who are removed from the Medicaid role who will be able to get other coverage, generally exchange coverage that, frankly, will be a better paying coverage for the provider community. I don't think we dispute that sort of kind of fundamental thesis. I think what we don't know and what everyone in the industry is going to have to experience over the next couple of quarters is how does this play out? We're just starting to see people getting removed from the Medicaid roles. It varies in different states, how quickly it's happening, how quickly they're able to requalify with our help requalify for other coverage. So again, I think we've made the point when we talked about our initial 2023 guidance, that in our 2023 guidance, as we thought about pricing dynamics in both of our business segments, we presume that redeterminations would be sort of a modest drag, maybe 50 basis point drag on our overall pricing. And we've, I think, been very candid about the fact that, that was a pretty broad kind of stroke that wasn't based on really detailed analysis, et cetera, because I don't think that was available to us. But again, I would say right now, and we're asking this question all the time and trying to go through the numbers as carefully as we can, but I don't think we're seeing much of an impact just yet. I think that's probably still likely to occur over the next several quarters.

Okay. That's helpful. Let's go to behavioral top line drivers here for a minute. On the volume side, I mean, you've sort of explained the labor bottlenecks. From here, is it just as simple as the rate of what you can rehire and add staff that's going to drive volumes? Is it that simple? Or how do you...

I think it's generally that simple. I think that most of the macro data and measures and just anecdotally, what you have read about over the last several years is that demand for behavioral care. And I think that spans all sorts of diagnoses, all sorts of age groups, all sorts of payer groups. But demand for behavioral care has really only increased during the pandemic. I think there's a lot that's been written that suggests that the pandemic itself probably exacerbated a number of behavioral illnesses, increasing isolation and levels of depression and therefore, subsequently addiction issues and that sort of thing. So our -- and by the way, I guess, our own micro data, the data that we track in terms of what we describe as inbound activity, these are people who are contacting us and our hospitals on 800 numbers or over the Internet, inquiring about care and this and that. All that data suggests that demand has been increasing. And so yes, I think our view, and we've said this from the beginning of the pandemic is to the degree that we can fill our labor vacancies, we have every expectation that volumes are on this sort of upward trajectory that should be sustainable for at least the immediate and the intermediate future. And I think you see that in our results. I think you see that in our results beginning in the third quarter of last year. Third quarter of last year, fourth quarter or the first quarter of this year, behavioral volumes are starting to climb back to where they were pre-pandemic. And it's really, in our minds, directly a function of our ability to fill those labor vacancies that we struggled with in the early part of the pandemic.

Okay. So it's just that simple, how our hiring trends going now.

Yes. I mean they continued to improve. I think we've said that really ever since -- I'm going to say April of 2022, COVID volumes had been in decline for a couple of months at that point for. We'll call it the 12 months since then. Our net hires have been positive. We predicted that would be the case once COVID volumes declined we're generally proving that to be true. It's still a tough environment. I think hospitals and particularly hospitals in their efforts to hire nurses and particularly RNs still struggle, and RNs are at a premium. But we're making progress. We're also making changes in our care treatment protocol. So we're trying to rely less on RNs, which is helpful. But yes, I think our expectation is, again, absent another COVID surge or some other unexpected disruption in the labor market we should continue to make incremental progress. Although, again, I caution that it's still a pretty tight labor market. I'd also suggest that if we do experience a little bit more economic weakness, if there's a modest recession or whatever. Historically, that has generally been helpful to us in a softer economic environment, the supply of nursing hours in particular tends to increase.

On pricing here, you guys have made some pretty clear strong comments about what you're asking the payers for. Some of the questions in the acute side, I mean, where are you in terms of getting the pricing up to the levels that you expect?

And I think the dynamic on the behavioral side is a little bit different because the behavioral business has really experienced this issue of reduced labor capacity or more scarce labor. And as a consequence, we've had to turn away more patients because we simply didn't have the appropriate staff to treat them. We have, I think, optionality with our payers and leverage with our payers on the behavioral side that we just don't have on the acute side. So we're able to go to our lowest-paying payers who tend to be, this is not exclusively, but tend to be managed Medicaid payers and say, look, if we're going to turn patients away in any event. We may as well turn the patients away who are paying us the least. I mean, it's a pretty straightforward sort of calculation. And when we make that point in a negotiation and where the payer does not have a lot of other options because there either are not a lot of excess beds in the market or there are not other providers willing to take these lower rates, we've been reasonably successful at getting these higher rates. And while I think the situation is improving as we talked about, is we're hiring more people and admitting more patients, it's not a seismic change. So I mean, I think those dynamics still exist that there are still large numbers of patients that are having to be turned away because there just simply isn't enough capacity in the behavioral space and certainly in certain markets. And as a consequence, the payers are, again, in certain markets and certain situations under some pressure to make sure they're paying an adequate enough rate so that their subscribers can be adequately treated.

Okay. Let's go to labor costs and margins for a minute. First, on contract labor, you said you thought you could reduce it by 1/3 this year, maybe progress in the first quarter sequentially was a little bit slower than expected. Is that still the right target for this year just based on what you're seeing?

I think so. I mean, again, the -- that assumption or that premise was really based on the fact that as COVID volumes declined, the ability and opportunity for nurses to make these sort of extraordinary premiums and pay that they were able to make during the height of the pandemic would be to continue to be reduced. I think we've clearly seen that. I think we saw a little bit of an interruption in Q1 because the volumes were so strong, particularly on the acute side that we didn't reduce premium pay quite as much as we thought we would. But I think we still think that the overall target that we set for 2023, which is, like you said, about a 1/3 reduction in premium pay, should still be achievable.

Okay. Where do you think all this settles over the medium term, long term in terms of utilization and rate on the contract side? Can we -- how close can we get back to 2019 levels?

Yes. So we have talked about the fact that prepandemic, our acute care segment was generally spending on average about $35 million a quarter on premium pay. And I think our view, and at least , I'm going to call it sort of near and intermediate-term forecasting, we're thinking we -- maybe those numbers get down to $55 million, something like that. Not quite back to prepandemic levels. And I think part of the reason why we don't get back there is that there is, I think, a universe of the nurse population who during the pandemic has grown accustomed, maybe more accustomed, to working in the temporary or traveling nurse milieu. And because there's a limited number of nurse supply to begin with, if there were nurses who moved into that milieu, it's harder to fill all those full-time vacancies. So my sense is we wind up maybe 1/3 above where we were prepandemic in terms of the use of premium pay.

Okay. I guess the more important piece is what long-term inflation looks like for full time, so let's go there. How much progress are you making getting back towards those low single-digit trends? What are you seeing in the markets in terms of hospitals still kind of competing and help bidding each other for nurses?

Yes. I mean as I said in my previous comments, I mean, the labor market remains quite tight. And obviously, we're in more of an inflationary environment post-pandemic than we were prepandemic. I think we've talked about the fact that our base wage rate inflation at this point is probably, again, 150, 175 basis points higher than it was prepandemic. Again, if there is a bit of, I think, an economic downturn, I think that rate of acceleration could decline some. But I think that's, again, in our 2, 3-year forecast that we're doing now, I mean we're generally projecting wage inflation, again, somewhere in the 150 basis point range above where it was prepandemic.

Okay. Okay. I think embedded in guidance was roughly flat margin expectations for the acute care segment. You actually started to turn the corner in the first quarter, margins starting to move higher. You didn't change guidance. Is that to say the -- that's not sustainable, what you saw in first quarter, the margin profile for the acute care business or is that just -- it's early in the year, and we're not changing guidance?

I think, again, and we sort of touched on this at the outset. I mean I think part of the really strong performance in Q1 was the very robust acute care volume numbers. Again, on a year-over-year basis, adjusted admissions 10% over the prior year. That rate of increase, as we've said, I think, is likely to slow. So yes, I mean, look, we made the point. Our first quarter was a strong quarter, above our expectations, maybe not quite above our own expectations that we were above consensus. We generally would not think about changing guidance after Q1. That's just sort of not our practice. We would obviously hope that the trends in Q1 would continue. But as your, I think, initial questions pointed out, we'd like to see how this sort of develops to what degree we're going to look back and think about some of that volume as being catch-up or pull through. I certainly feel very comfortable with our overall projections for the year in terms of whether we can exceed them. I think we'd like to see maybe another quarter or 2 performance before we would conclude that.

Okay. I mean the big medium-term question for me is what does the cadence of acute care margin recovery look like? I think you said you think you can get back to your pre-COVID margins over time. How should we think about the cadence in light of where you guys are? And 1 piece I want you to address this. I know it's not the whole margin recapture story, but you've had some start-up losses this year. Those will continue to ramp and be good guys next year. How much does that kind of further the margin recovery next year?

Yes. I mean reemerging from the pandemic, I think, it's more challenging for the acute business than it is for the behavioral business in the sense that the acute business had some benefits during the pandemic that were helpful to the business that it has to effectively replace. So the acuity of the COVID patients, the special reimbursement that the government offered directly for COVID patients, the 20% add-on for Medicare COVID patients, the reimbursement, HRSA reimbursement for uncompensated COVID patients, the sequestration wave, all those things were helpful to the acute segment and not in inconsequential numbers over the last several years. The acute business, I think, is a bit more of a kind of a climb out trajectory from the pandemic. And in my mind, 2023 is sort of a transition year in that climb out. We lose some of those good guys, although to your point, we replaced it a little bit with some of the drags that also we experienced last year like the start-up losses in Reno. Should become much less of an issue this year. But yes, I mean, again, I think what our overall guidance and assumptions for this year presumed was that there'd be sort of a quicker, steeper sort of climb out and recovery from the pandemic margins on the behavioral side, a little bit more muted on the acute side. And that's sort of the way the first quarter played out and kind of the way our guidance for the year plays out. We obviously would hope to do better on both segments, and we're encouraged by the first quarter results. But sort of a little bit cautious over the next couple of quarters.

Let's touch on behavioral margins for a second. It sounds like you're getting better pricing, endless sort of demand in a way as you described it. It's hard to think margins can't expand from here. I mean would you walk us back from that assumption?

No, I think we would thoroughly agree with that assumption. I think the question in our mind is -- and if there's a debate internally, it's over how quickly, what's a reasonable expectation of what that upward curve looks like. But yes, I think there's no question. Again, I think the first quarter was, I'm going to say, extraordinary from a historical perspective in that. I think we had 10-plus percent same-store revenue growth and margins expanded. As I'm recalling correctly, maybe 270 basis points. It's hard to put that up quarter after quarter. But broadly, I think our view is that as long as we can record same-store revenue growth in behavioral in the mid- to upper single digits, 6%, 7%, 8%, and that certainly seems very achievable in terms of, to your point, demand and pricing really doesn't seem like a significant stretch, we feel like margin recovery and behavioral probably occurs more quickly than it does on the acute side.

Okay. Changing topics just real quick, I mean your CapEx budget last year, I think it was down 25% versus your initial expectations. How should we think about where you're trimming and what the implications are for the medium term? Does that impact your competitiveness with the latest equipment, facilities? Where are you cutting and what does it mean?

Yes. I think as long as a provider is sort of tapping the brakes a little bit on CapEx in the short run, it probably has little kind of permanent or ongoing effect in the business. As you might imagine, the places where we're cutting are places that are probably non-revenue-producing. Bed replacement, lab equipment replacement, that sort of thing, that I think can easily be deferred for a year or 2. Obviously, if it extends out a lot longer than that, now I think you can really start to affect the business. On the behavioral side, I think we just slowed our pace of bed additions and it was really with the fundamental premise that we were struggling to staff the beds that we had. What was the point of building new beds, and I don't think we really lost anything during that period because we would have been unable to staff those beds. But as we continue in the success of being able to fill more of those full-time vacancies, I think we'll resurrect a lot of those building and bed expansion plans that we had prepandemic.

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

Okay. Thank you. Thanks, everybody.