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

So again, probably worth quickly reminding people what our original assumptions were for the impact of the decline in exchange enrollment. We assume that there would be a 25% to 30% decline in exchange enrollment as a result of the exchange subsidies lapsing. We assume that 10% to 20% of the people who lost coverage would replace that coverage with something we generally felt it would likely be commercial coverage to their employers. And we also assume that there would be a shift in metal tiers, particularly from Silver to Bronze and tried to take all those items into account and projected a $75 million unfavorable impact. I think through the first 6 months of the year, the actual impacts have played out the way we anticipated. We did, as I think you know, increased our full year projection of the impact from $75 million to $85 million as part of our guidance revision. And I think that revision was really the one assumption that I think we have tweaked is it turns out that rather than seeing some of the folks who lost their exchange coverage converting to other commercial coverage. It really felt like there was almost a one-for-one exchange between those who lost their exchange coverage and increased uninsured or uncompensated volume. And so a slight increase and uptick in our impact projection I think, was a result of sort of tweaking that aspect of the assumptions. So what we have is a $35 million impact in the first half of the year. We're expecting a $50 million impact in the back half of the year. And I think that's a function of just the progression of people losing their coverage. I think some people might have paid premiums for several months and then stop, not everybody stopped paying premiums in the first month. Honestly, to some degree, we didn't necessarily know when people stopped paying their premium. So it took us a bit of time to factor that in. So roughly, I think we think there'll be about a $50 million unfavorable impact in the back half of the year and that, I think, essentially becomes sort of the run rate then for 2027.

Okay. And then you mentioned this is part of the planning process. But for the exchange volumes that remain, obviously, there's been a big shift in metal tiers. In some markets, it's more pronounced than others. I guess, could you explain a little bit like what you planned for inside of the headwind related to that? And I guess when it comes to having patients with much higher co-pays and deductibles as they use services. Like, how do we think about the collection time line on those dollars and when you might have good visibility to them or just maybe characterize your level of visibility to those collection trends now?

Yes. So as I said, I mean, I think we tried to take that into account. I think we assume that there would be something around like a 25% shift from -- particularly from the silver to the bronze metal tiers. And that seems to generally be tracking our experience. And generally, what we find is that the more the more of the ultimate bill that is the responsibility of the patient, the higher the level of uncollectibility is, again, that's not anything new. We have factored that in, et cetera. Like I said, the biggest change I think, in our viewpoint was this idea that rather than some people losing their exchange coverage and commercial, it's really almost been a one-for-one exchange between exchange coverage and uncompensated care. And people that are pure uncompensated care have a very low collection rate generally.

Okay. And maybe we'll switch a little bit more to the behavioral questions at this point. So you mentioned a little bit off the top about the Talkspace acquisition and some of the strategic rationale for it. I guess how do we think about the first couple of weeks of integration, how that's going, like with the key integration milestones are going to be? And I guess, how do you think about the KPIs and disclosure we might get on this business over the next few years?

So [indiscernible] for the 4.5 months of 2026, it's likely to be an immaterial impact. But over the longer term, I expressed great enthusiasm about the Talkspace acquisition. I think that the most significant impact in the short term, I'll call maybe the short and intermediate term, is that on our -- what we described as step-down pages. The page are in patients or patients who are discharged from our inpatient facilities, but require follow-up care. Very often, our ability to keep that, if you will, follow-up care sort of within I'll call it the UHS family has been limited historically. I think for a couple of large reasons. One is geographic. So when we talk about follow-up care, we talk about programs that are described as partial hospitalization or intensive outpatient. And what distinguishes these programs from what I'll call sort of traditional outpatient where you're seeing a therapist once a week twice a week for an hour or so. These are patients who are seeing -- coming and getting therapy, both individual and group therapy 3 times a week, 4 times a week, 5 times a week, sometimes for 4 hours a day, 5 hours a day, 6 hours a day. And historically, we lost patients who didn't live close to our facilities. Maybe they were willing to drive 2 hours to become an inpatient or to be admitted as an inpatient, but now that we'll be asking them to come back 3, 4, 5 days a week, they really didn't want to make that same drive. Also, we didn't always have -- we've been a very inpatient-centric base business, having always had the same number of therapists on the outpatient side. As I said, one of the great attractions of Talkspace is a panel of 6,000 therapists who can provide and have capacity to provide that intensive outpatient partial hospitalization care that we weren't always able to provide. And just really having that virtual component and virtual alternative and virtual option is, I think, going to be a huge benefit for us. But when we think beyond that and think about other opportunities, I think they're just, obviously, overstating, if I would say, limitless, but there really are just a significant number of other opportunities. One of which, and I don't think I could cut all of them in this setting, but one of which is some integration with our Acute Care business. So we discharge patients from our Acute Care hospitals, many of whom may require some level of follow-up psychiatric care. So if you think about there's been a lot in the news in the last week or so about women with postpartum depression, as an example. So a woman who is showing evidence of postpartum depression after delivery might benefit -- extremely benefit from sort of Talkspace's follow-up, somebody. Who's just received the cancer diagnosis is often devastated, et cetera, working through that from a mental health perspective, again, that sort of opportunity. We have a long-standing relationship with the military. What we call our Patriot Support program, again, largely designed to provide inpatient support for active military, et cetera. But if you think about, again, some of the news coming out of the USS Lincoln, et cetera, again, lots of opportunities, I think, for that virtual alternative to really be helpful to active-duty soldiers who are suffering from PTSD or addiction issues or whatever. So again, very, very upbeat about the opportunities for Talkspace in 2027 and beyond.

Okay. When we think about the demand environment for kind of the base Behavioral business, how do you -- how would you characterize that where we are kind of coming out of the first half of 2026? Obviously, you mentioned earlier you trimmed the volume outlook there a little bit. It seemed like labor and on the investments you've made that like labor is a bit lot of the gating factor than maybe it's been in the past. I guess how do you think about what would be needed to really see an improvement on the volume side?

Yes. So if you go back and you look at it, our adjusted patient days and behavioral grew by 0.9% in 2025. In the first half of this year, grew by 1.5%. So they are accelerating. I think we have -- historically, I think we're at least over the last several years, kind of had this 2% to 3% growth target. I think in retrospect, that's proved to be a little bit aspirational. So we've scaled it back to more like 1% to 2%, we're sort of smack in the middle of that in the first half of this year. And that's why we scaled our projection back to that 1% to 2% range. Again, what I would say, and it's not exclusively a result of the Talkspace acquisition, but I would suggest that where the accelerated growth in Behavioral demand will occur over the next several years is on the outpatient side, a better and more efficient capture of those step-down patients on our part. We're dedicated focus on capturing those patients. The Talkspace alternative certainly helps. We've also talked quite a bit in the last year or 2 about what we described as our 1,000 branches initiative. These are freestanding outpatient facilities that we're building and standing up around the country. One of the things that we've found is that as patients enter the healthcare system, if they're entering the system in an outpatient program, very often, they're reluctant to do so on the campus of a behavioral -- an inpatient behavioral facility. And so having these freestanding outpatient centers as an alternative, again, I think we think is another efficient alternative. And again, it really sort of -- we can really now meet patients where they want to be treated where their employers and payers want them to be treated in some cases, that can be in a virtual setting. In some cases, it can be in a freestanding setting. And in some cases, if patients are comfortable, it can be on the campus of our hospitals, our inpatient facilities. But the point being that we're really building out our outpatient capacity so that we really can kind of offer patients, again, the most efficient and most comfortable setting for that.

Okay. And you mentioned with the second quarter, some discussion around the San Antonio facility and the Behavioral business that's right now dealing with some CMS certification challenges. I guess how are you thinking about like what might be a reasonable time line for getting certification back? How that's kind of played out in the past and maybe how you're thinking about the opportunity to like recover business in that market over the next couple of years, if that occurs?

All right. So as we've noted, the Laurel Ridge facility in San Antonio has continued to operate, albeit with a much smaller patient complement. And the reason for that is we have been going through the process of going back to CMS and getting recertified, and they require that you have patients in order for them to come back and survey, et cetera. And so we expect that -- we've completed, I think, the first several steps of recertification. The next several steps involve some regulatory visits and surveys, et cetera, which we hope will take place over the next few months, and that ideally, we would hope to be back in business and sort of ramping back up in early 2027. That sort of ramp-up is a little bit, not -- I think, perfectly analogous, but a little bit like opening a de novo facility. We obviously do have established referral relationships in that market, et cetera, which should help us ramp up more quickly. But I think, again, as we get to the third and fourth quarter, it's probably more likely the fourth quarter, we'll have, I think, hopefully, greater visibility on when we can actually get our certification back, when we can start taking patients, at what pace, et cetera. And so when we give our 2027 guidance, I think we'll be more specific about it. But I think suffice it to say that our focus right now is getting recertified where we've been already working closely with the regulators, cooperating et cetera. So feeling good about that process, but difficult to predict exactly the pace and how it will go at this point.

Got it. Okay. And then kind of -- more of, I guess, an overall question for the enterprise. I just -- you've seen a pretty big increase in professional and general liability expense. I guess we'd love to just understand a little bit better what's the absolute level of that expense that's now running through the P&L. And I know a lot of it is based on like actuarial experience and things like that. But like what's a reasonable way to think about what the expense profile and the growth of that expense could be over the next couple of years?

Yes. I mean, look, it's worth noting, and I'm sure, obviously, the reason you're asking the question is that that expense has been growing, I think, faster than the rate of inflation, certainly over the last several years. I think that's honestly true for us as well as other healthcare providers, honestly, we've seen that from providers outside of the healthcare space. There's just greater litigation activity and there is some element, I think one of our peers uses the term social inflation, juries willing to render verdicts that are higher than they have been in the past, et cetera, which tends to increase the overall expense. I think it's worth sort of putting in context, I mean, our malpractice expense generally averages about 1% of revenues, which puts it for us in the kind of $175 million to $200 million annual range. That's obviously not an inconsequential number, but certainly, one of our smaller expense numbers compared to things like salaries and supplies, et cetera. I do think it's likely that malpractice expense continues to grow faster than inflation, so instead of growing at 4%, 5%, maybe it grows at 10% to 15%. Unlike most other expenses, we tend to recognize it in real time as best as we can through the help of third-party actuarial reviews, which we do twice a year. So it's a little bit harder to predict and project. But yes, I mean, again, what I would just say is, I think -- I don't think we'll vary tremendously from that sort of [ 1% ] of revenue range, but it certainly may increase somewhat faster than the inflation rate.

Okay. And then when we think about the guidance revision that you touched on with the second quarter, it looks like there's a bit of an acceleration required in the second half. I know the concept of core growth kind of differs a little bit from analysts to analysts and investor to investor, but it looks like core growth needs to be a little bit better in the back half of the year than where we think maybe it was in the first half of the year. Would love if you could just walk us through the factors contributing to what we perceive to be that ramp-up and how the company is feeling about it at this pace.

Yes. I think we've touched on several of the more significant elements. We -- the acute capacity that we added and all those 177 beds and those 3 projects that I alluded to earlier, all opened in the second quarter of this year. So we think they'll continue to ramp up in the back half of the year, and we'll get a benefit from that. We talked about the continued improvement at Cedar Hill. And so I think that should and will do better in the second half of the year than it did in the first. We talked about growth in behavioral. -- while I don't think we'll get significant growth from the Talkspace acquisition itself, I do think we'll get growth from some of our own outpatient initiatives in the back half of the year. So yes, I think all those things combined lead us to believe that we should -- meeting that accelerated sort of uptick in earnings in the back half of the year, which is embedded in our guidance is definitely achievable.

Okay. And when we think about the policy headwinds are obviously in kind of material focus at the moment. I guess how are you thinking about what you might see in 2027, whether it's the potential for the exchange market enrollment to take another step back or whether there could be some challenges in your business from things like Medicaid work requirements?

Yes. As we talked about before from an exchange perspective, I think our expectation is that the biggest disenrollment activity has already now taken place. Might there be a an incremental step-up next year, that's possible. But I think, as I was saying before, what we'll see is because the impact of the exchange disenrollment has progressed and gotten larger as the year went on, not by a huge amount, but like I said, $35 million in the first half of the year, $50 million projected in the back half of the year. It will continue to increase next year, we think, at that sort of exit rate for the back half of this year. So that's a little bit of a headwind into next year. The other major issue, which you've alluded to, Steve, is Medicaid disenrollment. I think most providers, both public and private providers have been reluctant to really precisely try and size the Medicaid work requirements and the potential impact on Medicaid disenrollment. As we all wait to see, I think a lot of the specifics of how this is going to play out remain to be seen. There's been, I think, estimates from like CMS, that's somewhere around 4% of Medicaid enrollees could lose their coverage, but not exactly sure who those enrollees are, whether they're major utilizers of the system, et cetera, that remains to be seen. How different states implement the Medicaid work requirements at what case remains to be seen. Some states are actually challenging the work requirements in court. We're also seeing a debate about how there are exceptions for medical frailty in the bill, in the NOB 3. And we think a lot of behavioral coverage, as an example, may well qualify for the medical frailty exception. So we'll have to see how that plays out. So yes, I mean, the expectation is that Medicaid work requirements and the disenrollment coming from them could be a headwind to next year, but probably just too early to be precise about what that could be.

Okay.