Universal Health Services Q1 2022 Earnings Report

Universal Health Services EPS Results

• Actual EPS: $2.15
• Consensus EPS: $2.47
• Beat/Miss: Missed by -$0.32
• One Year Ago EPS: $2.44

Universal Health Services Revenue Results

• Actual Revenue: $3.29 billion
• Expected Revenue: $3.24 billion
• Beat/Miss: Beat by +$51.29 million
• YoY Revenue Growth: +9.30%

Universal Health Services Announcement Details

• Quarter: Q1 2022
• Date: 4/25/2022
• Time: After Market Closes
• Conference Call Date: Tuesday, April 26, 2022
• Conference Call Time: 7:58AM ET

Universal Health Services (NYSE:UHS) (NYSE: UHS) is one of the largest diversified health care management companies in the United States, offering a broad spectrum of services through its acute care hospital and behavioral health segments. The company operates general acute care hospitals, surgical hospitals and ambulatory centers, as well as inpatient and outpatient behavioral health facilities. Its network provides emergency and specialized medicine, diagnostic imaging, laboratory services, advanced surgical care and rehabilitation, complemented by a comprehensive array of behavioral services including psychiatric treatment, addiction programs and developmental disabilities care.

In the acute care segment, UHS’s facilities deliver services ranging from emergency department treatment and intensive care to maternity care and outpatient surgery. Through its behavioral health operations, the company focuses on mental health stabilization, co-occurring disorder programs, and long-term rehabilitation for patients of all ages. Many of its locations also incorporate telehealth offerings and community-based programs designed to expand access to primary and behavioral health care.

Founded in 1979 by Alan B. Miller and headquartered in King of Prussia, Pennsylvania, Universal Health Services has expanded its footprint to include more than 350 facilities across the United States and Puerto Rico, with select operations in the United Kingdom. Under the leadership of its founder and executive chairman, the company has pursued both organic growth and strategic acquisitions to enhance its clinical capabilities and geographic reach. UHS employs tens of thousands of health care professionals and support staff committed to delivering patient-focused care and operational excellence.

Universal Health Services Q1 2022 Earnings Call Transcript

Key Takeaways

• Q1 adjusted earnings per diluted share were $2.15, exceeding prior-year levels.
• Escalating labor scarcity and high contract nursing costs (premium pay rose to $150 M) weighed on margins, and the company may revise its 2022 forecast if these trends persist.
• Behavioral unit volumes were constrained by staffing vacancies despite strong inbound demand, keeping patient days slightly below last year.
• Operating cash flow reached $445 M versus $72 M in Q1 2021, and UHS repurchased $350 M of stock, underscoring solid cash generation and capital return.
• UHS expects contract labor rates to gradually decline, is boosting recruitment and alternative care models, and remains confident in long-term demand, leaving its annual outlook intact.

Presentation

[Operator]

Good day and thank you for standing by. Welcome to the Universal Health Services, Inc. first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

[Operator]

To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to our speaker today, Steve Filton, CFO. Please go ahead.

[Steve Filton, EVP and CFO at Universal Health Services]

Thank you, Mary. Good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the first quarter ended March 31, 2022. During the conference call, we will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements.

[Steve Filton, EVP and CFO at Universal Health Services]

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-K for the year ended December 31, 2021. We'd like to highlight just a couple of developments and business trends before opening the call up to questions.

[Steve Filton, EVP and CFO at Universal Health Services]

As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $2.02 for the first quarter of 2022. After adjusting for the impact of the item reflected on the supplemental schedule as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.15 for the quarter ended March 31, 2022.

[Steve Filton, EVP and CFO at Universal Health Services]

During the first quarter of 2022, our operations continued to be impacted by the COVID-19 pandemic as well as pressures on staffing and wage rates. Specifically, a surge in patients with the Omicron variant of the virus, which began in December of 2021, tended to peak in most of our geographies in January of 2022.

[Steve Filton, EVP and CFO at Universal Health Services]

In our acute segment, we would note, in general, the Omicron patients were less acutely ill than the COVID patients treated in previous surges and thus displayed lower acuity. Meanwhile, the amount of contract nursing hours used, and even more importantly, the rate we had to pay for those hours increased significantly in the first quarter, both on a sequential basis as well as year-over-year, at a year-over-year comparison.

[Steve Filton, EVP and CFO at Universal Health Services]

Although in our behavioral segment, contract nursing costs did not increase quite as dramatically, our inability to fill all of our labor vacancies had a notable limiting impact on our patient volumes and related revenues. We do note that our results were benefited in the first quarter from approximately $12 million of revenues net of related provider taxes from special Texas Medicaid reimbursements which related to the last four months of 2021. Recognition of those revenues were deferred until formal government approval was obtained.

[Steve Filton, EVP and CFO at Universal Health Services]

Our first quarter also included approximately $15 million of startup losses incurred by recently opened de novo acute and behavioral health facilities, and $6 million of losses related to temporarily closed beds at two behavioral health facilities which were impacted by natural disasters. Those beds have since been reopened.

[Steve Filton, EVP and CFO at Universal Health Services]

As disclosed in our last night's press release, our operating results for the first quarter of 2022 were unfavorably impacted by labor costs that were higher than anticipated and patient volumes at our behavioral health facilities that were lower than anticipated due to the continued uncertainties related to the COVID-19 pandemic, as well as cost escalations related to the nationwide shortage of nurses and other clinical staff.

[Steve Filton, EVP and CFO at Universal Health Services]

Although we're not changing our previously released 2022 operating result forecast at this time, we may make reductions to our forecast at a future date if the unfavorable operating trends experienced during the first quarter of 2022 do not improve. Our cash generated from operating activities was $445 million during the first quarter of 2022, as compared to $72 million during the same period in 2021.

[Steve Filton, EVP and CFO at Universal Health Services]

We note that first quarter 2021 cash generation reflected the repayment of the Medicare accelerated payments. We spent $200 million on capital expenditures during the first quarter of 2022. Our accounts receivable days outstanding decreased to 48 days during the first quarter of 2022, as compared to 50 days in the first quarter of 2021. Due in large part to the continued repurchasing of our shares, at March 31, 2022, our ratio of debt to total capitalization increased to 42.3% as compared to 35.7% at March 31, 2021.

[Marc Miller, President and CEO at Universal Health Services]

Our first quarter 2022 operating results were behind our internal forecasts, and our internal forecasts were below the consensus estimates. The primary driver of the shortfall was the fact that the labor scarcity has not moderated as quickly as we were expecting. We believe, in part, this is because at the height of the Omicron surge, providers were entering into longer-term commitments for temporary.

[Marc Miller, President and CEO at Universal Health Services]

And traveling nurses, not necessarily predicting that COVID volumes would decline as rapidly as they ultimately did. We do believe that the demand for this premium priced labor will continue to gradually decline. In the meantime, we continue to invest heavily in recruitment and retention initiatives and have substantially increased the pace of our hiring.

[Marc Miller, President and CEO at Universal Health Services]

Where appropriate, we are also developing alternative patient care models that allow us to use a wider variety of available caregivers to render the most efficient and highest quality of care that we can. While the pace of the recovery from the current labor scarcity is still uncertain, we're comfortable that it will occur over time.

[Marc Miller, President and CEO at Universal Health Services]

Combined with our confidence in the long-term baseline demand in both of our business segments, our bullish view of the underlying strength of our core businesses remains intact. Reflective of that sentiment, we remained an active acquirer of our own shares in the first quarter, repurchasing $350 million of those shares.

[Marc Miller, President and CEO at Universal Health Services]

At the same time, we continued to reinvest organically, opening the new acute care hospital in the Reno market and behavioral de novo and/or joint venture hospitals in Arizona, Michigan and Wisconsin. At this time, we're pleased to answer your questions.

[Operator]

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Josh Raskin from Nephron Research. Your line is open.

[Joshua Raskin, Co-Founder and Partner at Nephron Research]

Good morning. Just to start with the behavioral side, it looks like volumes came in below expectations due to the continued capacity constraints. So wanted to get your view, what is the ultimate solution to attracting more staff to meet the strong underlying demand you're speaking about? I mean, it doesn't sound like raising base wages is enough at this point. Or do you think this is just more of a structural impediment in behavioral care for the foreseeable future? Thanks.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. We've talked about this at some length before. I think the solution, you know, as I think our prepared remarks indicated, you know, we don't think this problem gets solved overnight, but we do believe it will continue to gradually improve.

[Steve Filton, EVP and CFO at Universal Health Services]

Number one, I think the market dynamics, and we've been through nursing shortages before in our tenure, although this one is certainly probably more severe than anything we've previously experienced. You know, the system will generate more nurses and other clinical personnel because wages are going up, and it will become a more attractive profession, and that supply of newer nurses will be helpful.

[Steve Filton, EVP and CFO at Universal Health Services]

At the same time, Marc alluded to this in his remarks. We've really upped our investment in recruitment and hiring initiatives, the number of people involved in those processes, making sure that our wage structures in every market are as competitive as they can be.

[Steve Filton, EVP and CFO at Universal Health Services]

We're, you know, reviewing competitive wage rates in most markets, you know, multiple times a year, whereas historically that's a process that took place maybe once every year, once every other year. We're changing patient care models. You know, Marc referred to that as well. Again, you know, we're seeing the beginnings of improvement in those areas. You specifically were asking about behavioral.

[Steve Filton, EVP and CFO at Universal Health Services]

I think we've been on the behavioral side of things, hiring nurses and other clinicians at record historical rates for us, for, you know, well over six or eight months. The real challenge is on the back end, you know, where the turnover rates continue to go up.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, that's the challenge that I think providers around the country are facing. But I think the encouraging thing for us is, at least in the last few periods, our net hires are actually positive. Now, again, I don't mean to imply that, you know, the problem has been solved, but, you know, I think we think it will continue to get better. As we continue to have net positive hires, it should allow us to treat more patients.

[Steve Filton, EVP and CFO at Universal Health Services]

That patient day number, which was slightly negative in Q1 compared to last year, should turn positive in the near future. That would be the hope and continue to improve from there. Because again, as I think Marc indicated in his prepared comments, we believe the underlying demand is there. We believe that for a long time, that really that core belief has not changed at all.

[Operator]

We have a question from Matt Borsch from BMO Capital Markets. Your line is open.

[Benjamin Rossi, Equity Research Associate at BMO Capital Markets]

Hi. Good morning. Thank you for taking my question. You have Ben Rossi here filling in for Matt. Just regarding the recent release of the Medicare IPPS proposed rule for 2023, I can appreciate that there are still some moving pieces, but was curious if you could provide us with a projection for your rates from that proposal. More broadly, how you feel about CMS factoring this inflationary pressure and whether you think that CMS will start to factor that in more accurately as we look out to 2024 and beyond. Thanks.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. As you suggest, there are a number of moving parts in the release. When we do the calculation to the best of our ability, we think that the net blended increase for UHS hospitals will be about 2.5%. That is pretty much the number that we included in our guidance for the year beginning in October, which is the beginning of the federal fiscal year.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, I think along with the rest of the hospital industry, we were disappointed that Medicare and CMS did not seem to acknowledge the inflationary pressures and particularly the labor inflation that hospitals across the country are experiencing. I suspect that in this period between the preliminary and final rates, Medicare will come under significant pressure from lobbying groups across the country representing hospitals of all stripes and sizes.

[Steve Filton, EVP and CFO at Universal Health Services]

Now, to your question, what impact will that have on CMS this year or next year? It's hard to know. We certainly have feedback both, I think, formally and informally from peers, both for-profit and not-for-profit peers, both in our markets and in other markets across the country, that hospitals are struggling, again, particularly on the labor side. Certainly they'll be making Medicare and CMS aware of that as acutely as they can over the course of the next few weeks and months.

[Benjamin Rossi, Equity Research Associate at BMO Capital Markets]

Okay. Great. Thank you.

[Operator]

Our next question comes from the line of Andrew Mok from UBS. Your line is open.

[Andrew Mok, Managing Director at UBS Securities LLC]

Great. Good morning. Thanks for the question. Steve, can you provide more detail for how labor expenses trended in the quarter relative to internal expectations in each of the segments? Exiting the quarter and into April, what level of improvement have you seen in contract labor rates, and what are the expectations there for the balance of the year? Thanks.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. I mean, so the cadence of the year so far, Andrew, obviously, you know, January still had very high Omicron volumes in many of our geographies. In some of those geographies, the Omicron volumes really didn't recede until the end of January, in some cases, even early February. Labor was definitely an overarching issue, you know, in the first, I'll call it 4-6 weeks of the quarter.

[Steve Filton, EVP and CFO at Universal Health Services]

I think what was disappointing in terms of our expectations was that the labor scarcity, again, I think we said this in our prepared remarks, did not recede or ease as much as we thought in the, you know, the final 6-8 weeks of the quarter as COVID volumes receded relatively rapidly.

[Steve Filton, EVP and CFO at Universal Health Services]

Again, I think as Marc alluded to in his comments, we think some of that was that hospitals were making longer term commitments. You know, I know a number of our commitments to temporary traveling nurses, instead of being for a week or four weeks, were in many cases for eight or even 13 weeks, and we've certainly heard of other hospitals making commitments for even longer than that. To some degree, I think, you know, we found the labor issues to be kind of stickier and more difficult to navigate in the back half of the quarter than we were expecting.

[Steve Filton, EVP and CFO at Universal Health Services]

I also think it's complicated, you know, when you have a tight labor situation in March and April, going through spring break and the Easter and Passover holidays, and people, I think, resuming their normal, kind of vacation plans and this and that for the first time in a few years, you know, it made, again, sort of backfilling and getting back to sort of a normal labor supply and demand dynamic a little more challenging.

[Steve Filton, EVP and CFO at Universal Health Services]

I think in both of our business segments, the hope is that in May, as the calendar sort of settles down, as we have, you know, more success in hiring, you know, more success in sort of trimming that turnover rate, become a little bit more aggressive in not entering into nearly as many longer term commitments on the temporary and traveling side of things, rejecting the highest rates that those temporary and traveling companies are demanding, you know, we'll see, you know, some relief, some measurable relief beginning in the May timeframe.

[Andrew Mok, Managing Director at UBS Securities LLC]

Got it. Can you help quantify the moderation in contract labor rates that you've seen in the market thus far?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. I mean, again, the first quarter was a quarter of escalating, I'll say dollars especially. You know, on the acute side, we talked about our premium pay in Q4 as being $120 million. That increased in Q1 to $150 million and compares to Q1 of 2021, when it was $70 million.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, it the overall dollars, premium pay, you know, certainly increased in Q1. We are seeing a reduction in rates, you know, at the very end of Q1 and into April, and we presume that will continue into Q2. You know, it's difficult to say, you know, the exact pace at which they're decelerating, but certainly we're seeing decelerating rates.

[Andrew Mok, Managing Director at UBS Securities LLC]

Great. Thanks for the color.

[Operator]

Our next question comes from the line of Justin Lake from Wolfe Research. Your line is open.

[Justin Lake, Managing Director and Senior Equity Research Analyst at Wolfe Research]

Thanks. Good morning. Look, I wanted to start off following up on that question around labor. Steve, you talked about $120 going to $150. How do you expect that within the guidance to kind of play out through the year? Are you assuming a pretty material decline there as we go through the year in terms of that temp labor?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. Justin, I think our commentary has been pretty consistent, really beginning with our third quarter call, you know, in October of last year into our year-end call in February. That commentary has sort of suggested that the labor recovery was happening slower than we expected. First of all, it was clearly set back by the Omicron surge in December of 2021 and in January of 2022.

[Steve Filton, EVP and CFO at Universal Health Services]

That definitely set things back from where our expectations were in the fall of last year. Even as I said, you know, even from our commentary that we made just two months ago when we issued our guidance and did our year-end announcement, I think the recovery is clearly slower than it is and, you know, than we expected.

[Steve Filton, EVP and CFO at Universal Health Services]

Obviously, I think that's been true, at least for two of our acute care peers who I think have made similar comments in the last week or so. Our original guidance always presumed that it was certainly a different cadence than has been the historically normative cadence for our company, that earnings would improve as the year went on, and the fundamental driver of that sort of cadence and that trajectory is the idea that labor pressures would ease as the year went on.

[Steve Filton, EVP and CFO at Universal Health Services]

I think it's worth noting, you know, in terms of the labor pressures being greater than we expected in Q1, we certainly acknowledge that our earnings missed our own internal forecast. Again, you know, Marc suggested we were off of our forecast. We were about 5% or 6% off of our forecast in Q1.

[Steve Filton, EVP and CFO at Universal Health Services]

We know that we were probably 11% or 12% off of consensus. You know, I think we have a sense that we may be able to recover that as the year goes on. Again, as you know, our press release indicated, if the labor recovery does not occur as fast as we think that it will, you know, we may have to revise that guidance later in the year. We're at the moment, you know, still hopeful that that improving cadence will occur as the year goes on.

[Justin Lake, Managing Director and Senior Equity Research Analyst at Wolfe Research]

Okay. Is there a number you can give us, Steve, in terms of like, you know, it's really helpful you're saying 120 and 150, you know, the last two quarters. Is there a number that you could anchor us to in terms of where you think this is gonna go through the year?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah, I mean, what I would say is, look, I don't know that any of us know where it's gonna go. I think what our guidance presumed is that by the end of the year, we would, at a minimum, return to, you know, kind of last year's pace. Like I said, in the fourth quarter of last year, you know, the premium pay was sort of that $70 million range, et cetera.

[Steve Filton, EVP and CFO at Universal Health Services]

It's really important to understand that that, you know, incremental, let's call it $50 million of premium pay, you know, is essentially, you know, a hit, direct hit to the bottom line because we're not getting any more nurses for that. We're getting the same amount of nurses, you know, for the most part and just paying premium rates for them.

[Steve Filton, EVP and CFO at Universal Health Services]

As those premium rates go down, I mean, as the premium rates have risen, they've clearly, you know, put a real strain on our earnings and on our peers' earnings. As they come down, you get that same benefit. You know, you'll be replacing a temporary nurse with an employed nurse who's making, you know, maybe a third of what that temporary nurse was making.

[Justin Lake, Managing Director and Senior Equity Research Analyst at Wolfe Research]

Okay. You know, to just put some math around this and finish it up, you know, you're talking about 150 going down to 70 by the end of the year, but you haven't seen any actual, you know, it sounds like you've seen a little bit of a moderation in the pay, you know, the payment terms, but not much of a moderation in the hours, right, even through April. Is there anything you can point us to that's saying, you know, you've got visibility here? If not, why not just take down the guidance and assume some more conservative path through the year?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah, I mean, honestly, Justin, I have to confess being a little bit frustrated. You know, two months ago, we issued guidance that I think was more conservative generally than our peers. At least from a number of quarters, I think we were roundly criticized for that, you know, we, you know, the complaint was we expressed too much caution about how quickly this labor situation would resolve itself, et cetera.

[Steve Filton, EVP and CFO at Universal Health Services]

Now, two months later, some people, and you in the moment are, you know, saying, "Okay, you know, now you're being too aggressive." All we're suggesting, I think, and again, I don't mean to imply that, you know, we're saying that the labor situation has turned or we're. We have 100% certainty that it will or when it will.

[Steve Filton, EVP and CFO at Universal Health Services]

I think we're just suggesting that more time is not an unreasonable sort of request for people to have two months after that guidance was initially issued. I pointed to a number of metrics. I said, you know, our net hires in the behavioral segment had turned positive in the last few periods. You know, I suggested that we're seeing lowering rates, et cetera.

[Steve Filton, EVP and CFO at Universal Health Services]

Again, not meaning to imply that there's a complete turnaround here, but I do think there's enough of these sort of early indicators that things are improving to a degree that makes us think that that 6% shortfall from our own internal forecast that we experienced in Q1 can be maybe partially or completely recovered as the year progresses.

[Justin Lake, Managing Director and Senior Equity Research Analyst at Wolfe Research]

Appreciate all the color, Steve. Thanks.

[Operator]

Our next question comes from the line of Stephen Baxter from Wells Fargo. The line is open.

[Stephen Baxter, Managing Director and Senior Equity Research Analyst at Wells Fargo]

Yeah, hi. Thanks. You know, appreciate the commentary on the impact to behavioral volumes from labor. I was hoping you could help us think about a little bit operationally about what happened in the acute care business in the quarter. When we look at it, I guess, against baseline levels, it does seem like the adjusted admissions took a step back versus where you've been running over the past three quarters.

[Stephen Baxter, Managing Director and Senior Equity Research Analyst at Wells Fargo]

I guess those quarters also had some COVID impact to them. Just trying to understand, you know, was there an impact on the volume side? And I guess if there was an impact on the volume side, it does seem like you're using a greater quantity of contract labor against that. You know, what does that mean for how your maybe retention rates are performing? Thank you.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah, look, I think it's worth noting that you know, the COVID volumes, again, and this is really acute care commentary, were so high in the beginning of the year that even though they declined fairly rapidly, our acute care segment finished the quarter with about 14% of their admissions for the quarter being COVID diagnoses.

[Steve Filton, EVP and CFO at Universal Health Services]

That's about as high as we've run during the two-plus years of the pandemic. I know people you know tend to have you know sort of recency bias, and they think of COVID being behind us, et cetera. You know, COVID played a significant part in Q1. On the acute side, you know, that's challenging because it you know, it's challenging on the labor side, as we've discussed.

[Steve Filton, EVP and CFO at Universal Health Services]

It's challenging on our ability to, you know, have effective throughput with non-COVID cases and procedural cases, et cetera. I think by the end of the quarter, most of the operational sort of throughput in terms of patients, et cetera, had returned in large part to normal. Again, those labor pressures persisted late into the quarter, maybe in some cases even into April, because I think of this phenomena.

[Steve Filton, EVP and CFO at Universal Health Services]

I make the point that it's not only our commitment, you know, that we're locked into longer term commitments for nurses, but to the extent that the nurses who we think will ultimately return to our facilities are locked into longer term commitments at other facilities or other geographies. That has to play out before those nurses will ultimately return to us.

[Steve Filton, EVP and CFO at Universal Health Services]

While we certainly acknowledge that some of those nurses probably don't return anytime soon and are more committed to sort of that traveling or temporary nurse lifestyle, we do believe and I think, you know, both our internal and external data suggests that more and more of those nurses are not gonna pursue that lifestyle indefinitely.

[Operator]

Our next question comes from the line of Jason Cassorla from Citi. Your line is open.

[Jason Cassorla, VP and Equity Research Analyst at Citi]

Great. Thanks. Good morning. I just wanted to go to CapEx quickly, just in context of this continued kind of pressured labor environment. Does it change how you're thinking about the pacing or timing for future capital deployment priorities as it relates specifically to service line build out or investment in equipment or otherwise at this juncture? Thanks.

[Marc Miller, President and CEO at Universal Health Services]

What I would say is we certainly have to take that into account on a episodic basis. You know, each project we look at and try to make a determination on market factors. For capital equipment, things like that, probably no change. For the larger project, projects in general, we look at them specifically and take into account each factor or all the factors in a particular market that might affect that project. In some cases, you know, we'll choose to hold at least for a period of time until we feel better about what's happening in a particular market.

[Jason Cassorla, VP and Equity Research Analyst at Citi]

Thanks.

[Operator]

Our next question comes from the line of Pito Chickering from Deutsche Bank. Your line is open.

[Pito Chickering, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Hey, good morning, guys. Thanks for taking my questions. A couple ones here. With what you've seen in the first quarter, it looks like labor pressures are continuing in April before hopefully turning in May. Because you said that the street first quarter estimates were 5%-6% higher than your own internal estimates, any chance you can give us a range for how you're thinking about 2Q sequentially or percent of the annual admissions here, annual EBITDA, just so we get this number right.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. I'm not exactly sure, you know, why you're asking me. As we've discussed on many occasions, you know, we don't give quarterly guidance, and that's an intentional decision on our part. As I said, we were, you know, 6% short of our own internal forecast in Q1.

[Steve Filton, EVP and CFO at Universal Health Services]

I think part of the reason that we particularly enumerated some of those startup losses and non-recurring losses in our prepared remarks was we were, you know, potentially suggesting a reason why I think we budgeted for those things probably more accurately than, you know, the street was able to. I don't know that for a fact.

[Steve Filton, EVP and CFO at Universal Health Services]

I don't know that that's the main difference between our internal forecast in Q1 versus the consensus estimates, but I think it's a possible explanation. You know, I think again, our perspective is that EBITDA basically gradually increases as the year goes on, which again, is different than what would be our normal historical cadence.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, again, getting back to this idea, in order to make up that, you know, 6% shortfall in Q1, we'd have to be a couple of percentage points higher in each of the next quarters on average, to still get to, you know, the midpoint of our guidance. Again, I don't think we think that's a certainty by any stretch. It's a difficult environment, but I think we certainly don't feel at this point, that, you know, we would say with, precision that we can't get there.

[Pito Chickering, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, great. Can you provide us a number of gross hires versus net hires in the fourth quarter versus the one quarter or first quarter? How's it tracking in April? Basically any color on turnover, is it consistent? Is it getting better or turning worse? The third tag on there is, you know, as you think about turnover, did it mean that your wages are uncompetitive and you may need to increase those rates?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. I mean, as I said in an earlier comment, this question of whether wages are competitive is certainly far from a static question. Literally, you know, we are doing competitive market reviews in all of our markets, you know, in some cases as frequently as quarterly.

[Steve Filton, EVP and CFO at Universal Health Services]

I mean, you know, that's how quickly the supply and demand dynamics are changing. Again, you know, the point that I would make is the labor or the wage pressure that we're feeling, you know, I'll speak to the acute business in particular, is not from the increases that we're giving from an underlying wage perspective, but it's from that premium pay.

[Steve Filton, EVP and CFO at Universal Health Services]

As that premium pay declines, you know, even if we're increasing our wages, our base wages by 100 basis points or 150 basis points, the economics are such that we benefit greatly, if, you know, again, the example that I was giving before, I think in response to Justin's question, if our premium pay goes from the $150 million that we spent on acute in Q1 to this, you know, $70 million we spent a year ago, you know, that benefit drops almost, you know, directly to the P&L, to the bottom line.

[Steve Filton, EVP and CFO at Universal Health Services]

Now, again, not going to happen immediately. We'll take some time. Probably gets offset a little bit by underlying wage increases. You know, there's still an enormous amount of leverage that comes from being able to reduce that number.

[Steve Filton, EVP and CFO at Universal Health Services]

The challenge that all the hospitals in general have had is that number has been increasing. You know, the sense is, I think at the moment that we're getting pretty close to the peak, if we're not there. Now I think, you know, the focus and all of our calculations are how quickly can it be reduced. I don't think there's a sense that that number is likely to go up anymore in any significant way.

[Pito Chickering, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, great. Sort of two quick follow-ups here. Supply inflation. You know, we're going to hear from suppliers about sort of pushing costs onto hospitals. I guess, what are you seeing from supplies and then from medical devices? Are you guys seeing inflationary pressures getting pushed to you on the supply side?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah, look, I think, you know, like every both, you know, business and personal consumer, we're seeing, you know, inflation affecting all of our spend. The labor inflation and, again, I'm not even sure I would describe it as inflation per se, but, you know, what I would describe as the reliance on this premium pay is so much the dominating dynamic in the space that even with inflation, you know, two things.

[Steve Filton, EVP and CFO at Universal Health Services]

I think if we see those premium rates come down, we'll get a direct benefit from that. I think if we see those premium rates come down, we'll also see our own hiring improve, and particularly on the behavioral side, that will allow our volumes to increase. That will, you know, provide a pretty significant offset to those inflation rates.

[Steve Filton, EVP and CFO at Universal Health Services]

Again, inflation is definitely a factor. I think, you know, we have a point of view that if we can solve the labor scarcity problem, that will more than overwhelm the pressures that we're feeling from increased inflation.

[Pito Chickering, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Great. Thanks so much.

[Operator]

Our next question comes from the line of Ann Hynes from Mizuho. Your line is open.

[Ann Hynes, Managing Director and Senior Healthcare Services Equity Analyst at Mizuho]

Hi. Good morning. Can you let us know what is embedded in guidance for base labor wage rates and what that compares to on a historical basis? Is your estimate tracking in line with your estimates? How should we think about that in 2023? I know it's early, but, given wages is your biggest cost structure. We probably want to assume the right pressure point for next year. Thanks.

[Steve Filton, EVP and CFO at Universal Health Services]

We talked, I think, about this a little bit in the Q4 call. I mean, I think if pre-pandemic our wage inflation was, let's say on the acute side, 3.5%. On the behavioral side, it was probably 2.5%. I think post-pandemic, we're thinking those rates are up 100-150, maybe even 200 basis points. I think we think those rates ease some in 2023, for a number of the reasons that we've already talked about.

[Steve Filton, EVP and CFO at Universal Health Services]

Again, I think when we do that math, if we're replacing nurses who were making $65 or $70 an hour with temporary or traveling nurses who are making $225 an hour, that's really the drag on our earnings in the current period. If we ultimately replace those nursing hours that we were paying $225 for per se at $75, even though that's a reasonable increase from what we had been paying pre-pandemic, it's still an enormous improvement over where we're sitting right now.

[Ann Hynes, Managing Director and Senior Healthcare Services Equity Analyst at Mizuho]

All right. Just a follow-up question. When I think about the nursing issue, like, the acute care seems very obvious. You have the premium rates, you had COVID spikes, and that should come down. I struggle more with the behavioral side and whether there's some structural shift in nursing going on. I guess, what is your view on that? Is there anything you can do to reduce your reliance on nurses?

[Ann Hynes, Managing Director and Senior Healthcare Services Equity Analyst at Mizuho]

If it is more structural in nature, would you consider portfolio rationalization, like in certain markets? Are you closing units right now? Maybe I know you've given a lot of nursing stats, but do you have, like, an absolute number of nurses you had pre-pandemic and what it is versus now in the behavioral business?

[Ann Hynes, Managing Director and Senior Healthcare Services Equity Analyst at Mizuho]

I'm just curious to see how much your nursing staff has been reduced and what you have to overcome to return to growth. Thanks.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. You know, and again, we've talked about this. The most difficult position generally to fill during the pandemic has been the registered nurse position on both the acute and the behavioral side. We're experimenting, more than experimenting, I think, you know, we're implementing new, newer, models of patient care that rely less heavily on the RNs and more heavily on LPNs and LVNs and paramedics.

[Steve Filton, EVP and CFO at Universal Health Services]

And all sorts of other, you know, folks who are rendering care and not what they're, you know, I always wanna make this point very clear. You know, we're not having people practice the phrase that gets used in the profession is above their license. What we're trying to do is relieve our RNs from doing more clerical and administrative work than they need to do.

[Steve Filton, EVP and CFO at Universal Health Services]

Somebody else can answer the phone, somebody else can speak with families, somebody else can change the sheets in a room, whatever it may be. Let's allow the nurses to do the things that are, again, at the top of their license, doing psychological assessments and behavioral care and delivering medication and all those sort of things.

[Steve Filton, EVP and CFO at Universal Health Services]

That's really a big focus of ours. Now, again, to be fair, those sorts of patient care model changes take some time. It takes some time to hire the other non-RN physicians, takes some time to train people, takes some time for people to get oriented, et cetera. We think we're making incremental improvement in those areas and we'll continue to do so. As far as portfolio rationalization, no, I mean, we're not really.

[Steve Filton, EVP and CFO at Universal Health Services]

I mean, we're you know, closing down capacity temporarily when we don't have sufficient clinical staff to treat patients. I think, you know, we've talked about this again in previous calls. We are, I think, rationalizing our capacity to a degree as we're negotiating our managed care contracts.

[Steve Filton, EVP and CFO at Universal Health Services]

If our managed care payers are not giving us sufficient increases to recognize this elevated level of you know, labor cost, you know, we're canceling some of those contracts, we're changing payer mix, et cetera. I think we're rationalizing capacity or the portfolio in that way.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, I think I've said this earlier, you know, we're also saying no to some of the really egregious temporary and traveling rates, where we're just saying, "Look, it doesn't make sense for us to pay XYZ for a nurse if we're only getting paid ABC from a payer."

[Steve Filton, EVP and CFO at Universal Health Services]

You know, I think unlike some providers, we don't have the point of view that we're gonna pay whatever it takes for a nurse. I think in some cases, we believe that it just makes sense to rationalize, using your terms, some of the capacity and just run a lower volume for a period of time until rates come into a more normalized range.

[Ann Hynes, Managing Director and Senior Healthcare Services Equity Analyst at Mizuho]

All right. Thanks.

[Operator]

Our next question comes from the line of Sarah James from Barclays. Your line is open.

[Sarah James, Equity Research Analyst at Barclays]

Thank you. I'm trying to run through some of the math. You said that you were 5%-6% off internal forecast in 1Q, so that's $19 million-$20 million. Acute premium pay went up $30 million. Can you give us what psych was? I know last quarter you said it was about $25 million-$30 million in premium pay for the year. Were there any positive offsets? It seems like there were to get to that 5%-6% off the internal forecast.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. Sarah, I mean, you know, what we talked about before is that the premium pay on the behavioral side is much less of an issue than it is on the acute side. It's probably, you know, a third or lower and, you know, when you talk about premium pay as well as things like retention bonuses and sign-on bonuses, et cetera.

[Steve Filton, EVP and CFO at Universal Health Services]

The real issue on the behavioral side is, you know, insufficient, you know, volume and revenue growth. You know, in Q1, our adjusted patient days were, I think, 1% below the prior year. Our overall revenue growth was 3.5%-4%. Clearly, that level of growth in both volume and revenue is not sufficient to, you know, support the increased labor inflation and just the, you know, general inflation we're experiencing.

[Steve Filton, EVP and CFO at Universal Health Services]

The issue on the behavioral side is not to get rid of the premium pay. That's certainly, you know, a goal as well. The real issue on the behavioral side is to hire sufficient clinical staff and to change the patient care models to hire sufficient clinical staff so that our patient days are growing at least at their historical norm levels of, you know, 3%-4% a year.

[Sarah James, Equity Research Analyst at Barclays]

Okay. Earlier in the call, you talked about considering expanding into alternative care models. What do you mean by that? Is that like outpatient methadone clinics, or can you be more specific?

[Steve Filton, EVP and CFO at Universal Health Services]

What it means, I think, are the folks who are delivering patient care are less RN intensive and, you know, more lower license level people, whether that's LPNs or LVNs or, you know, techs or whatever. You know, again, what it's really designed to do is to allow the RN to practice at the top of his or her license and allow other people to do the more administrative and clerical activities, and as a consequence, deliver the highest efficiency and best quality of patient care that we can, in a way that allows us to treat as many patients safely as we can.

[Sarah James, Equity Research Analyst at Barclays]

Got it. Last question is just a follow-up to Anne. When you mentioned canceling some payer contracts or shifting payer mix, is there any other detail you can provide on that, of what payers or mix are you using commercially?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. You're breaking up a little bit, Sarah. I'll try and answer what I think you asked. Yeah, again, I think you know, the detail that I'd offer around that is if you look at our Q1 behavioral results, our revenue per adjusted day is up you know, 5%+.

[Steve Filton, EVP and CFO at Universal Health Services]

I think that's reflective of the fact that we're doing a pretty judicious job of negotiating increased payer rates and choosing and trying to engineer payer mix so that you know, we're not dealing with payers who are sort of refusing to give us the sorts of you know, annual rate increases that we would need to counter inflation. I think we're being very successful at that.

[Steve Filton, EVP and CFO at Universal Health Services]

I think, you know, we're very pleased with that, you know, 5%+ of revenue per adjusted day on the behavioral side of the business. Again, now the real challenge for us is to move from a -1% patient day growth to the historical normative 3% or 4% or even above that.

[Sarah James, Equity Research Analyst at Barclays]

Thank you.

[Operator]

Our next question comes from the line of A.J. Rice from Credit Suisse. Your line is open.

[A.J. Rice, Managing Director and Research Analyst at Credit Suisse]

Hi, everybody. Maybe just a couple of questions. On the behavioral side, I know we're mainly talking about the labor component here, but I just wanna make sure that you're still feeling like the underlying demand for the service is still strong. I know your biggest hospital peer, which has behavioral health units reported that they were actually down year-to-year too in behavioral. I wonder if it's still so strong, where are these patients going? Do you have a sense of what's happening to them?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah, look, I think the reality, A.J., is that in many cases they're going untreated. You know, in many of our markets, you definitely have a sense that, you know, where we're unable to take a certain number of patients because we don't have a sufficient clinical staff, it's not like we believe that our peers in the market are able to do something we're not. I think, you know, some of those patients, you know, wind up not getting the care that they really need.

[Steve Filton, EVP and CFO at Universal Health Services]

Sort of back to your point, and we've made this point, I think, very consistently, you know, during the entire pandemic, and that is the ways that we measure the underlying demand. I think we measure them in a number of different ways, but one of the ways we measure the underlying demand is what we describe as inbound activity.

[Steve Filton, EVP and CFO at Universal Health Services]

These are the phone calls that we get to our 800 numbers, the internet inquiries we get to our websites, et cetera. Those, the volume of those inbound inquiries have been doing, you know, nothing but, you know, generally consistently rising during the pandemic.

[Steve Filton, EVP and CFO at Universal Health Services]

Our conversion rates, you know, the number of those inbound inquiries that ultimately result in admissions, you know, that percentage has declined pretty dramatically during the pandemic, really primarily because of the labor, you know, scarcity issue that we've been talking about.

[Steve Filton, EVP and CFO at Universal Health Services]

To answer the you know, your initial question, which again, I think Marc addressed in a broader way in his comments earlier, is, you know, we have a lot of confidence that the underlying demand for both of our business segments has not changed in any fundamental way.

[A.J. Rice, Managing Director and Research Analyst at Credit Suisse]

Okay. I know one thing, relative to your other public peer in behavioral that you're a little different is that you have some markets like in Massachusetts and Texas, where you have multiple behavioral health facilities in one metropolitan area, or a cluster of them.

[A.J. Rice, Managing Director and Research Analyst at Credit Suisse]

When you look at that, are those presenting specific challenges? Do you have more labor issues? How do you manage the fact that one behavioral health facility is not competing against the other behavioral health facilities for labor? Do you coordinate that? Any thoughts?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah, I think the reality is, you know, obviously having multiple facilities in a market, which we do in a number of markets. You mentioned Boston, Philadelphia, Atlanta, are all markets in which we have a pretty significant market share and a multiple facility presence. Obviously that affords you some luxuries of being able to move employees amongst facilities.

[Steve Filton, EVP and CFO at Universal Health Services]

It allows you to centralize some of the recruiting and HR functions and, you know, be more efficient in that regard, et cetera. You know, there is some benefit to that. The real issue is that, you know, some geographies are just more challenging than others in terms of the labor scarcity. You know, I think what we find is that when a market is challenging, all the providers in the market are challenged.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, that's just the way it is. Now, again, I will tell you, we have, you know, certain facilities that are fully staffed that are not struggling. We have other facilities that struggle to hire RNs. We have other facilities that have a sufficient number of RNs but struggle to hire, you know, mental health technicians who are, you know, unlicensed professionals. You know, it really varies. I wouldn't say that, you know, having, you know, multiple facilities is even more or less difficult. I think it just really depends on the geography.

[A.J. Rice, Managing Director and Research Analyst at Credit Suisse]

Okay, maybe just one final question. Obviously, your step-up pace of share repurchase is an important part of the UHS story for this year. I guess, how should we think about that activity? You did about $350 million in Q1. On the one hand, the market's giving you an opportunity here where there's a significant sell-off in the stock today, and so you get an opportunity to buy it cheaper than you could yesterday.

[A.J. Rice, Managing Director and Research Analyst at Credit Suisse]

Alternatively, you're talking about the fact that, you know, you've gotta see some improvement or you may adjust guidance at mid-year. Should we think that you would step up to try to take advantage of the pullback here, or do you sort of hesitate until you get better clarity on whether there's gonna be a need to adjust guidance? What's your thinking about share repurchase activity going forward?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. We indicated in our, you know, initial guidance that, our plan for share repurchase for 2022 was, you know, roughly $1.4 billion. You know, with the $350 million in Q1, we're right on track to get to that number. To your point, obviously, the market has changed a great deal just in the last few days. To be fair about it, you know, we haven't made any firm decisions about how to think about that. You know, whether we'll, you know, try and accelerate, share repurchase, et cetera. We certainly will think about that.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, the comment I guess that I'd make today is simply that I think we have every intention of fulfilling the annual share repurchase amount or something, you know, close to it, that was in our original guidance. That certainly our view hasn't changed. Again, I think for all the reasons that Marc articulated in his prepared comments or, you know, confidence that the labor scarcity situation will get resolved, and that the underlying demand is still quite strong in both of the businesses.

[Marc Miller, President and CEO at Universal Health Services]

Just to go a bit further what Steve said there, we are going to look at this. We're right on track for our previous guidance. If our shares continue to be this undervalued, it would be a pretty fair bet that, you know, whether we go above that 1.4, we haven't made a decision yet, but we're certainly going to look very carefully at doing something.

[Marc Miller, President and CEO at Universal Health Services]

You know, when our shares are so undervalued, given what Steve just said, about our belief in the business. You know, the demand is there. This labor issue will subside at some point. We know that, you know, fundamentally, we'll be in a good position. If we can take advantage of the undervalued share price, we'll certainly consider that and probably do that.

[A.J. Rice, Managing Director and Research Analyst at Credit Suisse]

Okay, great. Thanks a lot.

[Operator]

Our next question comes from the line of Jamie Perse from Goldman Sachs. Your line is open.

[Jamie Perse, Equity Research Analyst at Goldman Sachs]

Hey, good morning, Marc and Steve. Can you give us any color on profitability by month in the acute care segment? Even directionally, it seems like the labor environment was similarly challenged across all the months, but the big difference in January, you had a lot of COVID. March looked a lot more normal, and I'm just trying to understand the trajectory of profitability as that type of mix shift happens.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. I think as we have found, you know, throughout the pandemic, the acute business benefits to some degree from the COVID surges. The COVID patients historically have been more acutely ill. I think that was a little bit different in this most recent surge. Obviously, we got the benefit of the 20% Medicare add-on for COVID patients.

[Steve Filton, EVP and CFO at Universal Health Services]

We had the benefit in the quarter of the HRSA reimbursement for, you know, uncompensated or uninsured COVID patients, although that has pretty much been exhausted. I think the acute care business weathers the COVID surge in December and January better than the behavioral business, where there really, on the behavioral side of things, there's no benefit from the COVID surge. There's only pressures that sort of accompany it.

[Steve Filton, EVP and CFO at Universal Health Services]

I think the dynamic of the quarter is that we assume that as COVID volumes decline, the labor scarcity issue would ease more than it did and would benefit both of our segments in, you know, more than it did. I would say that acute profitability didn't change all that much during the quarter.

[Steve Filton, EVP and CFO at Universal Health Services]

I think our budget increased, so our budget shortfall increased as the quarter went on, although profitability only changed much. I would tell you that on the behavioral side, profitability was really challenged in January when the COVID volumes were as high as they were and got better some as the quarter went on.

[Jamie Perse, Equity Research Analyst at Goldman Sachs]

Okay. That's helpful. We've talked a lot about all the money you're spending on premium labor today. I'm just trying to think about as rates and utilization of premium labor come down, if that gives you an opportunity to redeploy some of that into base wage rates. Just thinking about the recapture ability of some of this excess costs right now, is it all recapturable or, you know, two-thirds, half? Just any thoughts on that would be helpful.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. I think that the reality is there's not a lot of. I forget the term you used, but sort of transferability between the two. You know, I made this point before. When a nurse comes to her supervisor, to a hospital chief nursing officer, whatever, and says that, you know, he or she is leaving to make $10,000 a week, which is probably four or five times.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, what his or her salary is, there's really no counter we can make to that. You know, raising base wages by 100 basis points or 200 basis points is not an effective counter to that sort of an offer. You know, that those opportunities really have to diminish in number in order for those nurses to come back.

[Steve Filton, EVP and CFO at Universal Health Services]

We're not gonna entice those nurses to come back with, again, 100 basis points, you know, increase in wage rates. Which again, I think is why the underlying base wage rate inflation, while it's up in both acute and behavioral, is not up by hundreds and hundreds of basis points, but just by 100 or 150 basis points because they're not really being changed to meet those, you know, that premium pay. We just can't do that.

[Marc Miller, President and CEO at Universal Health Services]

I'll make one more point on this. What we're trying to do, we're doing. Steve already mentioned earlier, we do market surveys, and we're doing adjustments, like, on a quarterly basis in a lot of our markets, trying to understand exactly what the correct base rate is for a market. One of the things I wanna make sure people recognize is that a lot of traveling nurses don't actually travel anywhere.

[Marc Miller, President and CEO at Universal Health Services]

In certain markets, I've seen traveling nurses, up to 50% of those quote-unquote travelers are people that live within four or five miles of where they're traveling to. A lot of them are people that have actually not gone anywhere. They're taking traveler contracts in their home market. What is happening now and is gonna continue to happen is that those opportunities for the traveling contracts are going away.

[Marc Miller, President and CEO at Universal Health Services]

Hopefully sooner than later, a lot more of those quote-unquote traveling nurses, if they wanna stay in their home market, which they clearly do 'cause they haven't gone anywhere, they're gonna have to go back to the local hospitals at the local wage rates, and not the traveling rates that they were getting for those contracts previously. We're already starting to see that, and hopefully that's gonna accelerate in the next couple of months.

[Jamie Perse, Equity Research Analyst at Goldman Sachs]

All right. Thanks, guys.

[Operator]

Our next question comes from the line of Kevin Fischbeck from Bank of America. Your line is open.

[Joanna Gajuk, VP and Equity Research Analyst at Bank of America]

Good morning. Actually, this is Joanna Gajuk filling in for Kevin. Thanks for just a couple of follow-up questions. You mentioned on the psych business, the pricing is pretty strong, and I guess you're managing your contracts there. Can you talk about on the acute care side, where are the commercial rates now and contracting there?

[Joanna Gajuk, VP and Equity Research Analyst at Bank of America]

Are you pushing you know rates there also to get some you know offset on the inflation and what the success rate is? Kind of any way you can frame it for us, you know the piece of the business on the acute care side in terms of the commercial payers. Thank you.

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. Joanna, I mean, I think we're doing the same thing on the acute side. I think it's a little bit harder to see on the acute side, because I think on the acute side, revenue per adjusted admission tends to be impacted by other variables besides just pure pricing. Especially during the pandemic, probably acuity has had a bigger impact on acute care revenue per adjusted admission than anything else, including the underlying pricing. Yeah, I mean, we're making those same judgments and for the same reasons, quite frankly.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, if payers are unable to give us sufficient rate increases at a minimum to sort of absorb at least a portion of this inflation and particularly the labor inflation, you know, then I think we're willing to you know, cancel contracts, terminate contracts, you know, move into you know, trying to shift payer mix to other more reasonable payers.

[Joanna Gajuk, VP and Equity Research Analyst at Bank of America]

Great. Thank you. I guess on the psych side, when you talk about the 5% increase you experienced in the quarter, is that kind of how you think about this going forward? Is this kinda assuming your guidance in terms of the pricing?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. You know, what we had said is that pre-pandemic, our behavioral pricing for a number of years tended to go up about 2% or 3% a year. During the pandemic, we've seen it up in that 5%-6% range, which is what we saw in Q1. I think it settles out as we emerge from the pandemic kind of in between in maybe that sort of, you know, 3%-4% range.

[Steve Filton, EVP and CFO at Universal Health Services]

Because I think, you know, some of the payer behavior which got, you know, a little bit less aggressive in terms of denials and things like that during the pandemic probably reemerges post-pandemic. Yeah, I think, you know, again, I think we think, you know, behavioral pricing settles into more of like a 3% or 4% range.

[Steve Filton, EVP and CFO at Universal Health Services]

Again, what's really needed to turn the behavioral segment around and start meeting our expectations is gotta increase those adjusted patient days from, you know, -1 to +3 or 4 or beyond that.

[Joanna Gajuk, VP and Equity Research Analyst at Bank of America]

Right. Exactly. I guess that's the bigger issue we talked for the last hour on. I guess in terms of the volumes on the acute care segment, did I hear right, you said that, volumes returned to normal, I guess, towards the end of the quarter. Did you mean, kind of the pre-COVID levels? Any kind of commentary, by, you know, in terms of the types, of volumes and what you're seeing there on the acute care side?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. You know, one of the most important metrics that we tracked during the pandemic is surgical volume because it encompasses a lot of those elective procedures. Our surgical volume in Q1 was above our pre-pandemic surgical volume, to be fair.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, slightly above, not by a lot. I think it was the first time during the pandemic that our surgical volumes actually exceeded the pre-pandemic or 2019 levels. Again, another encouraging sign that, you know, again, once we get some of these labor pressures at least partially behind us should help in the recovery.

[Joanna Gajuk, VP and Equity Research Analyst at Bank of America]

Great. Thank you so much.

[Operator]

Our next question comes from the line of Whit Mayo from SVB Securities. Your line is open.

[Whit Mayo, Senior Managing Director at SVB Securities]

Hey, thanks. Just one more question on premium pay. Take the $150 million. What did it look like the very first three quarters of 2021? I'm just trying to get a better comparison here.

[Steve Filton, EVP and CFO at Universal Health Services]

I don't necessarily have those numbers in front of me, Whit. I think, you know, what we said, which I know, you know, last quarter was that in the fourth quarter of 2021, it was $70 million. I think in the first quarter of 2021 it was $50 million. You know, I think you could sort of,

[Whit Mayo, Senior Managing Director at SVB Securities]

Okay.

[Steve Filton, EVP and CFO at Universal Health Services]

You know, bridge that gap.

[Whit Mayo, Senior Managing Director at SVB Securities]

Yeah, no, that's perfect. Just one other follow-up question. Just the DRG add-on and the HRSA payments. Can I get those two numbers from you?

[Steve Filton, EVP and CFO at Universal Health Services]

Yeah. I think we just have disclosed all along that the impact of those numbers, I believe in 2021 was about $11 million a quarter each for HRSA and for the 20% add-on.

[Whit Mayo, Senior Managing Director at SVB Securities]

Okay. That's it. Thanks.

[Steve Filton, EVP and CFO at Universal Health Services]

Barry, we're gonna have to make that our last question because we have some other commitments here.

[Operator]

Thank you. You may now.

[Steve Filton, EVP and CFO at Universal Health Services]

We'd like to thank everybody for their time. Thank you.

[Operator]

This concludes today's conference call. Thank you everyone for participating. You may now disconnect.

Participants

Executives

• Marc Miller, President and CEO

Analysts

• A.J. Rice, Managing Director and Research Analyst at Credit Suisse
• Andrew Mok, Managing Director at UBS Securities LLC
• Ann Hynes, Managing Director and Senior Healthcare Services Equity Analyst at Mizuho
• Benjamin Rossi, Equity Research Associate at BMO Capital Markets
• Jamie Perse, Equity Research Analyst at Goldman Sachs
• Jason Cassorla, VP and Equity Research Analyst at Citi
• Joanna Gajuk, VP and Equity Research Analyst at Bank of America
• Joshua Raskin, Co-Founder and Partner at Nephron Research
• Justin Lake, Managing Director and Senior Equity Research Analyst at Wolfe Research
• Pito Chickering, Managing Director and Senior Equity Research Analyst at Deutsche Bank
• Sarah James, Equity Research Analyst at Barclays
• Stephen Baxter, Managing Director and Senior Equity Research Analyst at Wells Fargo
• Steve Filton, EVP and CFO at Universal Health Services
• Whit Mayo, Senior Managing Director at SVB Securities