Universal Health Services Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2022

There are 12 speakers on the call.

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.

Speaker 1

Thank you, and good morning, everyone. Mark Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the Q2 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.

Speaker 1

I recommend a careful reading of the section on risk factors and forward looking statements and risk factors in our Form 10 ks for the year ended December 31, 2021, 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. As discussed in our press release last night, the company reported and adjusted net income attributable to UHS per diluted share of $2.20 from the Q2 of 2022. As previously disclosed in our preannouncement on June 30, 2022, our acute hospitals experienced a significant decline in COVID related patients during the Q2 of 2022. As a percentage of total admissions, COVID diagnosed patients made up 15% of total admissions in the Q1 of 2022, but only 3% in the Q2 of 2022.

Speaker 1

The decrease in COVID related patient volumes during the Q2 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. And even though we did make progress in reducing premium pay in the acute segment, which went from $153,000,000 in the first quarter to $117,000,000 in the 2nd 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 of 'twenty one, tended to peak in most of our geographies in January 'twenty two. 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.

Speaker 1

Meanwhile, the amount of contract nursing hours used and even more The rate we had to pay for those hours increased significantly in the Q1, both on a sequential basis as well as on a year over year comparison. In our behavioral segment, we also made progress in filling our vacant positions, but patient day volume still did not recover as quickly as we originally expected. We do note that our reported second quarter results were benefited from approximately $10,000,000 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 $10,000,000 represents a shift in timing only. The Q2 also included approximately $20,000,000 of start up losses incurred by recently opened de novo acute and behavioral health facilities, as well as a $16,000,000 pre tax charge incurred to increase our reserves for self insured professional and general liability claims.

Speaker 2

Our Q2 2022 operating results were significantly behind our original forecast. 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.

Speaker 2

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. 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% for $100,000,000 for the 1st 6 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.

Speaker 2

We are pleased to answer your questions at this time.

Operator

Our first question comes from Marco from Nephron Research. Your line is now open.

Speaker 3

Hi, good morning. Thanks for taking the question. So you spoke to some of the developments you saw in contract labor during the quarter. But I was wondering if you could provide a Some more detail on what you're seeing in terms of the hourly rates and utilization and how that's tracking into July. And also is there any detail you can provide on base hourly nursing rates and how those compare today to last year or even 2 years ago?

Speaker 3

Thanks.

Speaker 1

Yes. So what we said in the Q1 was that We had $150,000,000 $153,000,000 of premium pay in the acute segment, And we said that our guidance presumed that that number would be cut approximately in half by the 4th quarter, so that we'd have something like 75,000,000 or 80,000,000 premium pay in the 4th quarter. We're pretty much on track for that trajectory. As I said, We had $117,000,000 of premium pay in Q2, which is about 20%, maybe a little bit more reduction. I think that reduction came from a combination of both rate declines and hours utilized.

Speaker 1

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

Speaker 3

Great. Thanks. And then if

Speaker 4

I could ask one quick follow-up on

Speaker 3

the behavioral side. Is there any way to quantify the lost patient volumes from the lack of your ability to find the staffing. 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.

Speaker 1

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, etcetera, and we don't view them as the most precise statistic. But 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, etcetera. I think what I would say is we continue to believe that the historic levels of growth That we've experienced in our behavioral business, mid single digit volume growth, 3%, 4%, 5%, Same store patient day growth year over year, we believe is certainly still achievable, once we can Get beyond the current labor scarcity. And I think the Q2 represents an incremental improvement towards that goal, Still a ways to go, but I think the trend is a positive one.

Speaker 3

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.

Speaker 5

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

Speaker 1

Yes, 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 preannouncement and our remarks again today. It was 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, but that drag in the quarter was in my mind no more than $10,000,000

Speaker 5

Got it. Okay. And then on the behavioral side, behavioral revenue per patient day had been trending 5% plus over the last 7 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.

Speaker 5

Thanks.

Speaker 1

Yes, 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. And in the comparison between years, at least some of that is included. So As we've noted, the recording of that Kentucky revenue is much more ratable in 2022. So We're comparing a more ratable reimbursement rate in 2022 with that big chunk received in 2021. So probably That drives down the revenue growth rate more than anything else.

Speaker 6

Great. Thanks for the color.

Operator

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

Speaker 7

Yes. Hey, thank you. It looks It's about a when you look at the acute care reported EBITDA and the same store EBITDA, it looks like there's about a $20,000,000 drag from non same store items. It sounds like, if I remember correctly, the insurance company results are not reported in same store. Just wondering if you can confirm that or not?

Speaker 8

And then should we

Speaker 7

think about the balance of that, is being driven by startup losses or any other items impacting that? That would be helpful color to have. Thank you.

Speaker 1

So the insurance subsidiary results are certainly included in our same store acute results and always have been obviously except for when they first started. What I said in my prepared remarks was we had $20,000,000 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. And one of the things that we're experiencing Saying just yet another difficulty of the pandemic is a slower process in getting 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 a literally just a few day process between opening and getting your Medicare number certified. I think in the case of our hospital in Reno, it took us almost a couple of months. And as a consequence, I think we suffered more significant losses than we really anticipated and that's a big chunk of that $20,000,000 that I mentioned in my prepared remarks.

Speaker 1

One of the significant improvements we're Expecting in the back half of the year is that that hospital will ramp up fairly significantly and our forecast will be just that it will be profitable by the back half of the

Speaker 7

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

Speaker 7

Thank you.

Speaker 1

Yes, 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 revenue In the insurance subsidiary, it tends to distort that other operating expense line. So as an example, in Q2, If you exclude the insurance subsidiary from our acute care reporting, our same store revenue growth, which we reported 3% would be adjusted to 2%, But our other operating expense growth, which we report as 14% would be at 6%, which I think is probably much more in line or 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. And our next question comes from Benjamin Rossi with BMO. Your line is now open.

Speaker 9

Hi, good morning. Thanks for taking my question. Just filling in for Matt 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? And 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?

Speaker 1

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 Q1 to the Q2, and as I And commented in an earlier response, that's our expectation as the year goes on. That will increase that if that Plays out the way that we expect, it will certainly significantly diminish the pace of our cost increases. Now, as you point out, we certainly are experiencing other inflationary pressures throughout the business in the same way that all consumers and all businesses are, And we're certainly doing our best to recoup them from our managed care payers.

Speaker 1

I've mentioned in previous calls that 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, because As we identify contracts that simply in our minds are not even remotely keeping up with inflationary pressures and labor pressures And especially in places, whether it's 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 It struck me at least that there was a different tone from some of the payers. I think United 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. So Our expectation is that payers will be more receptive to it in 2023, but we'll also continue to be aggressive and try and grab the bull by the horns, where we're able to and Wrangle rate increases from reluctant payers where we can and where we can't, I think we're willing to Reconfigure our business and rid ourselves of some of those lowest payers.

Speaker 6

Got you.

Speaker 9

Great. And then quickly on recruiting, We've been continuing to hear about 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?

Speaker 1

Thanks. Yes, I mean, so the comments that I made at the outset indicated a roughly 20 Decline in premium pay on the acute side, sequentially from Q1 to Q2. On the behavioral side, We continue to have a number of months, 5 or 6 months certainly at least of 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 is really now on that back end and reducing the number of folks who are leaving. And Again, I'll repeat sort of what I said earlier.

Speaker 1

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 4 or 5 times their base salary, that we'll see a bit more of a return to historic norms of Nurses returning to full time jobs, etcetera. I'm not suggesting that there have been no changes during the pandemic. I think we are probably going to get used to a higher level, a higher normative level of Temporary and traveling nurses maybe than we've had in the past, etcetera. But 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.

Speaker 9

Great. Thanks for your comments here.

Operator

Thank you. And our next question comes from Jason Korsola with Citi. Your line is now open.

Speaker 4

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. And then just a follow-up on mix.

Speaker 4

Acuity seems to remain elevated, But are you seeing any relative pressure on the medical versus surgical side of the business worth noting? And then maybe how we should think about those trends for the balance of the year? Thanks.

Speaker 1

Yes, I think 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 the geographic sort of luck of the draw, in that you get the COVID patients in your market, Nobody sort of advertises or does anything to try and attract those patients, you get what you get. And so we've tended to have, I think, a slightly higher Medicare to commercial mix than some of our peers, particularly during surges. But other than that, I don't see that. 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 in our minds That's really just a continuing dynamic that has been present in the industry now for at least a decade, probably quite a bit more.

Speaker 1

And within our own hospitals, I don't know that we've really seen that shift accelerated. But again, I'll get back to you. 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 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 very significant surge of COVID in January 2021 and we were really kind of built our original 2022 forecast off of that experience. And 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 May June 2021, Has been just sort of extended out into the back half of the year and I think that was the crux of Mark's opening comments that We believe that demand has really been postponed or deferred and not for the most part lost in any significant way.

Speaker 1

And so We understand that we have a pretty significant forecast in the back half of the year for increasing volume and continued decreases in labor, But that was our experience during the quarter. The quarter got better sequentially with each month. July seems to be getting Sequentially better than June. And so we're encouraged that we know we have a steep hill decline, but we're encouraged that those should still be achievable forecast.

Speaker 4

Got it. Thanks. Appreciate that color. And maybe just a follow-up. Just on the CapEx side, if I heard this correctly, it sounds like you've reduced CapEx Funding expectations by about 20%.

Speaker 4

I think last quarter you discussed that you're taking CapEx spending into account on basis given the labor and volume backdrop, but perhaps if you can give any more detail around the CapEx reduction of developments there, that would be helpful.

Speaker 1

Yes. So a significant amount of our CapEx is on large projects. 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 a lot of it takes place in the month or 2 before the hospital opens when most of the equipment is Delivered and installed, and that's a significant expense, but we also opened several new behavioral hospitals. We've talked about Our projects to build new hospitals in California.

Speaker 1

We're opening a new patient tower in Edinburg, Texas very shortly, etcetera. So 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. So 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. And I think we just felt it was kind of a prudent course To slow those projects at a time, twofold, Lynn.

Speaker 1

Earnings were pressured, number 1, 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 going to have difficulty staffing. So all of that is I think sort of being done in real time and we'll continue to monitor it. And if I think volumes begin to improve as we believe they have already begun to and believe they will continue to do We'll make our judgments about restoring the pace of capital, but I would say for the foreseeable future, the pace of our capital spending will be You know, moderated below what our original forecast for this year were.

Speaker 4

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.

Speaker 10

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.

Speaker 1

Yeah, I mean I think and I think we said this last year, our malpractice experience is that we're not seeing an increased number of cases, And I think broadly, what our actuaries tell us is that this is the general experience across the country, But the value of cases that are being brought just is increasing at a fairly significant rate. So you're right, We did have an increase to our reserves last year. We did have an increase to our reserves in the Q2 of this year. We view it as A one time thing in the sense that I think otherwise our malpractice expense And provision from malpractice in the back half of the year will be as we originally forecasted.

Speaker 10

So it's the size of the claims, not the frequency of the claims?

Speaker 1

Correct.

Speaker 10

And 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. And then if you could just talk a little bit about The surgical trends in the quarter, any service lines stronger, weaker than your expectations?

Speaker 1

Yes, so sort of do it backwards and hopefully remember everything. Surgical trends, as I said, I mean, I think We're seeing what seems to be 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 sort of trend or that gap accelerating, but it's certainly continuing. As far as within our surgical services, are there particularly strong or weak service lines within cardiology, orthopedics, etcetera? No, I don't think so.

Speaker 1

I think they're tending to all grow at around the same levels. As far as the UK goes, I think interestingly, through most of the pandemic, I think our behavioral business in the UK Has been a little bit more stable than the acute business, while they experience many of the same issues, particularly with labor staffing, Because they tend to have a longer length of stay in smaller facilities, I just don't think that they were quite as pressured as we are in the US on that issue. So they've actually performed much closer to our forecast than the US business. Now keep in mind, It's still a pretty small part of the overall business. It's about 5% of our consolidated revenues.

Speaker 1

As you Point out recently the UK economy has come under some significant pressure. The exchange rate has 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 $1,000,000 in the quarter. And I think other than the sort of broad pressures on the UK economy and some of the taxes they're implementing and raising their corporate taxes, There is a macro, I think unfavorable sorts of issues, but I think the underlying business in the UK continues to do very well.

Speaker 6

Okay, thanks.

Operator

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

Operator

Your line is open.

Speaker 5

Thanks. Hi, everybody. Maybe first, you mentioned, Steve, you've seen progression throughout the quarter and July trends looked like they're at least Strong, if not a little better. Normal seasonal pattern would have you step down in Q3, probably in both businesses and then Have a strong finish to the year in the Q4. When you're thinking about the way guidance lays out for the back half of the year, I know you don't guide on Quarterly basis, but can you give us any flavor for how you're thinking about the trajectory?

Speaker 5

Will it be a normal seasonal year or would it be somewhat different than that?

Speaker 1

Yes, I mean I think almost by definition if you sort of go through the math of our back half expectations for revenues and EBITDA. You have to see that we pretty much assume that Kind of the normal seasonals progression that you alluded to, we are assuming is going to be overcome by this And a deferred and postponed demand. So we assume that the Q3 will be sequentially better than the 4th and the 4th will be sequentially better than the 3rd And by a significant amount. So and again, it's this idea that I'm going to go back to what I was saying before, If you looked at the recovery in 2021, the Q2 was the strongest of the year, which is again historically not The traditional seasonal pattern, but it was the emergence from the COVID surge, sort of the pickup in volumes, the easing of labor pressures. We think all those things are occurring in 2022 as well.

Speaker 1

We just think they're occurring at a sort of more elongated and slower pace, So that a good chunk of that recovery, a good chunk of that labor improvement will take place in quarters 3 and 4 this year rather than the way they did in quarter 2 of last year.

Speaker 5

Okay. And then maybe I'll ask on the behavioral business. You had a sequential improvement in margin of about 200 basis points, that was encouraging. And that really didn't come with a big rebound of volume or step up in volume. Is that how do you think then where we go from here?

Speaker 5

Do you need volume to step up somewhat to You 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 and any sense of where you think that would ultimately settle out coming out of the pandemic?

Speaker 1

Yes. So 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 2 business segments and I think they're impacted quite differently. So 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, etcetera.

Speaker 1

You're running very efficiently, all that sort of stuff. So 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. And 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, Whereas on the behavioral side, the COVID surge is sort of immediately devastating. There's really no benefit to It makes our staffing challenges wildly exacerbated.

Speaker 1

We have a lot of challenges when we have to isolate COVID patients and close beds, etcetera. So 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 improvement Since then, but your overall point I think is well taken. In order for us to Meet our forecasts that are out there, we clearly need an improvement in volumes, which again, I'm going to 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 volume increases. We thought we would do it earlier in the year, But our revised forecast has it slower and some of it quite frankly not even taking place in 2022, But that's the crux of our revised forecast.

Speaker 5

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?

Speaker 1

Yes, look, we've talked about this for some time that, yes, we think there are significant number of acute care hospitals who have existing behavioral services, either a dedicated floor or a discrete building in which they're offering behavioral services, But feel like they're not terribly efficient or focused on delivering those services and are looking for a partner who is more expert, more experienced in doing that. We mentioned earlier that we had a number of de novos open this year In Wisconsin, our first behavioral hospital in Wisconsin, in Iowa, In Missouri, we've had, you know, the Iowa and Missouri hospitals are joint ventures with acute care hospitals. We have a number more in the pipeline. So I think It's an accurate comment that you're hearing from others. 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, etcetera.

Speaker 1

So I think we're trying to create a pipeline of these joint ventures that can be absorbed in So the proper way without creating a drag in earnings. But yes, 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, 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 5 or 7 years.

Speaker 5

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Ben Hendricks with RBC Capital Markets. Your line is now open.

Speaker 11

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 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. I was just wondering if you could if there are any particular areas that you saw Different from your expectations and 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.

Speaker 1

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

Speaker 1

I think again it is more than anything a reflection 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 our ends and on other caregivers, so that the ultimate total care that's given to patients and attention that's given to patients It's the same quality, but just not as reliant on registered nurses.

Speaker 11

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

Speaker 1

No, I mean it's really I think we're making discrete decisions for each hospital in every market based on 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 Realize the benefits of that investment or should we wait until the staffing issues resolve themselves. But no, I wouldn't say that it's functionally, We're not buying CTs, but we are buying MRIs. It's not that sort of thing. I think we're making these individual judgments about Where it makes sense to postpone or wait on an investment until we are not as sort of capacity strain from a labor perspective.

Operator

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

Speaker 6

Great, thanks. I apologize for some of these questions because sometimes it gets It's confusing to me about whether we're talking about acute or behavioral volume. So maybe just to clarify, when you talked about labor being the biggest Headwinds of volume, but 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 you say labor is also a real gating factor to volume growth in acute.

Speaker 1

Yes. So 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, but 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 and therefore on the acute side, Most of the focus has been on that premium pay rather than sort of an absolute scarcity or vacancy sort of an issue. I will say that in Q2, we did see that issue arise in the acute care segment.

Speaker 1

I don't know that we saw it pervasively. I don't know that it was the single biggest issue by any stretch. But For instance, I think our surgical volumes overall were impacted in some of our markets by a lack of the anesthesia coverage, Anesthesiologists and their assistants, etcetera, tend to be independent contractors, not our employees. So it's not necessarily something we're in direct control of, But we were hearing feedback during the quarter that we were having to limit surgery schedules, etcetera, in Some markets because there simply weren't enough anesthesia, there wasn't enough anesthesia coverage. Same thing In some markets, we had to go on emergency room divert because we didn't have simply enough staff in the emergency rooms, etcetera.

Speaker 1

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.

Speaker 6

Okay. 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 deemphasized certain business lines because it doesn't make sense. Some 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 or I'm just trying to understand You know the thought process has changed and what, if any, the implications are for volume growth or margin improvement from here over the next few quarters?

Speaker 1

Yes, look, Kevin, I think that the notion that where there's a labor scarcity, You're going to want to emphasize your high margin service lines and deemphasize 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 Our patients are more than half of our patients, but about maybe half of our admissions come to 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. Same thing, OB as an example tends to be one of the lower margin service lines in most hospitals, But 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. So again, I heard what the other companies say and I think we certainly try and do it To the degree that we can, but I also believe that in a hospital there's really a limit to how much of that you can do.

Speaker 1

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 adequate rates, etcetera. So 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 is out of network, They're either going to pay a higher price or they're going to go to another hospital, but that's something that I think you can deal with in a more, In my mind, more sort of measured and rational way, and we certainly have talked about that now for several quarters.

Speaker 6

Okay, great. And then maybe just last question, I guess on the psych side, demand has 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 the last couple of years during the pandemic. So 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 in 2019 or So like what exactly does that mean from growth? Can you then grow from the way that we think about how this business should be growing in that Type of labor environment or does that still create a situation where labor is still tight and so there's still going to be struggles to kind of get to where that business should be? Thanks.

Speaker 1

Yeah, so Kevin, I go back to late 2019, right before Pandemic, I'm going to say November, December of 2019, January, February of 2020. And you're right, we were coming off some challenging years. We had seen Labor shortages back in 2015 2016 that I think we had largely overcome. We saw length of stay pressures in 2017 2018 From our managed Medicaid payers, I think we have largely overcome in, I would say that 4 or 5 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, and it certainly was still a tight labor market. But There's a difference between sort of a tight labor market and one in which there are extreme scarcity, which I think characterized the way it was during the pandemic.

Speaker 1

So We had I think a 4 or 5 month period of kind of just a brief window to see what it would be like to be able to operate without Any significant sort of overarching headwinds still in the tight labor market and we were doing pretty well during that Short period and then of course the pandemic occurs in the middle of March of 2020. I think that's really kind of what we're shooting for and I don't know that we're going to get back to That environment in 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 and I think we feel like there's a lot of incremental improvement as we return to an environment where We ought to be able to grow the behavioral business revenues into the mid to upper single digits, which we had done for a very long time, for a decade and a half or so before all this started, and I think that's the overall plan and we're very focused on I think Mark alluded to all the money that we've invested in recruitment and retention initiatives.

Speaker 1

We think that there's a real payoff to all those things over the next couple of years. And again, 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. 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.

Speaker 8

Hey, good morning guys. Thanks for taking me in here. A couple of quick questions. A follow-up question for A. J.

Speaker 8

Guidance questions. You said 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 4 20 ballpark. Is that just the right range we should be focusing on?

Speaker 1

Yes. So, Pito, as you know, we don't give quarterly guidance and I think as I've mentioned a number of times, we're not going to start doing it during the pandemic when I think there's greater uncertainties. But 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 back loaded more of our earnings into the back half of 2022 than we are in a normal year.

Speaker 1

And I think what you're suggesting is there still has to be some level of seasonality. The 3rd quarter is when our patients and our physicians take their vacation, etcetera during the summertime. So I'm not going to say that those are the right numbers, but I think the thought process is certainly reasonable.

Speaker 8

Great. And then a multipart question for you just back on the labor topic. I guess the first one is, as you look at your RN hourly rates in January versus June or July, Have those changed at all in 2022? Or are they stable? And then the same question for techs and LPNs.

Speaker 8

Are you hiring a lot more LPNs and techs than you And are we seeing sequential labor pressures from those rates? And then finally, can you refresh us on what percent of S and B Is RNs and non RNs? Thanks so much.

Speaker 1

Yes. So The answer I think, as I think every business in America is facing is, we're having a harder time hiring just about everybody. And again, as now like I follow other industries as closely as some of the folks on this phone, but certainly everything I read, everything I talk The peers, etcetera indicates that hiring quite frankly hiring people even here in our corporate office is more challenging than it was pre pandemic. So yes, I mean I think that's all a challenge. 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.

Speaker 1

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 sort of an appropriate reaction. So if a nurse is Leaving to take a traveling job in which she is going to earn 4 or 5 times her base salary, there's really nothing we can offer him or her to compete with that. And What we do is we try and look at the competitive rates in the market, base rates for RNs, etcetera, but we're not trying to match those Sort of crazy opportunities that nurses are finding in the temporary and traveling area. And what we also have found is that As COVID surges declined, the number of those crazy opportunities declined pretty precipitously as well. Again, I believe back to this thing, I mean, I think that the labor situation will continue to be a tight one for some time.

Speaker 1

I think there'll be upward pressure on nursing rates for some time, but just not nearly the sort of crazy kind of opportunities and crazy The pressures we felt when we were paying $2.25 an hour for a temporary nurse, etcetera, those rates I think have Come down almost by half since their height.

Speaker 8

Okay. And then the hiring of tax and LPNs, does that sort of change today versus pre COVID? Do you think that Sure. This level of LPNs, attacks versus RINs, this is the right level going forward?

Speaker 1

Yes, look, what I think is ultimately going to happen and certainly we're doing our best to encourage it is, we're going to see more people enter the workforce As you know, what we do is, you know, we encourage our mental health technicians to go to stool and become LPNs or some sort of certified clinical person. We encourage our LPNs to get their RN degrees, Etcetera, and obviously we're providing health 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. 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, our focus on building a bigger pipeline of sort of nurse Education progression, etcetera, will start to have a real impact over the course of the next couple of years. Great.

Speaker 8

Thanks so much, guys.

Operator

Thank you. And at this time, I would now like to turn the call back over to Mr. Steve Hilton for any closing remarks.

Speaker 1

None other than we thank everybody for their time and I 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.

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Earnings Conference Call
Universal Health Services Q2 2022
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