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

Okay. Thank you, everyone, and welcome. My name is Michael Ha, the managed care and health care facilities analyst at Baird. And our next session -- our first session is with Universal Health Services, an operator of acute and behavioral health care facilities. And I'm very pleased to have with us today, Chief Financial Officer, Steve Filton. So thank you very much for being here.

My pleasure.

Great. And with that said, Steve, do you have any introductory comments or...

Happy to jump right in.

Perfect. Okay. So policy. So from our end, incredibly focused impact on hospitals. Now we have our upcoming panel in a few hours to talk about it. But maybe to spend the first maybe a handful of questions on policy. You've been one of, if not the only publicly traded hospital to really help us size the impact of enhanced subsidies, Medicaid supplemental payments. But there is one more policy impact that I'm not sure if you've sized for us, which is work requirements. It's biannual reverification of expansion. I understand on the behavioral side, you're more insulated given the fact that you have optionality on your patients. But on the acute side, a bit more exposed. I think Medicaid is only 15% of your revenue and expansion is probably even smaller sliver. So I was wondering if you have any initial estimate or at least a way to frame up how to think about that impact?

So I think the reason that none of the other companies have tried to -- or I shouldn't say tried, but have not sized the potential impact from Medicaid disenrollment and the work requirements, et cetera, is because it's very difficult to do. There's a lot of varying estimates about how many people could be impacted. I've seen 7 million or 8 million. I've seen 12 million, 13 million. And who's impacted and sort of what their utilization patterns are equally as important. And again, at the moment, I think this is all almost speculation or almost all speculation. So the argument, I think, that the Republicans made during the BBB debate was, look, they weren't really eliminating -- work requirements weren't really eliminating anyone who needed coverage. They were largely young, healthy males et cetera. Now if that's true, and I don't know that we have the macro data to really support that. But if that's true, I don't know that it has an enormous impact on us as hospitals. Those are not people, young, healthy males who you would presume to be significant utilizers of the hospital systems. So I think we're going to have to wait. And in the bill, the work requirements don't begin until 2027. Some states apparently are anxious to implement them earlier. We'll see how many do so. But I think the hospitals are going to have to wait and see until we get a better sense of exactly who's impacted. To your point, on the acute side, there's really not a great deal that we can do to react to that. In other words, the vast majority of our Medicaid as well as our uninsured population comes to our acute hospitals through hospital emergency rooms. And we're obligated both legally and morally to treat those people, and we do and we will. As you suggest, on the behavioral side, we have more optionality about the patients we take, which is why when you look at the financial statements of the 2 segments compared to each other, there's far less uncompensated care in the behavioral segment than there is in the acute segment because of that optionality. There's maybe 20% of the uncompensated care in acute care or 20% compared to the acute segment in behavioral. So we'll see. I mean, I think the Medicaid work requirements remain to be seen. I think one of the things that we're expecting a little bit similar to what we experienced a couple of years ago when coming out of the pandemic, there was this push for Medicaid disenrollment that had been delayed for a number of years during the pandemic is that the initial disenrollment was muted in the sense that a lot of folks who were disenrolled were disenrolled for what I would describe as administrative reasons. They hadn't updated their address or their income data, et cetera. And when we work with those folks, a lot of them were able to reenroll. And I think there's an expectation that we may see some of that same dynamic here.

Great. And on the supplemental payments, you sized that at $360 million to $400 million by 2032. And I guess how does the breakdown the cadence of that reduction look starting in '28 and ramp into 2032? In other words, what do you anticipate? Is it starting '28 impact? How does that move up to 2032 over time? And I know Marc has mentioned this is the worst-case scenario. Could you please expand on what he meant by that? Trying to get a better sense on areas of conservatism within this range that you could point to?

So your first question, which is more of a mathematical question, we didn't give the breakout by year. It's relatively ratable. It does accelerate each year sort of, if you will, it compounds, but it's not a significant difference. So especially if you're doing 5-year projections that really don't even begin until 2028, if you do it ratably or you do it in a way that just sort of ramps up incrementally each year, I think that's a fair estimate. I think Marc's comment on our Q2 call was referenced to the fact that it seemed to us and I think to the industry that Congress purposely delayed these cuts for several years. These direct-to payment cuts don't begin until 2028 and then they play out over 10 years. And the notion was, I think, twofold. I mean, one, Congress was acknowledging that these cuts could and would be meaningful, particularly to rural hospitals, smaller hospitals, hospitals that were already operating at razor thin margins. I think these are largely public not-for-profit hospitals. And it felt like they wanted to give themselves some room to potentially modify or find ways to mute or mitigate the cuts in the future. Certainly, no guarantee of that. But as the hospital industry was lobbying during this process and Marc happens to be the President of the for-profit Federation of American Hospitals this year. So I think he's even more attuned to this than he might normally be. We were hearing from a lot of legislators that, look, some of these cuts may not be fully implemented, et cetera. And again, like I said, no guarantee. But I think he was just referencing this idea that keep in mind that this time frame is quite elongated and things could potentially change during that time.

Got it. Helpful. And you've spoken at a high level about things like shifting revenue sources, cost-cutting initiatives to help offset the impending cuts to supplemental payments. Wondering -- I know we're still years ahead, but if you have any more concrete thoughts and plans on what these efforts could look like? And should we expect these initiatives that you're planning and preparing to implement to fully offset the $360 million to $400 million?

I mean I think it's too early to make a statement like that in any sort of precise way. I think what we have said and we have cited and it's by no means a perfect analogy, but we've talked about the way that the industry collectively and specifically UHS responded to the COVID -- the advent of COVID back in the spring of 2020 and that was a much more sudden something we didn't really have time to prepare for, but we responded very quickly. There was really an immediate reduction in our revenues and in the way people -- their utilization patterns, the way they were visiting their physicians, the way they were visiting hospitals. And if you go back to that time period, you'll see that hospitals in general, UHS specifically, we froze hiring. We had a number of headcount reductions. We froze salaries. We froze 401(k) matches. We reduced capital spending. We froze vendor increases. We did a great many things. Now honestly, I don't -- obviously, we'll have a lot more time to react to these impending cuts if, in fact, they are all fully implemented. And so we'll be -- I think we'll be able to be quite frankly, a little more thoughtful. But we cite, I think, that experience, which is only a few years ago as an example of the, I'll call it, the agility, the flexibility that the for-profit operators have generally had and that I think we've demonstrated, and we'll certainly do that. And then on the behavioral side, and you alluded to this a little bit earlier in one of your questions, we talk about having a scarcity of capacity, not so much a scarcity of physical capacity, but largely driven by some labor scarcity. So we can't always in some of our hospitals, treat all the patients who are presented to us because we simply don't have enough staff. So in an environment where we are already capacity constrained and turning away patients, there's more optionality about what patients we take or don't take. So if Medicaid in a particular geography becomes a lot less profitable as a result of either disenrollment or DBP cuts or whatever it may be, we can think about managing the patient population in a way that helps us. We can focus on programs perhaps that are less Medicaid-centric and more Medicare or commercial centric. So again, lots of optionality. We're talking about all these things, planning all these things, not doing anything immediately because as we already alluded to, most of these cuts don't even kick in for a year, 2 years, 3 years. So -- but we'll certainly be prepared if and when they do.

Got it. And last one on policies. So state budgets, they're coming under pressure, provider tax reductions. I mean we're already hearing some states have lowered or exploring lowering provider rates. I was wondering if you've had conversations with states on this topic. Any thoughts on really their ability to manage budget pressure while also implementing all these new policies in the years ahead? And are there different ways you think states could explore to even potentially supplement the Medicaid program? If so, what might that look like?

Yes. And I should have mentioned this, I'm going to go back just to an earlier question you had about Marc's comment. I think the other point that Marc was trying to make on the call was that, as people know, there are -- the bill, the big beautiful bill allows programs that they call them preprints, these applications for either new or modified DPP programs to be grand filed and approved. And the biggest one for us is the Washington, D.C. program. We've been waiting for months and months and months for that program to be approved. Late yesterday, we heard from the District Hospital Association that the program, the preprint had been approved. We have not yet seen the documents that would verify or validate that. Hard to imagine the Hospital Association would get it wrong. But as an example, we expect that our DPP reimbursement will increase over the next few years before it begins to decrease according to the big beautiful bill. As to the direct question that you asked, are we having conversations, and I would say that as collectively as an industry with states about they're providing some relief, et cetera? The answer is yes. I think the industry state hospital associations are having all those conversations. States, as you might imagine, are reacting to some degree, the way that I was sort of talking about Medicaid disenrollment, et cetera, saying, well, let's see how this plays out. We're not going to make any commitments. They listen, they acknowledge that the reduction in directed payment programs could have a pretty significant impact on many of their hospitals. And so they're, I think, open to the idea of finding other ways to support them within their budget constraints. But again, nothing specific at the moment because I think the states are essentially taking that wait-and-see position, which I think makes sense. We don't -- none of us really know exactly how this is all going to play out. So they say, "Well, we'll plan, we'll think about, we'll consider, but give us some time to see how this all plays out."

It's great to hear, especially in the DC DPP approval. Could you remind us on the benefit that you're expecting? Is that $85 million, if I'm not mistaken, in flow all through earnings? And can you recognize that this year, do you think?

So the program we're expecting will be approved effective October 2024. So in our third quarter, we should, in theory, have a year's benefit. We've estimated that benefit previously in our SEC filings to be in the $85 million to $90 million range, as you suggest. Again, we haven't seen the specific documents to verify those numbers, although we're not expecting them to be materially different. But presumably, in our third quarter filings, we'll have all that detail.

That's great to hear. And should we expect all of that to -- or most of it to flow through to earnings? Is that reasonable?

Yes. Yes. There's really no -- when we give these DPP benefit numbers, we've historically given them as a net benefit, net of any provider taxes.

Great. And then on the topic of D.C., I think last week at Wells Fargo, you mentioned Cedar Hill that you might get deemed status in the coming days or even early this week. So any quick update there? Did you receive it? And in thinking about that $25 million headwind embedded in your guide, do you have a specific date? Or as long as it's approved by third quarter, then you're tracking to $25 million? Trying to understand that better.

Yes. So what I said last week at another conference was we had seen the paperwork from the Joint Commission who does the survey that they had written a letter to CMS recommending that we receive our deemed status as of last week, I believe, as of September 4. We haven't actually gotten the documents from CMS, but anticipate again that they generally accept that and that we will have our deemed status as of September 4. As to your question, we had a $25 million negative EBITDA from Cedar Hill in Q2. We projected in our revised guidance another $25 million negative loss in the -- in this back half of the year, probably heavily weighted to the third quarter. We didn't really have an absolute specific date in that, but assumed it would be within this time frame. So I think we're comfortable with that $25 million in the back half of the year is a reasonable estimate. Hopefully, we do better than that because now that we have our deemed status or presumably have our deemed status, we'll begin to sort of ramp up, accept more patients. We'll importantly begin to be paid for all of our patients. So hopefully, the turnaround can be executed pretty quickly.

And sort of a similar topic, different, the Proposition 35 in California. I know you have a pretty sizable presence. Has there been any update on the benefit there? I know that there's been lots of conversations, but not much movement. Any sense on magnitude timing. Could you actually recognize that this year? Is that pretty unlikely? Any new developments?

Yes. So I think the way you frame the question is correct. So Prop 35 was a measure passed in California that presumably makes available significant incremental funding for behavioral hospitals in particular. But very nonspecific. We've had lots of conversations with the county and city governments in which we operate behavioral facilities about the way that -- about ways in which we could improve access for behavioral patients in those areas, et cetera. If there was increased reimbursement or if there was funding for capital improvements or capacity expansion. But really, I don't believe there's been any objective, definitive sort of developments there. So no, I certainly don't think there'll be any impact of node in 2025. And whether there would even be sort of something like a material impact in 2026, I think it's very much up in the air at this point.

Okay. And now switching or flipping to volumes. I guess any update on intra-quarter volumes, how are you tracking through third quarter behavioral, everyone is focused on that 2.5% to 3% adjusted patient day growth. I know on the acute side, we've seen some cannibalization in West China, some softer surgical volumes, but you're also entering the third quarter with relatively easier comp prior year comp. Would just love to hear an update on volumes.

Yes. So on the acute side of the business, we have said that we think that a sustainable acute care model at this point is mid-single-digit revenue growth, 5%, 6%, 7%, I'll call it, 6% at the midpoint, split pretty evenly between price and volume. So on the volume side, roughly kind of consistent 3% adjusted admission growth. We've been hitting those numbers, honestly, or candidly, our, I think, adjusted admission growth in Q3 was actually a little bit better than our peers. It feels to us like that's a reasonably sustainable number. I know some of our peers continue to talk about an environment in which they believe acute care volumes may grow sustainably at a higher rate. And this is one of those issues, and I hope they're right. But I think we're comfortable with that kind of 3-ish percent growth rate that we've talked about. And nothing in the third quarter would suggest that, that becomes more or less reasonable. I think we're tracking to a number pretty close to that. On the behavioral side, patient day or adjusted patient day growth has been slower than we've anticipated for several years. It has improved incrementally, but as I said, slower than we expected. What we've talked about is the original goal for patient day or adjusted patient day growth for 2025 was 2.5% to 3% for the full year. At this point, it's clear to us we're not going to be able to get to that number, but have said that, we think we should be able to exit the year at something close to that number. And again, continue to believe that's the case. Just reminding people that probably the 2 biggest issues, I think, that we've discussed are labor scarcity issues. These were, of course, predominant during the COVID epidemic, they've certainly improved since then. But still in probably, I'm going to say, 1/4 to 1/3 of our facilities, we still struggle to some degree with filling all of our vacancy and that could be nurses in some cases, it could be therapists, counselors, psychologists, in some cases, and in many cases, it's -- the folks that we call mental health technicians. These are nondegree people, but they're critical to the treatment patients in a behavioral setting. And sometimes we can't hire enough of those folks. So I think we're making incremental improvement in that regard, which is helping improve our volumes in behavioral. And what we talked a lot about in the last couple of quarters, is the sense that a significant amount of the demand growth broadly in the behavioral space is in outpatient and I'll call them more alternative settings. And that hasn't been a huge focus of ours in the past. And it's -- I think it will be a greater focus in the future, both in terms of the patients we discharge from our inpatient facilities who need continuing outpatient care as well as patients who enter the system in an outpatient setting. These are more freestanding outpatient providers. We've really not played in that space in any sort of significant way, but we'll do so in the future. And I think we have not been getting what I would consider to be our fair share, our fair market share of that outpatient growth. And I think that will be a big contributor to getting back to that sort of 2.5%, 3% target that we've been citing for some time.

Great. And I'd love to stay on that topic on staffing and then outpatient. So I know you mentioned 1/4 to 1/3 of your facilities still experience shortages and still high turnover. I think if I'm not mistaken, turnover has been as high as 50% in recent years. Is it still at that level? Have you made improvement? Do you have a hard target on that turnover rate improvement? I guess, where was it pre-COVID? Just trying to get a sense on maybe internal metrics that you're looking at daily, weekly, get a better sense on internal goal posts.

Sure. So yes, I mean, I think during the pandemic, turnover rates, and I always make the point because I think it's important that this is not a UHS-specific issue, quite frankly. I don't think it's a behavioral specific issue. I think it's a broadly subacute issue, meaning behavioral facilities, nursing homes, skilled nursing facilities, home health facilities struggle with keeping and filling all their physicians. And it's because, I think, in large part, nurses, in particular, always have the option of working in an acute setting, in an acute hospital setting. And honestly, probably at a higher salary, probably at a higher base salary. Now this dynamic was exacerbated greatly during the pandemic when acute hospitals were paying -- I would say you hear these apocryphal stories, but they really weren't apocryphal. They were very true. Nurses were making $10,000 a week during the pandemic, working in a COVID unit or an acute ER, et cetera. Certainly, those dynamics have passed. But there's still that opportunity. There still is, I think, a relatively tight labor market for nurses. And again, for other therapists and even for the mental health techs. But that turnover rate certainly has diminished significantly. It's, I think, below 50% today in most cases. We tend not to sort of publish that on a routine basis, et cetera, because the numbers can be distorted. In other words, a lot of times a nurse will leave our full-time employment, but continue to work for us as what we would call a per diem nurse that is they sort of work when they want to be on call, et cetera. And so we really haven't really lost that nurse in that sense. And there are other things where one nurse will leave one of our hospitals and go to work in another and whether we count that as a termination and turnover, all these things -- the statistics aren't perfect. I think they are consistent internally, which is important to us, and we certainly have made improvements. But the turnover rate is still high. I would say it's at least in the 40s, and that's an incredibly inefficient rate to be losing people to have 3 or more of your workforce turnover every year. So lots of our -- during the pandemic, quite frankly, a lot of our focus was on recruiting and bringing enough nurses into the pipeline. I think post pandemic, we're much more focused on the retention piece of it, that once we bring a nurse or another employee into the fold, are we providing them the appropriate level of orientation and education? Are we providing them educational opportunities to want them to stay? Are we providing them the mentorship so they feel needed and wanted? All these things are quite important. And again, I think we're making progress, but it is certainly incremental.

Great. And anecdotally, I've heard year 1 turnover is much higher. But after they make it past year 1, and then it diminishes drastically. I was wondering, is that true? And are there ways financially that you're incorporating into compensation guaranteed like 2-year packages, if not to help drive that retention? Are those things you're considering?

So it's very true. Our retention rates once a nurse or quite frankly, an employee behavioral employee has been at work for more than a year, goes up, I'm going to say, exponentially. And part of it is, particularly in nursing schools today, many nursing schools really don't have any behavioral specific education. So a nurse might come to work for us out of nursing school, never having worked in a behavioral facility before and find that he or she -- this isn't what they kind of imagine, this isn't what they want and what they like. So we're doing a lot of different things. I mean, number one, we're partnering across the country with nursing schools to provide that opportunity for nurses to get an on-site work experience in behavioral to understand what it's like. So there's a better match that the nurses who do join us are nurses who understand what the environment and the milieu is like and that's what they want and the nurses who don't and provide that opportunity. But also, I think like during the pandemic, we were so desperate for nurses that nurses were coming and we were orienting them as quickly as possible. And sometimes I think that was a bit overwhelming for them. And I think we're much more deliberate today about how we're orienting and educating our nurses who come in, particularly those without behavioral experience to make sure that when they go out on the floor and when they begin to see patients in a live setting, et cetera, that, again, they have the right mentorship, somebody is partnered with them, they feel more comfortable, much more likely to not throw up their hands and say, I'm not really prepared for this. So yes, I mean, a big part of our emphasis is on that first year of experience, making sure that nurses are appropriately oriented and prepared.

Great. And in the last couple of minutes, I think we'll focus on behavioral outpatient. It just seems like such an attractive market, how fragmented it is, the market share grab opportunity. I mean managed care companies are coming out and saying how elevated the trends are. So I understand your focus here has started about a year ago with opening 10 facilities, and now you're planning on 10 to 15. But if these trends continue to inflect higher, stay elevated, just given how healthy your balance sheet is, would you consider levering up or shifting it higher in your deployment priorities or just allocating more dollars to de novo builds, getting to more than just 10 to 15 per year?

So just to make a point or clarify the point, when we talked about adding 10 or 15 facilities a year, these are new, as you suggest, de novo freestanding outpatient facilities. We do have a larger outpatient presence than that. We probably have somewhere in the 70, 75 outpatient facilities around the country. Many of them are -- what we would describe as step-down facilities. So when a patient is discharged from -- an inpatient is discharged from a behavioral hospital, they are often done so in need of continuing care. We call this intensive outpatient care or a partial hospitalization. This is not just an hours therapy a week with a therapist. This is 4, 5, 6 hours a day. It essentially mirrors the treatment that they were receiving in many ways in the inpatient setting, but they're not staying overnight. They've reached a point in their recovery where they don't need to be cared for 24 hours. And so we have a bunch of those facilities. So the new facilities we're talking about are more of these freestanding facilities that we have not had as much emphasis in. And the limitation, Michael, is really not a CapEx or facility one. Probably the biggest challenge going back to the theme that I described before, is finding the number -- the right number of therapists and making sure you have the right number of therapists. And so it's really not a question of the capital. The capital required to put up a freestanding outpatient facility is somewhere between $1 million and $2 million. So that's not a big hurdle here. It's making sure you have the right number of therapists. But to your point, we do, I think, have significant advantages as we open these things. We already have established referral sources who know us to understand our outcomes, et cetera. We have relationships with payers. We are -- and one of the things you talked about payers citing behavioral care as an increasing part of their medical losses. One of the things they've cited is a lot of out of network here, which means that they're sending patients to out-of-network facilities when we're largely, in most cases, an in-network provider. So again, that's another advantage to us as we move forward to this area.

Perfect. Well, that's time. Thank you so much, Steve, and thank you so much, everyone. Have a great rest of your day.

Thank you.