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

So I think it's worth noting and putting into context that while certainly, we view the talk space acquisition as a significant one, probably the most significant acquisition we've done since the acquisition of Psychiatric Solutions, which was almost 15 years ago at this point. The $835 million represents less than 1 year of our free cash flow. It represents -- even though we levered up a little bit to do the deal, it's about 1/4 of a turn of leverage increase as a result of the talk space acquisition. Our overall leverage today post talk space is in the low 2s. I think we've talked generally about targeting leverage levels in the 2 to 3 range. So the point, and now trying to be responsive to your question, Craig, is not that I think we ever viewed the talk space acquisition as sort of an either/or in the context of well, if we did talk space. we wouldn't be able to be as aggressive and as active as we have been in share repurchase and return of capital to shareholders. I think we continue to believe that -- particularly our current share price represents a fairly significant dislocation in the price. We've been a very active acquirer of our shares for a long time now. We've repurchased about 40% of the company's shares in the last 10 years. We continue to be an active repurchaser. We'll continue to be an active repurchaser after the talk space acquisition. So again, not even lower. And I think the other point worth making is we'll continue to look for other -- we have not been terribly acquisitive in the last several years because we've not found a great many compelling acquisitions, but we still have the flexibility to do one if we find one. And I think the one other comment that's worth noting about our capital deployment is our CapEx has been somewhat, I'll call it, exaggerated or inflated over the last several years because it's included or reflected a number of very large acute care hospital de novo projects. So we've opened 3 de novo facilities in less than 2 years, Henderson Hospital in Las Vegas, cedar Hill Hospital in Washington, D.C. and a replacement facility in Riverside County, California. We don't have any of those large again, whole hospital de novo projects in the pipeline for the next several years. So I think CapEx will kind of naturally start to come down over the next several years as well. Again, just allowing us greater flexibility for share repurchase or for any other uses that we may deem to be appropriate and earning a return. And I'll just 1 more comment before you get to your next question, Craig, we had sort of talked about returns. The price that we paid for talk space was definitely on the price side when you look at their current earnings. But what really drove our analysis of the deal and how we're thinking and strategic thinking about the deal is this opportunity to, what I call, sort of revenue synergies to take talk spaces, lower acuity patient population and find ways to -- where they need appropriate treatment, higher levels of in more acute treatment and to take our more acute patient population and find ways for them to be treated by the virtual therapists or the virtual therapy programming that talk space has. And so we thought that within a couple of years of being able to recognize those revenue synergies that the adjusted multiple for talk space would be more in the high single-digit multiples, which I think is sort of much more what we would look to as a target.

That makes sense. Maybe we can switch gears just to the acute side of the business. You're targeting kind of 1.5% to 2.5% adjusted admissions this year. We'll get into maybe the ACA in a little bit. But if I put that aside, how would you characterize the demand environment today? What are some key puts and takes into the back half?

Yes. I mean, so we did, as part of our revised guidance after Q2 lower slightly our acute care volume projections for the year by about 50 basis points at the midpoint. So we're now predicting generally sort of 1.5% to 2.5%, 2% at the midpoint. And that really was really just a reflection in our minds of the weaker volumes that we saw in Q1, which I think had a number of reasons behind them, including some weather issues, et cetera, but it would be difficult to get to that 2.5% midpoint just mechanically, given the softer volumes in Q1. But when you look back at our acute care adjusted admission growth over the last decade, I think it has averaged between 2% and 2.5%. So that sort of 2% midpoint that we've set for ourselves this year is fairly consistent with that. I think we think the demand environment or review the demand environment in acute care is relatively solid and feel pretty enthusiastic and bullish about our particular markets, both the kind of the patient population growth in our markets and the demand. So yes, we're generally feeling pretty bullish about acute care volumes and feel like they're very much in line with historical norms.

Got it. Anything you would call out on the acuity side or surgeries in terms of things you're seeing in the market?

Yes. I mean, I think as most of our peers have indicated, surgical volumes have been a little bit softer in the last few quarters. In Q2, I think our overall surgical volumes were down 0.8%, but that was actually an improvement over the previous couple of quarters. And I think we were encouraged by the fact that inpatient surgical volumes were actually up last quarter. We highlighted some service areas where they were particularly strong, including cardiology and neurology and urology and not surprisingly, these are service lines in which the acuity of the patients tends to be higher. And I think we've been able to grow our surgical procedures in those areas, in particular, partly because of the investments we are making in OR capacity and OR technology, robotics, et cetera. And the places where I think we see our surgical volumes a little bit softer tend to be in areas like GI and ENT. These lower acuity areas where not just for us, but I think collectively, for the industry, the vast majority of those procedures over the last several years have moved out of the hospital setting and into either ASCs or physician offices, et cetera. But yes, I mean, I think our view is that with the continued investment and focus on these higher acuity procedures, we think the demand in those service lines will continue to be strong.

Got it. And you touched on before the elevated CapEx for some new hospital systems. So if I think about West Henderson, Cedar Hill, you have the Aland Milla Medical Center. Can you just touch on kind of where you're at with these systems and really the implications for kind of the growth and margin trajectory as they continue to ramp up?

Yes. So thank you for mentioning the Alan B. Miller Regal center. I forgot to mention that in my talking about the facilities that we opened. So yes, if you think about the facilities that we've opened in the last several years, West Henderson Hospital in Las Vegas, and I think we made the point that, that opened in December of 2024, and it was profitable within its first quarter or so of operation, which is really extraordinary for a new hospital, although somewhat consistent with our experience in Las Vegas, where we're the #1 market share provider and it's been a fast-growing market, et cetera. The Cedar Hill Hospital, which is our second hospital in the Washington, D.C. market opened in April of 2025. That was an arrangement, and I think has a different sort of arrangement with the District of Columbia. The Cedar Hill facility is in an underserved part of the district and underserved from a health care perspective. The district was extremely anxious to have this facility. They're the ones who funded it. They built the facility. We have a long-term management and operating agreement. That facility has been somewhat slower to ramp up. We've certainly talked about that in our quarterly calls. It's been very busy from an emergency room standpoint from essentially the day that it opened, but we really need to find a better balance of emergent and elective procedures. Elective procedures have been somewhat lagging. And I think it's because there's a lack of both primary care and specialty physicians in the market because there really hasn't been high-quality hospital provider in that part of the city. Physicians have, for the most part, have not located there. They don't have their offices there. We're changing that. I think we're changing it relatively quickly. We're recruiting new positions. Physicians are being drawn thereby the busy emergency room, et cetera. But that will take a little bit of time to ramp up. I think it's worth noting that because the district has really been the one that built the facility and our CapEx investments in the facility are much less than they have been in a normal, I'll call it, a de novo facility, we don't have to get to the same sort of margins that we would need to get to it, I'll call an average hospital to get to our sort of normal hurdle rates of return. So we've talked about that hospital breaking even by the fourth quarter this year, and we would think that would continue to grow after that. The Alan B. Miller Hospital is our new hospital in Palm Beach Gardens, Florida. That hospital opened in July of this year. And as we're expecting and with -- again, with most new hospitals outside of Las Vegas, will be a bit of a drag as it works through. Most of our brand new de novo hospitals usually get to average divisional margins within about 18 to 36 months. That would be -- as I said, our West Henderson facility got there much, much faster. Cedar Hill is probably taking a little more time. The ABM or Alan B. Miller facility, we would hope would be more in the norm of those that 18- to 36-month ramp-up.

That's helpful. And then just last 1 on the acute business, if I think about access points and freestanding ERs have been an important part of that strategy, kind of where things stand today and what that means for some of the growth and margin trajectory of the business?

Yes. We've talked already about how on to the behavioral side, there's been continued and I think an accelerated shift into more outpatient settings. That shift has been taking place on the acute side, quite frankly, for, I think, a decade or longer. And we participated in that on the acute side, I think, more aggressively than we have on the behavioral side. You mentioned freestanding emergency departments. We have 35 of those around the country. We have them in virtually all of our markets. They're a very convenient access point for patients. We find that patients who are not generally bad acutely ill prefer to be treated in that setting, they can generally be treated more quickly, more conveniently more safely, et cetera, without the long wait times, et cetera. So they've been very successful. We've also got about a little more than a dozen ambulatory surgery centers around the country with the hopes of adding another one in every one of our markets over the next several years. And finally, we've probably got a couple of hundred physician practices around the country that also obviously helped to build our outpatient business. So yes, we have this, I think, a very comprehensive approach to outpatient that includes the FEDs that I think were in the crux of your question, but other elements of it as well.

Great. Maybe we can switch gears just to technology in terms of how you're deploying tech and AI. And if I look at it through the lens of there's applications like revenue cycle management, there's things on the clinical side that are maybe a little bit more longer dated. But just where are you seeing it have the biggest impact on your business today?

We've talked -- you mentioned revenue cycle, and we've talked a lot about that probably being the area that we most kind of aggressively started adopting AI technology from the perspective of denial appeals and the completeness of our billing packages that go out some of our medical records coding, our emergency room coding has been using an AI application. And we just generally think that revenue cycle broadly is well suited for artificial intelligence applications because there's thousands -- frankly, hundreds of thousands of transactions, they're recurring. They generally set a particular pattern, et cetera. And I think that's well suited for AI applications. We've also been, I'll call it, dabbling, if you will, with clinical applications. I think originally, I'll call them sort of peripheral applications like, for instance, using AI technology that's been developed by Hippocratic AI, which is a company that we've been a shareholder and an investor in to instead of a human being a nurse, making a post-discharge call to a patient finding out how they're feeling, finding out if they fill their prescriptions, finding out if they've made their, follow-up physician appointments, following up on whether they're in pain, those calls are now being made in many cases by an AI agent. And I think the latest data suggests that 50% of the people who pick up the phone and have an AI agent identified on the other end will continue the conversation. And I've listened in on a bunch of those conversations. They're really quite fascinating and people are very comfortable sharing and the information that's being gathered and being imported is really valuable, I think, helps to reduce readmissions, helps to make sure the patient is doing well. That's another example. Also using AI technology I'll say, kind of pseudo clinically to help us project diagnoses and project length of stay so that we can better manage length of stay, which is a significant way for us to control expenses. So yes, I think we've got -- what I think, in some ways, is the biggest challenge from an artificial intelligence perspective today is managing and prioritizing the opportunities really, focusing your resources, choosing the projects you're going to do based on what's likely to have the most significant fastest return, et cetera. We've got kind of a whole structure in place oversight committee, et cetera, to try and do that very effectively.

Got it. And when you think about the financial impact, is this something that just kind of gradually over time, accrues to the business? Or is there a tipping point? Like how do you see it as we go forward here?

No, I think it accrues. Maybe that's a good word, and I think it compounds. And I think when we're asked sometimes about how we think about some of the headwinds that particularly we'll face over the next years as a result of Medicaid challenges in OB3. And in other ways, I think we think about the efficiencies that AI can help us generate and help us realize as being a significant way that we're going to be able to offset some of those headwinds over the next several years.

Got it. Well, as we wrap up here on time. Just quickly on the headwinds. You mentioned OB3, the exchange marketplace. Any change in terms of your expected headwind that you're seeing in the business or how things are playing out?

I think the exchange dynamics have largely played out the way that we expected. We did -- we originally projected the impact from the exchange. The loss of exchange patients would be about $75 million this year. We upped that estimate a little bit to about $85 million to $85 million in the second quarter revision. But other than that, I think it has largely played out the way that we expected, I think we envisioned that '26 would be the big cliff for the dramatic decline in exchange patients. We'll see what happens next year, but not expecting that number to increase other than perhaps incrementally.

Got it. Okay. We're out of time. So, Steve and Darren, thank you so much for your time.

Thanks to everybody.