Universal Health Services Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2022

There are 12 speakers on the call.

Operator

Good day

Speaker 1

and thank you for standing by. Welcome to the Universal Health Services 4th Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to Steve Filton. Please go ahead.

Operator

Thank you. Good morning. Mark Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the 4th Quarter ended December 31, 2021. During the conference call, we will be using words such as believes, expects, For anyone not familiar with the risks and uncertainties inherent in these forward looking statements, I recommend a careful reading of the section on risk factors and forward looking statements and risk factors in our Form 10 ks for the year ended December 31, 2021.

Operator

We'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the Company reported net income attributable to UHS per diluted share of $3 for the Q4 of 2021. After adjusting for the impact of the items reflected on the supplemental schedule as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.95 for the quarter ended December 31, 2021. During the Q4 of 2021, Our operations continue to be significantly impacted by the COVID-nineteen pandemic. Specifically, we experienced an increased wave of COVID patients In December 2021, which peaked in January of 2022, the negative impact resulting from this elevated level of COVID volumes was primarily a function of increased labor scarcity issues exacerbated by the large number of employees sidelined by the virus itself or quarantine due to exposure to the virus.

Operator

In what was already a very tight labor market, these incremental labor challenges in addition Pressuring our salaries and wages expenses also suppressed patient volumes at Our acute care and behavioral health facilities while causing postponement of certain elective scheduled procedures at our acute care hospitals. Our net cash generated from operating activities was $884,000,000 during the full year of 2021, which includes the unfavorable impact of $695,000,000 of Medicare accelerated payments that were received during 2020 and repaid to the government during 2021. We spent $856,000,000 on capital expenditures during the full year of 2021, which includes the construction costs related to a new 170 bed acute care hospital in Reno, Nevada that is scheduled to be completed and opened next month. Our accounts receivable days outstanding decreased to 50 days during the year ended December 30, 2021, as compared to 55 days during 2020. At December 31, 2021, our net our ratio Debt to total capitalization increased to 40.8% as compared to 37.9% at December 31, 2020.

Operator

As of December 31, 2021, we had $854,000,000 of aggregate available borrowing capacity pursuant to our $1,200,000,000 revolving credit facility.

Speaker 2

In our Acute Care segment, our ambulatory care development continued In 2021, we currently have 18 operational freestanding emergency departments and partnerships With national third party entities for further development of ambulatory surgery centers and home health operations in our existing markets. In conjunction with our ongoing development of primary care physician networks, these initiatives are meant to create A more fulsome care delivery system in each of our markets. Our new hospital in Reno scheduled to open soon We'll enhance our statewide presence in Nevada. Bed tower projects adding new capacities to hospitals in important markets are underway at Edinburg Regional Medical Center in South Texas, Henderson Hospital in Las Vegas and Inland Valley Medical Center in California. Planning is also underway on new acute care hospitals in West Henderson, Nevada and Palm Beach Gardens in Florida.

Speaker 2

In our behavioral segment, 2 new de novo joint venture hospitals opened in 2021 In Clive, Iowa and Cape Girardeau, Missouri. 2 more new hospitals have opened already in 2022 in Michigan, which is a partnership with Beaumont Health and Wisconsin, and another is scheduled to open later in the year in Arizona in partnership with HonorHealth. These de novo developments along with an increased focus on outpatient development and telemedicine in our existing markets is meant to also build out a more fulsome continuum of care in the behavioral segment as well.

Operator

In anticipation of a continued downward trajectory of COVID volumes from those experienced during recent surges and relief from the accompanying pressures on our operations and financial results, Our Board of Directors authorized a $1,400,000,000 increase to our stock repurchase program. After the resumption of our Share repurchase activity in the Q2 of 2021, we repurchased approximately $1,200,000,000 of our shares During 2021 and close to $300,000,000 more thus far in 2022. We currently have approximately 1 point $46,000,000,000 authorized for stock repurchases after giving effect to the recent increase approved by our Board of Directors. Our 2022 operating results forecast, which was provided in last night's release, assumes that the negative impact of COVID virus will diminish in 2022. While the decline in actual COVID cases appears to be occurring rapidly, We believe the process of backfilling non COVID cases and most importantly the easing of workforce shortages, Which dominated the healthcare landscape in 2021 will take place more gradually over the course of 2022.

Operator

We have a host of active initiatives in place to increase the efficiency of recruitment and retention of our clinical staff And also implementing innovative care models in recognition that certain changes to the healthcare staffing dynamic may last well beyond the decline in COVID cases. While the pace of recovery is difficult to predict, We remain confident in the fundamental underlying demand in both of our business segments, the early signs of which have already been emerging in the last few weeks. Mark and I will be pleased to answer your questions at this time.

Speaker 1

Our first question comes from the line of Kevin Fischbeck with Bank of America.

Speaker 3

Great, thanks. So I guess your guidance for this year looks like it has margin degradation. Can you talk a little bit about how you're looking for the margin outlook in both segments?

Operator

Yes. So I think Kevin as the remarks my opening remarks indicated, I think that's premised on the idea that the stabilization of the labor markets Will be a more elongated process than the volume recovery. So I think we have a notion that while our volumes and revenues will increase At a pretty decent pace in 2022, so will salary expense, both the continued use Premium pay in the short run and then the underlying wage rate inflation. I think it's a bit of a trade off. Obviously, we have hopes that We can do better and make more progress on the salary front and more quickly than our guidance has presumed.

Operator

But I think at the moment, that seems to be the most prudent sort of outlook.

Speaker 3

I guess, are both segments seeing the same type of pressure or would you say one is seeing more of it and would you expect one division to kind of come out of this margin pressure earlier than the other?

Operator

I think we have made the point throughout the pandemic that while both business segments See the impact of the labor shortage, they it gets manifested in different ways. So on the acute side, for the most part, We're able to fill most of our vacancies, but we have done so through the use of premium pay, significant amounts Premium pay as an example, I think we incurred about $120,000,000 of premium pay in the acute division in Q4. Alternatively, on the behavioral side, I think we've only incurred about $25,000,000 or $30,000,000 of premium pay expense for the full year. The bigger issue on the behavioral side has been just an absolute inability to fill some of those vacancies. And as a consequence, the labor shortage on the behavioral side really manifests itself on the volume side more so than in actual salary expense.

Operator

And we expect that those both those dynamics continue into 2022, although they begin to recede as COVID volumes begin to recede.

Speaker 3

Okay, great. Thanks.

Speaker 1

Your next question comes from the line of Andrew Mok with UBS.

Speaker 3

Hi, good morning. Steve, can you walk us through the different growth outlooks Between the segments for 2022 with respect to volume and price and how much new store revenue is contemplated in the guide?

Operator

Yes. So I think, Andrew, that the same store growth in both segments is sort of anticipated to be In the sort of mid single digits, in that sort of 5%, 6% range, which quite frankly in a Normal year would be relatively unremarkable. I think on the acute side, that's kind of a mix shift Away from higher acuity COVID volumes and more towards, Again, a backfilling of all this non COVID activity, which has lagged somewhat. We've been Running at levels that are sort of 95% to 100% of pre COVID levels of emergency room visits and elective and scheduled procedures, etcetera. We presume that those percentages will increase in 2022 as the COVID volumes decline.

Operator

But overall, the impact on revenue kind of mid single digits and again sort of harkening back to Kevin's first question, The increase in salary costs outpacing that a little bit. On the behavioral side, our Volumes have been sort of flatter in Q4. Our patient days, I think, were relatively flat compared to the previous year's Q4. I think we're assuming again that same sort of mid single digit revenue growth, But more of it coming from an actual increase in patient days rather than any sort of patient shift mix. As far as the amount of revenue growth that's coming from non same store, I think it's a couple of percentage points.

Operator

And Mark ticked off, I think, a lot of the major additions in the 2 business segments That are driving that.

Speaker 3

Great. And then as a follow-up, you did about $320,000,000 of EBITDA in the behavioral business, But there were a few out of period payments even beyond Kentucky. I think there might have been some dollars from Florida there. So how did the core behavioral business perform in the quarter? And is that a good run rate to think about for 2022?

Speaker 3

Thanks.

Operator

Yes. So we called out the Kentucky Medicaid reimbursement was a little over $30,000,000 in the quarter because I think we thought that was one really extraordinary item in the quarter. There were other sort of kind of one timers, but I think they largely offset each other. And I will say this about Kentucky. We recorded $30,000,000 roughly of Kentucky reimbursement in the 4th quarter that represented 2 quarters of earned activity.

Operator

In 2022, That reimbursement has already been approved for the full year. So there'll be a much more ratable recognition of roughly $55,000,000 or $60,000,000 of that Kentucky reimbursement In 2022 and that's included in our guidance. But other than the Kentucky item, I think we purposely Did not highlight anything else in the quarter because we generally felt like they were offsetting puts and takes.

Speaker 3

Great. Thanks for all the color.

Speaker 1

Your next question comes from the line of A. J. Rice with Credit Suisse.

Speaker 4

Hi, thanks everyone. First of all, just maybe looking at the pace of the share repurchase activity, You know, you're running $1,200,000,000 to $1,400,000,000 You're generating good cash flow, particularly as now you get past the repayments to the feds, But that still is probably a faster pace than you're generating free cash flow. Can you just comment, do you think you'll continue at that pace? And then also, I assume if you do that the leverage will tick up over the course of this year. How I mean you ended at 2.2 times debt to EBITDA.

Speaker 4

How much are you willing to let leverage sort of creep back up To fund the repurchase?

Operator

Sure, A. J. So as you indicated, we repurchased about 1.2 dollars of shares in 2021, that was over the course of just 3 quarters since we didn't resume our share repurchase activity until April. If we continue at that pace, we'll be repurchasing somewhere in the neighborhood of $1,400,000,000 which is the amount Share repurchase authorization increase that our Board granted yesterday. And that's our plan and that quite frankly is what's in our guidance.

Operator

Obviously, we're doing this on an opportunistic basis as we have historically done. So we are leaving ourselves the flexibility to respond to market Conditions and other deployment, capital deployment opportunities, etcetera, but our current plan is pretty much As the Board authorization increase would indicate over the course of the next year. And to your point, It would certainly we'd be buying back shares at a pace above our free cash flow generation. So our leverage would go From approximately the low 2s, 2.1, 2.2 at the end of 2021 to the high 2s of 2.7, 2.8 at the end of 2022.

Speaker 2

I'll just make the point. I mean, we're very comfortable with that if the stock remains undervalued. And that's the calculation that we've made. So depending on where the stock is, this we believe is the right amount at this time, Certainly at this level of our share price.

Speaker 4

No, that's great. I think shareholders obviously appreciate that. Maybe my follow-up question. We often asked you about geography and were there any differences. And I'll ask you that again about the cube Business where we usually ask, but I would also ask in the dynamics you're seeing in the behavioral business, Is the labor challenges particularly acute in specific geographies where For some reason, you have a little more of a challenge than in other geographies.

Speaker 4

So anything about the geography, differences

Operator

So the way that I would answer the question, A. J, is first by saying that I think what we've experienced Certainly, in the most recent, I'll call it, 6 to 8 months is that the most significant labor Pressures are closely correlated to the level of COVID frequency in the market. So markets that are hard hit by COVID clearly feel greater labor pressures for a variety of reasons, Particularly with Omicron, more of our own employees out sick, etcetera, and on the sideline, but also employees Leaving in particularly in the behavioral space to work for premium rates in more acute settings, all that sort of thing. And I think what we have found in the last few surges, again, at least with the back half of 2021 and into 2020, that Those surges have been pretty widespread geographically. Obviously, at any point in Time, we may be getting hit in one market worse than another.

Operator

But I would say broadly, the performance is pretty Diffuse, although from a timing perspective, one market may be under pressure 1 month and not so much in the next month. But it's really much more COVID related Than any other sort of underlying geographic issues.

Speaker 4

Okay. All right. Thanks a lot.

Speaker 1

Your next question comes from the line of Matthew Borsch with BMO Capital Markets.

Speaker 5

Hi, good morning. Thanks for taking my question. You have Ben Rossi filling in for Matt here. Regarding patient acuity, on a same facility basis, you reported some good numbers for adjusted admissions, Revenue per adjusted admission, while also showing some sequential decreases in overall occupancy rates and length of stay in both acute and behavioral. Just curious if that is a reflection of the type of acuity caseload you saw this quarter and whether that trend is continuing in 1Q?

Speaker 5

Thanks.

Operator

So look, acuity is really an issue in the Acute Care segment, not in the behavioral segment in the sense that Reimbursement doesn't change on an acuity basis for the most part in the behavioral segment. I think in the acute segment, what we have largely During the COVID surge is in 2021 is that as COVID has surged, acuity goes up, the COVID patients are sicker. But for the most part, we've been able to maintain a Pain a reasonable level of non COVID business as well, which has really sort of led to these really high Acuity and revenue rates in the acute business, which for the most part have overwhelmed or offset the higher salary costs, which alluded to earlier. That became more challenging. I indicated in the Q4, we had about $120,000,000 Premium pay in the acute business, that's the highest we've experienced to date.

Operator

I mean, compared to just sequentially, I think we had around $80,000,000 in the Q3 of This year, and I think we had about a little over $50,000,000 in the Q4 of last year. So it gives you an indication of how much those that premium pay has really Pressured margins in the acute business. I think the other dynamic that we've noticed or has been noticeable in the acute Space is that the Omicron patients, as have been reported, I think more broadly, are less acutely ill than The Delta patients before them. The problem is I don't know that we've been really able to take advantage of that. You make the point that our length of stay has remained pretty stable.

Operator

I think in theory, we should have been able to discharge some of those Omicron patients more quickly. The challenge is as we try and discharge those patients, the sites to which we would normally discharge them, Long term care, skilled nursing, nursing homes, home health are struggling with their own labor challenges. And as a consequence, we haven't really The benefit of being able to discharge the less acutely ill patients faster. Again, I think all that will tend to work itself out as COVID volumes decline, we'll return to kind of a more stable referral network and discharge Pattern that's more reflective of what we've historically been used to.

Speaker 5

Got it. Thank you.

Speaker 1

Your next question comes from the line of Jason Casorla with Citi.

Speaker 6

Great. Thanks. Good morning. So you talked about volume and labor backdrop largely improving throughout the year, but is there any way to help frame that from the cadence from an EBITDA perspective? I mean, if you look back, you did about $425,000,000 of EBITDA in 1Q 2021.

Speaker 6

Is that the right bogey to think about 1Q or maybe how you'd frame that? Thanks.

Operator

So look, UHS intentionally has never given quarterly guidance, and we're certainly not about to begin that This year when I think there's greater uncertainty than is historically the case. Look, we're looking At a cadence that is certainly not what has been the historic norm. Normally, the first quarter is our strongest We come out of the gate really strong in both business segments, etcetera. This year, we come out of the gate with our highest COVID volumes to date in the pandemic. Now they Decline pretty quickly and have been declining and continue to decline and that's encouraging.

Operator

But as I've alluded to in some previous Comments, the labor pressures are declining more slowly, etcetera. So I think broadly, we've tried to indicate that I think we think the first half of twenty twenty two will certainly be more challenging as labor Pressures diminish more slowly than COVID volumes decline. I think the second half of twenty twenty two We'll begin to look a lot more like a pre pandemic year like the back half of twenty nineteen might have looked.

Speaker 6

Got it. Okay, fair enough. And maybe just go to your CapEx guidance. So CapEx at the midpoint, so just call it like 20% increase over 2021 and where you ended up spending there. You made some comments in your prepared remarks around some new towers at key facilities and the like, but maybe could you just I'll flush out your CapEx priorities for both segments and where you're looking to invest those dollars for 2022?

Speaker 6

Thanks.

Operator

Yes. So as Mark commented on in his remarks and I think also as he had on to a response earlier, I think what really informs our whole approach in terms of what we're dedicating to share repurchase and what we're dedicating to CapEx, etcetera, It's our view that the underlying demand fundamentally in our two business segments remains strong. And so from a CapEx perspective, we're going to invest in projects that we think make sense and are economically compelling. Mark alluded to our de novo development in Reno. We had a small community in Ashland Reno, but this really, I think we'll position us as a much more competitive player in the Reno market, but even more broadly as the preeminent statewide player in the state of Nevada.

Operator

Same thing, South Texas is an important market to us, Riverside County, California. We've invested both in physical capital. We acquired A significant physician practice in the Southern California market. So we like our Franchises in both our acute and behavioral segments, and we're continuing to reinvest in those. And then Again, as I think Mark pointed out, we have a view that we think and we understand why, but those investments and that underlying the strength of the underlying demand Somewhat unappreciated in the market.

Operator

And while that's the case, we also intend to be an active acquirer of our shares, which we think are really well valued at this Point in time.

Speaker 6

Got it. All right. Thanks for all the color.

Speaker 1

Your next question comes from the line of Pito Chickering with Deutsche Bank.

Speaker 7

Hey, good morning guys. Thanks for taking my questions. On the acute side, in the script you quantified or I think to Kevin's question, you quantified about $120,000,000 of premium pay in 4th quarter. How did that track versus 3Q and sort of for all of 2021? And if we think about converting that to sort of more of a normalized level, how much was premium pay costing versus normal full time employee

Operator

Yes. So I think I actually mentioned, Pito, that $120,000,000 in Q4 Compared to about $80,000,000 in the previous quarter in Q3 and a little over $50,000,000 in the Q4 of last year. And the point that you raised is a good one. Honestly, the rise in that expense Is, I think, driven more by rate than by volume, meaning we're not necessarily using more nurses, more hours. We're using some greater number.

Operator

But The rates are just going crazy as I think it's been written about and sort of reported on broadly across So normally, I would say to you that we replace Premium pay temporary traveling nurses with our own employee nurses who would make 50% less or something like that. But I think in some cases, we're able however you want to look at it, either we're paying 3x more for A temporary or traveling nurse than we would for a base pay or if we can replace that nurse with an employee, We'll be paying a third. The difference is quite significant.

Speaker 7

Have you seen the premium pay begin to inflect At all, I know it's early in the year, but any color in certain risk vacancies? What are you seeing on the hourly rate rates for those or now as well as the hours you guys are using?

Operator

Yes. I mean, look, I've made the point that the decline in COVID volumes has really been occurring over a really short period of time at this point. I mean, it was only in the latter half of January that we started to see those declines. So we're into this for 4 or 5 And I think as the surge really worsened, hospitals were making longer term commitments to these nurses. We were making some longer term commitments, but I think the other piece of this is the nurses themselves We're making longer term commitments.

Operator

Even if we weren't, they might have been making longer term commitments with others. The other issue is that, look, nurses have made a lot of money, Those who have sort of sought these premium rates in the last 6 or 8 months. And as a consequence, I think they have some greater flexibility. And so what we're seeing is that Some nurses are taking some time off, etcetera, before they return to work and they're thoroughly entitled to that. But That's I think all those reasons are why I think it takes some time.

Operator

So I would say to you that I think we've seen again, as my remarks have indicated, We've definitely seen encouraging signs of volume recovery in both business segments in the last 4 or 5 weeks. I would say we've seen the earliest signs Labor pressures easing, but I think we've got a long way to go on the labor side.

Speaker 7

Okay, great. And then one quick follow-up there. On the behavioral side, as we look at 2021, much of revenue is impacted by the lack of staffing? And how do you think that evolves in 2022? Do you think you can recapture for those lost behavioral revenues in 2022 from staffing?

Operator

As we've indicated, I think, on a number of occasions, we think The single biggest reason that behavioral volumes and therefore behavioral revenues have lagged pre pandemic levels Is the labor shortage. A lot of it has been exacerbated by the COVID volumes. And again, The idea that some subset of our employee population has been seeking these premium rates in a more acute setting. And by the way, As best as I can tell and talking to colleagues in other service industries, etcetera, it's a pretty standard and wide Thread phenomena in any subacute setting, nursing homes, home health agencies, skilled nursing, long term care facilities All saying the same thing. And as I indicated in a previous response, we're finding that on the acute side to be true because as trying to discharge patients.

Operator

We're being told by all these sorts of facilities that they simply don't have the capacity because of a lack of Staff, so the question about how do you quantify what the loss revenue is, is difficult to do. What we have said before is that every indication we have of underlying demand is that it has continued to grow. I would say the last several quarters, our inbound activity, incoming phone calls, incoming Internet inquiries, etcetera, are up 15% or 20%. I don't think we've taken the position that we could satisfy all that demand, but there is certainly a significant amount of demand Out there to be satisfied. And again, I think our guidance presumes sort of mid single digit revenue growth, Which gets us back to sort of 3% or 4% volume growth just over the prior year.

Operator

We certainly don't think that's the top end of the potential growth in volume, But we'd be pleased if we can get there and if the labor situation resolves and so we can get there.

Speaker 7

Great. Thanks so much.

Speaker 1

Your next question comes from the line of Jamie Purce with Goldman Sachs.

Speaker 8

Hey, good morning guys. I Just wanted to start with the revenue per adjusted admission, if you can get any color on assumptions for 2022 and we're obviously way above the 2019 trended growth line. What's sustainable about that versus as things start to normalize in terms of payer mix and acuity That starting to come back down.

Operator

So Jamie, I think the answer again is different in the two business segments. I think in the acute care segment, There certainly is an expectation that revenue per adjusted admission will come down from the very high levels that it has been running during Particularly during these high COVID surges. But we believe that, that will be replaced in large part by Non COVID, more traditional non COVID surgical and other procedural admissions that have lagged some During the pandemic, I'll also make the point that as that business mix shift occurs, Some of the cost pressures will alleviate as well because while the COVID patients had very robust revenue, they also had very high Generally more ICU utilization, more supply utilization, all that sort of stuff. On the behavioral side, There's not nearly I think as big a shift or change in acuity. I'll make the point just because I had this question Last night, it looks like our revenue per adjusted day in the 4th quarter is quite high in the behavioral segment.

Operator

But if you adjust for The Kentucky reimbursement that we talked about earlier, I think you get to a much more historically looking reasonable number. Again, so I think on the behavioral side, just the general sense is that as the labor situation eases, we'll simply be able to admit more patients. Patient days will grow over the previous year instead of the flat patient days, for instance, that we saw in Q4.

Speaker 8

Okay, that's helpful. And then just one follow-up on kind of longer term margin expectations. It seems like there might be a lot of Temporary costs in your cost structure for 2022 in terms of premium pay and things like that. How should we think about the longer term margin Can you get back to 2019 levels in a couple of years or as things start to normalize? Or just Any thoughts you can share on where things go after this maybe transition year?

Operator

Yes. And again, I think we've said a number of I don't believe we feel like the fundamental economic model in either of our business segments has changed, Meaning, what the historical model has been is that if you can achieve revenue growth in sort of the mid single digits, Generally, you're going to see EBITDA growth and margin expansion over time. As you characterize it, I we're viewing 2022 as a bit of a transition year, particularly the first half of twenty twenty two that as volumes Recover those labor pressures are not going to ease as quickly and therefore we're going to see some margin compression at least in the first half of twenty twenty two. But I think over time, we have an expectation that the models will work as they have worked in the past. And if we can achieve mid single digit growth, Maybe inflation, particularly wage inflation, has increased by 100 or 125 basis points post pandemic, but the model hasn't been turned upside And as a consequence, if that underlying demand is out there and there's been a significant amount of unmet, Postponed deferred demand in both of the business segments over the last several years, which we firmly believe, Then I think revenue growth, I think beginning again towards the end of 2022 should be relatively robust.

Operator

We should see EBITDA growth. We should see margin expansion after we get over these labor pressures. And it will look like the way it was. Can we get back to 2019 margins, the answer I think is yes. The question is how quickly.

Operator

We're certainly not going to get back there in a year, But we certainly believe that we can get back there and go beyond that quite frankly.

Speaker 8

Okay. Thanks for the detail.

Speaker 1

Your next question comes from the line of Josh Raskin with Nephron Research.

Speaker 9

Hi, thanks. Good morning. I wanted to follow-up on the comments that both you and Mark made on the outpatient development. And I'm curious what types of facilities do you think are most useful to UHS In the next couple of years, I'm thinking more specifically in the acute care segment. And maybe how does that outpatient development work in the Broader segment strategy for the Acute Care segment.

Speaker 2

Well, I think it's, I mean, there's a lot of areas that we're looking at, Specifically freestanding emergency departments, we have had a lot of success with that and we continue to evaluate A number of opportunities on the FEDs that I think are going to be very positive as a standalone business as well as what they can Referring to the acute care hospitals. On top of that, we're doing a lot more work with physician clinics. And Again, being able to open and drive business from those clinics in some part to the hospitals, And we see a lot of opportunity in a number of our markets. We had a significant acquisition in California earlier, I guess a few months ago, with a large physician group, which we had been working with for many years, but acquiring them now, and Just increasing the synergies and the things that we're able to do with them as an owner of the practice, That's been a little bit enlightening to us. And so we're looking for more opportunities there.

Speaker 2

In addition to that, I would say the traditional Outpatient radiology services as well as surgical hospitals. It's been a little bit Tougher for us to get deals that we like on the ASC front, but we are currently evaluating Probably in all or just about all of our acute care markets right now. We've partnered with a large surgery center company to do that For the last couple of years. And so I think we're going to gain more traction with that as we go forward in the next 3 to 4 quarters certainly.

Speaker 9

Got you. Just a follow-up on that, Mark. And the ASCs, I'm curious how you think about that shift from inpatient to outpatient care and how important you think that Versus the what sounds like maybe not the most rational market, I don't want to put words in your mouth, but it sounds like it's more of a pricing issue than a strategy issue. Is that right?

Speaker 1

Yes. I mean,

Speaker 2

as far as I look at it, look, it's definitely a trend. It's definitely something We're very cognizant of as far as the desire to move certain business out of the inpatient setting to outpatient. And that's driven by the insurers and for a number of reasons. I'm not sure I categorize it the way you said, but I do think we have great opportunities to not only partner and create new outpatient surgery center businesses That are advantageous on their own, but also to decamp some of the business that is taking up space in our inpatient settings And then have higher acuity, higher paying business, replace that lower end outpatient business.

Speaker 9

Got you. That's perfect. Thanks.

Speaker 1

Your next question comes from the line of Justin Lake with Wolfe Research.

Speaker 10

Hey, good morning. It's Austin on for Justin here. Steve, I was just kind of curious on the full year if you can maybe help us size or give some color on the impact of kind of the direct COVID reimbursement programs, Sort of the benefit from sequestration, that 20% bump and HRSA? And then kind of what is embedded in the assumption for 2022 related to those programs? Thanks.

Operator

Yes. So we've disclosed the impact of The sequestration waiver and the HRSA reimbursement and the 20% add on, I think historically, in the last few quarters, it's been running in the sort of $30,000,000 plus or minus of that range. The way we've incorporated that in our projections or guidance for 2022 is based on the current knowledge, the Medicare waiver lapses in the first half The public health emergency, which drives the 20% add on, I think it lapses in early in the second Quarter, the HRSA money seemed to be running out. So we've assumed all that. Again, the tricky part of this is It looks like and this will be the thing, I mean that reimbursement will largely tail off as the COVID volumes tail off.

Operator

A month or 2 ago, we were concerned that maybe we'd be facing significant COVID volumes and the loss of that extra reimbursement. But It appears that the 2 will sync up more naturally. But yes, we've assumed those things go away Relatively, for the most part, in the first half of the year. Again, that syncs up with guidance, which presumes Overall COVID volumes go down in the first half of the year, that the expenses associated, the really high expenses with those COVID patients go down, Etcetera, so that it's really not a significant drag on our earnings.

Speaker 10

Awesome. Thanks, Steve. And maybe as just a quick follow-up there, just kind of curious maybe on a percent basis where COVID admissions had kind of trended early in Omicron and kind of where they're settling out here? And then maybe for the full year, is there kind of a given range that you guys are assuming COVID volumes to continue to run at?

Operator

Yes. So during the COVID surges, I think at the height of the COVID surges on the acute side, I would say somewhere in the 15% of our admissions were COVID related during the Delta surge, during the Omicron surge, And because the length of stay of the COVID patients is about twice what our average length of stay is, COVID patients were taking up A third of our beds across the portfolio, again, during the surges. So it was a significant number. I think the assumptions that we've made For particularly the back half of twenty twenty two is that we'll be in this kind of, as has been described, endemic environment in which Something like 3% to 5% of our acute admissions will be COVID related and probably less

Speaker 1

Your next question comes from the line of Whit Mayo with SVB Leerink.

Speaker 3

Hey, thanks. Good morning. I haven't heard about Signet or your U. K. Operations and sometimes so was hoping maybe to get an update.

Speaker 3

And I think the broader question and maybe this is framed More for Mark is just thinking about a broader portfolio review for behavioral. I mean, at some point, does it make Since to get smaller to get bigger and maybe making some decisions during a pandemic is ill advised, but just any Update strategically, operationally, anything that you guys are deploying internally that's different this year that gets you excited that we should be probably

Operator

Yes. I mean, well,

Speaker 2

I'll start with the portfolio review. I mean, we do that All the time. And I'll tell you, we've really done that during the last few years during COVID. And to your point, We have scaled down a few places, some operations, a couple of leased facilities and a couple of others where we just Saw the changes in those markets. They weren't big players in the portfolio and we've jettisoned them.

Speaker 2

So we continue to look to pare down if possible, while at the same time, we're doing a lot to grow the division as well. We're trying to always improve the assets. One of the comments I'll make is our JV opportunities on the behavioral side Continue to be robust. And I wanted to just make the point on that, all JV opportunities and all JV partners are not created equal. So there are a lot of JV opportunities, situations that we look at that we pass on, that others do Because we just don't see the merit long term.

Speaker 2

If you notice, the ones that we do for the most part are recognizable nationally, no names Well, they're very strong regional players and that's purposely done. So we're very excited when you say What could we offer as far as getting you all excited? We and Steve has already mentioned this, but with the demand being where it is, We're very excited that when we get the staffing stabilized, and it is stabilizing, and it will continue to stabilize throughout this year, We should be able to pop because we know we track every week. We're talking very specifically about Which beds are closed due to staffing, due to COVID. And as we see that start to turn and it's already starting to turn, That's all upside for us.

Speaker 2

In regards to Signet, Signet's really been a terrific hedge for us. They are growing. There are a number I speak with them very often, weekly in fact. Our team over there is very strong. They're competing quite well against historical, In fact, larger players in that market, we're competing much, much better than we have in the past.

Speaker 2

Others are having some hiccups. So we're very excited. The list of opportunities just in the U. K. Is incredibly impressive.

Speaker 2

And along with that, we will look at things outside the UK if they present and we think they make sense. But right now, We have a number of areas just within the UK that we think we can add beds either to existing facilities Or some new facilities and our relationship with the NHS has never been stronger. So we're quite positive about That business and where it's going to go going forward.

Speaker 3

Great. That's helpful. And maybe just one quick follow-up Steve, if you could maybe give an update on what you're contemplating for Texas, DSRIP, UCC as this Program presumably will continue now. And your 10 ks has an update that there's, I guess you guys expect $391,000,000 from state supplemental payments and that number hasn't historically been that reliable. So I guess I'm just trying to make

Operator

Yes. So first of all, I'll make a few broad comments. You alluded to the 10 ks, which was filed last night. I do think UHS has a rather expansive disclosure on these state programs. So if people are really interested in the details, I would suggest They spend some time reading our 10 ks disclosure on the subject because I think it is rather informative.

Operator

Broadly, as it regards Texas, there are a couple of different programs in Texas. I think the one that is Sort of most uncertain at the moment is the directed payment program, which the state and CMS are sort of in dispute over. We had about $12,000,000 or $13,000,000 of reimbursement related to that program, which we did not recognize In the last 4 months of 2021, although we remain hopeful that it will be approved and will wind up getting recognized retroactively in The uncompensated care program, which people have expressed some concerns over, etcetera, looks like it is moving forward. The next I think payment is actually scheduled to occur within the next week or 2. I just saw a communication in that regard From the HHS of the Health Department in Texas.

Operator

So it seems like that's moving forward. So Amit, I'll finally make one last comment. Look, there is some choppiness associated with these state reimbursement programs. We tend to be conservative about how we account For them tending to wait until they are approved either at the state and or the federal levels and sometimes that means that We're not recording the income or revenues rapidly. But if you look at the trends over time, The trajectory of those programs tends to be increased.

Operator

And then I think they are because the hospitals really rely on these programs and a lot of the hospitals that rely on these programs are safety net hospitals where they need to be Those that rely on these programs are safety net hospitals within each of the states, etcetera. And so the programs really become An important part of both state and federal funding. So yes, there's some uncertainty and some volatility in how these things get recorded. But I think our general sense is that the programs will remain at or equal to historical levels. Again, with the one exception that I would note, we didn't really get into it in detail, but we recorded on the Kentucky reimbursement Essentially 18 months' worth of reimbursement in 2021.

Operator

So in other words, 6 months of the reimbursement that we recorded really related to the Last half of twenty twenty. So that's a bit of a headwind going into 2022 because we'll only record 12 months of Kentucky reimbursement in In 2022, but that's clearly baked into our guidance.

Speaker 3

Okay, great. Thanks guys. Appreciate it.

Speaker 1

Our final question comes from the line of Sarah James with Barclays.

Speaker 11

Thank you for squeezing me on. When you talked earlier about getting back to the pre 2019 margins, how much of that is cost control versus more of a change in the rate environment?

Operator

Honestly, Sarah, I think that the real driver, as I think Mark and I both alluded to, It's volume recovery. Look, we're certainly looking at cost controls. And I think cost controls focused on the elimination of this really expensive labor component that we've been incurring for the last during the pandemic. But again, I mean, I don't think we Anticipate sort of reaming efficiencies out of the business in order to get back to those margins. What I was saying before is, We're going to get back to this model of mid single digit revenue growth.

Operator

And if you combine that with efficient operations, which we have historically Always had. Then I think you sort of get back to that model. But no, I don't think we're either cost cutting our way Back to 2019 margins nor getting there from extraordinary rate increases, although we would hope That both from our government and commercial payers over the next year or 2, there's more and more recognition of The inflationary pressures on labor and other costs.

Speaker 11

Got it. That's helpful. And as you think about That recognition across your different types of payers, how do you think about the timing of that? Like which With Medicare Act First or when you think about Medicare, Medicaid and the private payers, Where do you think the recognition could start?

Operator

It's a great question, Sarah. And obviously, from a Medicare and Medicaid perspective, That's largely out of our control, meaning, I mean, there are bigger forces, bigger lobbying groups, both at the federal and state level. We're active participants in those groups, so we're not we're sort of not driving that. But again, I think the inflationary pressures put that not for profit hospitals in particular at a disadvantage. And so there will be great pressure on that.

Operator

As far as the commercial payers, we have a much more active role there. And I think we're playing that active role And pressing more and more of our payers for what we believe to be reasonable rate increases. And then if we don't get I think we're more willing today than we have been in some time to terminate contracts to walk away from business that doesn't have a reasonable

Speaker 11

That's helpful. Thank you.

Speaker 1

I'll now turn the conference back over for any closing remarks.

Operator

We'd just like to thank everybody for their participation and look forward to talking again at the end of the Q1. Thank you.

Speaker 1

Thank you all for joining today's meeting. You may now disconnect.

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Earnings Conference Call
Universal Health Services Q4 2021
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