Universal Health Services, Inc. ($UHS)

[Audio Gap] percent and same-store revenue growth in our behavior was up about 7%. And we've commented that there's a bit of a stronger contribution from pricing, and we had some seasonal factors that impacted our volume in the quarter. I think if you think about those seasonal factors, primarily weaker flu on the acute care side and then a little bit of weather disruption on the behavioral side. And excluding some of those factors, I think we were right in the 2% range from a volume perspective in both segments. Pricing growth in the quarter included core growth. We put that at around 3% and the benefit of funding from some of the Medicaid supplemental programs that were approved last year. We had a a $133 million year-over-year increase in those payments. So given all the sort of focus on the increase in those Medicaid supplemental payments, we've been getting this question a lot. What was the core growth. And I think just to sort of give you the headline, we would put it at around down $20 million or so, so down around 3% -- and that math exercise essentially is we had a $15 million headwind related to the exchanges that we -- as part of our guidance that we reaffirmed. We had about a $30 million impact split between behavioral and acute on the seasonal factors related to flu and respiratory. We had about a $5 million impact for the readiness for the California staffing regulation that begins in June. And then on a non-same-store basis, we have a number of de novo hospitals, and there was about a $15 million noncore type of headwind in the first quarter on that. So put all those things together, it kind of adds up to about a $20 million or down roughly 3% number. And obviously, we expect that to improve over the balance of the year.

Then how that goes from Q1 for the rest of the year? .

Yes. So I think there's really 4 components to that. So clearly, when your volumes have some pressure as we saw in the first quarter. You lose some operating leverage. And we do expect volumes to improve as we look at the rest of the year. reaffirm the 2% to 3% zone that we think we can achieve. Part of that is we have a bit of new capacity coming online and acute. We've got about of new capacity growth coming online. Some of that you'll see in the second quarter, but certainly in the second half of the year. So as that capacity gets absorbed, you'll see some benefit there. So operating leverage between both segments. The second piece is we've talked a lot about the investments that we've made in behavioral in terms of headcount. And really, those investments were made to better accommodate the demand that we're seeing and be able to grow our volumes a bit better. And so in behavior, we expect there to be somewhat of a moderation in head count growth in '26. Headcount grew about 4% in '25 against 1% volume growth. We expect head count growth to be more closely in line with volume growth this year, so closer to that 2% level. It stepped down in the first quarter, it was about 2.5% or so head count growth in Q1. And as we kind of move down into the 2% range, I think that will contribute some positivity to the P&L. And then two more things, Kevin, I would say, we don't talk a lot about our health plan. We've got a pretty high-performing, high-quality health plan in State of Nevada, particularly in Northern Nevada. We achieved 4 stars. So we went from 3.5 to 4 stars. That should be about a $25 million tailwind for the year, and we have been losing a little bit of money last year. We made some money in -- that's a positive. And then, look, we have talked a lot about our Cedar Hill de novo hospital. We've got $50 million built into our guidance of improvements. We lost $50 million and start-up losses last year. We expect to achieve breakeven for the full year, some gradual improvement as we move through the year should also help the underlying. That does enter our same-store group the second quarter.

All right. Great. And then that 2% to 3% volume number that you guys outlined for both the acute and the behavioral it sounds like you're saying you think Q1 was essentially 2% if you kind of adjust for blue in both of those numbers? Like how do we think about the fundamental demand of both of those businesses right now like to get to that 2% to 3%? .

Yes. So I think, first, it starts with the markets, right? We have for a long time, really gravitated, especially in our acute care division, when you look at our footprint to markets with stronger than average population growth compared to the U.S. overall strong demographics. And so those are key elements of the demand drivers in our business. So if you're in good markets and can grow at a higher rate because of the underlying trends in the market. We've also invested pretty heavily in our markets. So I talked about some capacity that we're adding in both divisions, both acute and behavioral, but in particular on Q, we've got a number of big bed tower projects that will be coming online here in the second quarter, and then we're opening our 30th hospital this month in Florida in a really attractive market, that will be a de novo, but worth mentioning just that hospital because it's in the Palm Beach Gardens Jupiter area, and that will be embedded growth as we think about future years, just given the strength of that market. And then I think the strategies that we employ. So alignment with our physicians, investments that we make in outpatient, all the things that really contribute to volume I think as it relates to the exchanges, the reduction in exchange volume that we've talked about is really more of a payer mix shift issue for us is the way we think about it than it is a volume drag. We think a lot of that exchange -- those exchange members that are losing coverage and not paying their premiums, ultimately show up at the hospital and Included in our $75 million exchange impact or headwind for this year is really the notion that the vast majority of those will convert to some form of uninsured as opposed to volumes, that's a lesser part of it. Kevin, on the behavioral side, I think the last few quarters, we've exhibited much better momentum around volumes the last 4 quarters. You've seen sequentially improving volume. We talked about in the first quarter. We reported 1.6% adjusted patient day growth Weather was a little bit more widespread and the behavioral impact, that was about a 50 basis point impact overall. And so that would have come on straight into that 2% range. I think for us, the 2 big drivers of volume and behavioral that we think will get us more deeply into the 2% to 3% range are going to be, again, investing in headcount, which we've done most of that in '25 and then really focusing more aggressively on our outpatient strategy, which we're dealing with some capital with the tax base acquisition. You can certainly talk -- cover that one. but also some things that we're doing from an internal perspective.

Okay. And can you talk a little bit about the behavioral investment? Because it sounds like you added 4% to labor force, but it sounds that the volumes haven't been matching to 4%. Like did you get what you wanted to out of that lift? And why is it only 2% necessary going forward if you did 4% last year? .

Yes. So I think if you look at the progression of our volume, we went from kind of negative in the first quarter to exiting the year around 1.5%. So and attribute some of that incremental progress to the investments that we made and in headcount. So roughly 4% growth in headcount, there's obviously onboarding and training and things like that, that go into bringing those folks on. And we exited the year as I said, around 3.5%, 4% head count growth, and that stepped down a little bit closer to 2.5% in the quarter. So when we think about our ability to service the volume that we have, we have the capacity in many of our facilities. From a bed perspective, we're operating in the sort of low 70% with our occupancy rates. And now it's really just about matching volume with staff and do you want to get the operating leverage from that.

Okay. And then you mentioned a formal care being more of a payer mix issue, but it seems like Q1 was a little bit lower than kind of what the annualized number would have implied it to be, which is kind of what a lot of the companies are saying right now. So I mean I think you indicated it's going to ramp as the year goes on. Does it -- so I guess, a, what are you seeing there? But then, b, if it's ramping at the year goes on, does that mean 27% to a bigger annualized cut than 26%? Or is it something about the seasonality of that business that should always be lower in Q1. .

Yes. No, I appreciate that question. So Yes. So exchange, health insurance exchange volumes, the observed trend in the first quarter was down 5%. And what we really did in the quarter was we had a $15 million impact in the first quarter, and more than half of that was an additional reserve that we took, which really kind of takes into account this idea that -- our fully-loaded exchange volumes will ultimately be down closer to 11% to 12% after we see kind of who pays premiums and who doesn't and the effectuation rate of those individuals that we serve that may not even have coverage at the end of the day. So that's really what that impact was. And we did make the comment that the impact would steepen a little bit as we move through the year. And so there's a few things that go into that. First, we did have -- in 2025, we had a little bit of a buildup of our exchange volumes. So ended in the second half higher than what we were in the first half. So the expectation is that the year-over-year reduction in exchange volumes as a result will be a little bit steeper. But I think we also built in the idea that there's some shift in metal tier. So some of the behavior may change in terms of utilization, certainly the out-of-pocket and some of the uncollectibles, we're in that $75 million number that we expect to build throughout the year. So I think it's a little early to say for sure exactly how the rest of the year plays out, we'll probably know more in the second quarter. I think it's fair to say there's probably a little bit of a headwind as we think about just '27 given the dynamic that we had a higher exchange mix last year and then the decline is a little bit bigger. I don't think it will be that much that material, though, as we think about '27.

Okay. And when we think about the Florida SDPs, you guys put out an 8-K, I guess, last week, right? -- with a 25 approval, but we don't have the 26 improvement just go through kind of where we are and all of that right now. .

Yes. So certainly, a lot of questions in the Florida program now for several months. lot of providers obviously have exposure to that market. And we were, I think, pleased to see the approval. It shows that -- even in this corona administration, there is recognition that these Medicaid supplemental payments are part of the broader funding mechanism for providers and hospitals -- in many states, Medicaid base rates are underfunded. And so that's why these programs were designed and we think they aren't going away. They'll continue to be there. There's obviously some things that legislation last year that will change that a little bit in the future. As it relates to Florida, so we did note in our 10-Q filing last week that -- the program was approved. And it relates to the fiscal '25 program, so October 1 of '24 to September 30 of '25, the incremental benefit that we expect relative to how we -- the previous program would be $100 million of incremental supplemental benefit, and we'll record that in our second quarter coming up here. The '26 program has not been approved. We fully expect it to be approved. It's just it's lagging the '25 approval. It remains to be seen if it will be approved in the same way, the same structure. And so we don't have an estimate on that yet at this point, the '25 is the known amount.

Is there a nuance that would make you think that it would be potentially noticeably different than the 25?

No. I think it's really just a reticence to provide an estimate on that program until it's approved and the structure is fully known. But I think our our general expectation is that it will be approved at some point this year and from a sizing perspective, likely to be similar in size to the 25 program that was just approved, but we'll have to wait for those details.

Okay. And then a number of companies have talked about major cost-cutting initiatives because of whether it's SDP cuts in the future or maybe more in the near term kind of Medicaid pressure on enrollment, exchange pressure on profitability. What are you guys doing, if anything, to kind of like adjust and react to those funding pressures? .

Yes. So I think the -- so first of all, I would say we're always working on those things internally, and I think our teams have done a really good job on the cost side. In acute care, we've done a lot to improve productivity. And I think there's still a lot of opportunity there, not just this year, but as we think about into the future. So what does that mean? Driving improvements in length of stay and throughput in our hospitals, both on the inpatient and through the emergency departments. So real opportunity there. In behavioral, we've talked to you a little bit about this, but we made a big investment over the last couple of years in improving our RCM on the acute care side and have yielded some real results from that initiative really over the last 4 to 6 quarters on the acute side. We're going through that same process on the behavioral side. I think that will be a bit more of a 27 tailwind for us as we think about revenue cycle improvements and behavioral, but those are real opportunities for us thinking about next year. And then I think the other piece of this, and it's not necessarily cost related, but I think relevant to UHS as a company, we've opened a lot of hospitals and recent years, you were at 1 of our newer ones here in the market. We opened that hospital with 150 beds. We're staffing it to 120. But I think you heard from local folks that we've got plans in place to continue to grow as that market continues to grow in the southeast part of Las Vegas and West Henderson, and we've got de novo hospitals, 1 that we'll be opening this month. That will be embedded growth as we think about '27 and '28. We've got facility in Washington, D.C., that's had some gradual improvement. More to go there, but that's embedded growth as we think about the opportunity to, to really get some earnings growth out of some of those newer facilities. We have 2 de novo hospitals on the behavioral side that 1 just opened and 1 they'll be opening in the third quarter. So again, lots of opportunity as we think about new facility and expansion.

Okay. And then can you talk a little bit about AI. It's a hot topic nowadays. Everyone seems to be talking about what the opportunity is? Where do you guys see the opportunity for AI? And is there anything that people are talking about that you feel like you're getting ahead of their skis on at all as far as the opportunity? .

Yes. So I mean, I think -- so let's start maybe with the fundamental. Some industries are going to be disrupted in pretty significant ways and some industries are going to benefit a great deal from AI or other advanced technologies. And I think our industry is certainly in the latter. And so we're early in that journey. I think what I would say a few things. First, there's a big focus internally on our AI governance process and making sure that we're making the decisions in a controlled way that we can scale them across our facilities and get the benefit, and know what the KPIs are that we're measuring against. And so those decisions are made in, I think, a very controlled way. We've got a lot of projects that are in various stages of evaluation. It's a a couple of dozen are all in flight. Probably half of those are scaled or mostly deployed. And a lot of it -- a lot of our start was on the revenue cycle side. We've talked a lot about that in acute care, as we went through our process improvement, it was both process and technology improvement. And so from standpoint of how we manage denials and how we do claims appeals. There's a lot of automation that we brought in into that process with technology and AI being a big part of that and we'll continue on that journey with behavioral. As I said, we were an early investor in epocratic AI, which is 1 of the leading AI companies in health care and happy to partner with them in a number of projects. We have 1 solution that's fully deployed. We've talked a little bit about how all of our patients that are being discharged from the hospitals typically get a call from the nurse while we've been able to automate many of those calls with the Agentic AI through a post-discharge follow-up. So being able to verify with the patient. They've got their prescriptions, they're following up on the DME or some of their post-acute care, et cetera. And there's few other projects with hippocratic AI that we think will impact some of the other areas of the hospital. And then with respect to your question about what people might be missing. I think this is going to be a more gradual process. I think we're -- we're kind of -- we think this is a multiyear process that should have some benefit to margin, but it's not going to show up overnight.

And then actually, you mentioned on the behavioral side, doing some things on claims denial side of things, similar to what you've done on the acute care side. Is there the same opportunity from like a revenue capture perspective there? Or did you start with the cube because that was going to be a bigger opportunity or is there a similar update both.

Yes. So I mean, I think we started with acute. I think the opportunity there really was built around the fact that we have fully deployed our across our acute care division, we're still in the implementation process and behavior on that. And we expect to see some of the similar types of process improvements on behavioral and some of the technology that we've deployed, particularly around claims denials management, those types of things, we think technology will play a big role in behavioral.

Okay. And then on behavioral, you've talked a lot about the shift to how patient you guys seem to be investing a lot of money into that side of the equation. Can you talk a little bit about why that's so interesting now and what the opportunity is for you? .

Yes. So I think behavioral, just kind of at a high level, think about it as being roughly a little bit less than 10% of our total revenue and our behavioral business. And clearly, the outpatient side of behavioral has grown a little bit more rapidly than the inpatient side. And so our focus, our investment, our strategies have been really designed around the opportunity that we see over the long term to participate in a bigger way on the outpatient side. People are accessing mental health care services, a stigma attached to Mental Health has sort of come down as a society and many people are comfortable kind of entering the mental health care system and kind of lower levels of care. And now we've got a full continuum of services to offer from inpatient to some of the step down levels of care that are adjacent or satellite to our hospital campuses. We're opening outpatient -- freestanding outpatient clinics. We're making some investments there. And then we obviously -- we announced the tax-based acquisition. We're really excited about that. That will be a virtual platform that really kind of fully closes out the full continuum of services and outpatient.

Is there a way to think about where outpatient can go if it's a little less than 10% of the behavioral like, I guess, in acute outpatients closer to half. Like is there like a way to think about that? .

Yes. Well, I think the idea is that -- we do think that getting more deeply into the 2% to 3% range from a volume perspective, outpatient is going to be an even more important part of that equation. I don't know that we have a target around where that can go. But with tax base, just the base business, that would add 300 or so basis points to the to the outpatient mix. And then we have a number of programs that will be developing alongside tax space that are really more revenue synergies to get out some of the the step down levels of care where people are coming out of our inpatient facilities and need the continuum of services. And some of them really just don't want to go back to the inpatient campus or satellite campus location. They want to have these services on a virtual basis, and now we'll be able to offer those higher levels of care on a virtual basis with the Fox based platform. .

Yes. And on the call, you talked a lot about how there were synergies between the 2 businesses. Do you view the synergies more as driving volume into tox based kind of leveraging it as a postop -- or do you believe the tox space can drive volume into the inpatient side. For 1 way than the other? .

It's by rational, but I would say the opportunity that we're going to really focus on heavily in kind of the early days of the integration will be in the step-down levels of care, where -- we know that people need those levels of care in patient LP intensive outpatient services or the example we've talked a lot about and the opportunity to develop those on a virtual basis is something that we're excited to do with Tox space. There's other ways that I think tax-base plays into our environment. On the residential side, where we have a lot of youth and adolescent having text-based therapy and some of the asynchronous types of therapy that tox space offers is going to be really appealing to that population, and we'll be able to create a more sticky sort of post discharge relationship with the patient. So it's really becoming more about the lifetime value of the patient as we follow them in their journey.

Great. And then since you are in Las Vegas, a little about Las Vegas market. I guess it's unusual to be hearing about Las Vegas being kind of a drag to the corporate. Like in Q4, it was down in Q1, it was better, but still a little bit below kind of the average. So like where -- what's been going on in Vegas and how do you think about that rebounding over the rest of the year? .

Yes. So we're pleased to see that the first quarter volumes improved a little bit after being a little softer in the fourth quarter. So we were up about 1.5% or so in Vegas, in Nevada broadly and feel good about kind of the overall market. We've been here for a long, long time. We've got a big footprint, not just here, but also in the northern part of the state with renew. And I think as we heard yesterday in the hospital visit, clearly, tourism volumes were down kind of high single digits last year, that was maybe a little bit of a drag overall. But I think the good thing about what we're seeing in the market is unemployment has held steady. There are other there's better balance to the Vegas economy now. We've got a lot of sports teams and a lot of the industry, particularly moving in the Henderson area, where we have 2 hospitals. And so feel good about our prospects here, our footprint our market share or outpatient strategy. And then the northern part of the state, we've got this health plan that should exhibit some real improvement year-over-year as well. .

And maybe last question we run out of time here, but can you talk a little bit about your capital spending? -- leverage. It's pretty low relative to where the competitors are operating. Is there -- are there deals to be had? Should we be expecting free cash flow to be done on hospital deals on adjacent deals like talk space? Or should we think about repo as capital deployment? .

Yes. So we've had $1.3 billion under our share buyback. And so I would start there because I think we made the comment in the first quarter earnings call that we'd be a little more aggressive in the second quarter on share buyback, just given the compelling value that we see in our own stock. We've got $800 million or so earmarked for talk space, which we expect to close in the third quarter, and that's on track. And then we'll continue to invest in our markets, be opportunistic with share repurchase -- and from an M&A perspective, in both segments, I think you'll see us continue to be opportunistic, particularly in the outpatient side in both segments.

All right. Great. I think that's all we have time for. Thank you very much. .

Good to see you.