Universal Health Services, Inc. ($UHS)

Good morning. Thanks for joining us, everyone. I'm Whit Mayo. I cover health care providers and managed care for Leerink. This is day 2 of the Global Healthcare Conference. I'm joined with Steve Hilton and Darren Lehrich. Steve, you've got an announcement this morning. Maybe we'll just start there and start with the acquisition of Talkspace.

Sure. Yes. So just a few minutes ago, we announced a definitive agreement to acquire Talkspace for $5.25 a share, which equates to an enterprise value of approximately $840 million. We're extremely excited about this acquisition and the opportunities it presents to us. Those of us who follow us know that really for the last year or 2, we have really been focused on in our behavioral segment, especially building our presence in the outpatient space and have done a number of internal things to accelerate that. But we described in the press release the acquisition of Talkspace as an accelerant to that process. And I really like that term because I think it really is extremely apt in this case. One of the things that I think has been a bit of an obstacle to growing the outpatient business is just access to therapists who are in great demand today. But by acquiring Talkspace, we're acquiring their cadre of 6,000 therapists, many of whom Talkspace believes have additional capacity as more demand is created, and we believe this acquisition will create more demand. It is a sort of what I think about as a bidirectional sort of benefit in acquiring Talkspace. For -- again, those who've listened to us in the past, I described the outpatient business and behavioral as sort of having kind of two distinct phenomena to it. One is step down, which has been sort of our historic focus. When patients are discharged, when inpatients are discharged from our facility, they often require additional and continuing care that we call that step down. But some of the challenges in meeting that demand is sometimes the patients don't want to continue to receive that demand on our campus. They live far away. They're just not anxious about making -- they're traveling. So now we have this virtual option that we'll be able to offer, and I think that's a real benefit. In the case of some of our patient population, particularly the adolescent or I would say, really teenage population, that's a population that I think is really drawn to virtual care. In many cases, I think they prefer that. So now having this option in a much more comprehensive way than we have it today is significant. And the payer relationships that Talkspace brings, I think, are an extreme benefit to us. They are, as an example, a benefit to Tricare. So I don't know specifically, but if you're with one of the plans that Talkspace is aligned with, maybe Talkspace is on your membership card, et cetera. So if you have a behavioral need, just call a number and you're speaking with somebody and you're able to get assessed, et cetera. And now here's where I think the direction flows the other way. If people need more intensive outpatient, intensive outpatient, partial hospitalization or even inpatient care, Talkspace now has a partner that they'll be able to refer to. So extremely excited about those opportunities, which are mostly revenue driven. A lot of times when there's an acquisition, people ask about the cost savings. I think there are some small amount of, I'll call them, public company cost savings to the extent we have duplicative public audit costs or SEC costs. Obviously, I think those can be eliminated. But for the most part, the Talkspace infrastructure and technology, which we think is quite an advantage will remain in place. Their team will remain in place. We're very impressed by both their technology and their personnel and their skills. So we're excited about that aspect of it. The transaction we expect will close in the third quarter. We expect that the transaction will be slightly accretive in its first 12 months. And then as these revenue synergies are realized over the next several years, we'll continue to become more and more accretive. Our leverage, which I'm often pointed out in these meetings is rather low, will increase by about 0.3x. And I think I take this opportunity. When asked about our leverage levels, I think we often respond that we are comfortable having a lower leverage level because it gives us the ability to respond to opportunities as they arise. This is certainly one of those opportunities. There may be others in the future. But we'll continue to be an opportunistic deployer of capital, meaning if other M&A opportunities arise, we'll evaluate them and respond if appropriate. We'll also continue to be an active acquirer of our own shares, which we think are a compelling investment at the moment. I'm going to pause if there's anything I should have added. I'll ask Darren to add and then happy to [indiscernible].

Yes, Steve, no, I think you covered it well, Steve. I think the only thing I'd add just as it relates to the last point that Steve made, so leverage moves up by 0.3x. So that brings us to pro forma about 2.1x. That's the low end of the 2 to 3x range that we've been talking to you all about as our target. And I think on that point, it really is kind of a good example of how we're thinking about deploying our balance sheet and our capital to create new earnings streams as we think about the headwinds that we have in some of the out years that you all have been asking us about. And this is a really good example of how we're using that to deploy capital and replace some of those potential headwinds that are down the road and still have a really strong balance sheet position to be able to respond to other opportunities that are in the environment. Whit, I'm sure you've got questions and I appreciate you letting us break the news here.

I appreciate you making the news here. How do I think about the potential revenue synergy opportunities over time? I know it's early, and there's a lot to evaluate, but any initial thoughts on what that could look like in the coming years?

Yes. I mean so just at the outset, I think Talkspace, their own projections for 2026 revenues were $280 million. So that is roughly a 3.5% increase in our behavioral revenue. We've not quantified and I think don't intend to quantify the potential revenue synergies down the road. We've really explored them in great detail with the Talkspace team. We think they're significant. Obviously, I think we'll have more to say when the deal closes, when we give our guidance for next year, when they'll, I think, be much more firmly ensconced in sort of this partnership relationship. But yes, I mean, I think -- and we've tried to walk through, I think, some broadly what some of those opportunities are -- but I think, again, I'll stress what I said at the very beginning, this focus on outpatient growth, which has really been a significant focus of ours, I think, is really accelerated or potentially accelerated over the next 6 months, 12 months, a couple of years by this acquisition.

Yes. And to be clear, there wasn't any consideration for unannounced growth within the guidance that you provided a few weeks ago, correct?

No, no, there was no contemplation of this transaction in our guidance from it a couple of months ago.

Okay. Is this an area that you think you're going to continue to make additional investments through M&A? Or is this a new platform acquisition. We're going to learn from this, we're going to try to grow this. Just how do I sort of square that against sort of the capital deployment thinking over the next few years?

Yes. I mean, so first of all, I think as we sort of often answer the question about acquisitions, generally, I think we are always open to ways in which we can enhance our existing strategy. What I will say about Talkspace is, it's really one of the leading companies in this virtual behavioral health care delivery space with a very nationally recognized brand. There are 200 million people in the United States and Puerto Rico that have access to the tax-based product through -- mostly through payer relationships, but relationships sometimes with cities and that sort of thing. And we'll continue to invest. I mean, they're investing in technology and we're very supportive of those investments. So we'll continue to invest in their technology yes. So anyway, there may be other acquisitions, but I think we feel like we got the pick of the litter in terms of this virtual space.

Yes, pretty extensive reach. When I look at your legacy behavioral outpatient business today, I mean there is some telehealth virtual engagement. I don't think the percentage is a lot. Where do you think that, that could potentially go over time?

So historically, and when I say historically, I mean this obviously is really the last several years, and I think it was really kind of accelerated by the pandemic. We've used virtual or telehealth largely as a means to supplement the care that we provide in our inpatient facilities. So if we had an inpatient facility that was lacking a therapist or a psychiatrist in psychiatrist therapists from a different geography could Zoom in or Skype in or whatever and help assess patients and help create patient treatment plans and that sort of thing. So mostly what I described as sort of internal. We did have some capacity to deliver virtual care and therapy on an outpatient basis. but it was relatively limited. And again, the Talkspace capacity really accelerates that to a significant degree. Hard to say again with precision, what the opportunity is, but I think we think it is measurable and one that will continue to realize the benefit for several years to come.

Remind me the kind of staffing model Talkspace, what percent of the therapists are actually employed versus being in their own independent practice and just to compensate presume per session per encounter per visit type of compensation model?

Yes. So the smaller number or a smaller percentage of their therapists are employed or W-2. The much larger percentage are independent contractors who, I think, as your question suggests, are probably either have their own practice or working somewhere else, et cetera. But again, the perspective that they've offered to us is that they believe that I think many of their therapists have additional capacity to take on more demand if it is offered. And beyond that, with 6,000 therapists there very adept at recruiting, evaluating, hiring therapists who quite frankly, I think, really like the flexibility of the kind of that more flexible discretionary model that Talkspace offers, you can kind of work when you want and they'll match you with the demand to patients, et cetera, which is a little bit different than, let's say, the inpatient model, which tends to be more restrictive in terms of hours and that sort of thing.

And I would just add to what Steve said. So we've assessed the capacity that they have and feel good about our ability to generate more virtual services as a result of the capacity of the 6,000 therapists that are part of Talkspace. The overlap is very good in that they're in all 50 states, and so we feel good about that. And then as we've dug into the business and better understand it, therapist turnover is very low. So they have very good satisfaction, not just among patients and consumers, but within the therapists that are on the Talkspace platform. And that makes us feel really good about our opportunity to introduce that virtual access to care to the UHS enterprise.

Might just stop for a second and see if anyone has a follow-up question in the audience as it relates to the transaction. I put everybody on the spot, so I can keep going. But maybe just to shift to the outpatient investments you have been making over the last number of years, it's been a pretty significant increase in the outpatient capacity. Just maybe talk about where you are in terms of the size of the number of outpatient access points and the growth that you've seen over the last few years?

Yes. So the last couple of quarters, we've been disclosing account of outpatient facilities in our behavioral segment roughly 120 or so. And to be fair, those are not all new. We've not historically reported all of them. Historically, most of our outpatient facilities have been on the campus or very close to geographically proximate our inpatient facilities, and we have generally not counted those or disclosed those in our counter facilities. We recently have sort of changed the way we count and report because we want people to know that we're very focused on this outpatient growth. At the same time, we've also talked about really developing kind of freestanding facilities, which is relatively new for us. And one of the main reasons for that is that we find that people who are entering or what we'd call stepping into the behavioral system often don't want to receive their care on a hospital campus, branded with an inpatient hospital name. They have this I'll call it, fear angst, et cetera, being kind of swept up into sort of what I'll call the inpatient net. While I don't think that's really a legitimate fear necessarily, we acknowledge that it is the way some people feel and they much prefer to receive their care in a freestanding setting, et cetera. So we've talked about the fact that in the last few quarters, we've talked about the fact that in the last couple of years, we've created this new freestanding segment of the business. We've branded it separately with this 1,000 branches brand we opened, I think, 10 new facilities in 2025, I expect to open another 10 a year for the next several years, and we'll continue to pursue that. I think there's -- we definitely see a need for that. Again, the nice thing in my mind about Talkspace is now we offer this end-to-end continuum that really offers behavioral services almost of every sort and variety that you can imagine from inpatient to intensive outpatient to partial hospitalization to 50-minute therapy sessions to virtual assessments. There's really, I think, no other provider in the behavioral space that offers the continuum of services that we're now will be able to.

Yes. And you've always said historically one of the larger pain points that you've had and opening up an outpatient clinic has been the availability of therapist. So this sort of opens that up, okay. So I think I get the strategic element of the transaction. So congrats on the announcement this morning. I wanted to shift to a topic and question that I think has sort of entered the picture of this earnings season for the acute care segment that it feels like many of your peers have cited perhaps a new earnings stream sort of coming into the picture with resiliency and cost initiatives. And I know that you have a lot of things underway. You may not have branded it or called it out as a specific program. But maybe just spend a minute talking about some of the technology, the AI, the things that you're excited about perhaps contributing to incremental growth this year versus prior years?

Yes. We, I think you framed it quite accurately. And I think on the fourth quarter year-end call, Marc, in particular, in his both prepared and responsive remarks, really try to address the fact that in our minds, driving productivity, driving efficiency is not something that just sort of has arisen as a result of the challenges that face us as a result of the Big Beautiful Bill. But it's something we've been ongoing. And I think particularly had ongoing really since the pandemic ended. And if you look, I think, at our acute results since the pandemic ended, we've driven length of stay, particularly case mix adjusted length of stay to levels that are now below where they were at the beginning of the pandemic. We've really, I think, driven a number of productivity improvements. So if you look at the growth in our salaries and wages in the last couple of years, they've clearly been even less than sort of inflation, so suggesting that we're driving productivity increases. And we're going to continue to do all those things. And then I think Marc tried to touch on, as your question sort of suggests the ability to use information technology, AI and other technologies to drive some of that productivity. And we've talked a little bit about specific examples of that. we're finding a number of examples in the revenue cycle space in terms of coding assistance, in terms of denials appeals in terms of ensuring that bills are going out has complete with complete documentation, et cetera. So all those things. And I think there are many other opportunities. One of the things that I think we've reported on maybe in contrast to what others have said that they've seen an increase in payer denials and patient status changes. And just sort of complained about the heightened aggressive behavior from peers. And I'm not suggesting that we haven't seen that. But I think some of the improvements that we've made in the revenue cycle area and the investments that we've made in people, process and technology over the last several years, particularly in the acute space have helped us at a minimum, stay even with the payers because I do think they're getting more aggressive as they feel the pressure on their medical losses, et cetera. We undertook a significant sort of third-party consulting review of acute care revenue cycle a couple of years ago. We've been implementing a number of improvements since then. And I think it's worth noting that we're undertaking a similar review in our behavioral space this year, and I'm sure that will carry over into next year as well.

Okay. Is most of the revenue cycle opportunity more on yield, improving yield? Or is it eliminating this friction, just the back and forth with the plans and the denials and everything?

So I think it really falls into a few different categories. I mean, one is the nature of revenue cycle processing in our space is it's complicated. It's -- but it's also sort of routinized, it's recurring, et cetera. And in my mind, that's sort of the perfect application for AI technology I'll go back to these denial letters. And again, this is a perfect example of I think where we're just effectively countering what the payers are doing because I think we've had some sense for a couple of years now that payers are generating denials and generating their denial letters through AI technology of their own. And what we've been doing is using a nurse another professional to look at the nil, go through the medical records, create a denial appeals letter get that process started. And on average, that was taking an hour or 2 of a nurse's time for every single denial of which there are many. And now what we're finding is that AI generates the denial letter, a nurse spends 5 minutes reviewing it, making sure it's complete, making sure it's accurate. And so from a productivity standpoint, we're just doing better. We're using a vendor who uses AI technology to do ER coding. ER coding is much simpler, more straightforward than inpatient coding, which tends to be much more complicated. And again, we found that they're able to do it accurately. We've done a lot of parallel testing. They do it accurately, and they do it quite frankly, more productively than human beings are going to do it. And so again, another example of that. So I think it does a number of things. It just -- I think AI helps us complete these routinized tasks in a more efficient, productive way. And I think the opportunity is to do that in other ways are significant, and we'll continue to -- one of the challenges I think we have in what I would sort of describe as the early innings of AI development and AI initiatives is prioritizing and choosing the applications that are most practical that can be developed the most quickly that are the most impactful. And so we have sort of an AI steering committee that spends a lot of time and effort I'm just that aspect of it, making sure that -- because I think the number of potential uses is vast and you want to skinny that down to a manageable number and then sort of decide how you're going to approach it. So -- some of these things we're developing on our own with internal coding capabilities, et cetera. Some were using vendors for who have already developed these applications. And in some cases, we talked on our call our year-end call that we've invested in a company called Hippocratic AI, which is the company dedicated exclusively to developing AI applications in the health care space. and we've used those as well. So it's a multi sort of tiered approach to really getting the best uses from AI.

Yes. Coming out of the fourth quarter, there was a little bit of noise within the acute care segment, a lot of out-of-period directed payment stuff in 3Q that didn't recur into 4Q. You had an ACO payment. A lot of stuff kind of obscured the growth. Do you want to spend a minute just sort of framing the 3Q to 4Q walk forward and sort of how you're looking about the growth quarter-over-quarter?

Yes. So I think particularly from an acute care perspective, we did get this question post the quarter that it appeared to some people that the sequential results in acute care were actually a sequential decline from Q3 to Q4. That's not the way we saw it and we analyzed it. We did highlight a number of nonrecurring items in the third quarter, the most significant of which was the DPP program and the out-of-period DPP benefits from the District of Columbia that we recorded in the third quarter. But I think we also mentioned an opioid settlement, we mentioned some revenue cycle benefits, including discrete settlement with a payer. I'm not sure that we called out precisely the magnitude of each one. But ultimately, when we sorted through it all, we generally view the acute care results between Q3 and Q4 is relatively flat. Now to be fair, I think most people have expected historically there to be a bit of a step-up in Q4. And I think we attribute the lack of a step-up to relatively soft volumes, not only that we experienced in acute care in Q4, but it seemed to be sort of industry-wide. But otherwise, I think we generally view the Q3, Q4 acute care results is pretty flat and pretty stable.

No. Maybe just turn to the exploration, the subsidies. Maybe it's a little bit too early. I think you've talked a little bit about some of the activity you've seen quarter-to-date, a little bit of softness on HIX volume, and I don't think you can conclude whether or not the -- those patients are going to another payer class yet, but maybe spend a minute there and sort of how you think about the slope of the headwind this year as the year progresses?

So in our fourth quarter call and in our earnings guidance for next year, we have outlined the fact that we've assumed a $75 million headwind in effectively in our acute segment as a result of the expiration of the HIX subsidies. And the two biggest assumptions we made there were that about 25% to 30% of our HIX patients would lose their coverage. HIX patients, and again, in our acute segment represent currently about 6.5% of our total adjusted admissions. So assuming that 25% or 30% of that is lost. We assumed a small percentage of those people, maybe 10% to 20% would get other coverage largely commercial coverage, either through their employer or potentially by stepping down from a gold plan to a bronze plant, something like that. Using those projections, we play that out based on the utilization patterns of that population, et cetera, and we come up with the $75 million number. People have asked us appropriately, well, now we've got a couple of months under our belt in 2026. Are we sort of tracking those assumptions. And I think what we've said is the actual reduction in HIX patients is a little bit less than the 25% to 30%, but we expect that number to grow as the next couple of months progress because what we think will happen in a practical way is some people who are sort of believed or supposed to be still having HIX coverage will not make their premium payments or we'll stop making their premium payments, and that number will grow some. I think it's too early, and I think other providers have made the same comment. A little too early to sort of precisely say, yes, here's where we are. Here's how our assumptions compare with the actual reality I think we'll all have, I think, more insight and more to say at the end of April when everybody reports the first quarter results. But at least at the moment, feel comfortable that the assumptions we've made seem pretty reasonable.

Should we think that this is potentially a headwind that recurs into 2027. I mean I don't know if you spent much time thinking through like beyond '26 at this point.

Yes. I mean that my gut, it is that if you can afford the HIX subsidies or the HIX payments without the subsidies in '26, you can probably in '27. But I mean that's a possibility. But no, I mean, not that we've given guidance for '27 and beyond, but I'm not sure we're necessarily assuming that this continues to compound.

You've had a number of new hospitals that you've opened in the last year or so in opening, particularly one in West Palm Beach. Do you want to maybe talk about how those are tracking versus internal expectations and what the incremental growth could be in 2026?

Yes. So I think as far as new hospitals go, the major assumption that we made is in the second quarter of 2025, we opened Senior Health Medical Center in Washington, D.C., our second hospital in that market, had a number of challenges in terms of delayed Medicare certification and some other challenges. Lost about $50 million in 2025, lost about $25 million in Q2, $25 million in Q3, the facility pretty much broke even in Q4. We assume the facility will be profitable in 2026. I have encouraged people to think about it as whatever profitability we generate from Cedar Hill in 2026 will be offset by the startup costs and losses at our Palm Beach Gardens Hospital. But broadly, very excited about the Palm Beach Gardens Hospital. That's a very attractive demographic market. The hospital is extremely well located right off I-95 and while I think with most new de novo hospitals other than in Las Vegas will likely be a bit of a drag in its first year will continue to accelerate pretty significantly after that and looking very much forward to the ultimate contribution from that facility.

Okay. We've just got like a few seconds here left. I don't know if there are any questions in the audience. Well, I think we can just wrap it up. 6 seconds to go. Thank you so much for coming.

Appreciate it.