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

Good day, and thank you for standing by. Welcome to the Q2 2024 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Filton, Executive Vice President and CFO. Please go ahead.

Good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2024. During the conference call, we'll be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on Risk Factors and forward-looking statements and Risk Factors in our Form 10-K for the year ended December 31, 2023, and our Form 10-Q for the quarter ended March 31, 2024. We'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $4.26 for the second quarter of 2024. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $4.31 for the quarter ended June 30, 2024. Our acute hospitals experienced a moderation of the demand for their services in the second quarter, with adjusted admissions increasing 3.4% year-over-year and surgical growth flattening out. Overall, revenue growth was still a solid 6.6%. Meanwhile, expenses were well controlled. Specifically, the amount of premium pay in the second quarter was $61 million, reflecting a 15% to 20% decline from the prior year quarter. On a same facility basis, EBITDA at our acute care hospitals increased 37% during the second quarter of 2024 as compared to the comparable prior year quarter. And the increase was 20% if you exclude the impact of the incremental Medicaid supplemental payments in Nevada. During the second quarter, same facility revenues in our behavioral health hospitals increased by 11%, primarily driven by a 9.3% increase in revenue per adjusted patient day. Even after adjusting for Medicaid supplemental payments not included in our original 2024 guidance, same facility revenues increased by 7.2% and same facility EBITDA for our behavioral health hospitals increased 13% in the second quarter as compared to the comparable prior year period. Our cash generated from operating activities increased by $422 million to $1.1 billion during the first 6 months of 2024 as compared to $654 million during the same period in 2023. In the first half of 2024, we spent $450 million on capital expenditures and acquired 1.1 million of our own shares at a total cost of approximately $195 million. Since 2019, we have repurchased approximately 30% of the company's outstanding shares. As of June 30, 2024, we had $1 billion of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. In our acute care segment, we continue to develop additional inpatient and ambulatory care capacity. We currently have 27 operational freestanding emergency departments as well as 12 more, which have been approved and are in various stages of development. Also, construction continues on our de novo acute care hospitals, consisting of the 150-bed West Henderson Hospital in Las Vegas, Nevada, which is expected to open late this year; the 136-bed Cedar Hill Regional Medical Center in Washington, D.C., which is expected to open in the spring of 2025; and the 150-bed Alan B. Miller Medical Center in Palm Beach Gardens, Florida, which is expected to open in the spring of 2026. In our behavioral health segment, we recently opened the 128-bed River Vista Behavioral Hospital in Madera, California; and we are developing the 96-bed Southridge Behavioral Hospital in West Michigan, a joint venture with Trinity Health Michigan, which is expected to open later this year. I'll now turn the call over to Marc Miller, President and CEO, for closing comments.

Thanks, Steve. We're pleased with our second quarter results as both our business segments continue to make operational improvements. As we anticipated, acute care volumes have moderated somewhat and are gradually beginning to resemble the patterns we experienced prior to pandemic. The increase in operating income in comparison to last year's second quarter for acute care hospitals is a further step towards a more extended margin recovery we hope to sustain for the next several periods. In our acute segment, physician expense, which is a significant headwind in 2023, has stabilized at approximately 7.5% of revenues. Based on the generally favorable operating trends in the first half of the year, we are increasing the midpoint of our 2024 EPS guidance by 17% to $15.80 per diluted share from $13.50 per diluted share previously. New supplemental programs being developed in Tennessee and Washington, D.C., which are not yet fully approved, are not included in our revised guidance. Lastly, as announced in yesterday's earnings release, our Board of Directors has authorized a $1 billion increase to our stock repurchase program, thereby increasing the current aggregate repurchase authorization to $1.228 billion. We're happy to answer questions at this time.

[Operator Instructions] One moment for our first question, which comes from Ann Hynes of Mizuho Securities.

I just want to focus my question on the supplemental payments. I'm just trying to figure out what inning you are in both the acute care and behavioral, so maybe new programs like -- so you mentioned D.C. That sounds like it might be a new program in acute care. And on the behavioral side going forward, that would be great.

Yes. And so I think we had mentioned before that, I think, from our perspective, while we may understand that individual states are contemplating either new programs or expansion of existing programs, we tend to really not discuss them until there is some formal submission of a program to CMS and sort of pending approvals from CMS within the state. And then both the Tennessee and Washington, D.C. programs sort of fall into that category. As you suggest, Tennessee is a state in which we have exclusively behavioral business. Washington, D.C. is a geography where we have both acute and behavioral business, although the Medicaid supplemental program would be primarily beneficial to the acute business. Both programs, we have been told that the expectation from state of the district is that the programs are likely to be approved either later this year or early next year. Both programs would be retroactive. We believe Tennessee would be retroactive most likely to July of 2024 and that D.C. would be retroactive to October of 2024, this year. And again, none of these things are guaranteed and they all depend on CMS approval. Those are the two, I'll call them, incremental or additional programs we would disclose. But we certainly are aware of other states and where expansion of programs or new programs are at least being considered.

Great. And just one follow-up. I know that you provided the potential benefit for Tennessee, but have you -- can you provide what you think D.C. would be?

Yes. So we've disclosed in our 10-Q that we think the potential benefit of -- our prior 10-Q, the potential benefit in Tennessee would be between $42 million and $56 million annually. The potential benefit in Washington, D.C. is probably in the $80 million to $90 million range annually.

And our next question will be coming from Stephen Baxter of Wells Fargo.

I was hoping you could elaborate a little bit on behavioral volume performance in the quarter. I think you had expectations maybe at the last earnings call, just improved a little bit in the second quarter. So just wondering if you could talk about some of the drivers of performance in the quarter. And then also how you're thinking about behavioral demand growth in the back end of the year.

Yes. I think that the dynamics surrounding behavioral volumes have remained pretty much the same. You are correct in your description. We -- behavioral patient days on a same-store adjusted basis were up, I think, about 2% in Q1. We expect it be to equal and maybe better than slightly in Q2. We did not. I think the issues are very familiar to what we've been talking about for some time. While we've made, I think, a lot of progress on filling our labor vacancies around the country, we still find in very specific markets and geographies that certain labor positions, sometimes nurses, sometimes therapists and counselors, sometimes nonprofessionals and mental health technicians are difficult to place and can sometimes limit capacity or our ability to admit patients. I think we've discussed in the last few quarters, the fact that Medicaid disenrollments, particularly in the Southern states, Texas and Mississippi, Louisiana, Arkansas, have had more of an impact on our business as people have gotten disenrolled from Medicaid, and it's taken them some time to get either reenrolled in Medicaid or into a commercial exchange program. If they get into a commercial exchange program, they often have the high co-pays and deductibles, which make them meeting their financial requirements, difficult behavioral hospitals. And finally, we have a handful of behavioral facilities that struggled with very specific issues in 2023. I believe they've all improved, but are doing so at a somewhat slower pace than we originally imagined they would. I think, ultimately, we still believe that, that 3% patient day growth target that we embedded in our original 2024 guidance is an achievable target, probably not in terms of full year growth. But I think we believe that by the end of 2024, we should be growing at that rate. And we view that as a sustainable rate of growth going forward.

And our next question will be coming from Ben Hendrix of RBC Capital Markets.

Just wanted to see if you could elaborate a little bit on the moderation in acute demand and your surgeries flattening out with trending towards pre-COVID levels. Any trends you can call out specifically in specific categories? And any payer mix implications there and how you're seeing that develop?

Yes. I mean so one comment that I'd make about the 3.4% adjusted admission growth in acute care is that, that comparable number in the second quarter of last year was 7.7%, and surgical growth in the second quarter of last year was in the 5% to 6% range. So those were both very difficult comparisons. I think we had a view that 3.4% adjusted admission growth was relatively flat. Surgical growth was relatively close to our expectations given the very difficult comparison. We've been talking, I think, for some time about the expectation that acute care volumes, both overall admissions, and surgical growth would return to sort of pre-pandemic patterns. I don't know that, that's absolutely where we are right today. But certainly, I think we've been preparing for that. And I think a lot of the cost management that you saw during the quarter was an expectation and preparing for that so that as we return to some of those pre-pandemic levels of revenue and volume growth, we could generate the sort of increased EBITDA and margin expansion and remain on that trajectory for at least several more periods.

And our next question will be coming from A.J. Rice of UBS.

Maybe just first question, and then I have a follow-up. First question on the updated guidance. I know you didn't raise the full year guidance after the first quarter, and there was some outperformance. And then you've had some outperformance in the second quarter. And then there's also the supplemental payments maybe that weren't in the original guidance. Can you just sort of parse out how much is just capturing year-to-date trends? How much is an adjustment for supplemental payment information? And then have you made any adjustment to your second half expectations in this updated guidance?

Yes. So A.J., from a high-level perspective, the approach that we took to the revised guidance was obviously to increase the guidance by the amount of the first half beat, which was substantial to include in the revised guidance for the back half of the year. Any supplemental programs and payments that we knew would continue and be present in the second half. We did not, as Marc indicated in his comments, include anything for Tennessee or Washington, D.C. And then we included some of the cost management improvements that we've made, which we believe are certainly sustainable. But for the most part, particularly from, I think, a revenue and a volume perspective, just generally retained our original guidance for the second half of the year.

Okay. There's been a lot of discussion this quarter about impact of Two-Midnight rule Medicaid redeterminations and so forth. Can you just maybe make some comments about what you're seeing there and how -- I know Two-Midnight rule wouldn't affect the behavioral business, but the redeterminations, maybe it had some impact on both sides. Any updated thoughts on what you're seeing in those two areas?

Yes. I mean as far as Two-Midnight goes, and we've commented on this before, and I acknowledge that our comments may be a little bit different than what some of our peers have said. But it's -- we've been unable to validate or, I think, precisely identify any real benefit that we're getting from the Two-Midnight rule change. We don't see any dramatic change in metrics like amount of denials or patient status changes, et cetera, nor, anecdotally, do we hear from our personnel who deal with this issue on a daily basis that they've seen real behavior changes on the part of payers. Again, I know some of our peers have suggested otherwise, but we're just unable to really parse out any significant impact from the change on the Two-Midnight rule. Medicaid redeterminations, I think, on the acute side, have resulted in an increase in commercial exchange patients. Again, I think compared to some of our peers, probably not as big an increase. We've gone -- we had commercial exchange patients as a percentage of our overall adjusted admissions. Pre the end of the [ PAG ] was about 4%. I think that number has climbed to about 5% currently. I know some of our peers have suggested that number has climbed to 6% or 7%. We haven't gotten that high. On the behavioral side, I alluded to this in an earlier response, I do think we're being affected by the Medicaid redeterminations, particularly in the adolescent population. We definitely have seen some weakness in that population in the last, I'm going to say, 2, 3 quarters. And it's -- I think it's been a slow process for those adolescents to either reenroll in Medicaid or to get on to a commercial exchange program. And if they get on to a commercial exchange program, to exhaust sometimes large copays and deductibles that those plans have. So I think Medicaid redeterminations could probably have a bigger negative impact on the behavioral business. The shift to commercial exchanges on the acute side has probably been a slight net positive.

And our next question will be coming from Justin Lake of Wolfe Research.

Steve, first, on the guidance in terms of just kind of isolating that DPP bucket, I think you started the year at about $810 million in the 10-K that you expected to get this year. You updated it to $860 million with the ones with the 10-Q. Just curious what that number is right now that you expect to get this year. So let's just do that in my first question. Then I've got one for Marc.

Yes. So we're still working on that disclosure, which we'll have in our 10-K in 8 or 10 days. But I think there'll be a significant step up from the $860 million, obviously, including the Washington, Idaho numbers that we included in the press release, et cetera, but there'll be a more precise picture that we file our Q in a week or so.

Okay. Do you have a round number you could share with us? Like does it go to -- do you think it goes much higher than $900 million? Or if I add those two numbers in there?

Yes, I think it will go into the low to mid-$900s million.

Okay. So if we look at your guidance raise of $215 million, you started the year at around $810 million. If it goes to low to mid-$900s million, is it maybe fair to say that maybe half, give or take, of that guidance raise is coming from these supplemental payments? Is that a reasonable way to think about the rest in terms of core?

I think that's fair.

Okay. And then, Marc, you talked about the improvement in the hospital business in terms of the margins. Curious if the -- there's still a potential way to go to get back to pre-COVID levels. What do you think a reasonable target is when you sit down with your hospital operators? And do you have a trajectory or a plan at which you kind of -- time line is probably the best way to put it, in terms of when you expect to get there? Maybe you could share a couple of the steps you expect to take to get there.

Yes. I mean we have a lot of plans, and there's a lot of discussions on how we're going to continue to incrementally improve. I'm not going to give you a number or a time period right now. But every market is a little bit different, obviously. We've been very pleased with the work that the operators have done, especially in the last 12 months, in addressing not only the volume issues, but really getting a better handle on expenses. And I think if we just continue with that trajectory, we'll get to where we need to be fairly soon, but we still have a little ways to go.

And our next question will be coming from Jason Cassorla of Citi.

Great. Maybe just to ask on the acute pricing and mix in the quarter, up 3.5% or so, but kind of normalizing for the supplemental payment dollars this year, maybe only up kind of slightly year-over-year. Is that just simply a function of that lower acuity volume continuing to return? I know you made comments around surgical volume dynamic in the quarter. Or just maybe anything you can give on acuity and payer mix trends within the Q, kind of outside of the supplemental payment programs would be helpful.

Yes. I think it's a variety of things, Jason. Again, I think we had a pretty difficult comparison. We were comparing to something close to 10% revenue growth last quarter, high surgical -- in last year's quarter rather, high surgical growth, et cetera. I think we're seeing some settling down, some exhaustion of some of those postponed and deferred procedures that had been postponed and deferred during the pandemic. I think that even exclusive of the supplemental payments, our expectation in the acute business is, we'll get to, as we have, historically, a same-store revenue growth sort of trajectory of 5%, 6%, split pretty evenly between price and volume. And again, I think with the progress that we've made, as both Marc and I have alluded to, on the cost management side, that should allow us continued EBITDA growth and margin expansion until we get either completely back to or something close to pre-pandemic margin levels in that segment.

Okay. Great. And then maybe just a follow-up with the $1 billion increase to the share repo program. I know you accelerated a little bit in terms of share repo activity in the quarter, maybe with the Illinois lawsuit kind of dynamics going on. But with the increase there in the repo program is the expectation that you're still aiming to spend around $500 million, $600 million on share repo for this year. Or how should we think about the share repurchase dynamics?

Yes. So I think your suggestion is largely on point. Our original guidance suggested that we would spend the bulk of our free cash flow, which would be $500 million or $600 million on share repurchase. And I think that is still our intent. And I think, frankly, the main point of including that announcement in this quarter's release was to just reinforce that idea. We believe we're still on track and, obviously, we needed the reauthorization to be able to accomplish that.

Our next question will be coming from Sarah James of Cantor Fitzgerald.

I was hoping you could talk a little bit about the embedded adjusted admissions growth baked into your guidance for the second half. Are you assuming that first half levels stay flat or decelerate? And could you talk a little bit about what the drivers are for that assumption?