Universal Health Services Q2 2022 Earnings Report

Universal Health Services EPS Results

• Actual EPS: $2.20
• Consensus EPS: $2.08
• Beat/Miss: Beat by +$0.12
• One Year Ago EPS: $3.76

Universal Health Services Revenue Results

• Actual Revenue: $3.32 billion
• Expected Revenue: $3.27 billion
• Beat/Miss: Beat by +$53.92 million
• YoY Revenue Growth: +3.90%

Universal Health Services Announcement Details

• Quarter: Q2 2022
• Date: 7/25/2022
• Time: After Market Closes
• Conference Call Date: Monday, July 25, 2022
• Conference Call Time: 9:06PM 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 Q2 2022 Earnings Call Transcript

Key Takeaways

• Adjusted net income per share of $2.20 in Q2 was below plan as COVID admissions fell from 15% to 3% of total cases and non-COVID volumes did not ramp up quickly enough to fill the gap.
• Acute segment labor costs improved with premium pay down from $153 million to $117 million sequentially, but overall expenses remained elevated due to high contract nursing rates and hours.
• Behavioral health volumes lagged initial forecasts despite progress in staffing, though results benefited from a $10 million timing shift in Texas Medicaid reimbursements and absorbed $20 million of start-up losses plus a $16 million liability reserve charge.
• Outlook and cost discipline centers on realizing deferred non-COVID demand later this year, heavy investment in recruitment/retention and new care models, a 20% cut to capital expenditures (≈$100 million), and moderated share repurchases while maintaining full-year targets.
• Payer negotiations are being prioritized to pass through inflation and labor costs, with UHS giving notice on underpriced contracts and noting early 2023 receptivity from major payers for rate increases.

Presentation

[Operator]

Good morning, and thank you for standing by. Welcome to the Universal Health Services, Incorporated Second Quarter 2022 Earnings Conference Call. I would now like to hand the conference over to our speaker today, Steve Filton, Chief Financial Officer. Please go ahead, Mr. Filton.

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

Thank you, and good morning, everyone. Marc D. Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 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. For anyone not familiar with the risks and uncertainties inherent in those 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, and our Form 10-Q for the quarter ended March 31, 2022. 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 an adjusted net income attributable to UHS per diluted share of $2.20 for the second quarter of 2022. As previously disclosed in our pre-announcement on June 30, 2022, our acute hospitals experienced a significant decline in COVID-related patients during the second quarter of 2022. As a percentage of total admissions, COVID-diagnosed patients made up 13% of total admissions in the first quarter of 2022, but only 3% in the second quarter of 2022. The decrease in COVID-related patient volumes during the second quarter was not offset by an equivalent increase in non-COVID-related patients, resulting in significant shortfalls in revenues and earnings compared to our original forecast for the quarter.

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

Even though we did make progress in reducing premium pay in the acute segment, which went from $153 million in the first quarter to $117 million in the second quarter, overall costs did not decline sufficiently to offset the weaker revenues. Specifically, a surge in patients with the Omicron variant of the virus, which began in December 2021, tended to peak in most of our geographies in January 2022. In our acute segment, we would note that in general, the Omicron patients were less acutely ill than the COVID-related patients treated in previous surges and thus displayed somewhat 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 on a year-over-year comparison.

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

In our behavioral segment, we also made progress in filling our vacant positions, but patient day volumes still did not recover as quickly as we originally expected. We do note that our reported second quarter results were benefited from approximately $10 million of revenues from supplemental Texas Medicaid reimbursements, which were not reflected in our estimates for the quarter in the pre-announcement. These revenues were originally contemplated to be recorded in the second half of the year, so the $10 million represents a shift in timing only. The second quarter also included approximately $20 million of startup losses incurred by recently opened de novo acute and behavioral health facilities, as well as a $16 million pre-tax charge incurred to increase our reserves for self-insured professional and general liability claims.

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

Our second quarter 2022 operating results were significantly behind our original forecasts. The primary driver of the shortfall was that non-COVID volumes did not recover as quickly as we had anticipated based on our previous experience during the pandemic when COVID volumes declined rapidly. We believe there are multiple contributing factors to the slower demand rebound, most notably labor scarcity issues, which continue to constrain our ability to meet demand in certain circumstances. In the end, however, we believe that the majority of demand shortfall has been simply delayed or postponed, and that ultimately it will be realized. We are encouraged by the progress made in reducing premium pay and filling vacancies, and we continue to invest heavily in recruitment and retention initiatives.

[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 high quality of care where we can. In reaction to the earnings softness and the fact that we are completing a refinancing during the quarter, we reduced the pace of our capital expenditure spend by about 20% or $100 million for the first six months of the year. Similarly, we moderated the trajectory of our share repurchases, although we still expect to acquire approximately the same number of shares as were in our original guidance. We are pleased to answer your questions at this time.

[Operator]

As a reminder, to ask a question, you'll need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Marco from Nephron Research. Your line is now open.

[Marco Criscuolo, Senior Equity Research Associate at Nephron Research]

Hi, good morning. Thanks for taking the question. You spoke to some of the developments you saw in contract labor during the quarter. I was wondering if you could provide a little more detail on what you're seeing in terms of the hourly rates, and utilization and how that's tracking into July. Also, is there any detail you can provide on base hourly nursing rates on how those compare today to last year or even two years ago? Thanks.

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

Yeah. What we said in the first quarter was that we had $150 million, $153 million of premium pay in the acute segment. We said that our guidance presumed that that number would be cut approximately in half by the fourth quarter, so that we'd have something like $75 million or $80 million premium pay in the fourth quarter. We're pretty much on track for that trajectory. As I said, we had $117 million of premium pay in Q2, which is about a 20%, maybe a little bit more reduction. I think that reduction came from a combination of both rate declines and hours utilized. I think, you know, split pretty evenly in terms of their impact. You know, I think that's where we are.

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

As far as underlying base wage rates, I think as we've noted before, they have, you know, gone from sort of pre-pandemic increases, I'll say on the acute side, specifically from, let's say, 3%-3.5% to something more like 4.5%-5%. On the behavioral side, they probably started at somewhat lower but, you know, again, something in the neighborhood of 125 basis points-150 basis point increase in base rates, pre-pandemic, post-pandemic comparison.

[Marco Criscuolo, Senior Equity Research Associate at Nephron Research]

Great. Thanks. If I could ask one quick follow-up on the behavioral side. Is there any way to quantify the lost patient volumes from the lack of your ability to find the staffing? Like, in other words, is there any detail you could provide on how many admissions or patient days you think you've lost from that? Thanks.

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

We do track that internally. We don't disclose those numbers, in part because, you know, I think different hospitals track them a little bit differently, et cetera, and we don't, you know, view them as the most precise statistic. We do know that we have turned away, during the pandemic, a significant number of patients, either because we didn't have the staff to treat them or because, we had certain beds blocked because patients couldn't be exposed to other patients with COVID, et cetera.

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

I think what I would say is, you know, we continue to believe that the historic levels of growth that we've experienced in our behavioral business of mid-single digit volume growth, you know, 3%, 4%, 5% same-store patient day growth year-over-year, we believe is certainly still achievable, once we can, you know, get beyond the current labor scarcity. I think the second quarter, you know, represents an incremental improvement towards that goal. Still a ways to go, but I think, you know, the trend is, you know, a positive one.

[Marco Criscuolo, Senior Equity Research Associate at Nephron Research]

Okay. Thank you very much.

[Operator]

Thank you. One moment for our next question. Our next question comes from Andrew Mok with UBS. Your line is now open.

[Andrew Mok, Healthcare Analyst at UBS]

Thanks. Good morning. Steve, acute results missed internal plan by a pretty wide margin. Can you help parse out the impact from the health plan business within the acute segment? How much of an earnings drag was that? Is that expected to get better for the balance of the year? Thanks.

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

Yeah. I mean, the insurance subsidiary was somewhat of a drag on earnings. It certainly was not the most significant or even close to the most significant. I think obviously as we discussed both in the pre-announcement and our remarks again today, it was, you know, the difficulty we had in replacing COVID patients with non-COVID patients. The insurance subsidiary winds up being a drag because as we add new subscribers or establish new accountable care organizations in our markets, there are generally startup costs and losses associated with that. You know, that drag in the quarter was, you know, in my mind, you know, no more than $10 million.

[Andrew Mok, Healthcare Analyst at UBS]

Got it. Okay. On the behavioral side, behavioral revenue per patient day had been trending 5%+ over the last seven quarters. That moderated to less than 2% this quarter. Is there anything to call out that's driving the slowing increases on the behavioral pricing? Thanks.

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

Yeah. I mean, probably a chunk of that, and probably the most significant chunk is, if people recall and we did disclose, we recorded that special reimbursement, special Kentucky reimbursement, in June of last year. In the comparison between years, at least, some of that is included. As we've noted, the recording of that Kentucky revenue is much more ratable in 2022. We're comparing a more ratable reimbursement rate in 2022 with that big chunk received in 2021. Probably that drives down the revenue growth rate more than anything else.

[Andrew Mok, Healthcare Analyst at UBS]

Great. Thanks for the call.

[Operator]

Thank you. One moment for our next question. Our next question comes from Stephen Baxter with Wells Fargo. Your line is now open.

[Stephen Baxter, Senior Equity Analyst at Wells Fargo]

Yeah. Hey, thank you. It looks like there's about a, you know, when you look at the acute care reported EBITDA and the same-store EBITDA, it looks like there's about a $20 million drag from non-same-store items. It sounds like, if I remember correctly, you know, the insurance company results are not reported in same store. Just wondering if you can confirm that or not. Should we think about the balance of that, you know, as being driven by startup losses or any other items impacting it? That would be helpful color to have. Thank you.

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

The insurance subsidiary results are certainly included in our same-store Q results and always have been, obviously, except for when they first started. What I said in my prepared remarks was we had $20 million of startup losses at new acute care and behavioral facilities. The biggest chunk of that is our new hospital in Reno, which opened, I believe, very late in March or early April. One of the things that we're experiencing, just, you know, yet another difficulty of the pandemic, is a slower process in getting a new hospital certified and getting their Medicare numbers and therefore, being able to bill patients in a more timely way. Historically, that used to be literally just a few day process between opening and getting your Medicare number certified.

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

I think in the case of our hospital in Reno, it took us almost a couple of months. As a consequence, you know, I think we suffered, you know, more significant losses than we really anticipated, and that's a big chunk of that $20 million that I mentioned in my prepared remarks. One of the significant improvements we're expecting in the back half of the year is that hospital will ramp up fairly significantly, and our forecast at least is that it will be, you know, profitable by the back half of the year.

[Stephen Baxter, Senior Equity Analyst at Wells Fargo]

Got it. Okay. Thank you. Just as a quick follow-up, you know, it does seem like there, you know, a little hard to tell, but might be some pressure on the other OpEx line beyond the insurance company results. Can you talk about, you know, anything else you're seeing impacting that line item, whether it's, you know, physician staffing costs or anything of the like? Thank you.

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

Yeah. I mean, the acute care other operating expenses appear to be going up fairly significantly, but as you pointed out, I think the biggest chunk of that is the impact of the insurance subsidiary. The insurance subsidiary records its medical losses, or we record its medical losses in that other operating expense line because their medical losses tend to run, you know, 85%-88% of revenue, as opposed to other operating expense at the hospitals, which tend to run at 20% of revenue, something like that. When we have an increase in subscribers, an increase in revenue in the insurance subsidiary, it tends to distort that other operating expense line.

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

As an example, in Q2, if you exclude the insurance subsidiary from on our acute care reporting, our same-store revenue growth, which we report at 3%, would be adjusted to 2%. Our other operating expense growth, which we report as 14%, would be at 6%, which I think is probably, you know, a much more in line or, you know, what would be an in-line expected number for that other operating expense. There's nothing else extraordinary in that other OpEx line that I can think of.

[Operator]

Thank you. One moment for our next question. Our next question comes from Benjamin Rossi with BMO. Your line is now open.

[Benjamin Rossi, Assistant Vice President, Equity Research at BMO Capital Markets]

Hi. Good morning. Thanks for taking my question. Just filling in for Matthew Borsch here. Just regarding inflationary pressures for 2023, I know it's early, but how do you think we should be thinking about key inflationary pressures for 2023 versus historical trends? With managed care negotiations and ability to pass some of these inflationary pressures through pricing, can you just give us some timing on how we should think about that?

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

Yeah, look, I think that by far the biggest challenges that our hospitals have faced have been on the labor side of the business, and I don't think that's purely just sort of normal inflationary pressures. I think we have had a point of view for some time that as COVID volumes declined and settle into something more of an endemic level, the pressure, particularly on premium pay, would ease. We certainly saw that sequentially from the first quarter to the second quarter, and as I commented in an earlier response, that's our expectation as the year goes on. That, you know, if that plays out the way that we expect, it will certainly significantly diminish the pace of our cost increases.

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

Now, you know, as you point out, we certainly are experiencing other inflationary pressures throughout the business, you know, in the same way that all consumers and all businesses are. We're certainly doing our best to recoup them from our managed care payers. I've mentioned in previous calls that, you know, we've been aggressively giving notice of termination on contracts in both the acute and the behavioral business at a pace faster than, quite frankly, I can really remember ever historically.

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

Because as we identify contracts that, you know, simply in our minds are not even remotely keeping up with inflationary pressures and labor pressures, and especially in places, whether it's, you know, behavioral or even in some of our acute facilities where we're already capacity constrained, we are willing to part with what we believe are inadequately reimbursed contracts and focus on patients and contracts that are, in fact, adequately reimbursed. I also would note that it, you know, it struck me at least that there was a different tone from some of the payers.

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

I think UnitedHealth Group in their quarterly earnings call acknowledged that they'd be giving some level of price increases in 2023 to providers to acknowledge the increased inflationary pressures, which at least for me was the first time that a payer had acknowledged that. Our expectation is that payers will be more receptive to it in 2023, but we'll also continue to be aggressive and you know try and grab the bull by the horns where we're able to and you know wrangle rate increases from reluctant payers where we can and where we can't I think we're willing to you know reconfigure our business and rid ourselves of some of those lowest payers.

[Benjamin Rossi, Assistant Vice President, Equity Research at BMO Capital Markets]

Gotcha. Great. Quickly on recruiting. Been continuing to hear about, you know, tight labor conditions for clinical staff, particularly LPNs. Just looking for a quick update on how your internal initiatives for recruiting retention are playing out. Thanks.

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

Yeah, I mean, the comments that I made at the outset, you know, indicated a roughly 20% decline in premium pay on the acute side, you know, sequentially from Q1-Q2. On the behavioral side, we continue to have a number of months, five or six months, certainly at least, continuous net new hires, meaning the number of people we're hiring is exceeding the number of people that are exiting the company. Our focus, quite frankly, is really now on that back end and reducing the number of folks who are leaving. Again, I'll repeat sort of what I said earlier.

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

I think we have a view that as COVID volumes decline and we settle into sort of more of an endemic kind of an environment where there are not these extraordinary opportunities for nurses to chase premium dollars that are 4x or 5x their base salary, that we'll see, you know, a bit more of a return to historic norms of, you know, nurses returning to full-time jobs, et cetera. I'm not suggesting that there have been no changes during the pandemic. I think we are probably gonna get used to a higher level, a higher normative level of temporary and traveling nurses maybe than we've had in the past, et cetera. I do think those numbers will continue to come down from where they are today to something approaching what we were used to in a pre-pandemic environment.

[Benjamin Rossi, Assistant Vice President, Equity Research at BMO Capital Markets]

Great. Thanks for your comments here.

[Operator]

Thank you. Our next question comes from Jason Cassorla with Citi. Your line is now open.

[Jason Cassorla, Managed Care and Healthcare Facilities Analyst at Citi]

Great. Thanks. Maybe just for the acute business, can you discuss the utilization by payer across commercial Medicare and Medicaid, and if there's any particular payer buckets where you're seeing outsized pressure on volumes? Just on a follow-up on mix, acuity seems to remain elevated, but are you seeing any relative pressure on the medical versus surgical side of the business worth noting? Maybe how we should think about those trends for the balance of the year. Thanks.

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

Yeah, I think, you know, we have said throughout the pandemic that we have not seen dramatic changes in our payer mix. I think for the most part, our acute hospitals have tended to experience higher levels of COVID during the surges than at least our public peers. I assume that's just a geographic sort of luck of the draw, in that you get the COVID patients in your market. You know, nobody sort of advertises or, you know, does anything to try and attract those patients. You get what you get. We've tended to have, I think, a slightly higher Medicare to commercial mix than some of our peers, particularly during surges. Other than that, I don't see that.

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

You know, the managed care companies, I think otherwise from a mix of business perspective, continue to talk about a shift from inpatient to outpatient. I think, you know, in our minds, that's really just a continuing dynamic that has been present in the industry now for, you know, at least a decade, probably quite a bit more. You know, within our own hospitals, I don't know that we've really seen that shift accelerated.

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

You know, again, I'll get back to, you know, I think the fundamental challenge that we faced in our acute care business in Q2 was that as COVID volumes declined, and they declined rapidly, we were unable to replace them at the same pace as we did, let's say, in 2021 with elective and scheduled procedures and the more acute and more profitable sorts of procedures that sort of, you know, go missing during the COVID surges. You know, I'll just remind everybody that in 2021, Q2 really proved to be the most profitable, most robust quarter of the year for both of our business segments after, again, a you know a very significant surge of COVID in January of 2021.

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

We were really kind of built our original 2022 forecast off of that experience. I think what we found is that, particularly again, on the acute side, that recovery of non-COVID volumes, which occurred earlier in 2021. It occurred in April and May and June of 2021, has been just sort of extended out into the back half of the year. You know, I think that was the crux of, you know, Mark's opening comments that we believe that demand has really been postponed or deferred and not, for the most part, you know, lost in any significant way. We understand that we have a pretty significant forecast in the back half of the year for increasing volume and continued decreases in labor. You know, that was our experience during the quarter.

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

The quarter got better sequentially with each month. July seems to be getting sequentially better than June, and so, you know, we're encouraged. We know we have a steep hill to climb, but we're encouraged that those should still be achievable forecasts.

[Jason Cassorla, Managed Care and Healthcare Facilities Analyst at Citi]

Got it. Thanks. Appreciate that color. Maybe just a follow-up. Just on the CapEx side, if I heard this correctly, it sounds like you've reduced CapEx spending expectations by about 20%. I think last quarter you discussed that you're taking CapEx spending into account on an episodic basis given the labor and volume backdrop. Perhaps if you can give any more detail around the CapEx reduction and the developments there, that would be helpful.

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

Yeah. You know, a significant amount of our CapEx is on large projects. You know, obviously, there was a significant amount of money spent in the early part of the year to open the hospital in Reno. Capital spending on new hospitals is back-end loaded in the sense that, you know, a lot of it takes place in the month or two before the hospital opens, when most of the equipment is delivered and installed. And that's a significant expense. We also opened, you know, several new behavioral hospitals. We've talked about our projects, you know, to build, you know, new hospitals in California. We're opening a new patient tower in Edinburg, Texas, very shortly, et cetera.

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

Those projects and all of our large projects are difficult to really slow down or certainly stop in any efficient way. I think we've learned this over the years. Most of that reduction that you know I referred to is really in sort of discrete equipment spending and smaller capital projects that can be you know postponed or delayed. I think we just felt it was kind of a prudent course to slow those projects twofold when you know earnings were pressured, number one, but also when you know labor constraints were such an overarching issue, you know why build new capacity or open new capacity if we were gonna have difficulty staffing it?

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

You know, all of that is, I think, sort of being done in real time, and we'll continue to monitor it. If I think volumes begin to improve, as we believe they have already begun to and believe they will continue to do so, you know, we'll make our judgments about restoring the pace of capital. I would say for the foreseeable future, the pace of our capital spending will be, you know, moderated below what our original forecasts for this year were.

[Jason Cassorla, Managed Care and Healthcare Facilities Analyst at Citi]

Got it. Thanks. Appreciate all the color.

[Operator]

Thank you. One moment for our next question. Our next question comes from Whit Mayo with SVB Securities. Your line is now open.

[Whit Mayo, Managing Director and Senior Research Analyst at SVB Securities]

Hey. Thanks. Steve, on the malpractice charge, is this a one-time prior year negative development, or did you raise your estimates and reserves on a go-forward basis? I know we had a higher malpractice development last year, so just trying to understand kind of what you have in your plan now.

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

Yeah. Whit, I mean, I think we said this last year, you know, our malpractice experience is that, you know, we're not seeing an increased number of cases. I think broadly, you know, what our actuaries tell us is that this is the, you know, the general experience across the country. You know, the value of cases that are being brought just is increasing at a fairly significant rate. You're right. We did have an increase to our reserves last year. We did have an increase to our reserves in the second quarter of this year. We view it as a one-time thing, in the sense that, you know, I think otherwise our malpractice, expense and provision for malpractice in the back half of the year will be as we originally forecasted.

[Whit Mayo, Managing Director and Senior Research Analyst at SVB Securities]

It's the size of the claims, not the frequency of the claims?

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

Correct.

[Whit Mayo, Managing Director and Senior Research Analyst at SVB Securities]

Okay. Maybe just two other quick questions. I'm curious how the U.K. operations are performing now and if there was any sizable impact from currency in the quarter. If you could just talk a little bit about the surgical trends in the quarter. Any service lines, you know, stronger or weaker than your expectations?

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

Yeah. Sort of do it backwards and hopefully remember everything. Surgical trends, as I said, I mean, I think, you know, we're seeing what seems to be a kind of a common theme, which is that our outpatient procedures tend to be growing faster than inpatient. Honestly, I'm not sure that's a new development, nor, as I said earlier, do I think we see that for the trend or that gap accelerating, but it's certainly, you know, continuing. As far as within our surgical services, you know, are there particularly strong or weak service lines with cardiology, orthopedics, et cetera? No, I don't think so. I think, you know, they're tending to all grow at around the same levels.

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

As far as the U.K. goes, I think, you know, interestingly, through most of the pandemic, I think our behavioral business in the U.K. has been a little bit more stable than the acute business, while they experience, you know, many of the same issues, particularly with labor staffing, because they tend to have a longer length of stay and smaller facilities. I just don't think that they were quite as pressured as we are in the U.S. on that issue. So they've actually performed, you know, much closer to our forecast than the U.S. business. You know, now keep in mind, it's still a pretty small part of the overall business. It's about 5% of our consolidated revenues. As you point out, recently, the U.K. economy has come under some significant pressure.

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

The exchange rate has, you know, become unfavorable to us. Again, because it's such a small part of the business, it certainly has had an unfavorable impact, but I think it's only a few million dollars in the quarter. I think, you know, other than the sort of broad pressures on the U.K. economy and some of the taxes they're implementing and raising their corporate taxes, there are some macro, I think, unfavorable sorts of issues. I think the underlying business in the U.K. continues to do very well.

[Whit Mayo, Managing Director and Senior Research Analyst at SVB Securities]

Okay, thanks.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of A.J. Rice with Credit Suisse. Your line is open.

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

Thanks. Hi, everybody. Maybe first, you mentioned, Steve, you've seen progression throughout the quarter, and July trends looked like they're at least as strong as June, if not a little better. Normal seasonal pattern would have you step down in third quarter, probably in both businesses, and then have a strong finish to the year in the fourth quarter. When you're thinking about the way guidance lays out for the back half of the year, I know you don't guide on a quarterly basis, but can you give us any flavor for how you're thinking about the trajectory? Will it be a normal seasonal year, or will it be somewhat different than that?

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

Yeah, I mean, I think almost by definition, if you sort of go through the math of our back half, expectations for revenues and, you know, EBITDA, you have to see that we pretty much assume that kind of the normal seasonal progression that you alluded to. We're assuming is gonna be overcome by this kind of deferred and postponed demand. We assume that the third quarter will be sequentially better than the fourth, and the fourth will be sequentially better than the third, and by a significant amount. Again, it's this idea that I'm gonna go back to what I was saying, you know, before.

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

If you looked at the recovery in 2021, you know, the second quarter was the strongest of the year, which is, again, historically not the traditional seasonal pattern, but it was the emergence from the COVID surge, you know, sort of the pickup in volumes, the easing of labor pressures. We think all those things are occurring in 2022 as well. We just think they're occurring at a sort of more elongated and slower pace so that, you know, a good chunk of that recovery, a good chunk of that labor improvement will take place in quarters three and four this year rather than the way they did in quarter two of last year.

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

Okay. Then maybe I'll ask on the behavioral business. You had a sequential improvement in margin of about 200 basis points, which is encouraging. That really didn't come with a big rebound in volume or step-up in volume. How do you think then where we go from here? Do you need volume to step up somewhat to get further margin improvement? Are there other things that are specific to the labor situation, whatever, that suggest that you can see more margin improvement? Any sense of where you think that would ultimately settle out coming out of the pandemic?

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

Yeah. Look, I think you highlight, A.J., kind of an important point in the way that COVID surges sort of manifest themselves and impact the two business segments, and I think they're impacted quite differently. On the acute care side, we have the COVID surge in January, and while COVID patients present a lot of sort of operating challenges for an acute care hospital from an earnings and financial perspective, there is a significant benefit to them. They're high acuity patients. There's very little bad debt, or there had been very little bad debt because there were government programs to cover the uncompensated COVID patients, et cetera. You're running very efficiently, all that sort of stuff.

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

As those patients decline, as the COVID patients decline on the acute side, now there's this sort of air bubble, if you will, created, and you've got to fill that bubble with non-COVID business. As I said, for a number of reasons, that's been a more challenging and I think a slower recovery in 2022 than it was in 2021. As a result, the weakest month that we've had this year on the acute side of the business is April, and it has gotten better since then, as I've said, sequentially each month. Whereas on the behavioral side, the COVID surge has sort of immediately, you know, devastating. There's really no benefit to it. It, you know, it makes our staffing challenges, you know, wildly exacerbated.

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

We have a lot of challenges when we have to isolate COVID patients and close beds, et cetera. The weakest month of the year for our behavioral business this year has been January, when we had the biggest COVID surge, and then we've just generally seen a sequential improvements since then. You know, your overall point, I think is well taken. In order for us to, you know, meet our forecasts that are out there, we clearly need an improvement in volumes, which again, I'm gonna say we believe the underlying demand in both businesses is there. As the labor situation eases, as the COVID surges ease, it should be easier to execute on those, you know, volume increases.

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

We thought we would do it earlier in the year, but, you know, our revised forecast has it, you know, slower and some of it, quite frankly, not even taking place in 2022. You know, that's the crux of our revised forecast.

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

Okay, maybe I'll just slip in one last one because it hadn't been addressed. It seems like some of the specialty hospital peers, whether it's rehab or behavioral, they're talking about seeing an uptick in acute care companies or entities being interested in doing joint ventures as they're repositioning and trying to deal with their own labor challenges. Are you seeing that? Any update on discussions around potential JVs with other big health systems?

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

Yeah. No, no, Look, we've talked about this for some time that, yes, we think there are a significant number of acute care hospitals who have existing behavioral services, either, you know, a dedicated floor or a discrete, you know, building in which they're offering behavioral services, but feel like they're not, you know, terribly efficient or focused on delivering those services, and are looking for a partner who is more expert and more experienced in doing that. You know, we mentioned earlier that we had, you know, a number of de novos open this year, you know, in Wisconsin, our first behavioral hospital in Wisconsin, in Iowa, in Missouri. We've had, you know, and, you know, the Iowa and Missouri hospitals are joint ventures with acute care hospitals. We have a number more in the pipeline.

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

I think it's an accurate comment that you're hearing from others. You know, I think we're trying to measure that again, against sort of a real uptick in capital investment at a time when there are challenges in opening new capacity with labor, et cetera. I think we're trying to create a pipeline that of these joint ventures that can be absorbed in a sort of proper way without creating a drag in earnings. Yeah, I think we have said for some time, we think that the opportunity to joint venture with some acute care hospitals and probably even more importantly, some acute care hospital systems to offer behavioral services.

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

We have said for some time, we think that the opportunity to joint venture with some, acute care hospitals and, probably even more importantly, some acute care hospital systems to offer behavioral services is a significant opportunity over the next five or seven years.

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

Okay. Thanks a lot.

[Operator]

Thank you. One moment for our next question. Our next question comes from Ben Hendrix with RBC Capital Markets. Your line is now open.

[Ben Hendrix, Healthcare Services and Managed Care Analyst at RBC Capital Markets]

Hey, thank you very much. Just to follow up on the behavioral side, certainly you've mentioned that the volumes have got sequentially a little bit better since the low point in January, but they seem to trend a little bit better than we had expected and seem to be a little bit better than some commentary from your peers on behavioral. Just wondering if you could if there are any particular areas that you saw or were a little bit different from your expectations. Just how that's trending in general, and if there were any particular mix issues with payer mix or if there was any kind of patient mix that deviated from your original expectations. Thanks.

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

No, Ben, I think, you know, as I think we tried to allude to before, you know, the main challenge for our behavioral hospitals during the pandemic has been a lack of staff. As a consequence, we feel like we've had to turn away significant numbers of patients because we didn't have adequate staff to treat those patients, mostly RNs, but in some cases, therapists, physicians, psychologists, you know, family counselors, and in other cases, non-professionals, mental health technicians, et cetera. Progress in that area has been slow, but since the, you know, the COVID decline in January especially, we've made a lot of progress. I think more than anything else that has allowed us to make incremental improvements in our volumes. I think those have continued into July, and our expectation is, they'll continue into the balance of the year.

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

I don't know that it's in any particular service line, or payer. I think again, it is more than anything, a reflection of the fact that we are slowly getting our arms around the labor scarcity issue, increasing our net hires, experimenting, maybe not even experimenting anymore, but implementing, new patient care models that rely somewhat less on RNs and on other caregivers, so that the ultimate total care that's given to patients and attention that's given to patients is the same and is the same quality, but just not as reliant on registered nurses.

[Ben Hendrix, Healthcare Services and Managed Care Analyst at RBC Capital Markets]

Thanks. Just a quick follow-up on the CapEx side. I know you talked about a reduction in CapEx and part of that going to discrete equipment spending. Is there any particular color you can give us on the priorities for those cuts kind of in the equipment side? Thanks.

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

No, I mean, it's really, I think we're making, you know, discrete decisions in, you know, for each hospital in every market based on, you know, where are they, you know, sort of struggling, you know, if we invest in new equipment, you know, will they be able to, you know, have the staff to, you know, realize the benefits of that investment, or should we wait until the, you know, the staffing issues resolve themselves? No, I wouldn't say that it's functionally, you know, we're not buying CTs, but we are buying MRIs. It's not that sort of thing. I think, you know, we're making these individual judgments about, you know, where it makes sense to postpone or wait on an investment until, you know, we are not as sort of capacity constrained from a labor perspective.

[Operator]

Thank you. Our next question comes from Kevin Fischbeck with Bank of America. Your line is now open.

[Kevin Fischbeck, Healthcare Facilities and Managed Care Analyst at Bank of America]

Great, thanks. I apologize for some of these questions because sometimes it gets confusing to me about whether we're talking about acute or behavioral volume. Maybe just to clarify, when you talked about labor being the biggest headwind to volume growth, you're talking about the behavioral side more than the acute side? Because it sounded like in Q2, it was more COVID dropped and then core didn't come back rather than a staffing issue on the acute. Do I have that right? Or would you say labor is also a real gating factor to volume growth in acute?

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

Yeah. Thanks, Kevin. It's a good question, and I probably should have been a little more precise in my commentary. I think absolutely from the beginning of the pandemic, we have talked about the major headwind or gating factor on the behavioral side as being the labor capacity constraint and shortage. I do believe that in Q2 and I think on the acute side, through most of the pandemic, the issue has been we've been able to fill most of our vacancies, but we've had to do so at an extremely high cost. Therefore, on the acute side, most of the focus has been on that premium pay rather than sort of an absolute scarcity or, you know, a vacancy sort of an issue.

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

I will say that in Q2, we did see that issue arise in the acute care segment. I don't know that we saw it pervasively. I don't know that it was the single biggest issue by any stretch. For instance, I think our surgical volumes overall were impacted in some of our markets by a lack of anesthesia coverage. Anesthesiologists and their assistants, et cetera, tend to be independent contractors, not our employees. It's not necessarily something we're in direct control of. You know, we were hearing feedback during the quarter that we were having to, you know, limit surgery schedules, et cetera, in some markets because there simply wasn't enough anesthesia coverage.

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

Same thing in some markets, we had to go on emergency room divert because we didn't have, you know, simply enough staff in the emergency rooms, et cetera. Again, I don't know that it was a pervasive issue in the acute care space in Q2, but I do think it contributed to the Q2 weakness in a way that we hadn't necessarily seen before.

[Kevin Fischbeck, Healthcare Facilities and Managed Care Analyst at Bank of America]

Okay. Because I guess when we hear some of the other companies talk about how they think about managing their business during this labor shortage, some companies said we've just de-emphasized certain business lines because it doesn't make sense when labor is $150 an hour, and therefore are growing more slowly. I haven't heard you guys talk about that. I mean, when you think about cutting back on CapEx because it might just be hard to staff to that growth, I mean, are you at all changing your model or your thought about managing through this? I'm just trying to understand, you know, the thought process has changed and what if any implications are for volume growth or margin improvement from here over the next few quarters.

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

Yeah. Look, Kevin, I think that the notion that where there's a labor scarcity, you're gonna wanna emphasize your high margin service lines and de-emphasize your low margin service lines is sort of theoretically an attractive idea and something that I think we do and we do all the time to the degree that we're able to. I do also believe that in a business in which at least half of our, you know, patients, or more than half of our patients, but about, you know, maybe half of our admissions come through the emergency room. I'm sure you can understand that that's not an easy business to control, and you basically take what comes in and you treat those patients.

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

Same thing, you know, OB, as an example, tends to be one of a lower margin service lines in most hospitals. When a woman comes into the hospital in labor, there's really no option to do anything but to treat that woman, and that's, of course, what we do. You know, again, I heard what the other companies say, and I think we certainly try and do it to the degree that we can. I also believe that in a hospital, there's really a limit to how much of that you can do.

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

I think what we can do in terms of being selective in our business is what I alluded to before. In terms of managed care contracting, we don't have to be in network with managed care payers who are not offering us, you know, adequate rates, et cetera. I think in that regard, that's an easier sort of function to manage, because you can sort of do that in advance, and if somebody's out of network, they're either gonna pay a higher price or they're gonna go to another hospital. That's something that I think you can deal with in a more, in my mind, more sort of measured and, you know, rational way. We certainly have talked about that now for several quarters.

[Kevin Fischbeck, Healthcare Facilities and Managed Care Analyst at Bank of America]

Okay, great. Maybe just last question, you know, I guess on the psych side, you know, demand's been strong for a number of years and you guys have been growing slower than how we think about overall demand in psych even before, you know, the last couple of years during the pandemic. Just trying to think about what it means when labor gets better from here, but maybe it's a little bit elevated than it was, you know, in 2019 or, you know. Like what exactly does that mean from growth? Can you then grow from, you know, the way that we think about how this business should be growing in that type of labor environment?

[Kevin Fischbeck, Healthcare Facilities and Managed Care Analyst at Bank of America]

does that still create a situation where labor is still tight and so there's still gonna be struggles to kind of get to where that business should be? Thanks.

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

Yeah. You know, Kevin, I go back to late 2019, right, you know, right before the pandemic and, you know, I'm gonna say November, December of 2019, January, February of 2020. You're right, you know, we were coming off some challenging years. We had seen labor shortages back in 2015 and 2016 that I think we had largely overcome. We saw length of stay pressures in 2017 and 2018 from our managed Medicaid payers I think we have largely overcome. I would say that four or five month period, late 2019, early 2020, I think we were generally feeling like we were firing on all cylinders for the first time in a long time. It certainly was still a tight labor market.

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

You know, there's a difference between sort of a tight labor market and one in which there are extreme scarcity, which I think, you know, characterized the way it was during the pandemic. We had, I think, a four or five month period of kind of just a brief window to see what it would be like to be able to operate without, you know, any significant sort of overarching headwinds still in the tight labor market. We were doing pretty well during that short period. Of course, the pandemic occurs in the middle of March of 2020. I think that's, you know, really kind of what we're shooting for.

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

I, you know, I don't know that we're gonna get back to that environment in, you know, the next month or the next quarter, but I think we feel like it's not something that's so far away that we can't see getting there. I think we feel like there's, you know, a lot of incremental improvement as we return to an environment where we ought to be able to grow the behavioral business revenues in sort of mid to upper single digits, which we had done for a very long time, you know, for a decade and a half or so, you know, before all this started. You know, I think that's the overall plan, and we're very focused on it. You know, I think, you know, Mark alluded to all the money that we've invested in recruitment and retention initiatives.

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

We think that there's a real payoff to all those things over the next couple of years. Again, you know, fundamentally, every measure that we have is that there's still significant demand out there for behavioral, and that quite frankly, demand for behavioral services has probably in the general population, increased during the pandemic rather than decreased.

[Kevin Fischbeck, Healthcare Facilities and Managed Care Analyst at Bank of America]

Great. Thanks.

[Operator]

Thank you. One moment for our next question. Our next question comes from Pito Chickering with Deutsche Bank. Your line is now open.

[Pito Chickering, Healthcare Facilities and Medical Devices Analyst at Deutsche Bank]

Hey, good morning, guys. Thanks for fitting me in here. A couple of quick questions. A follow-up question for A.J.'s guidance questions. We set our models appropriately. Historically, about 46% of your EBITDA in the back half of the year comes in 3Q and the rest in 4Q, which means that 3Q EBITDA, about $420 ballpark. Is that just the right range we should be focusing on?

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

Yeah. Pito, as you know, I mean, we don't give quarterly guidance. I think, you know, as I've mentioned a number of times, you know, we're not gonna start doing it during the pandemic when I think there's greater uncertainties. I think you're right. I mean, I think in the sense that those percentages are probably reasonable. I think what I've said earlier is clearly we've backloaded more of our earnings into the back half of 2022 than we are in a normal year. I think what you're suggesting is there still has to be some level of seasonality. The third quarter is when our patients and our physicians take their vacations, et cetera, during the summertime.

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

I'm not gonna say that those are the right numbers, but I think the thought process is certainly reasonable.

[Pito Chickering, Healthcare Facilities and Medical Devices Analyst at Deutsche Bank]

Great. Then a multipart question for you, just back on the labor topic. I guess the first one is, if you look at your RN hourly rates in January versus June or July, have those changed at all in 2022, or are they stable? Then the same question for techs and LPNs. You know, are you hiring a lot more LPNs and techs than you used to? And are we seeing sequential labor pressures from those rates? Then finally, can you refresh us on what percent of S&B is RNs and non-RNs? Thanks so much.

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

Yeah. The answer I think, you know, as I think every business in America is facing is, you know, we're having a harder time hiring just about everybody. And again, you know, as you know, not like I follow other industries as closely as some of the folks on this call, but certainly, you know, everything I read, everything I talk to peers, et cetera, you know, indicates that, you know, hiring, you know, quite frankly, hiring people even here in our corporate office is more challenging than it was pre-pandemic.

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

Yeah, I mean, I think that's all a challenge. You know, I think what we said a number of times, however, is that while there is certainly some upward pressure on nursing rates, and RN rates, in some ways, the pressure has been so great and the opportunities have been so great for nurses to work in these temporary and traveling jobs that raising their rates has really not even been, you know, sort of an appropriate reaction. If a nurse is leaving to take a traveling job in which she is gonna earn four or five times her base salary, there's really nothing we can offer him or her to compete with that.

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

You know, what we do is we try and look at the competitive rates in the market, base rates for RNs, et cetera, but we're not trying to match those sort of crazy opportunities that nurses are finding in the temporary and traveling area. What we also have found is that as COVID surges decline, the number of those crazy opportunities decline pretty precipitously as well. You know, again, I you know, I believe back to this thing, I mean, I think that the labor situation will continue to be a tight one for some time.

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

I think there'll be upward pressure on nursing rates for some time, but just not nearly the sort of, you know, crazy kind of opportunities and crazy pressures we felt when we were paying, you know, $225 an hour for a temporary nurse, et cetera. You know, those rates I think have come down almost by half, you know, since their height.

[Pito Chickering, Healthcare Facilities and Medical Devices Analyst at Deutsche Bank]

The hiring of techs and LPNs, does that sort of change today versus pre-COVID? Do you think that this level of LPNs to techs versus RNs, do you think this is the right level going forward?

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

Yeah. Look, what I think is ultimately gonna happen, and certainly we're doing our best to encourage it, is, you know, we're gonna see more people enter the workforce, as you know. What we do is, you know, we encourage our mental health technicians to go to school and become LPNs or, you know, some sort of, you know, a certified clinical person. We encourage our LPNs to get their RN degrees, et cetera. And obviously we're providing help and support for them to do that. So hopefully over the course of the next few years, and not just UHS, but the industry will build a better pipeline. And what we've found is that occurs sort of naturally when there is a nursing shortage.

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

Obviously, I think what the pandemic did was it exacerbated that shortage and sort of made it occur almost overnight in a way that that's not something we've experienced before. But I think the overall reactions are focused on building a bigger pipeline of sort of, you know, nurse education progression, et cetera. We'll start to have a real impact over the course of the next, you know, couple of years.

[Pito Chickering, Healthcare Facilities and Medical Devices Analyst at Deutsche Bank]

Great. Thanks so much, Steve.

[Operator]

Thank you. At this time I would now like to turn the call back over to Mr. Steve Filton for any closing remarks.

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

None other than we thank everybody for their time, and we wish everybody a good rest of the summer. Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Marc Miller, President and CEO

Analysts

• A.J. Rice, Healthcare Analyst at Credit Suisse
• Andrew Mok, Healthcare Analyst at UBS
• Ben Hendrix, Healthcare Services and Managed Care Analyst at RBC Capital Markets
• Benjamin Rossi, Assistant Vice President, Equity Research at BMO Capital Markets
• Jason Cassorla, Managed Care and Healthcare Facilities Analyst at Citi
• Kevin Fischbeck, Healthcare Facilities and Managed Care Analyst at Bank of America
• Marco Criscuolo, Senior Equity Research Associate at Nephron Research
• Pito Chickering, Healthcare Facilities and Medical Devices Analyst at Deutsche Bank
• Stephen Baxter, Senior Equity Analyst at Wells Fargo
• Steve Filton, EVP and CFO at Universal Health Services
• Whit Mayo, Managing Director and Senior Research Analyst at SVB Securities