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

Yes. I mean, I guess the best way I would characterize it, I think it's still dribs and drabs. And that's a hard way to describe $40 billion of money. But I think the states and counties, et cetera, who are ultimately going to administer the distribution of those funds are still slow to do so. We continue to work with those entities to stress the sort of programs that we can offer and how we think it can be helpful. And again, I think what we tend to try and differentiate ourselves is being able to offer a broad continuum of care rather than, let's say, specifically methadone clinics or Suboxone clinics or whatever but kind of the broader, more traditional addiction treatment. But I would say that broadly, we're seeing just really I'm going to say, relatively immaterial amounts of those settlement monies working their way into the system as of yet.

All right. You've consistently reiterated your view that over a period of time, you believe that given an improved volume environment, a sustained top line environment and a certain cost environment, you can get back to a 26%, 27% margin. Any updated views on how long you think it would take you to get there in that circumstance where you had sustained volumes, sustained rate, same-store revenue and normalized cost.

Yes. I mean -- and obviously, it's a step process because in that case, you're talking about something like a 500 basis improvement from where we are today. And a lot of it, I think, is what you already discussed. I think as long as we can get back to 3% or 4% volume growth, which sort of was the traditional level of volume growth pre-pandemic, patient day volume growth as long as inflation, cost inflation, particularly salaries and wages tends to be more modest and moderate. I think all that is helpful. I think in addition to that, we'll continue to try and drive productivity gains. We're implementing an electronic medical record. I think that will allow us to centralize some functions that we've previously been unable to centralize things like utilization management, intake, et cetera. So yes, I think all those things combined, I certainly wouldn't guarantee that we can get back to sort of the absolute peak behavioral margins, which we probably experienced in the 2013, '14 time frame. But certainly, I think we should be able to get a good portion of the way there over, I'm going to say the next 2 to 4 years.

Remind me on your EMR investment, what the -- how many facilities have gone through an implementation, how long 5-year sort of process, maybe longer?

Yes. So I think probably at this point, we've got 15 to 20 facilities either live or in some phase of implementation. And yes, I think that probably a 4-, 5-year time frame is a pretty good estimate of...

How much you spend in a year.

It's probably in the $10 million to $15 million a year range over that 5-year period.

Okay. Helpful. Shifting to the acute care business. I think I know the answer, but how do you feel about the durability of the demand and volume environment that we have seen.

Yes. I mean, look, that seems to be the $64,000 question that most people have. I think we've probably been more bearish or maybe even better description will be less bullish than some of our peers in the sense of we've taken the approach that historically, our acute volume growth measured by adjusted admissions has generally run in the 3%, 3.5% range. We've clearly been running above that in the last couple of quarters, we were in the sort of 5% to 6% range. And so our view is at some point, we're going to moderate to those levels. Others have argued and I think it's a legitimate argument that if you look at -- if you go back and you take 2019, the last pre-pandemic year, acute care volumes and you ignore the pandemic and index forward what would have been your expected growth. Here we are in 2024, and we're still short of where we would have otherwise been. Now lots of things have happened during that time. We've lost 1 million people to COVID deaths and those were big users of the system. But now the population continues to age. I don't know that any of us know exactly how utilization patterns may have permanently changed as a result of the pandemic, et cetera. What I will say is it does certainly seem like the strength of those acute care volumes seems to be more sustainable than we might have originally thought. Again, I think we'll probably take a kind of a more conservative view that it will moderate at some point. But others have made the argument that at least to have several years' worth of runway. And as I always point out to people, I hope they're right. This is one of those situations where I obviously hope that our conservative position is wrong, and I hope they're right. But honestly, I don't know that any of us know that with real precision.

Got it. Okay. Remind me the -- your exchange admission growth in the first quarter, I can't remember if you disclosed that in your Q or in the conference call or not.

So I would say last year or before the disenrollment sort of process began. Acute division, I think I said this before, are the percentage of our admissions that are exchanged admissions are in the -- were in the 4% range. I think today, they're in the 5% range. So proportionately, they've increased a fair amount, but it already seems like that has started to flatten out. So I think we're in this sort of 5% range of our overall acute admissions or exchange -- patients who have exchange coverage.

Okay. Can we just have a quick conversation around DPP and supplemental programs. You have talked a lot about this over the years. They've continued to grow and become a recurring piece of your revenue and earnings stream. You've just disclosing your 10-Q a potential program in Tennessee, which is not insignificant. How much more visibility do you have into some of these programs that are being established?

Yes. I mean what we do know is, obviously, states have become much more interested in either implementing these programs, implementing new programs or to the degree that a have programs that have more headroom, et cetera, in expanding these programs. We tend not to disclose them in any sort of formal way or we tend not to sort of disclose any activity until there is a more formal submission of a program to CMS for approval, et cetera, because what we have found is that some of these programs can take years to sort of develop. I'll use the big benefit that we're getting this year is a new program in Nevada that's worth about $160 million to us annually. But that program, I will tell you, was being kicked around for 3 or 4 years before it was implemented. And so I'm glad that we didn't go out and sort of talk about it too prematurely, but we disclosed it when the state submitted the program to CMS. But we do know that other states are looking at this and other states that have programs are looking at expanding them. The concern that people have and have expressed to me is being 2x. One is, is there going to be some effort to sort of reverse these programs, et cetera. And look I think you have made this point more than anybody that if you -- and we disclose probably more detail about these programs than anybody else, and if you look at it over time, the programs have done nothing but increased. And year-to-year, you may see a slight reduction in the state like Texas, which has a bunch of different programs. But over time, it has done nothing but increased. And I think these programs become an embedded fabric of Medicaid reimbursement and particularly for those safety net hospitals that I think they're really designed to help the most those safety net hospitals become completely reliant on these programs. And without them, I think they're just no longer economically viable. So from a public policy perspective, the idea that these programs are sort of somehow going to be dramatically overnight sort of reduced or limited. I think that's not generally a tremendous risk. What I do think and what I think CMS has been very open about is that they are going to look for ways to cap the growth in these programs. But recently, the new rule that they came out with, I think it was encouraging that they didn't try and cap them as a percentage of overall Medicaid reimbursement. They said they shouldn't -- these all in Medicaid reimbursement programs shouldn't exceed commercial reimbursement. That's a pretty high bar. And I don't think that's going to be much of a restriction in most of our states. And then the other issue that they've really sort of addressed is they object to these hold harmless agreement where general state revenues are used to be the financing vehicle. We have a couple of states where that's the case. Florida, Texas have those as opposed to provider taxes, which CMS sort of signs off on. But what CMS has said is they're not going to enforce any sort of prohibition to these all agreements for 3.5 years. So our view is that the states that have these programs have plenty of time and the programs are important enough to the states that they will conform their programs to meet the CMS criteria in my expectation is that will be the case. Again, I think it's a perfectly legitimate argument to say how much can these programs continue to grow. I think they're unlikely to grow at the same rate, although I think over the next couple of years, we may still see some relatively significant growth -- but at some point, the rate of growth will be capped. But I think the concern that somehow they're going to be retrends dramatically, et cetera, I think, is probably not a realistic risk.

Any other signs of inflation in the acute segment. Professional fees have moderated -- they're still growing. You've got the other operating expense to professionals or the professional fee, the provider taxes in there sometimes labor normalized? I mean, anything else that's sort of emerging as another newer pain point?

Yes. No, I don't think so. I mean, obviously, the physician expense issue was very sort of idiosyncratic and having to do with no surprise billing act and pressure from payers on that very specific especially ER and anesthesiology coverage, hard to identify something comparable to that. I mean obviously, we've struggled with just the broader inflationary pressure on all of our business. We're buyers of food and utilities and insurance like everybody else and those costs have gone up. But I think all those costs are moderating. So when you look at what the tailwinds in this business have really been, which I think is acute care volume growth, which has kind of been better than expected, behavioral pricing growth, which has been better than expected, and you combine those 2 sort of top line strengths with moderating costs. I think that's what really drove the outperformance in Q1 and hopefully, will continue for the balance of the year.

It doesn't hurt to have some exchange growth and some favorability around redeterminations at the same time. Looking at -- playing the model, which is dangerous sometimes see, but normally when I think about the seasonal pattern of the way your earnings develop. Q1 for acute a big number, usually goes down a few points or so. Behavioral usually has a high water mark going from Q1 to Q2 just in terms of EBITDA, even when you normalize for some out-of-period stuff that would seem that the Street might be still a little bit off on kind of that seasonal pattern to your earnings, meaning that would imply a number higher than where the Street is I know you don't always spend time looking at consensus, but just as really a question more about like the seasonality of the business and the weighting first half, second half. If you had any updated views.

No. Well, first of all, I mean, I think your comments are that has sort of -- that's an accurate description, I think, of what the historic model or the historic results would show. The other issue that has gotten a lot of attention, I think, is most providers have said that in this year, March tended to be softer in both of our business segments really because of the calendar issues and the timing of Easter and spring break, which were in March of this year, but April of last year. So I think we get a benefit from that. I think other than that kind of specific nuance this year the -- there's -- I don't think any reason why the normal seasonal pattern should not hold.

Okay. So even stronger seasonality in Q2.

Perhaps a little bit more step.

Yes, big calendar benefit in April, things are flat year-over-year. I feel like in May and maybe even June, I haven't looked yet, but that's helpful. What are some of the bigger changes within the broader UHS organization that no 1 you ever ask you about that you're excited about?

Yes. Look, I think we have made some personnel upgrades. We've got a new managed care person that honestly, we recruited from HCA, who's been with us for now probably 6 months. I think that's really helpful in an environment where the relationship with payers just -- is more and more difficult every day.

Friction.

That's a good word, a good description. We've got a new Chief Medical Officer in our acute business. And I think our quality scores have been on the rise, and that's, I think, an important thing. We talked about the EMR in behavioral, I think will be a long-term benefit. The other thing is one of the biggest challenges in behavioral is what we describe as patient observation. And that is in the behavioral business, it is absolutely imperative that we have eyes on our patients I'm going to say, almost constantly 24/7 and that can be difficult when you're relying, frankly, that -- the biggest burden on that falls to the what we call our mental health technicians. These are nonprofessional people who are generally making $20, $25 an hour. But that -- and so that's always a challenge for us. But I think that technology is really improving in that regard. And I think most behavioral providers are experimenting with these new patient observation technologies, basically, our patients wear something that looks like an Apple Watch. And we can tell where they are at all times. We can also tell what our mental health techs are carrying around what looks like an iPad and effectively we can tell when they've made contact with the patient, we can tell if a patient is not where they're supposed to be. They're in the room when they're not. They're not in group therapy when they should be that sort of thing. And I think that's going to be a real improvement in sort of quality and risk mitigation, et cetera. So that's another, I think, a really important development in the business.

Okay. And if I have any questions -- last 1 for me. Just capital deployment, you guys are pretty active buying back your stock, you've consistently been active. You can always get an authorization updated not a lot to do on the balance sheet right now. How do you feel about accelerating buybacks? How do you feel about timing of acquisitions may be coming into the picture?

Yes. I mean, I think the acquisition landscape has been relatively quiet for the last several years. I think on the acute side, there haven't been a ton of for-profit acquisitions. Quite frankly, there have been more, as you know, for-profit sales than there have been acquisitions. At some point, I think that, that might change because I think a lot of these not-for-profit transactions are not really helping the hospitals that are involved, improve their operations, et cetera. On the behavioral side, I think our biggest challenge has been chasing sort of private equity investment money in the business. But obviously, that business, I think, has been challenged more with higher interest rates. So we'll see. But yes, I think we continue to find the repurchase of our own stock to be among the most compelling investments we can make. We've been a little bit more cautious since we've had this Illinois verdict just to see what we're going to have to do in terms of posting a bond or this or that. But I think over time, we'll continue to devote a significant portion of our free cash flow to share repurchase.

We got like 50 seconds left. We can just end it there. Steve, thank you.