Universal Health Services Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Steve G. Filton, Executive Vice President and Chief Financial Officer
• Marc D. Miller, President and Chief Executive Officer

Analysts

• Marco Criscuolo, Nephron Research
• Benjamin Rossi, BMO Capital Markets
• Andrew Mok, UBS Group AG
• Justin Lake, Wolfe Research
• Stephen Baxter, Wells Fargo & Company
• Jason Cassorla, Smith Barney Citigroup
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Ann Hynes, Mizuho Securities
• Sarah James, Barclays Capital
• A.J. Rice, Credit Suisse Group AG
• Jamie Perse, The Goldman Sachs Group, Inc.
• Joanna Gajuk, Bank of America Co.
• Whit Mayo, SVB Securities

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 speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to our speaker today, Steve Filton, CFO. Please go ahead, Filton.

[Steve G. Filton, Executive Vice President and Chief Financial Officer 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 forecast projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of this 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.

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.

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. In our acute segment, we would note in general Omicron patients were less acutely ill than the COVID patients treated in previous surges, and thus displayed lower acuity. Meanwhile, 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 a year-to-year -- and year-to-year comparison. Although in our Behavioral segment contract nursing cost did not increase quite as dramatically, our inability to fit all of our labor -- 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 approvals was obtained.

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 bet at two behavioral health facilities, which were impacted by natural disasters. Those beds have since been reopened.

As disclosed in on 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. Although we're not changing our previously released 2022 operating results 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. We note the 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 to the large part to the continued repurchasing of our shares at March 31, 2022, our ratio of debt to total capitalization increased to 42% as compared to 35.7% at March 31, 2021.

[Marc D. Miller, President and Chief Executive Officer at Universal Health Services]

Our first quarter 2022 operating results were behind our internal forecasts, and our internal forecast were below the consensus estimates. The primary driver of the shortfall was the fact that the labor scarcity has not moderate as quickly as we were expecting. We believe in part this is because of the height of the Omicron surge, providers we're entering into longer-term commitments through temporary and traveling nurses, not necessarily predicting that COVID volumes will 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 has substantially increased the face of our hires. 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, and 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 remain an active acquirer of our own shares in the first quarter, repurchasing $350 million of those shares. 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.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Josh Raskin from Nephron Research. Your line is open.

[Marco Criscuolo, Analyst at Nephron Research]

Good morning. This is actually Marco on for Josh. Thanks for taking the question. Just to start with the Behavioral side, it looks like volumes came in below expectations due to the continued capacity constraints. So I 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 G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So we've thought about this at some length before. I think the solution and the -- and 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. 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. But, 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. At the same time, and Marc alluded to this in his remarks, we really up-ed 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. We're reviewing competitive wage rates in most markets 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. And, again, we're seeing the beginnings of improvement in those areas. So, you specifically were asking about Behavioral. I think we've been on the Behavioral side of things, hiring nurses and other clinicians at record rates now for -- at record historical rates for us for well over six or eight months. The real challenge is on the back end, where the turnover rates continue to go up, and 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. Again, I don't mean to imply that the problem has been solved, but I think we think it will continue to get better. And as we continue to have net positive hires, it should allow us to treat more patients and 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 hold 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 believe has not changed at all.

[Marco Criscuolo, Analyst at Nephron Research]

Okay. Thanks.

[Operator]

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

[Benjamin Rossi, Analyst 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 proposal contract for 2023, I could appreciate that there is still some moving pieces, but was curious if you could provide us with the projection for your rates in that proposal. And then 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 G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, 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.

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

[Benjamin Rossi, Analyst 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, Analyst at UBS Group]

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? And 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 G. Filton, Executive Vice President and Chief Financial Officer 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. And so labor was definitely an overarching issue in the first, I'll call it, four to six weeks of the quarter. I think what was disappointing in terms of our expectations was that the labor scarcity, again, I think we said in our prepared remarks, did not recede or ease as much as we thought in the the final six to eight weeks of the quarter as COVID volumes receded relatively rapidly. And again, I think as Marc alluded to in his comments, we think some of that was that hospitals were making longer-term commitments. I know a number of our commitments to temporary and traveling nurses instead of being a week or four weeks, or in many cases for eight or even 13 weeks, and we've certainly heard of other hospitals may occur that's really longer than that. And so to some degree, I think 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. Now, something it's complicated. 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, it made again sort of backfilling and getting back to sort of a normal labor supply and demand dynamic a little more challenging. I think in both of our business segments, the hope is that in May, as the calendar sort of settles down, as we have more success in hiring, 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 of the highest rates that those temporary and traveling companies are demanding, we'll see, you know, some relief -- some measure of relief beginning in the May time zone.

[Andrew Mok, Analyst at UBS Group]

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

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. I mean, again, you know, the first quarter was -- was a quarter of escalating, I'll say, dollars especially. On the acute side, we talked about our premium pay in Q4 as being a $120 million. That increased in Q1 to $150 million and compares to Q1 of '21 when it was $70 million. So, it -- in the overall dollars, premium pay, you know, certainly increased in Q1. We are seeing a reduction in rates at the very end of Q1 and into April, and we presume that will continue into Q2. But it's difficult to say the exact pace at which they're decelerating. But certainly we're seeing decelerating that.

[Andrew Mok, Analyst at UBS Group]

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, Analyst at Wolfe Research]

Thanks. Good morning. Well, I wanted to start off following up on that question around labor. So, Steve, you talked about $120 million going to $150 million. The -- 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 G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, Justin, I think our commentary has been pretty consistent really beginning with our third quarter call in October of last year into our year-end call in February, and 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 '21 and in January '22. That definitely set things back from where our expectations were in the fall of last year. But even as I said, even from our commentary that we made just two months ago when we issued our guidance and in our year-end announcement, I think the recovery is clearly slower than -- than we expected. And 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 presume 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 the cadence in that trajectory is the idea to labor pressures would ease as the year went on. I think it's worth noting, in terms of the labor pressure to be greater than we expected in Q1, we certainly acknowledge that our earnings missed our own internal forecast, again Marc suggested we were off of our forecast, we were about 5% to 6% off of our forecast in Q1. We know that we were probably 11% or 12% off of consensus. But I think we have assessed that we may be able to recover that as the year goes on. Now, again, as our press release indicated, if the recovery does not occur as fast as we think that it will, we may have to revise that guidance later in the year. But we're at the moment still hopeful that that improving cadence will occur as the year goes on.

[Justin Lake, Analyst at Wolfe Research]

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

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. I mean, well, what I will say is -- look, I don't know that any of us know where it's going to go. I think what our guidance presumed is that by the end of the year, we would add a minimum return to kind of last year's pace. And like I said, in the fourth quarter of last year, the premium pay was something like $70 million range, etc. And it's really important to understand that, that incremental, well, let's call it $50 million of premium pay, is essentially 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 for the most part and just paying premium rates for them. So as those premium rates go down -- I mean, as a premium rates have risen, they clearly put a real strain on our earnings and on our peers' earnings. But as they come down, you get the same benefit. You'll be replacing temporary nurse with an employed nurse who is making maybe a third of what that temporary nurse is making.

[Justin Lake, Analyst at Wolfe Research]

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

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah, I mean -- So, honestly, Justin, I have to confess being a little bit frustrated, two months ago, we issued guidance that I think was more conservative generally than our peers'. And at least from a number of quarters, I think we were roundly criticized for that, that we -- we explained that we expressed too much caution about how quickly this labor situation would resolve itself, etc. Now two months later, some people, and you in the moment, are -- you are 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 we are saying that the labor situation has turned over. We have 100% certainty that will when it will. I think we're just suggesting that more time is not an unreasonable sort of request for people. I have have few 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 has turned positive in the last few periods. I suggest that that we're seeing lowering rates, etc. Again, not meaning to imply that there is a complete turnaround here, but I do think there is enough of these sort of early indicators that things are improving to a degree that makes us think that that 6% of shortfall from our own internal forecast that we experienced in Q1 can be maybe partially or completely recovered as the year progresses.

[Justin Lake, Analyst at Wolfe Research]

I appreciate all the color, Steve. Thanks.

[Operator]

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

[Stephen Baxter, Analyst at Wells Fargo & Company]

Yeah, hi. Thanks. I appreciate the commentary on the impact 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. So, 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. I guess those quarters also had some COVID impacted on. So just trying to understand 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. What does that mean for how your -- maybe your retention rates performance. Thank you.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. I think it's worth noting that the COVID volumes -- again, this is really acute care commentary, we're so high in the beginning of the year that we see -- even though they declined fairly rapidly, we -- our acute care segment finished the quarter with about 14% of their admissions for the quarter being COVID diagnosis. And that's about as high as we've run during two-plus years of the pandemic. So, I know people tend to have sort of recency bias and they think of COVID being behind us, etc. But played a significant part in Q1. And on the acute side, that's challenging because it -- It's challenging on the labor side. As we've discussed, it's challenging on our ability to have effective throughput with non-COVID cases and procedural cases, etc. I think by the end of the quarter, most of the operational sort of throughput in terms of patients, etc., have returned in large part to normal. But again, those labor pressures persisted late into the quarter, maybe in some cases even into April, because I think of this phenomena -- and I make the point that it's not only our commitment that we're locked in to 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. And while we certainly acknowledge that some of those nurses probably don't resign 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 going to pursue that lifestyle indefinitely.

[Operator]

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

[Jason Cassorla, Analyst at Smith Barney Citigroup]

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 buildout, or investment in equipment, or otherwise at this juncture? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

So 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. So, for capital equipment things like that, probably no change. But for the larger projects in general, we look at them specifically and taking into account each factor, or all the factors in particular market, that might affect that project. And in some cases, 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, Analyst at Smith Barney Citigroup]

Thanks.

[Operator]

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

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey. Good morning, guys. Thanks for taking my questions. A couple of ones here. With what you've seen in the first quarter, it looks like labor pressures continuing into April before hopefully turning in May. And because you said that the Street first quarter estimates were 5% to 6% higher than your own internal estimates, any chance you can give us a range for how should they be at 2Q sequentially or percent of the annual business -- or annual EBITDA, just we get this number right?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So I'm not exactly sure what you're asking. I mean, as we've discussed on many cases, you know, we don't give quarterly guidance and that's an intentional decision on our part. As I said, we were 6% short of our own internal forecast in Q1. And 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 potentially suggesting a reason why I think we budgeted for those things probably more accurately than the Street was able to. I don't know that for a fact. I don't know that that's the main difference between our internal forecast in Q1 versus the consensus' estimate. But I think it's a possible explanation. 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. But, again, getting back to this idea, in order to make up that 6% shortfall in Q1, we have to be a couple of percentage points higher in each of the next two quarters on average to still get to the midpoint of our guidance. Again, I don't think we think that's certainty by any stretch. It's a difficult environment. But I think we certainly don't feel at this point that we would say with precision that we can't get there.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Great. And then can you provide some gross hires verses net hires in the fourth quarter versus one quarter -- first quarter? How is it tracking in April? And basically any color on turnover? Is it consistent? Is it getting better or turning worse? And then the third tag on there is, if I think about turnover, did it means your wages are uncompetitive and that you may need increase those rates?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, I mean as I said in an earlier comment, if it's question of whether wages are competitive, is certainly far from a static question, and literally we are doing competitive market reviews in all of our markets in some cases as frequently as quarterly. I mean, that's how quickly the supply and demand dynamics are changing. But again, the point that I would make is the labor or the wage pressure that we're feeling -- yeah, 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 a premium pay. And as that premium pay declines, even if we are 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, in the example that I was giving before I think in response to Justin's question, if our premium pay goes from $150 million that we've spent on acute in Q1 to this $70 million we sent a year ago, that benefit drops almost directly to the patient to the bottom line. Now, again, not going to happen immediately. It will take some time probably get also a little bit by underlying wage increases by -- you know, there's still an enormous amount of leverage that comes from being able to reduce that number. The challenge that also the hospitals in general have had is that number has been increasing. And the sense is I think at the moment that we're getting pretty close to the peak, if we're not there. And now, I think, you know, the focus and all of our calculations are, how quickly could it be reduced? I don't think there is a sense that that number is likely to go up any more in any significant way.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

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

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. Look, I think, you know, like every both business and personal consumer, we're seeing inflation affecting all of our spend, but, you know, the labor inflation -- and I ask you -- again, I'm not even sure I would describe it as inflation per se, but 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. I think if -- if we see those premium rates come down, we'll get a direct benefit from that. And I think as we see those premium rates come down, we will also see our own hiring improved, and particularly on the behavioral side, that will allow our volumes to increase. And that will provide a pretty significant offset to those inflation rates. So, again, inflation is definitely a factor, but I think 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 the increased inflation.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Great. Thank you so much.

[Operator]

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

[Ann Hynes, Analyst at Mizuho Securities]

Hi, good morning. Can we guys know what is embedded in guidance for base labor wage rates and what that compares to on a historical basis? And is your estimate tracking in line with your estimates? And then how should we think about that in 2022? I know it's early, but just given wages as a big -- your biggest cost structure, we probably want to assume the right pressure point for next year. Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah, sorry. And 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%, 3.5%, on the behavioral side it was probably 2%, 2.5%, I think post pandemic we're thinking those rates are up 100 to 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. But again, I think when we do that math, if we are 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 -- at $75, even though that's a reasonable increase from what we had been paying pre-pandemic, it's still in the norm is improvement over where we're sitting right now.

[Ann Hynes, Analyst at Mizuho Securities]

All right. And then just a follow-up question. When I think about the nursing issue, like your acute care seems very obvious. You have the premium rates. You had COVID spikes. And that should come down. But I struggle more what the Behavioral side and whether there are some structural shifts in nursing. I'm going on, I guess, what is your view on that. And is there anything you can do to reduce your reliance on nurses? And if it is more structural in nature, would you consider portfolio rationalization like at sort of markets? Are you closing units right now? And maybe -- I know you've given a lot of nursing staff, but do you have like an absolute number of nurses you had pre-pandemic and what it is versus now in the behavioral business? 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 G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, again, we 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. And we are experimenting -- certainly more than experimenting, I think we're implementing new -- newer models of patient care that rely less heavily on the RNs and more heavily on healthy on LPNs and LVNs, and paramedics, and all sorts of other folks who are rendering care, and not what -- you know, I was going to make this point very clear. We're not having people practice the phrase that gets used in the probation is above their license. What we we're trying to do is relieve our RNs from doing more clerical and administrative work than then need to do. Somebody else can answer the phone, somebody else could speak with families, somebody else can change the sheets in the room, whatever it may be and less allows the nurses to do the things that are, you know, at the top of their license - doing psychological assessment and behavioral care and delivering medication and all those sort of things. So that's really a big focus of ours. Now, again, to be fair, those sorts of outpatient care model changes takes some. I takes some time to hire the other non-RN positions. It takes some time to train people. It takes some time for people to get oriented, etc. But we think we're making, you know, incremental improvement in those areas and we'll continue to do so. As far as portfolio rationalization, no -- I mean, we're not really -- I think we're closing on capacity temporarily when we don't have sufficient clinical staff to treat patients. But I think 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. If our managed care payers are not giving us sufficient increases to recognize this elevated level of labor costs, we're canceling some of those contracts. We're changing payer mix, etc. So, I think we're rationalizing capacity or the portfolio in that way. And I think -- and I said this earlier. We're also saying no to some of the really, really egregious temporary and traveling rates. We were just saying, look, it doesn't make sense for us to pay X, Y, Z for a nurse if we're only getting paid A, B, C from a payer. And so, I think unlike some -- some providers, we don't have the point of view that we're going to pay whatever it takes for a nurse. I think in some cases we believe that it just makes sense to, you know, rationalize -- you know, and using your term 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, Analyst at Mizuho Securities]

All right. Thanks.

[Operator]

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

[Sarah James, Analyst at Barclays Capital]

Thank you. I'm trying to run through some of the [Technical Issues]. You said that you were 5% to 6% off internal forecast among behavioral of about $19 million to $20 million. Acute premium pay went up $30 million. Can you give us what side was -- I know last quarter you said it was about $25 million to $30 million in premium pay for the year. And then were there any positive offset? Because it seems like there were to get to that 5% to 6% off the internal forecast.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, Sarah -- I mean, you know, what we've talked about before is that premium pay on the behavioral side is much less of an issue than it is on the acute side is probably a third or lower, and, you know, when we talk about premium pay as well as things like retention bonuses and sign-on bonuses, etc. The real issue on the behavioral side is insufficient volume and revenue growth. So, in Q1, our adjusted patient days were I think 1% below the prior year. Our overall revenue growth was 3.5%. Clearly those -- that level of growth in both volume and revenue is not sufficient to support the increased labor inflation and just, you know, general inflation we're experiencing. But it's not -- the issue on the behavioral side is not to get rid of the premium pay. That's certainly a goal as well. But the real issue on the behavioral side is to hire sufficient clinical staff and to change in patient care models to hire sufficient clinical staff, so that our patient days are growing at least at their historical norm levels of 3% to 4% a year.

[Sarah James, Analyst at Barclays Capital]

Okay. And then earlier in the call, you talked about considering expanding into alternative care models. What do you mean by that? Is that like outpatient methadone clinic? Or can you be more specifics?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, what it means I think are the folks who were delivering patient care are less RN-intensive and 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 particularly as we can.

[Sarah James, Analyst at Barclays Capital]

Got it. And last question is just a follow-up to Ann's. So when you mentioned canceling some payer contracts or shifting payer mix, is there any other details you can provide on that as what payers [Technical Issues]

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, 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'll offer around that is, if you look at our Q1 Behavioral results, our revenue per adjusted day is up 5-plus percent. I think that's reflective of the fact that we are doing a pretty judicious is job of negotiating increased payer rates and choosing and trying to engineer payer mix, so that where we're not dealing with payers who are sort of refusing to give us the sorts of annual rate increases than we would need to kind of replacement, I think we're being very successful at that. I think, you know, we're very pleased with that 5-plus percent of revenue per adjusted day on the behavioral side of the business. Again, now the real challenge for us is to move from a negative 1% patient day growth to the historical normative 3% to 4% or even above that.

[Sarah James, Analyst at Barclays Capital]

Thank you.

[Operator]

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

[A.J. Rice, Analyst at Credit Suisse Group]

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 want to 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. So, 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 G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. Look, I think the reality, A.J., is that in many cases, they're going untreated. In many of our markets, you have -- you definitely have a sense that where we are 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. So I think, you know, some of those patients wind I'm not getting the care that they really need. And sort of back to your point, and we've made this point I think very consistently during the entire pandemic, and that is the ways that we measure the underlying demand -- I think we measure then in a number of different ways, but one of the ways we measure the underlying demand is what we describe as inbounding activity. These are the phone calls that we get our 800 numbers, the Internet inquiries, we get to our websites, etc., and those -- the volume of those inbound inquiries have been doing nothing but generally consistently rising during the pandemic. And our conversion rates, the number of those inbound inquiries that ultimately result in admissions, that percentage has declined pretty dramatically during the pandemic, really primarily because of the labor scarcity issue that we've been talking about. So, to answer your initial question, which again I think more addressed in a broader way in his comments earlier is, 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, Analyst at Credit Suisse Group]

Okay. I know one thing relative to your other public peer in and 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 cluster of them. 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 G. Filton, Executive Vice President and Chief Financial Officer 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. And obviously, that affords to use some luxuries of being able to move employees among facilities that allows you to centralize some of the recruiting and HR functions and, you know, be more efficient in that regard, etc. So, there is some benefit to that. But the real issue is that some geographies are just more challenging than others in terms of the labor scarcity. And I think what we find is when a market is challenging, all the providers in the market are challenged and that's just the way it is. Now again, I will tell you we have, yo know, certain facilities that are fully staffed that are not struggling. We have other facilities that struggled to hire RNs. We have other facilities that have a sufficient number of RNs which struggled a hire mental health technicians, or, you know, unlicensed professionals. So, it really varies. And I wouldn't say that having multiple facilities is even more or less difficult. I think it just really depends on the geography.

[A.J. Rice, Analyst at Credit Suisse Group]

Okay. And maybe just one final question. So, obviously, your step-up pace of share repurchase is an important part of the UHC 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 is a significant sell-off in the stock today, and so you get an opportunity to buy it cheaper than you could yesterday. Alternatively, you're talking about the fact that, you know, you're going to see some improvement or you may adjust guidance at mid-year. Should who 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 is going to be a need to adjust guidance, which we're thinking about share repurchase activity going forward.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So we have indicated in our initial guidance that our plan for share repurchase for 2022 was, you know, roughly $1.4 billion. With the $350 million in Q1, we're right on track to get to that number. To your point, obviously the license has changed a great deal just in the last few days. And to be fair, we haven't made any firm decisions about how to think about that, whether we'll try to accelerate share repurchases, etcetera. And we certainly will think about that. But the comment, I guess that I had made today is simply that I think we have every intention of fulfilling the annual share repurchase amount or something close to it that was in our original guidance. That's certainly our view hasn't changed. And again, I think for all the reasons that Marc articulated in his prepared comments are confidence that the labor scarcity situation will get resolved and that the underlying demand is still quite strong in both of the businesses.

[Marc D. Miller, President and Chief Executive Officer at Universal Health Services]

But just to go a bit further what Steve said there, we are going to look at this. And so we're right on track to our previous guidance. If our shares continue to be this undervalued, it would be pretty fair bet that, you know, whether we go above that $1.4 billion, we haven't made a decision yet. But we're certainly going to look very carefully at doing something when our shares are so undervalued, given what Steve just said about our belief in the business. The demand is there. This labor issue will subside at some point. So we know that fundamentally we'll be in a good position. So we can take advantage of the undervalued share price. We'll certainly consider that probably do that.

[A.J. Rice, Analyst at Credit Suisse Group]

Okay. Great. Thanks a lot.

[Operator]

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

[Jamie Perse, Analyst at The Goldman Sachs Group]

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 left a lot more normal. And I'm just trying to understand the trajectory of profitability if that type of mix shift happens.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So I think as we have found throughout the pandemic, the acute business benefits to some degree from the COVID surges. The COVID patients historically have been more acutely ill that -- 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. We had the benefit in the quarter of the HRSA reimbursement for, you know, uncompensated or uninsured COVID patients. All of that has pretty much been exhausted. So, I think the acute care business, whether is the COVID surge in December-January, better than the behavioral business, with really on the behavioral side of things is no benefit from the COVID surge, there is only pressures that sort of the company in. 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. So, I would say that acute profitability didn't change all that much during the quarter. I think our budget increased. So, our budget shortfall increased as the quarter went on, although profitability only change much. I would 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 quarter went on.

[Jamie Perse, Analyst at The Goldman Sachs Group]

Okay, that's helpful. And then just 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 recapturability of some of those excess costs right now. Is it all recapturable, or two-thirds, half? Just any thoughts on that would be helpful.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah, I think that the reality is, there is not a lot of -- after that the term you use, that sort of transferability between the two, you know, I've made this point before. When a nurse comes to her supervisor to hospital, the chief nursing officer or whatever, and says that she -- here she is leaving to make $10,000 a week, which is probably 4 or 5 times what his or her salary is, there's really no counter we can make to that. And raising base wages by 100 basis point to 200 basis points is not an effective counter to that sort of an offer. So, that -- those on opportunities really have to diminish in number in order for those nurses to come back. We are not going to entice those nurses to come back with, again, 100 basis point 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 are 100 and 150 basis points because they're not really being changed to meet those -- that premium pay. That we just can't do that.

[Marc D. Miller, President and Chief Executive Officer 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 want to make sure people recognize is that a lot of traveling nurses don't actually travel anywhere. So, in certain markets, I've seen traveling nurses, up to 50% of those "travelers" are people live within 4 to 5 miles of where they're traveling to. So a lot of them are people that have actually not gone anywhere. Their changing travel contracts in their home market. And what is happening now is going to continue to happen is that those opportunities for the traveling contracts are going away. And so hopefully, sooner than later, a lot more of those "traveling nurses," if they want to stay in their home market, which they clearly do because they haven't gone anywhere, they're going to 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. And we're already starting to see that, and hopefully that's going to accelerate in the next couple of months.

[Jamie Perse, Analyst at The Goldman Sachs Group]

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, Analyst at Bank of America]

Hey, good morning. Actually this is Joanna Gajuk filling in for Kevin. Thanks for just a couple of follow-up questions. So you mentioned on the psych business, the pricing is very strong. And I guess you are managing your contracts there. Can you talk about the -- on the acute care side, or are the commercial rates now are contracting there, are you pushing rates there also to get some asset on the inflation? And what the success rate is? And kind of any way you can frame it for us that -- the piece of the business on the acute care side in terms of the commercial payers? Thank you.

[Steve G. Filton, Executive Vice President and Chief Financial Officer 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. And 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. But yeah, I mean we're making those same judgements. And for the same reasons quite frankly, 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, that I think we're willing to cancel contracts, terminate contracts, you know moving -- you know, move into trying to shift payer mix to other more reasonable payers.

[Joanna Gajuk, Analyst at Bank of America]

Great. Thank you. And I guess on 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 kind of assuming your guidance in terms of the pricing?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, you know, what we have 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% to 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 may be that sort of 3% to 4% range, because I think, you know, some of the payer behavior which got a little less aggressive in terms of denials and things like that during the pandemic probably re-emerges post pandemic. So, yeah, I think, again -- I think we think, you know, behavioral pricing settles into more like a 3% to 4% range. Again, what's really needed to turn the Behavioral segment around to start meeting our expectations is got to increase those adjusted patient days from, you know, negative 1%, 2%, up 3% to 4%, or beyond that.

[Joanna Gajuk, Analyst at Bank of America]

Right, exactly. That's a bigger issue we talked for the last hour on. But I guess in terms of the volumes on the acute care segment, so did I hear right you said that the volumes return to normal, I guess, towards the end of the quarter. Did you mean kind of the pre-COVID levels? Or any kind of commentary -- but in terms of the types of volumes and what are you seeing there on the acute care side?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yeah. So, you know, one of the most important metrics that we've factored in 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 prepared -- slightly above, not by a lot. But I think it was the first time during the pandemic that our surgical volumes actually exceeded the pre-pandemic or pandemic '19 level. So, again another encouraging sign that -- again, once we get some of these labor pressures at least partially behind us, should help in the recovery.

[Joanna Gajuk, 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, Analyst at SVB Securities]

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

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Got it. So, I don't necessarily have those numbers in front of me, Whit. I think that what we said, which I know your last quarter, was that in the fourth quarter and '21, it was $70 million. I think in the first quarter of '21, it was $50 million. So, I think you could sort of bridge that gap.

[Whit Mayo, Analyst at SVB Securities]

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

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

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

[Whit Mayo, Analyst at SVB Securities]

Okay. That's it. Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

And, Mary, we're going to have to make that our last question, because we have some other commitments here.

[Operator]

Thank you. You mean...

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

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

[Operator]

[Operator Closing Remarks]