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

Good day, and thank you for standing by. Welcome to the Q2 2026 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Darren Lehrich. Please go ahead.

Thank you. Good morning, and welcome to Universal Health Services Second Quarter 2026 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then we will open it up for Q&A. During today's conference call, we will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, we recommend a careful reading of the section on Risk Factors and Forward-Looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2025, and our Form 10-Q for the quarter ended March 31, 2026. In addition, we may reference during today's call, measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI and adjusted net income attributable to UHS, which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in yesterday's press release and our supplemental materials on our website. With that, let me now turn it over to Marc for some introductory remarks.

Thanks, Darren. Good morning, and thank you for joining today's call. I'm pleased to share some operational and strategic highlights from the second quarter before Steve discusses financial highlights. Overall, our second quarter of 2026 featured a rebound in Acute Care volumes, Behavioral Health volumes that were consistent with recent trends, continued expense management and exchange trends that progressed in line with our expectations. During the quarter, we also benefited from the approval of the Florida DPP program for 2025, which was not contemplated in our original outlook. From an operational perspective, I want to highlight the investments we are making to expand capacity in the communities that we serve. We continue to see favorable demand trends across our markets, supporting confidence in the long-term need for capacity in both inpatient and outpatient service lines in our Acute Care and Behavioral Health segments, allowing us to extend our footprint with access points that are convenient to our patients and help further align us with physician stakeholders. In Acute Care, we added 177 licensed beds in 3 hospitals during the second quarter. These new beds represent a 2.5% increase to our same-facility bed capacity and position us to respond to strong demand in these communities. In May, we officially opened the Alan B. Miller Medical Center in Palm Beach Gardens, Florida, and we are very pleased to have achieved joint commission accreditation for this de novo hospital in July, reflecting sound execution by our local team. We've experienced a strong reception from the Palm Beach Gardens community, and are excited to serve this fast-growing area of Florida with the newest and one of the most advanced medical campuses in the region. Within our Behavioral Health segment, we continue to make strong progress in our integration planning for the pending Talkspace acquisition, which we expect to close in mid-August of this year. Talkspace represents not only a unique opportunity for us to accelerate our presence in the outpatient market, but also creates the nation's first end-to-end continuum of behavioral health care services, from acute inpatient and residential services, inpatient, in-person, outpatient care and soon with Talkspace virtual services nationally. As Steve will detail shortly, we've increased our professional and general liability reserves and now assume higher anticipated operating losses at our de novo hospital in Washington, D.C. as well as San Diego -- I'm sorry, San Antonio, Texas behavioral hospital that we are in the process of recertifying in order to reestablish much-needed mental health services capacity in that region of Texas. Accountability and delivery of high-quality care are at the core of our purpose. We are deeply committed to excellence and to addressing any instances that fall short. Overall, the broad portfolio continues to perform well operationally and clinically, and we have a 46-year track record of strong quality and safety performance across both our Behavioral Health and Acute Care divisions. Before passing it over to Steve, I want to make a brief comment about our share repurchase activity during the second quarter, which accelerated to $320 million as compared to $127 million in the first quarter of 2026. The recent dislocation in our share price represents a compelling opportunity to deploy capital and retire UHS shares at heavily discounted levels. Given the strength of our balance sheet and the confidence we have in our ability to generate cash flow, we intend to remain highly active with our share repurchase program at these levels. In closing, I want to thank the UHS team for their focus on quality patient care and for their ability to adapt in such a dynamic 2026 operating environment. I want to emphasize that our strategy remains steadfast: to invest in high-growth markets, expand access to care, operate efficiently and create long-term value for patients, employees and shareholders. I remain very optimistic about our long-term outlook, given the quality and strength of our portfolio, the experience of our management team and the underlying demand characteristics of the markets that we serve. With that, I'll now turn the call over to Steve Filton for more details on the quarter.

Thanks, Marc. I will highlight a few financial and operational trends before opening the call up to questions. The company reported adjusted EPS of $5.98 for the second quarter of 2026, representing growth of 12% on a year-over-year basis. Second quarter adjusted EBITDA less NCI was $678 million, representing growth of 5% on a year-over-year basis. When excluding the $100 million out of Florida -- out-of-period, Florida DPP benefit not contemplated in our guidance, our Q2 adjusted EBITDA less NCI fell short of our internal expectations, primarily attributable to 3 items: approximating $63 million, including $28 million attributable to higher professional and general liability reserves; approximately $20 million attributable to the San Antonio behavioral facility; and approximately $15 million attributable to a continued slower ramp-up of our Cedar Hill Medical Center de novo facility in Washington, D.C. At the segment level, on a same-facility basis, adjusted admissions in our Acute Care hospitals increased 2.9% as compared to the second quarter of 2025. Volume performance improved sequentially from the first quarter of 2026 and was broad-based geographically. Same-facility Acute Care emergency department visits increased 4%, while same-facility surgeries decreased 0.8% as compared to the second quarter of 2025. Although surgical volumes continue to be somewhat muted, the trend in the second quarter improved slightly compared to the past several quarters. From a service line perspective, we experienced positive trends in certain higher acuity inpatient service lines, notably urology, neurology and cardiology as compared to last year's second quarter. Payer mix trends remain consistent with recent quarters with stronger growth in Medicare and Managed Medicare, modest growth in managed care volumes, excluding the exchanges, and slightly lower Medicaid volumes. Year-to-date, facility -- year-to-date same-store facility Acute Care adjusted admissions growth through the second quarter of 2026 was 1.4%, and we believe it's appropriate to fine-tune our volume guidance for the full year to a range of 1.5% to 2.5% or 50 basis points lower at the midpoint of our prior range to reflect the year-to-date trends. On a same-facility basis, net revenue in our Acute Care segment during the second quarter of 2026 increased 8.2% and increased 5.9%, excluding the impact of our health plan. Acute Care same-facility revenue per adjusted admission increased by 3.0% during the second quarter of 2026 on a reported basis, and increased 2.7% after excluding net out-of-period Medicaid supplemental benefits from both periods. Acute Care rate growth continues to track in line with our expectations overall. Operating expenses were well managed across labor, supply and other expense categories. Same-facility Acute Care salaries, wages and benefits expense for adjusted admission increased 2.7% and supply expense per adjusted admission decreased 2.5% over last year's second quarter. Contract labor was 2.5% of Acute Care segment revenue or 20 basis points lower year-over-year. Other operating expenses increased primarily due to our health plan, which experienced revenue growth of approximately 35%. For the second quarter of 2026, our Acute Care performance resulted in 8.2% same facility segment EBITDA growth. Excluding the out-of-period supplemental program benefit from both periods, second quarter 2026 same-facility Acute Care segment EBITDA increased 6.3% on a year-over-year basis. In our Acute Care segment, the net out-of-period benefit related to supplemental payments was approximately $7 million, comprised of approximately $23 million in the second quarter of '26 from the Florida program as compared to approximately $16 million of out-of-period amounts in the second quarter of '25 related to other state programs. With respect to health insurance exchange trends during the second quarter of 2026, we estimate an impact of approximately $20 million, which was in line with our expectations. Exchange volumes declined approximately 15% as compared to the second quarter of 2025. The reduction in the number of exchange volumes corresponds to the increase in self-pay volumes during the second quarter. Based on the trends during the first half of 2026, we expect the full year pretax impact to be within the upper half of our originally contemplated guidance range or approximately $85 million. While the first half decline in exchange volumes was below the 25% plus range in our original forecast, we believe our impact estimate is supported by the trends we have observed year-to-date in our business and other dynamics such as shifts in the metal tier that are playing out within the exchange market. As it relates to our Acute Care de novo hospitals, our Palm Beach Gardens facility opened in May and second quarter start-up losses at this facility were in line with our expectations. In Washington, D.C., Cedar Hill Regional Medical Center entered the same-facility hospital group in the second quarter and continue to ramp at a slower-than-expected pace. Second quarter performance at Cedar Hill represented an improvement of approximately $15 million year-over-year, although results there were similar to our first quarter. Turning to our Behavioral Health segment results. During the second quarter of 2026, same-facility net revenue increased 7.4%, supported by a 6.1% increase in same facility revenue per adjusted patient day and a 1.4% increase in same-facility adjusted patient days as compared to the second quarter of 2025. Year-to-date, same facility adjusted patient day growth through the second quarter of 2026 was 1.5%, and we believe it's appropriate to fine-tune our volume guidance for the full year to a range of 1.0% to 2.0% or 100 basis points lower than the prior range at the midpoint to reflect year-to-date trends and an outlook for second half volumes to be similar to Q2 performance. Same facility Behavioral Health segment EBITDA increased 9.0% in the second quarter of 2026. Excluding the net benefit from out-of-period supplemental payments, same-facility revenue per adjusted patient day increased 5.3% and same facility segment EBITDA increased 5.7% on a year-over-year basis. In our Behavioral Health segment, the net add of period benefit related to supplemental payments was approximately $18 million, comprised of approximately $77 million in the second quarter of 2026 from the Florida program as compared to approximately $59 million of out-of-period amount in the second quarter of 2025 related primarily to the Tennessee program. For the second quarter of 2026, Behavioral Health segment facilities, salaries, wages and benefits per adjusted patient day increased 4.8% on a year-over-year basis, showing improvement on a sequential basis as head count moderated further to 2% growth. In California, based on our success in hiring and training, we remain on track with the $35 million impact that we contemplated in our original 2026 outlook with respect to the state's nurse staffing ratio requirements that went into effect June 1. As it relates to our Behavioral Health hospital in Texas that is in the process of getting recertified, we stopped receiving reimbursement at the end of April and do not expect to receive reimbursement from government or managed care sources until we regain certification, which we anticipate in 2027. The facility will operate, in the meantime, with limited patient census and therefore, we will incur operating losses and will be excluded -- and the facility will be excluded from our same facility performance. During the second quarter of 2026, pretax losses at this facility totaled approximately $10 million, including staff severance costs. We expect operating losses to run between $5 million and $10 million per quarter for the balance of 2026. During calendar year '25, this facility's EBITDA was approximately $25 million. Moving on to cash flow and balance sheet highlights. Second quarter cash generated from operating activities was $44.3 million as compared to $549 million during the same period last year. During the second quarter of 2026, we spent $228 million on capital expenditures, reflecting the de novo hospital opening and bed capacity expansions Marc referred to earlier. During the second quarter of 2026, we acquired 1.89 million of our shares at a total cost of $320 million. As of June 30, 2026, we had $978 million of repurchase authorization available pursuant to our stock buyback program, and we expect to remain active with share repurchase throughout 2026. From a balance sheet perspective, we ended the quarter with cash of $139 million, total debt of $4.85 billion and net leverage of 1.8x. As of June 30, 2026, we had $1.27 billion of additional borrowing capacity available pursuant to our revolving credit facility. Turning to our outlook for 2026. We are updating our financial operating forecast to reflect year-to-date performance and recent developments. The components of our updated 2026 guidance compared to our previous forecast can be found in our second quarter earnings press release and our supplemental earnings material. Our updated guidance represents approximately 7% revenue growth, 3% EBITDA less NCI growth and 6% EBITDA -- EPS growth at the midpoint. Focusing my remarks specifically on adjusted EBITDA less NCI, our updated 2026 forecast is in a range of $2.61 billion to $2.72 billion, representing a decrease of approximately $50 million from our prior outlook at the $2.66 billion midpoint. At a high level, we include approximately $150 million of additional Medicaid supplemental net benefit for the full year that is offset by approximately $200 million of adverse items not originally contemplated in our outlook. The primary drivers of these factors are as follows: First, we now expect the net benefit from Medicaid supplemental funding to be approximately $1.5 billion for the year or an increase of approximately $150 million from our prior outlook. This $150 million is comprised primarily of the $100 million net benefit from Florida recognized in the second quarter, growth in other programs during the first half of 2026 and approximately $25 million related to the Texas Atlas program that we expect to record in the third quarter. It is worth noting that more than 1/5 of the $1.5 billion total is derived from state-based programs not subject to the reductions in the OBBA legislation. Second, we now include $50 million of impact associated with the Texas behavioral health facility that is in the process of being recertified. This includes the loss of approximately $30 million in earnings originally budgeted for this year and approximately $20 million of operating losses assumed for the full year while we work towards recertification. Approximately $20 million of this impact was in the second quarter and the remaining $30 million is expected to impact the second half of 2026. Third, we are adjusting the year-over-year tailwind related to Cedar Hill Regional Medical Center in Washington, D.C. from $50 million to $20 million. Our original guidance assumed Cedar Hill would be breakeven during the first half and have positive earnings in the second half of 2026, which would have yielded a $50 million de novo tailwind net of anticipated start-up losses at the Palm Beach Gardens de novo hospital. The $50 million difference in our guidance now assumes Cedar Hill will reach breakeven during the fourth quarter and therefore, approximately $20 million of start-up losses at our Florida hospital will not be contained by second half operating gains at Cedar Hill as originally contemplated in our prior -- approximately $20 million of this impact was in the first half of 2026 and the remaining $30 million is expected to impact the second half of '26. Fourth, we are increasing our professional and general liability expense estimate for the full year by approximately $50 million, of which $28 million was recognized during the second quarter of 2026, and the remainder represents increases to our quarterly expense going forward. It is important to point out that the increase to our reserve and additional expense for the balance of 2026 is split somewhat evenly between our Acute Care and Behavioral Health segments and reflects industry-wide trends generally associated with higher claim severity across all health care settings. The PLGL adjustments are in connection with our semiannual third-party actuarial review process conducted during the second quarter. Finally, we are fine-tuning other aspects of the 2026 outlook, including the same facility volume assumptions for both segments, which resulted in EBITDA less NCI impact of approximately $50 million. As mentioned earlier, we now expect Acute Care adjusted admissions to be in a range of 1.5% to 2.5% and Behavioral Health adjusted patient days to be in a range of 1% to 2% as compared to our prior range of 2% to 3% for both segments. We believe centering our same-facility volume outlook at approximately 2% for Acute Care and 1.5% for Behavioral Health still reflects a healthy demand environment, while being respectful of our more recent performance. Operator, that concludes our prepared remarks, and we're pleased to answer questions at this time.

[Operator Instructions] Our first question today will be coming from the line of Ann Hynes of Mizuho.

Sorry about that. I was on mute. Just -- my question is focused on your Acute Care volume change. Is that non-ACA-related, meaning you're seeing some pressure just in your base business? And if that's the case, to you, just provide a little bit more detail on what you think is happening.

Yes. So I think as we said, Ann, in our remarks, we're just trying to be practically reflective of our first half performance. Acute Care volumes sort of trended in that 2% adjusted admission range for the first half. I think we're seeing continued shift of certain elective and outpatient procedures into alternate site settings, ASCs, freestanding imaging, et cetera. And I think that's the primary contribution. But we're pleased overall with our Acute Care volume growth in Q2, pleased with the surgical volumes in Q2, which both overall volumes and surgical volumes rebounded in Q2. So we feel good about that, but felt like we were being, I think as our comments indicated, sort of respectful of the first half performance by slightly lowering the midpoint of our admission growth for the back half of the year.

Next question. And our next question is coming from the line of Andrew Mok of Barclays.

When we contemplate all the puts and takes to the guidance revision for this year, it looks like underlying EBITDA growth accelerates several hundred basis points in the back half. Can you walk us through the drivers of that back half acceleration?

Sure, Andrew. I think as we contemplated the revised guidance, we felt like we identified a number of positive developments that should occur during the second quarter. One, which we referenced in our prepared remarks, was the new capacity. We added 177 beds across 3 markets in our acute facilities during the second quarter. Those projects will continue to ramp up as the year goes on. The initial openings of all 3 of those projects, I think, indicated strong demand. And so we're very positive about that. And those beds, again, I think as Marc mentioned in his comments, represent about a 2.5% increase in our bed capacity. So that's one item. I think -- both Marc and I mentioned that Cedar Hill -- that benefit will continue to grow as the year goes on. If you recall, we lost $25 million in the third quarter of last year at Cedar Hill. We're expecting Cedar Hill to be at breakeven this year. So that's another positive swing there. In Behavioral Health, I think I said in my comments, that our head count growth was 3% in the first quarter, moderated to 2% in the second quarter. We expect the head count and labor cost growth to continue to moderate during the second half. And finally, our comparison in the second half in Nevada, particularly in the fourth quarter, had seasonally softer trends during 2025. And we continue to see more normal growth trends in Nevada during 2026. So that's another opportunity for accelerated growth in the back half of the year.

And our next question will be coming from the line of Matthew Gillmor of KeyBanc.

For the Florida DPP program, I heard that you booked the [ '25 ] portion in the second quarter. If this program is renewed for fiscal '26, with the sizing of the '26 program be about the same? And I think bigger picture, I just wanted to better understand if there are more opportunities with DPP to be recognized during 2026?

So I think the answer, Matthew, is we're not certain what the impact of the 2026 approved program would be, which is partly why we have not either recorded any benefit in '26 or included it in our guidance. Obviously, if the program is approved, we will record it and we'll be benefited by that. As far as other programs, there was a recent approval of a California program that we've been recording. I don't think we think that has a material impact on us. There are a couple of other states that are contemplating either new programs or expanded programs. I don't know that any of them at this point would be material and certainly none of them are included in our guidance.

Got it. And then as a quick follow-up, Steve, can you give us a sense for how we should think about the ramp of the facility in San Antonio once it gets the CMS certification back in 2027?

Yes. That's hard to do at this point, Matthew. Obviously, we don't know when the facility would or could be recertified. We don't know if it will be recertified with certain sort of conditions as to its ramp, et cetera. So as we go through the process of getting surveyed, of dealing with the regulatory environment as we learn more about it, we'll be relaying that to you all, both in terms of timing and ramp expectations, et cetera. The one thing that I will say is just reiterate what Marc said and that is, we've had a lot of support from the broad San Antonio community. The [ beds ] at Laurel Ridge Hospital represent about half of the behavioral beds in the market. And so they are sorely missed in the community by the population, by referral sources, et cetera. So our hope would be -- and our expectation, that the demand will be there when and if we get recertified, and we would be prepared to ramp up relatively quickly and efficiently, but we'll continue to keep you posted on the timing of that.

Our next question will be coming from the line of Jason Cassorla of Guggenheim Partners.

Maybe -- just hoping you can discuss behavioral volumes, just how that 1.4% compared to your internal expectations, I guess, particularly after the head count increases you've had over the past few quarters. Anything changing on the demand front? Or is this very much like more of the same as you've flagged before around outpatient preference or outpatient shifts? Just any thoughts on the Behavioral Health volume demand environment would be helpful, too.

Yes. Jason, I mean, in the case of Behavioral, I think the 1% to 2% change to our estimated volume range is very consistent with what we have been running for now a number of quarters. I think we had originally anticipated a slightly higher growth rate, largely based on increases in outpatient demand. And I think to date, outpatient has been growing at about the same rate as inpatient. To your point, we've added some head count in order to allow us to accommodate more outpatient capacity. I think it's just growing a little bit slower than we originally imagined. As we, I think, talked about in the last couple of calls, we do expect the acquisition of Talkspace to be a significant accelerant to our outpatient growth, really providing our patients this virtual option for outpatient treatment and outpatient care that we really weren't able to offer before in any sort of sizable way. So obviously, the Talkspace acquisition won't be completed till August. It will take a little bit of time to complete that integration fully. But I feel like at that point in time, we may revisit our outlook for -- particularly for outpatient growth. But yes, I think the change that we made was largely really just to recognize that that's kind of the environment that we've been operating in for some time.

Got it. Very helpful. And then if I could follow up, I just wanted to ask about the malpractice reserve headwinds. It looks like increases to those reserves have had like a 2% to 3% annual EBITDA headwind over the past few years. I guess just stepping back, do you think these types of hefty increases will be like simply structural moving forward? Or are there any developments that could give some sort of visibility into a deceleration in those costs? Or any thoughts around that would be helpful.

Difficult for us to predict, Jason. What I would say is we include in our guidance and in our budget, the amounts from our third-party actuaries. We don't independently come up with those numbers. And then, of course, we have, on a twice a year basis, a third-party actuarial review of where our expense and reserves stand. And to your point, they've been increasing. As we said in our prepared remarks, I think the main reason they've been increasing has been an overall increase in the severity of claims across health care providers of all sorts, including Acute and Behavioral. I don't think this is anything UHS-specific. In terms of the things that we do to control that, obviously, internally, we have significant risk management programs to reduce the number of negative outcomes, et cetera, and are very focused on that. But in terms of the broader sort of environment where cases are just worth more, both in settlements and in verdicts, difficult for us to control that. There is a significant amount of lobbying going on by the industry for malpractice and [ tort ] reform at both the state and federal levels, but very difficult to predict how that will turn out.

And our next question is coming from the line of Pito Chickering of Deutsche Bank.

A question on surgical volumes. Can you talk about the emergent versus elective surgeries that you saw in the 2Q and split out between inpatient and outpatient? And what do you think the demand set up is for that in the back half of the year?

So Peter, we don't necessarily track elective versus nonelective surgeries. What we said in our prepared remarks was overall surgical volume was down 0.8% in the quarter. That's a bit of an improvement from the first quarter sequentially. On a blended basis, it reflects an increase in inpatient surgeries and a slight decline in outpatient surgeries. What I would say is that surgical performance or our surgical volumes seem to be a little bit better than some of our peers. Always hard to know exactly why that is. I will say that internally, we've been very focused in the last several quarters, maybe the last year on -- in an environment where we are otherwise, I think, trying to be very tight on expense control and capital spending. We've been very focused on investing in those equipment and other investments that will be revenue producing, whether that's robotics, whether that's more advanced imaging equipment, et cetera. And it feels like that is having some impact -- some positive impact. So we're pleased with that.

Then a follow-up there. I mean, I guess, are there any areas within specific -- or weaknesses because you don't track emergent versus elective. I guess, just overall, are there any sort of categories that were sort of stronger or weaker within the quarter? And then you talked about this in the script, but how should we think about the continued focus from CMS to push outpatient procedures into the ASC and kind of how do you guys combat that? And how do you view, I guess, sort of medium-term outpace and surgical growth?

Yes. So we didn't necessarily comment specifically on surgeries, but having talked about service line growth in areas like urology and neurology and cardiology, I would suggest that those are areas where procedural volumes were strong as well. Obviously, the shift to outpatient is nothing new, as you know, Pito, I think we combat that in a number of ways. We continue to invest in ambulatory surgery centers where they're appropriate and where they make economic sense. We certainly have at least one ASC in every single one of our markets, and in many cases, multiple ASCs. We continue to expand. And like I said, invest in our own outpatient surgical capacity, whether that's physical capacity, building more OR suites or whether that's investing in equipment, responsive to the needs of our procedure list. And we continue to do that. And I think, obviously, based on the second quarter performance, I would say, do it effectively. But the shift to outpatient certainly is going to continue, and we'll continue to pursue the initiatives that we've been pursuing to counter that.

And our next question is coming from the line of Ryan Langston of TD Cowen.

Sounds like you had fairly strong same-store ED volumes, Steve, I think I heard you say around 4%, but a little less growth in inpatient admissions and surgical procedures. Anything in particular driving that sort of slightly lower ED conversion to inpatient rate?

No. I think, Ryan, that's -- again, that's not a new phenomenon. I think the issue is that for a good portion of the population who don't have their own primary care doctors, they use hospital ERs as their primary care doctors. And as a consequence, those visits are not necessarily sort of traditionally emergent. And so we can -- while we continue to see a lot of acutely ill patients in our ERs, we also continue to see patients who are coming there for what traditionally have been more like a PCP visit.