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

All right. Well, thanks, everybody, for joining us here and joining us for the TD Healthcare Conference. My name is Ryan Langston. I'm the senior analyst covering health care facilities and managed care. Very happy to have Steve Filton with us, Executive Vice President, Chief Financial Officer of Universal Health Services. Very quickly, UHS, one of the largest acute care and behavioral health providers, operates more than 400 acute care hospitals, behavioral health facilities, ambulatory centers around the U.S., Puerto Rico and U.K. And with us today, as we said, we have Steve. So Steve, thanks for joining us.

My pleasure.

So only two or three things, I think, to talk about. But I guess you just reported recently, but maybe just kind of start at the top. Why don't you remind us maybe kind of the building blocks of the 2025 guidance? Obviously, you threw out some pretty good guidance measures in terms of modeling. But just maybe kind of step back and just give us kind of the overall building blocks for that.

Look, Ryan, I think as you alluded to, obviously, there's a great deal sort of happening around us, particularly kind of legislatively and from a public policy perspective. But as far as the business itself goes, it feels like we've -- in both of our business segments returned to what I would describe as sort of a historically normative business model. And that is -- and we talked about this on our call last week, revenue growth in sort of the mid-single digits, I would say, for our acute business, that's probably 5%, 6%, 7%. For our behavioral business, that's 6%, 7%, 8%. For acute, I think that's split pretty evenly between price and volume, adjusted admissions and pricing. And I think on behavioral, it's probably, as we said, 2.5%, 3% volume, patient day volume and maybe 3% to 4% price. And then I think from an expense perspective, we've seen kind of a moderation in wage inflation and the use of premium pay and some of the things that were really had come under pressure during the pandemic, during the sort of inflationary cycle that we started to see sort of post pandemic. On the acute side, physician expense had been a real pressure point in 2023. I think generally stabilized in 2024. We view that as relatively stable going forward. So I think the point that we tried to make on the call is that in creating our 2025 forecast, for the most part, we tried to ignore kind of what's happening around us, not because we're trying to ignore it, but because there was no way to sort of precisely include it in our guidance. So we, I think, tried to create a 2025 model that includes some level of conservatism or caution so that if there are incremental sort of challenges, whether they be in Medicaid reimbursement or tariffs or whatever, we can absorb that. Obviously, if there are more significant changes, we'd have to revise guidance at some point. But the business itself feels kind of as stable and predictable as it's felt in -- certainly in the post-COVID era.

I want to touch on one thing you said there. So we're talking about behavioral pricing. I think maybe even the last couple of quarters, up until the fourth quarter, you talked about maybe kind of some moderation coming there. It's been fairly strong recently. But now you're saying 3% to 4%. So I guess on that, like what maybe kind of changed between what you were saying, maybe what you're seeing now in terms of being able to keep that relative sort of mid-single-digit strength on pricing?

Yes. So what we have said now for a number of years where pricing has been really rather robust in the behavioral space is that we've been aided by what I think is a relative lack or scarcity of supply of beds, really inpatient beds in the behavioral space, not just at our own hospitals, but I think more broadly in the industry at large for a variety of reasons. I mean, I think some of it is labor scarcity. There's just not a lot of, I think, new beds, et cetera. So what I think that scarcity has allowed us to do is to be more aggressive with at least some of our payers. And so we've gone back to payers in markets where our hospitals are running relatively full, et cetera, and have said to them. And these are mostly managed Medicaid payers, although there are certainly some others and said, look, if you're not willing to pay us the market rate or what we perceive to be the market rate in this market, we'll terminate our contract with you because we have other payers, other patients who are, frankly, better paying, whose insurance companies are willing to pay what we consider to be a fair market rate. There's essentially a line or at least figuratively a line of patients waiting to get into the facility. I think the notion has been all along that at some point, as that bed scarcity sort of alleviates itself and payers have more optionality in that regard, some of that leverage will decline. And I should also make the point that I think that scarcity also creates an advantage for us or an opportunity for us to really manage or maybe kind of maximize our payer mix. So when you have a scarce number of patients to admit, you have the option to admit better reimbursed patients, et cetera, focus on those service lines, et cetera, those age groups that are going to have the best reimbursement. And so again, the notion was that as volumes increased, there would be some diminution in our optionality, both in contracting and sort of managing the patient and payer mix. What we've really seen, I think as most people know, is that volumes have not grown. They've grown incrementally, but they've not grown really in a very significant way. And therefore, I don't think our leverage has increased. So to your point, even though we're still talking about 3% to 4% pricing growth next year, that would still be a moderation from what we've seen over the last several years. So I think I said on the call last week that if there was kind of an upside in the guidance for next year, I think behavioral pricing broadly would be probably the biggest source of upside.

And not trying to get into '26 and beyond, but do you think that's a dynamic that if kind of holds now, all else equal, that might carry forward at least in terms of maybe not the proportion, but sort of a little bit higher strength than what we thought.

Yes. I mean I think -- and again, if you go back -- for several decades, if you like, looking at the behavioral model, I think behavioral same-store revenue growth, again, in that sort of 6%, 7%, 8% range is not at all kind of a stretch or really sort of a heroic reach. I do think that as we move forward, it will be skewed a little bit more towards volume and a little bit less so to pricing. But I think overall, that 6%, 7%, 8% revenue growth is certainly a very achievable target.

Okay. Maybe more kind of what's going on right now. One of the things we're getting more from investors now is the flu, right? We're seeing flu data out in the market that it's the highest it's been in 15 years or pick your year. But I guess -- what do we think about flu in terms of the impact on your business? One of your competitors, I think, said in the fourth quarter was actually a 1-point drag to volume. So where do we think the flu is at now? And what might that be doing to your business in the first quarter?

Yes. So -- and nobody is going to do this. But I think if you go back and you look at our commentary and generally my commentary over the years, I think we tend to generally not highlight the flu as something that has a significant impact on our results one way or the other. Busy flu season, not a busy flu season. I think for a variety of reasons. I mean, number one is flu patients tend not to be the most acute, the most profitable patients. Broadly, medical patients are less profitable than surgical or procedural patients, and I think flu patients even more so. The other issue that I think sometimes people ignore is flu creates challenges for us, a busy flu season. Sometimes it can crowd out other business in a really busy flu season. When everybody gets the flu, our employees get the flu as well, and that sometimes creates problems for us, and we have to curtail procedural schedules sometimes on relatively short notice or we have to use more premium pay, et cetera. So bottom line, as I think back, I can recall some years where we said maybe we had an $8 million or $10 million benefit in a really busy quarter with a flu season or a quarter with a busy flu season. But ultimately, I think when you're going to look back at the end of 2025 and we're describing our experience, I think it's highly unlikely we will cite the flu one way or the other as being really important or really unimportant. It is a busy flu season. I certainly acknowledge that, but it doesn't feel like that should have a material impact on our first quarter results.

Okay. In terms of investor incomings for us, at least, I think the most -- especially recently, the most important thing we're talking about is state-directed payments, right? We just saw Thursday, Friday, there was a lot of news flow. The Republicans are finally starting to talk about these state provider taxes and SDPs and things like that. So where do we sit just in terms of you are assessing the viability, the risk to those programs as we sit. Again, we said Thursday, Friday, they started to talk about it publicly. Obviously, the stock has reacted to that. So where are we at just sort of in that thinking of 0 to 100, no risk to, yes, really at risk?

Yes. And so look, I would sort of start by saying that I don't know that our perspective or point of view on this subject is terribly more insightful or meaningful than anybody else. We read largely the same news reports and news flow that you all do. And I think what we've taken away from that over the last week or so is that in passing this bill and the Republicans passing this bill in the House, there were a number of Republican Congress men and women who were very pointed in saying that they only voted for the bill because they were assured there would not be significant Medicaid cuts. And in fact, Speaker Johnson himself, not just an individual Congress but Speaker Johnson began to eliminate, I think he appeared on CNN one night last week and talked about FMAP was off the table and per capita rate caps were off the table. And essentially, I think sort of suggesting that really significant Medicaid cuts were off the table. President Trump himself has sort of suggested that other than sort of targeting fraud and abuse and waste, which I think is not nearly as great as the $800-plus billion in Medicaid cuts in the bill, he's not really in favor of those. So again, you're right. As the sort of other areas have been eliminated, there was a turn to talk about the supplemental payments. But I think our general sense is the same that might there be tweaks to the supplemental payment structures? Sure, might instead of capping them at average commercial rates, that could be capped at something less than that, 90%, 85% of average commercial rates, could the programs be capped in some other way to control the increased spending. But the idea that there would be really kind of massive cuts to the DPP programs and that would be acceptable to individual Congressmen. And I think it's worth noting that in the Senate, where we still have to go to get a bill passed, I think there's even less enthusiasm for Medicaid cuts. So again, we certainly are not any more in a position to prognosticate than anybody else. But it seems to us that big Medicaid cuts, regardless of the source or how they're done, I think, are not terribly likely and would really struggle to sort of pass the political hurdles.

And one question we've been getting is just sort of these would have to likely go through a rule-making process, right, because they were set through rule-making processes. Obviously, they're approved by CMS. This isn't something that Trump or DOGE or pick your whoever can just sort of executive order these out of existence or make changes to them, right? This would have to go through a formal rule-making process.

Yes. I think to your point, it would be very difficult to do this simply by executive action.

Okay. And anything on these, and we'll move on, but anything you're hearing from the states? I mean, obviously, these don't just benefit you, they benefit the states, right? So anything from your state lobbying groups that you're hearing or just even up to the governor level, like any sort of commentary that you're hearing in your states?

No. And look, I think this goes for Medicaid programs in general. Medicaid subscribers are as present and important in red states and as they are in blue states. And our sense is that if you go back -- if you look at our experience with Medicaid supplemental payments, we get significant benefits in very red states, big red states like Florida and Texas, but also a lot of smaller red states like Idaho and Mississippi, et cetera, and Tennessee or potentially Tennessee and Kentucky. So yes, I mean, our sense is that the states themselves would push back state legislators, but obviously, Congressman and senators from individual states would push back. And there's a lot of support for, again, Medicaid reimbursement in general, not just the DPP programs.

And then just maybe on that, I think we've done some writing on this, but 19 or maybe only 20 states actually allow psychiatric IPFs to qualify for the SDP programs. do you think maybe over the next couple of years, assuming these programs sort of largely stay the same, that maybe you could actually see somewhat of a tailwind maybe in terms of other states sort of picking up these and qualifying them in certain locations that don't?

Yes. Certainly, prior to the last, call it, 6 weeks or whatever, that was our view that there would be, if anything, kind of an upside to these DPP programs because to your point, many of them don't include behavioral treatment or include behavioral treatment to a lesser degree. And we tend to believe that at both the state and federal level, there's a fair amount of bipartisan support for greater behavioral access and more behavioral care, et cetera. So yes, I think that's -- I think when this hopefully settles out, it's entirely possible that the programs that are out there begin to skew a little bit more heavily to coverage for behavioral patients.

Okay. I guess on the enhanced subsidies, right? I mean you, I think, have been -- and we appreciate the only one really to size it in terms of what you think the overall impact could be. But maybe just remind us, I think you talked a little bit about this on the fourth quarter call, but maybe just some of the inputs that go into that. And let's just assume worst case, they just fall off in 2026. What sort of kind of plans could you have in place to sort of maybe mitigate that offset?

Yes. So -- and part of the reason I think we sort of proactively went and tried to size it is it felt like to us and to me that back in the fourth quarter, as people were speculating about the subsidies, and potentially going away that in our minds, they seem to be overstating the potential impact. And even though when we gave -- and I think we stressed very strongly that we were giving a guesstimate with a lot of kind of broad assumptions, but doing so in a way to sort of ring-fence the issue that it was not an insignificant issue, but it also wasn't sort of a seismic issue. So what we said was about 5% of our acute care patients currently are exchange patients. That's a little bit lower than what some of our peers. I think some of our peers have talked about, maybe closer to 7%. We assumed that if exchange subsidies were removed, then maybe we would -- half of those patients would lose their coverage. Obviously, some of them would continue to have exchange coverage. And what we tried to do then is to say, all right, well, the 2.5% of our patients who would lose their subsidies they would stop coming to the hospital for elective sorts of procedures, and we would lose the profits from those. But they would continue to come to the hospital for their emergency procedures, and we would have the cost of treating that without effectively any reimbursement. So that was sort of the broad assumptions that we use to get to our kind of $45 million, $50 million impact. Now again, there's a lot of sort of nuances to this. Could people get other coverage? Could they sort of kind of downsize their exchange coverage from gold to silver, silver to bronze, whatever. But beyond that, I mean, particularly on the acute side, a lot of those patients are coming to the emergency room to the degree they're coming to the emergency room, there's not a lot we can do to really control that. But obviously, like I said, to the degree that on the behavioral side, first of all, we don't have nearly as many exchange patients on the behavioral side because I think the high co-pays and deductibles have always made that exchange coverage not terribly meaningful on the behavioral side. But we have certainly more optionality on the patients we take on the behavioral side, et cetera, which is why our uncompensated care or bad debt or whatever on the behavioral side is probably 20% of what it is on the acute side. So I think a much smaller impact on the behavioral side.

Okay. Sort of to that, I mean, obviously, the acute sector has some pressures. We just talked about a couple of them. But the payer side does too, right? Like I guess where are we at just sort of in the life cycle of dealing with your managed care partners? I mean you've been doing this for a while now. They're dealing with 2 midnight and increased trend and on the MA side, 2 years of negative rate updates. Where are we at in those sorts of negotiation cycles?

So it feels like taking a step back, what we saw is that again, no surprise to anybody here. I mean there's a significant amount of literally, what I'll call day-to-day tension between providers and payers in terms of getting treatment authorized and patient days on the behavioral side authorized, getting inpatient admissions authorized versus an observation status. And then once patients in the hospital and we're sending out bills, there's a significant amount of denial activity and denial appeals. And it's literally kind of a day-to-day battle. I think what we saw during the early stages of the pandemic was because utilization dropped so dramatically, the payers really kind of took their foot off the gas in terms of their really aggressive, what I'll call, utilization review procedures sort of under that broad umbrella. Beginning, I don't know, late '22 into '23, as utilization started to bounce back, I think we sort of -- we saw the payers sort of revert to what I would consider to be their historical practices, all the things that I mentioned before. I don't think that behavior changed much. People have asked me, do we see it now incrementally change quarter-to-quarter as they struggle with higher MLRs or whatever issues. And it's hard for us to see that. And part of it is, I mean, we've devoted an enormous amount of attention and resources and dollars to this activity, meaning striving to make sure that we get preauthorizations for everything we're supposed to and that our claims clean -- 99% of our claims go out clean and that our denial appeal processes are as efficient as they can be. And we've been more aggressive in either suing some of our payers are going through arbitration, getting contract language changed to try and limit their -- the amount of optionality they have in terms of some of this utilization review, et cetera. So again, I don't, in any way, mean to imply that if you -- again, if you talk to our operators and the folks who really kind of run our billing and collection procedures, they'll tell you the sort of real struggle of doing this day-to-day. But I don't know that it's -- we find that it's terribly different than it was 3 months ago or 6 months ago or 9 months ago. It feels pretty much like this is now the new norm, which I think is, I would just say, unfortunate because I think there's a lot of waste, time wasted and dollars wasted on what I would consider to be nonproductive sorts of activities, frankly, on both sides. So hopefully, this can improve, and we don't spend as much time on this in the future.

Maybe specifically on the commercial side, obviously, during the pandemic, we saw wage rates spike up. You weren't necessarily being paid for that. But a couple of years kind of post 2020, you had some good commercial rate increases, broadly speaking. We've seen that in the industry. But it was just right before this on the GLP panel, and they had talked about they're seeing all this pressure with GLPs and now they might look to the medical side and their contracts with health systems at this point to sort of shave off some of that trend. So maybe looking out past 2025, '26, '27, where do we think commercial rate updates go? And maybe if you're already starting to see some of that moderation or at least some of those commercial plans starting to push back a little bit on some of the premiums they were giving you?

Yes. I mean, so we certainly made the point that I think beginning -- if I've got my sort of chronology correct in my head, beginning in kind of late '22, early '23, as we began to renew managed care contracts, we were getting a higher inflation update. I think as an acknowledgment that broadly inflation was higher. I think that has eased a little bit, and we're certainly seeing that slowdown. I guess I would, again, sort of stress the idea that I don't think we find contractual negotiations and contractual rate increases as challenging as we find the day-to-day behavior. So higher denial rates ultimately impact sort of what we would describe as your net yield, et cetera. And I think we find that payers use those utilization review tactics more aggressively to sort of get to their kind of target MLR numbers than they actually do the contractual pricing because those they can change, meaning that day-to-day behavior, those they can change kind of in real time. Obviously, contracts, we're both, I'll call it, stuck with or we're committed to for usually a multiyear period.

On the fourth quarter call, you had called out, I think, a $35 million increase in liability reserves. I think you said it was close to $80 million maybe for the year, maybe slightly below that. One of your competitors obviously called out sort of a similar dynamic on fourth quarter, talking specifically, I think you sort of referenced the same thing about sort of these claims and the amounts of the settlements or the verdicts sort of really going up. And I think we've seen that, obviously, with your disclosures and with some of your competitors' disclosures. But how do we think about that in terms of just risk that 2025 and beyond that you're just going to start to have to really sort of crank up those accruals and it's really going to kind of flow through the business?

Yes. So I tried to make the point on the call that historically, what we provide for in terms of malpractice expense, and ultimately, the reserves that we maintain are really largely driven by third-party actuarial estimates and that what we try to -- well, so I think what's happening and what some of our peers are addressing is that third parties who are not -- they're obviously using UHS-specific data in doing their actuarial estimates, but they're also looking at industry trends, et cetera. And I think what we hear from our insurance brokers, from our actuaries is that the incidence and frequency of malpractice claims is not necessarily rising, but the value of individual claims and verdict, et cetera, seems to be going up. And by the way, I think that's true in both the acute and the behavioral segments. And again, I think that's an industry-wide phenomenon, not just a UHS phenomena. So I think our actuarial estimates reflect that. What we tried to do in 2024 was instead of reserving for and expensing at the midpoint of the actuarial range that we get from our third-party actuary, we've kind of tried to move into the upper end of the range as an element of being cautious and conservative. And sort of back to your point, in the hopes that we don't then have another surprise in 2025. I don't think there's a guarantee of that, but we've tried to be a little bit more cautious. But yes, I think that's a trend that's with us. Now again, I think in the long run, it is -- I would hope likely, and I would like to think it's likely that we start to see some malpractice reform and tort reform at both the federal and state levels because I think some of these verdicts -- and again, I think this goes well beyond sort of the broadly the health care and the malpractice field, but you see these really, I'll call them nuclear verdicts in product liability and all kinds of other areas that I think it's just very difficult for private business to operate in such a volatile environment. And I do think -- and there's evidence that some states are reacting to that, and we'll see more to reform in the future. To be fair, that's a multiyear process. But hopefully, that's kind of an offset if we're having this conversation 2, 3, 4 years from now.

Another thing that came up on the fourth quarter call was just leverage. I mean, you guys are in a great spot, sub-2x, I think, right around 2x, which is in services is about as low as you'll probably ever see. Where do we think in terms of just appetite, not even just for share repos, but M&A or just building some outpatient centers around your inpatient facilities or building a new hospital, right? You're building Cedar, I think, opens in April. You have was Henderson that just opened in Vegas. So just in terms of maybe utilizing a little bit of that, maybe I'll call it, underleveraged.

Yes. I mean so if you look at it, I think historically, I'll sort of call it in kind of a base case, we've tended to operate at leverage levels in the high 2s, low 3s. To your point, we're well below that. So that leaves us a lot of flexibility. I think in an environment where there is a lot of uncertainty at the moment, I think that the low leverage level tends to make sense. I think as things settle out, we're probably more inclined to be a more aggressive acquirer of shares. We've been a pretty aggressive acquirer of shares. I think we noted on the call that since 2019, I think we've repurchased about 1/3 of our outstanding shares. So I think we'll continue to be an active acquirer. Obviously, the low leverage level also allows us to respond to bigger opportunities as they arise. To be fair, we have not seen a lot of kind of external M&A opportunities requiring a significant inflow of capital over the last several years. But we always like to be in a position to have the option to respond to that. But I think in the short term, I would say past this prologue, we'll spend something close to $1 billion in CapEx next year. To your question, I don't think we've neglected, whether it's outpatient growth or any other sort of capacity growth that to us makes sense because of leverage levels, that's certainly not been the case. I do think we're a judicious deployer of capital. So we like to do it where we think there's going to be adequate or above adequate returns. And again, we'll continue to be an active share repurchaser whether we choose to lever up to do that, I think it remains to be seen, but I think that's certainly entirely possible.

Just a couple of seconds left. You've been at UHS for quite a while. What are you most personally proud of at your time there?

We talk about this a lot internally. At the end of the day, we interact with literally hundreds of thousands of patients a year. And these are patients who are generally at their most vulnerable. There either medically compromised or psychiatrically compromised and they're in need of care, et cetera. And we are very proud of the care that our facilities provide. And those of us in the corporate office who are not necessarily clinicians or directly involved feel very much a part of that effort. And we'll get testimonials from people and that sort of thing that is very heartwarming.

Great. Well, we're at time. Thank you. Thanks, everybody.

Thank you.