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

Got it. And when we think about, I believe your preliminary 2017 outlook appears to assume the second half exchange headwind carries forward approximately the same exit rate, which would annualize $50 million into $100 million for '27. I mean, given another year of material premium increases in the marketplace, more potential metal tier migration, if exchange enrollment does decline incrementally, call it 5%, 10%, or more in '27. Why wouldn't the total headwind rise meaningfully above?

It could, Michael, to be fair, I think our point of view, at least at the moment, is we just don't have any real insight into that. There's also been speculation that there could be some level of reenrollment as people realize that having -- going uninsured has been problematic, maybe they can get -- some of these people are working people who maybe will be able to get insurance through their employers, et cetera. We just don't know. So you're right. I mean, I think the way you framed it is our presumption at the moment is that the run rate for the exchange impact in the second half of the year will be the run rate for next year. As we get closer to giving our actual 2027 guidance in several months, if there's more visibility, if there's more clarity, we'll update those estimates, but we just don't have nearly enough information or precision to do that at the moment.

And on Medicaid, managed Medicaid volumes have declined modestly during the first half. Several Medicaid plans have recently reported greater-than-expected eligibility-related attrition, especially with work requirements, creating more uncertainty to '27. How should we think about in size the incremental risk to UHS' payer mix and uncompensated care after considering medical frailty exemptions, which I believe you've mentioned in the past may affect most of your behavioral lives. And basically in your ability to help those eligible patients document those exceptions.

So yes, just sort of the level set in terms of our payer mix experience to date in 2026 through the first half of the year, we haven't really seen significant changes in our mix. Putting the exchange dynamics aside, which we've already talked about. But in doing that, we've seen slight increases in Medicare and Managed Medicare. We've seen slight decreases, which your question, I think, alluded to in Medicaid and managed Medicaid, our commercial volumes, again, outside of the exchanges have remained fairly stable. As we think about going into next year and potential headwinds into next year, the biggest one is the one you highlighted, Michael, which is the Medicaid work requirements which are part of OB3, will take effect in 2027. We have not tried to precisely size that impact. I'm not aware of any provider who has chosen to do that. I think in large part, because collectively, I think as hospital providers, we're waiting for greater clarity on how the Medicaid work requirements are going to be implemented by the states. How quickly, how aggressively the states have an option part of OB3, to ask for a 6-month waiver and implementation. We don't know how many states will do so. We do know that there are states that are actually suing in the courts to challenge of some of the requirements of the Medicaid work requirements. There is -- again, you alluded to this in your question, there's an exception in the Medicaid work requirements in OB3 for patients who are described as suffering from medical frailty. There's not a lot of definition in the bill for that. We've always understood it to cover potentially a significant amount of our behavioral diagnoses, but again, that's going to be up to the states to promulgate the regulations and define them in each of the states. And so we'll see how that plays out. And again, maybe in several months when we're ready to give our 2027 guidance, there'll be greater clarity. CMS really probably one of the few organizations that's really tried to size this issue, they projected that Medicaid work requirements could result in a disenrollment of up to 4% of the Medicaid population. But even CMS has not tried to tackle which of the Medicaid participants likely to lose coverage, be disenrolled, is it the higher utilizers. I think the speculation has tended to be -- it will be the lower utilizers, but again, we have to see that. In terms of that we're prepared for that, Michael, which again, was part of your question, when -- any time a patient comes into one of our facilities, I'm going to say generally through the emergency room, they will interact with a registrar, with an intake person. And if they don't have insurance coverage, if they don't have Medicare, they don't have Medicaid, they don't have commercial. Our intake folks are trained to work with people to determine, look, are you eligible for some coverage that you don't currently have? Could you qualify for Medicaid? We have, in most of our hospitals work with third-party companies that will turn those folks over to who work, quite frankly, on a contingent basis and go through the exercise of helping those people fill out Medicaid applications. literally, they'll accompany them to the Medicaid office, et cetera. we're prepared to do that. We'll search for other options as well. Sometimes they are county programs. Sometimes we'll -- a patient can qualify for COBRA if they've been employed et cetera. So we're -- our folks are trained to do that. They've always been trained to do that. It's part of what they do. They'll do that with the work requirements. Again, they'll need to have better understanding of exactly what -- how the requirements are going to play out. But you know those of you who've kind of studied or read the bill, people can qualify for work requirements if they're in school, if they have volunteer jobs, et cetera. So we'll go through all those processes to understand whether people qualify for the Medicaid work requirements.

Got it. A couple of quick ones on policy, and then we'll move on the statutory SDP limits begin with state fiscal year '28, which starts during calendar '27 for several of your important states while some payment pool is even -- they fluctuate with Medicaid utilization. So how should we phase in the potential SDP headwind across calendar years '27 and '28, including any earlier pressure caused by Medicaid disenrollment. And maybe the follow-up is, some of our policy checks seem to think if Congress flips or could be a chance that SDP gets delayed or rolled back post midterms? Would love to hear your thoughts on that.

Yes. So I think you have a number of sort of questions embedded in there. Number one, I think, is we believe that the impact from those DPP reductions in calendar year '27 will be relatively minimal. And so our projections really presume that the bulk of the cuts start to impact us in 2028. We provide a lot of detail on that in our public filings -- of the $1.5 billion worth of Medicaid supplementals that we project today or in our second quarter 10-Q that we'll receive this year we believe that the cuts beginning in 2028 and playing out over the next 5 years would amount to about $500 million of that $1.5 billion and incurred fairly ratably, about $100 million a year. your kind of second or maybe a follow-up question about how might the outcome of the elections affect some level of modification or retraction of some of the requirements of those cuts, hard to know. We're not counting on that. I think that it's entirely possible that, particularly if there is some sort of blue wave and the Democrats take control of the house or maybe the house and the Senate, that there could be some movement towards delaying or elongating those cuts or the impact of those cuts. I think the other, quite frankly, sort of political impetus may be just simply the passage of time, the OB3 cuts were sort of controversial when they were first passed and there were even Republicans who objected mostly on the ground that they would unfavorably impact rural facilities. And that objection came from senators sort of from different backgrounds, including Senator Collins remain and Senate Holly from Missouri, very different sort of political -- different parts of the political spectrum. But as a consequence, they did include in the bill, the rural fund to help that. But the reality is as these cuts, both the Medicaid work requirement cuts and then the DPP cuts as they start to take effect in '27 and '28. The truth is they're going to affect hospitals well beyond just the rural hospitals. They're going to affect urban hospitals, they're going to affect safety net hospitals, they're going to affect children's hospitals. And as I think those cuts become a lot closer to reality and then perhaps start to be implemented. I do think there is a good chance that political pressure might grow to sort of relieve some of that. But as I said, to be fair, in terms of both the way we projected, both the way we're approaching this. We're not assuming there are changes. If there are, we'll welcome them. But if not, we're going to be prepared for the cuts that are on the books at the moment.

Got it. And in a similar vein on the proposed 2027 OPPS rule would reduce reimbursement for 340B acquired drugs, which has been a hot topic today and redirect savings into higher nondrug components which UHS has limited direct exposure to 340B, if finalized, how could this rule affect your net reimbursement and also your competitive position given a lot of these non-for-profit systems have been benefiting a ton from 340B?

So we disclosed again in our public filings that if the proposed rule stands in its current form, that we, as many of our for profit peers would benefit because we've not never benefited from the 340B favorable implications. Our outpatient Medicare reimbursement would increase by about 8% and Outpatient Medicare for us is not a huge part of our revenue stream. It's single digits of our total revenue, 5%, 6% or so. But honestly, this is one of those things where we're definitely sort of waiting on the sideline to see we imagine that there will be significant or has been significant pressure from the not-for-profit industry about the rule and its implications for them. So we'll see how it plays out. But it would have an incremental effect an incremental positive effect on us if it were to stand.

Got it. And now we have a few minutes left, and we've been touch on behavioral. But -- all right. So with talk space, 1,000 branches, UHS is now uniquely positioned as the only scale provider with end-to-end continuum of behavioral health care. So I'm trying to think -- how does that breadth of service create tangible value, commercial value through stronger rate negotiations, preferred network status, greater directed volume relative to this fragmented local provider landscape. Over time, -- could it help enable UHS to assume greater accountability for outcomes, total cost, episode-based shared savings, could there be capitated arrangements. I mean, how should we think about the evolution of this model given how uniquely positioned you are?

Yes, I must feel like I should be asking the questions -- this is like Jeffery. I think you've answered the questions. No, look, I think -- and I think it's worth noting, we've talked a lot about a shift in focus over the last several years in our behavioral segment to more of an emphasis on outpatient revenue growth. We have been for our 40-plus years of behavioral history, really an inpatient-centric provider. And quite frankly, we think that the inpatient business is a solid business that will continue to grow incrementally. But the real growth and the real accelerated growth we believe in behavioral demand will take place on the outpatient side for a variety of reasons, that's where patients would prefer to be treated if the clinically appropriate space, payers and employers would prefer that. I think their subscribers and their employees can be treated on an outpatient basis. It tends to be cheaper, et cetera. And we have been focused on playing a bigger part in delivering that outpatient continuum of care. And your question alluded to the various ways that we've done it. Today, most of our outpatient revenues are generated by patients who we describe as step-down patients. So these are patients who are discharged from our inpatient facilities but who require some level of continuing care. And it's a level of generally relatively high acuity continuing care, meaning not just an hour worth of therapy a week or a couple of hours of therapy a week, but things that we call partial hospitalization or intensive outpatient where they're receiving outpatient therapy 3, 4, 5 days a week, 3, 4, 5 hours a day depending on their clinical needs. Today, we only capture a very small percentage of those patients in the mid-single digits top 3, 4%, 5% of those patients. We think that the ultimate ability to capture that could be in the double digits, et cetera, and that which would be a significant opportunity for us. And we've developed our own sort of focus is to get there. paying more attention to the discharge planning for patients, building out our 1,000 branches, freestanding facilities. But the talk space acquisition is really the one that really exponentially increases our ability to provide an alternative to patients because by being able to provide a virtual alternative to patients, we're not limited by proximate geography they don't need to live near our hospitals to get that care. We're not limited by the therapists that we can offer and the schedules that we can offer, let's say, we do our intensive outpatient 3 days a week in the mornings and a patient wants to have their therapy in the afternoons or in the evenings or on the weekends, much more likely that we'll be able to accommodate that need with talk space. So again, the ability to really be, as your question suggests, the only viable end-to-end continuum provider from the lowest acuity, our long therapy that is sort of in the bread and butter of what tag space has done to the intensive inpatient care that we provided on both an acute and residential basis for our whole history really positions us, I think, uniquely and what makes us so excited about the opportunities with talk space.

Beautiful. Well, that's all the time we have. Thank you, Steve. Thank you, Darren, and everyone, enjoy the rest of your day. Thanks.