Earnings Call Transcript - UHS Q3 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Universal Health Services Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Steve Filton, CFO. Please go ahead.

Steve Filton, CFO

Thank you, and good morning. Marc Miller is also joining us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2023. During this 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 these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and Risk Factors in our Form 10-K for the year ended December 31, 2022, and our Form 10-Q for the quarter ended June 30, 2023. We'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $2.40 for the third quarter of 2023. After adjusting for the impact of the item reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.55 for the quarter ended September 30, 2023. During the third quarter, same facility revenues at our behavioral health hospitals increased by 7.6%, primarily driven by a 6.5% increase in revenue per adjusted patient day. The patient day growth in the quarter was greater at our acute care behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day beyond the already robust levels we've been posting for several periods. Additionally, as we have anticipated in our original 2023 guidance, we're beginning to see a negative impact of Medicaid redeterminations in certain states on behavioral health volumes. With 8.3% revenue growth, same-facility EBITDA for our behavioral health hospitals has increased approximately 10% during the first 9 months of 2023 compared to the comparable prior year period. Our acute hospitals experienced strong demand for their services in the third quarter with adjusted admissions increasing 6.8% year-over-year. In part because the volume growth was skewed somewhat to lower acuity procedures, overall revenue growth was 7.5%. While overall surgical volumes increased about 3% from the prior year quarter, there was a continuing shift from inpatient to outpatient. Additionally, we note that managed care behavior has become more aggressive in 2023 as it relates to denials and patient status classification changes. Meanwhile, the amount of premium paid in the third quarter was $69 million, reflecting a 15% decline from the amount in the previous several quarters. The continued robust increase in acute volumes is the major reason the premium pay has not declined further. It's worth noting that our average hourly rate, which includes premium pay, was slightly lower than in the third quarter of 2022 in 2023 as compared to the comparable prior year quarter. Our cash generated from operating activities was $815 million during the first 9 months of 2023 as compared to $699 million during the same period in 2022. In the first 9 months of 2023, we spent $537 million on capital expenditures and acquired $2.7 million of our own shares at a total cost of approximately $367 million. Since 2019, we have repurchased approximately 26% of the company's outstanding shares. As of September 30, 2023, we had $721 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. I will now turn the call over to Marc Miller, President and CEO, for closing comments.

Marc Miller, President and CEO

Thanks, Steve. Despite what remains a difficult operating environment, our consolidated results continue to track our revised earnings guidance. As we anticipated, acute care volumes have continued their recovery trajectory and have gradually begun to resemble the patterns we experienced before the pandemic. As Steve has previously commented, we recognize the need to counter the increasingly aggressive behavior on the part of our payers and seek appropriate price increases to offset the impact of inflation on our cost structure and to seek further contractual protection to ensure we are properly reimbursed for the level of care provided to our patients. We previously highlighted the upward pressure on physician expense, which tended to run at a rate of about 6% of revenues, pre-pandemic but is running closer to 7.6% in 2023. In our behavioral segment, we have been pleased with our strong pricing and related earnings growth to date but acknowledge significant upside opportunity in our existing occupancy rates, particularly as we continue to improve our recruitment and retention metrics. As previously disclosed, we expect our operating results for the fourth quarter of 2023 to include revenues earned by our hospitals in connection with the Florida Medicaid Managed Care directed payment program. In addition, it is worth noting that we continue to believe a new Nevada state directed program, which we have previously disclosed appears to still be on track for 2024 implementation with a potentially materially favorable impact on our Nevada hospitals. We are pleased to answer questions at this time.

Operator, Operator

Our first question comes from Justin Lake of Wolfe Research.

Justin Lake, Analyst

Thank you for the detailed information. I have a couple of questions regarding 2024. Although it's early for guidance, I'd like to hear your thoughts, Steve, on potential challenges and opportunities. Specifically, Marc, I appreciate your comments about Nevada, which seem quite significant. Can you provide some historical context on the timing and likelihood when a state approaches CMS to implement one of these programs? Have you ever encountered a state that was unsuccessful? Has CMS ever declined to approve a proposal, stating they won't provide matching funds despite available resources? Any historical insights would be helpful.

Steve Filton, CFO

Sure. Regarding your question about 2024 guidance, we won’t provide formal guidance until our fourth quarter earnings call at the end of February. However, we believe the underlying metrics of both businesses are increasingly resembling our pre-pandemic operating environment. While I won't detail the factors influencing 2024 right now, the most significant consideration is the supplemental program in Nevada, which we've been discussing in our reports for some time. We believe the program has been submitted to CMS by Nevada and that the state is in discussions with CMS to ensure it meets their requirements. We anticipate CMS approval is likely coming soon, potentially early in 2024, and the program is expected to be retroactive to January 1, 2024. We are awaiting the state to release an impact file showing the estimated effects on individual hospitals, with estimates for UHS in Nevada ranging from $100 million to $150 million. This estimate seems reasonable based on our understanding of the program mechanics. However, the main factor still pending is CMS approval, which we expect shortly in 2024. We will keep everyone informed as we receive updates.

Operator, Operator

Our next question comes from Jason Cassorla of Citi.

Jason Cassorla, Analyst

Steve, I wanted to go back to your commentary on the Medicaid redeterminations impact on behavioral volumes. Are you able to work with those patients to help get them back on the coverage like you can with the acute care business? And as a result, see that volume headwind as more of a transitory issue? Or how should we think about the puts and takes on the redetermination impact on volumes for behavioral specifically?

Steve Filton, CFO

Yes. And to be perfectly candid, Jason, I think we're guesstimating to a degree the impact. What we have noticed during the quarter is that in certain states and probably for us, most notably, Texas, certainly being the largest one, and it's been reported that I think there have been at least 1 million people redetermined off the rolls in Texas. But what we've noticed in a place like Texas is that the number of calls and inquiries that we're getting that qualify from both a clinical and financial perspective, meaning there's adequate coverage available, have declined a little bit in the quarter. We don't know, I think, precisely that that's related to Medicaid redeterminations, but we sort of draw that conclusion based on historical trends and metrics. As has been reported, it seems like a lot of these redeterminations are for administrative reasons. A great number of these people will be able to get back reenrolled. When they reach out to us, we certainly can help them do that. We can also try and help them to get other coverage. But a lot of those things take a little bit of time. So I think our perspective on this is it's probably, in large part, kind of a temporary dynamic. But I think we feel like there is a reasonable chance that our volume growth, particularly in our residential business amongst our trial and adolescent population might have been greater in the third quarter had it not been for the impact of Medicaid redetermination, again, especially in Texas but a handful of other states as well.

Jason Cassorla, Analyst

Great. Helpful. And then maybe just as a quick follow-up. Just on capital deployment. It looks like share repurchase activity picked up in the quarter. I guess just given the backdrop, how are you thinking about the uses of your free cash flow moving forward in areas where you perhaps see the best returns just at this juncture?

Steve Filton, CFO

Yes, I would just remind people that we have slowed our share repurchase a little bit in Q2. It seems like ages ago, but there was the threat of a government shutdown at the time, and we were concerned potentially about some short-term cash flow crunch issues. But obviously, that got resolved at least for the time being, and we resumed our sort of regular share repurchase activity in Q3. And I think we generally think about using the bulk of our free cash flow for share repurchase going forward.

Operator, Operator

Our next question comes from Stephen Baxter of Wells Fargo.

Stephen Baxter, Analyst

Can you expand a little bit on the managed care environment? Any way to quantify, I guess, how much of a drag on your realized commercial rates you're seeing from these tactics like if you thought you were getting a 5% rate increase. Is that effectively now 4% or some other number, given the drag there? And would you say this is getting back to pre-pandemic practices as the environments normalize? I think you've talked something about that in the past? Or do you think this is something that's kind of gone well beyond that?

Steve Filton, CFO

Yes. I think the way you frame the question, Stephen, is quite appropriate. I think that what we experienced or observed was particularly early on in the pandemic when health care utilization dropped dramatically. I think we felt like the managed care payers eased up quite a bit in what sort of their historically more aggressive utilization review, audits, denials, patient status changes, that sort of thing. I think as utilization picked up for the industry in 2023 and seem to be getting more back to normal, that created some pressure on the MLRs for the managed care companies. They returned to what I would describe as their historical practices when it came to denial and claims reviews and that sort of thing. And I think that's what we're seeing. And I think the way it's reflected is. And it's difficult to quantify in a precise way, but our acute care revenue per adjusted admission, which was up only modestly in the quarter, I think we would have been higher had it not been for this behavior. Now I think to a degree, we view it as again, relatively temporary in nature. You saw that our accounts receivable days outstanding ticked up in the quarter. A lot of this is I think, sort of an extended process, meaning we'll appeal a lot of these claims denials. We'll work to collect a lot of these moneys. And I think we will collect a substantial amount of them down the road. But again, in the current period, it did weigh I think, somewhat on our acute care revenue per adjusted administered.

Operator, Operator

Our next question comes from A.J. Rice of UBS.

A.J. Rice, Analyst

Maybe two things. Just to put a finer point on your revenue per adjusted admission trend in acute you're talking about MCO behavior. I think you also commented on volumes coming back tend to be a little lower acuity. Is there any way to parse that out? Do you think the underlying apples-to-apples pricing in acute care is still in that sort of 2% to 3% range? and how much are each of those being a drag? And then the flip side on the behavioral side, it looks like it's more of a volume question. And you mentioned Medicaid redeterminations, but there's been times when it's been constrained somewhat by staffing challenges. And just maybe comment on the underlying demand. This is still there to the same degree has been historically on the behavioral side.

Steve Filton, CFO

Okay. Quite a bit in your question, A.J. I'll try and cover it all. Again, I think on the acute side, as you suggest, in our prepared comments, and I think we've talked about this in previous quarters, I think the volumes are particularly high in 2023 because we are experiencing, not just us, but the industry in general, some level of recapture of procedures that were postponed or deferred during the pandemic. And I think by their nature, those procedures tend to be the lower acuity, less intense procedures. Obviously, the emerging sorts of procedures that occurred during the pandemic, the heart attacks, strokes, accidents, trauma, those were attended to immediately but more elective, low-intensity stuff with the things that were deferred, including even as simply as visits to primary care physicians, et cetera. And so as those began to occur kind of in their more normal trajectory, they sort of create a cascade of demand as well. So somebody who hasn't seen their primary care doctor for a couple of years now goes and now has his visit to the cardiologist or had routine colonoscopy or whatever it may be. And I think you're seeing that. So as our volumes, I think, are elevated, our revenue per admission is somewhat more muted. I think over time, we would expect our volumes to moderate a little bit, but also our revenue per adjusted admission to come up. And again, I think we have a view that the long-term model in this business has not changed dramatically. I think we imagine that revenue growth in the acute business over time for a historically long time has been in that kind of mid-single-digit range, 5%, 6%, 7% and split pretty evenly between price and volume. And I think as time passes, we'll get closer and closer back to those historical norms. I think on the behavioral side, as you suggest, the sort of dynamic has been kind of the flip side of that where pricing has been particularly strong. And again, that's a little bit of a mix issue. We've talked about some weakness in the residential business. In a couple of facilities that are challenged with some very specific issues, but also with Medicaid redeterminations I mentioned earlier. But again, I think over time, those at least will see an increase in residential business. That will naturally bring down pricing, but will also increase volumes. The staffing issue just is a continuing issue we remain constrained in some markets, in some facilities by a lack of staff that could be nurses, therapists, or mental health technicians who are nonprofessionals. Generally, I think we continue to improve our recruitment and our retention metrics. And I think those metrics as they continue to get better will drive greater volumes.

Operator, Operator

Our next question comes from Jamie Perse of Goldman Sachs.

Jamie Perse, Analyst

First on physician subsidies, can you confirm whether that was in line with expectations this quarter? Secondly, what are you observing in terms of market dynamics? Are you noticing the market starting to stabilize, or is there still more disruption? Additionally, could you provide any comments regarding your earlier remarks from the second quarter about the potential stabilization into next year?

Steve Filton, CFO

Yes. In Q2, we mentioned that we initially expected physician expenses to be $55 million to $60 million higher in 2023 compared to 2022. However, this issue has turned out to be larger than anticipated, a trend observed by many of our industry peers. We projected that the second half of the year would also see an increase of another $55 million to $60 million over the second half of 2022, and we are closely tracking these projections in the third quarter. Essentially, we haven’t observed a significant sequential increase in our professional fees or physician expenses. Our expectation at that time was not necessarily that physician expenses would completely stabilize in 2024, but rather that the current increase rate of around 35% to 40% would significantly decrease. While we are not ready to specify an exact figure, we anticipate an increase in the range of 10% to 15%. This expectation is influenced by the industry's need to reset itself following the No Surprise Billing Act and its effect on the profitability of physician billing operations, as well as the impact of lower billings throughout the system. We are in the process of replacing the most expensive contracts through a bidding process and, in some cases, bringing services in-house. We believe these actions will lead to greater efficiencies, which is why we think 2024 will be less volatile and not experience as many large increases as we did in 2023. As we approach our 2024 guidance, we will have a clearer understanding and provide more details. For now, we are on track for the second half of the year, in line with what we indicated last quarter.

Jamie Perse, Analyst

Okay. Perfect. That's helpful. And then secondly, just on 2024. Can you update us on progress with the three de novo hospitals in Nevada, Florida and D.C.? Specifically, how should we think about the EBITDA drag as some of those preopening expenses ramp up next year?

Steve Filton, CFO

Sure. So the only hospital that will actually open in 2024 is our West Henderson facility in Las Vegas, which I think at the moment is scheduled to open either late in Q3 or early in Q4. I think it will have a bit of a drag in our 2024 results. But given that it's relatively late in the year, given our historical success in opening hospitals in that market, I don't think it will be a tremendous drag. Again, as we get closer to our actual guidance, we'll put some more concrete numbers around that. But I don't think it should be terribly impactful to our 2024 guidance.

Operator, Operator

Our next question comes from Pito Chickering of Deutsche Bank.

Pito Chickering, Analyst

Can I revisit the topic of Medicaid redetermination? Is this mostly related to inpatient care or residential services? Regarding referral channels specific to Texas, are there any patients in the emergency room who cannot be discharged to inpatient behavioral care due to lack of coverage? Also, can you share any insights on which referral channels you are observing as a result of Medicaid redetermination in Texas?

Steve Filton, CFO

Yes. So I think as I mentioned, and again, I want to be clear that I'm not sure that the data that we get and the space that we have is sort of absolutely precise or that we can sort of correlate it to redeterminations in a very precise way. I think what we observed during Q3 was that the number of inquiries that we're getting, and that includes, as you suggest, referrals from third-party sources. It includes direct calls to our 800 numbers, it includes direct inquiries to our Internet sites, et cetera. We're not necessarily down in volume, but what we were noticing is that it was a greater number of patients who did not have appropriate financial coverage. We always have some patients who don't, but it seems that number seemed to elevate in Q3, especially in particular geographies in which Medicaid redeterminations were high. I mentioned Texas a bunch of times. I think Arkansas and Indiana were also states where we saw an elevated level. But again, I'm not sure that I can parse it between inquiries from referral sources or direct increase to us. And like I said, I don't know that we can also tie it directly to what we generally are asking patients is what their current sort of financial coverage is. We're not necessarily getting their history of had Medicaid, lost Medicaid. We will talk to them about whether we can help them get Medicaid coverage, et cetera, but we don't necessarily document the history there. So it's a little bit difficult to, I think, give the level of precise data that you're looking for.

Pito Chickering, Analyst

Okay. So just to make sure I understand that. So the number of inbound inquiries are basically the same, but the financial ability to pay was lower.

Steve Filton, CFO

Correct.

Pito Chickering, Analyst

Okay. Got it. And then a quick follow-up to Jamie's questions on the business pressures. Thanks for giving us this number is about 30% to 40% increase for this year, moderating sort of 10% to 15% for next year. I guess, what percentage of contracts are locked in either typically multiyear contracts? So what percentage contracts are already locked in for next year? Or you've already gone and in-sourced this group yourselves?

Steve Filton, CFO

Yes. The reality is that these contracts span multiple years, but they include options for short-term exits. The physician expense issue escalated into a crisis in 2023 because, while hospitals generally maintain long-term agreements with their physician providers and ER teams, these groups began notifying hospitals that they would give a 90 or 120-day notice, as stipulated in the contracts, unless there was an increase in their subsidy or changes made to the agreement. Thus, the actual duration of the contract may not hold much significance since, in many instances, including our situation and likely for others in the industry, there are always short-term exit options available.

Operator, Operator

Our next question comes from Sarah James of Cantor Fitzgerald.

Sarah James, Analyst

I wanted to go back and clarify two comments that you made. First, on what sounds like the low acuity pent-up demand working its way through. You said you expect it to phase down over time. So just wondering if that means you expect it to still be a factor in 2024, if you're talking about phasing down through the end of this year? And the second clarification is just on the inpatient denials from insurers. Can you give us a little bit more context? Are these procedure classes that the payers are saying should have been outpatient? Or is it something about the number of hours spent or some other aspect that they're pushing back on?

Steve Filton, CFO

Yes. It is nearly impossible for us to accurately determine if a specific procedure is a catch-up for something that was delayed during the pandemic. When we schedule an elective surgery or diagnostic test, we don't know when the patient originally intended to undergo that procedure or discussed it with their physician. What we do know is that the volume of elective procedures declined significantly in the early stages of the pandemic, but it has been returning since. Therefore, we conclude, and I think it's a reasonable conclusion, that there is some level of catch-up. To be fair, acute care adjusted admissions increased by about 10% in the first quarter, which was quite extraordinary. This growth moderated slightly in Q2 to around 8%, which is still high, and further moderated to just under 7% in Q3. While this remains a strong number historically, it appears to be stabilizing. Regarding how quickly this continues and what remains in the pipeline, I’m not sure anyone can answer that question with certainty. I just don’t believe that the data exists in a meaningful way for anyone to capture. When we provide our guidance for 2024, we will make estimates based on current trends and our projections for acute care volumes. Generally, we believe that lower acuity volumes will continue to recover and stabilize, leading to mid-single-digit acute care revenue growth that will likely be evenly divided between price and volume. Whether this occurs early or late in 2024 is still uncertain. Regarding denials, especially in the acute business, the primary issue revolves around classifying patients as either inpatient admissions or observation status. This is frustrating because many of these patients remain in the hospital for several days, yet from a managed care perspective, they may not meet the criteria for inpatient admission, and we get reimbursed as if they were simply outpatients in our emergency room. While we do face some outright denials from insurance companies asserting that a patient should not have been treated at all, the majority of challenges we encounter with insurers in the acute sector relate to how patients are classified between inpatient and observation.

Operator, Operator

Our next question comes from Ann Hynes of Mizuho.

Ann Hynes, Analyst

Can you just give an update on the behavioral hospitals that had some issues in Q2, how they are progressing back to normal admission trends? And also maybe to that same effect, I know in Q2, you hired a bunch of nurses that take a while to train and a while to ramp up. Can you talk about how that's going? And when you think that group of nurses will be able to take on a full patient load that we'll be able to see in the admission trends?

Steve Filton, CFO

Thanks, Ann. So you alluded to the two items that we probably discussed at the greatest length in Q2 that were affecting behavioral volumes in Q2. One was a handful of residential treatment facilities that were challenged with very kind of specific and nuanced issues with either regulators or referral sources, etc., that were working their way through. And then secondly, on a broader kind of more macro basis, a significant amount of new nursing graduates entering the system, having to orient them, get them trained, etc. In both cases, we talked about the fact that the recovery from those things would take the better part of the year. By the end of the year and early into 2024, we thought both those issues would be largely behind us. I think that's true. The first issue is a much more identifiable issue; those facilities will sort of return to their normal trajectory. The staffing issue is obviously an ongoing one. We're constantly hiring new nurses and having to train them, etc. Again, I think it became an issue in Q2 in the spring when a lot of new nursing graduates were coming out of school. Those numbers crept up and were having sort of a measurable impact in the business. I think the encouraging thing from our perspective is that overall, our hiring rates as well as our turnover — hiring rates are going up and our turnover rates are coming down, albeit in both cases incrementally, which should allow us to, in our minds, get back to kind of what we think is a more normative and expected level of volume growth in behavioral, which is probably not terribly higher than the 1% we're running now, but maybe in the 3% or 4%. In terms of our model and our ability to generate incremental earnings and incremental margin growth, that small increase in occupancy should make a big difference.

Ann Hynes, Analyst

All right. And I'm not sure if you said this, but can you just provide the contract on premium labor as a percentage of total labor for nursing and acute care?

Steve Filton, CFO

Yes. So it was $69 million in Q3, which is about a 10% to 15% increase over what we've been running last few quarters.

Operator, Operator

Our next question comes from Kevin Fischbeck of Bank of America.

Kevin Fischbeck, Analyst

Great. I may have missed something, but you mentioned earlier that the lack of labor is hindering volume growth. However, on the RTC side, it seems that redetermination might also be limiting volume growth, which appears contradictory. Am I correct in understanding that the challenges with occupancy are more acute and not related to labor issues on the RTC side? If that were the case, you would be able to address the redetermination challenge, correct?

Steve Filton, CFO

Yes. I just think they're discrete issues, Kevin. I think again, Medicaid redeterminations, I think, again, in just certain geographies are creating, we believe, relatively temporarily a bolus of patients who lack coverage, who didn't lack coverage, let's say, a quarter ago or two quarters ago. And so where we seem to be turning more patients away in Q3 for lack of financial resources than we have had in the past. But again, we think that's sort of a temporary issue. The staffing issue tends to be more of an issue in the acute behavioral business just because we rely more on RNs in that patient care model. And so yes, I mean, the staffing constraint and the deflection issue in behavioral tends to be more skewed to the acute behavioral business than the residential business.

Kevin Fischbeck, Analyst

Okay. That's helpful. Regarding the professional fees, I understand that the percentage increased from 6% of revenue to 7.6% of revenue. Can you clarify if that figure refers to acute care revenue or total revenue? Additionally, is there any reason to believe that this cost pressure is fundamentally different from past cost pressures? Currently, you are negotiating better rates to accommodate the inflation spikes seen in recent years. Is this new cost pressure just another factor to price in over the next few years, perhaps taking three years to recover the 1.6% margin headwind, but ultimately something you expect to regain? Or does this cost present any structural differences when compared to others?

Steve Filton, CFO

Yes. So two things. Number one, in terms of the first question, yes, I should have been clear this is the physician expenses really, as we've been discussing, it is really ER coverage, anesthesiology coverage and by definition, is an acute care issue, and those percentages were meant to be percentages of acute care revenue. Your second question about sort of isn't just like any other expense. I mean, again, as I was mentioning, I think in a previous response, I think what really drove this sort of immediate pressure in position expense and the timing of it was the passage of the No Surprise Billing Act. What I think we all collectively learned was that these physician coverage businesses had relied heavily on their profitability in large part for their billings to out-of-network patients. I'm not sure collectively we have a full understanding of that. When that ability was reduced dramatically by the No Surprise Billing Act, those businesses, to the degree that they were run by third parties or even to the degree that hospitals were insourcing, became much less profitable, and we had to absorb those costs. I mean in our case, in almost all cases, we were just having to pay third parties more. But I think once that gets reset, I'm not sure the pressure continues. I mean, to me, that's a one-time reset. I think that's what you're seeing play through our numbers in 2023, etc. I do think there's also an element, I mean, there is, I think, a finite — there's a shortage of these kinds of doctors much like there was a shortage of nurses that we felt during the pandemic, and that exacerbated the dynamic a little bit. But again, I think that expense rose by 35% or 40% for us in 2023. I can't think of another expense that rose by anywhere near that amount. And so again, I think we have a view that this is a largely kind of one-time notion. That's not to say there won't be pressure on physician expense next year that, as I said earlier, it couldn't increase by 10% or 15%. And something above the rate of inflation. But I just don't think we think that this is something that we're going to have to face 35% or 40% increases multiple years in a row.

Kevin Fischbeck, Analyst

But I'm sorry, maybe I'm just — it seems to me like you're not saying this 1.6% acute care margin pressure is going to reverse over time as you just price — surgeries, everything higher to reflect you now have an increased cost in here. You're saying this is a new baseline and we should kind of think differently about the long-term margin in acute because these pressures won't continue to get worse, but they're here to stay.

Steve Filton, CFO

Yes, I don't think anybody is suggesting that physician expenses are likely to decline anytime soon. I don't think that's anything we have suggested. Like I said, we said earlier, when people talk about what's likely to be in 2024, I said a 10% or 15% increase is not an unreasonable way to think about it.

Operator, Operator

Our next question comes from Whit Mayo of Leerink.

Whit Mayo, Analyst

I know you guys are still going through the planning process for 2024, but I just wanted to sort of dial in to maybe some of the top strategic priorities you have for the behavioral health business that might be different than some of the initiatives in prior years? You've covered your labor agenda pretty well on this call and the progress — the small progress, I think, that you're seeing there. But just anything else you'd call out, any organizational changes, anything that gets you excited or less excited about next year?

Steve Filton, CFO

Yes. I mean, so Whit, I think as we've discussed, obviously, staffing, recruitment retention remains a top priority and focus, and honestly, I think will continue to be for the foreseeable future. Like I said, I think we feel like we've made a significant amount of progress, but it continues to be a major focus because, again, I think we have a belief that to the degree that we can hire appropriate clinical personnel, particularly in very specific geographies, very specific hospitals. We absolutely have the ability to increase occupancy significantly. There are other initiatives, I think we have to increase occupancy. I think broadly, increasing occupancy is sort of the most significant opportunity we see in our behavioral business. In a business where pricing has been strong, where I think what Q3 reflects is that cost controls have been improving. We've been reducing contract labor over time. I think that increased occupancy is the most significant opportunity we had in the future. I think we believe it's a significant opportunity. Recruitment retention is a big way to get there, but we're looking at broadening our continuum, focusing on certain service lines like substance abuse and MAT and telehealth and outpatient and broadening sort of the continuum of care that we already, I think, offer a pretty broad continuum of care, but broadening that even more and broadening our payer mixes that we reach out to. We have a pretty strong presence in both the active and retired military, but I think have a number of initiatives to increase our penetration there. So there's a handful of important initiatives in behavioral. But all I think would fall under this umbrella of being able to increase occupancy.

Whit Mayo, Analyst

Got it. Steve, just looking at the guidance, I know that you're reiterating it, but my math, if I just apply very simple normal seasonality looking at the DPP program in Florida, you can easily get to the high end of the range. And I know that you're very respectful of the volatile operating environment, but just sort of anything that I'm missing or any refresh views as you kind of look within the range and kind of how you feel like you're tracking next.

Steve Filton, CFO

Yes. I mean, I feel like — and I will say that we don't pay a great deal of attention to consensus estimates, but the last time that I looked at consensus estimates, I think they were sort of in the midpoint of our revised guidance. It seems like a reasonable target at the moment. I think as we've discussed on the call, in my mind, clearly, the two upsides for us, number one, as we just discussed, is if we're able, over the fourth quarter to increase behavioral volumes and occupancy, I think that would be extremely helpful and create a significant amount of upside. And on the acute side, being able to push that pricing number up, recapture some of the disputed amounts from our managed care payers, increased acuity, that sort of thing. So I think we've largely discussed what the upsides are and that if we were able to achieve those things, maybe we could get beyond where the consensus targets have us now.

Operator, Operator

Our final question comes from Joshua Raskin of Nephron Research.

Joshua Raskin, Analyst

Just on the physician staffing costs again. Can you just remind us how much of the staffing may be for ED anesthesiology, how much of that is outsourced or if any of it's in-sourced at this point? And then separately, how are your employee physicians performing? Is it really just an issue of specialists that we're billing for specific out-of-network issues? Or are you seeing some of that internally as well?

Steve Filton, CFO

Yes. So first of all, for us, Josh, all of these contract services have historically been outsourced at least ER and anesthesiology. We have, in the last three or four months, brought some of those services in-house where we thought it made economic sense to do it, but historically, they've all been outsourced. I think it's a very different dynamic. And I think again, it's very specific to these hospital-based physicians, anesthesiology, ER being by far the highest ones. But we're seeing it some in radiology, some in intensivist or labors or whatever. Clearly, ER and anesthesiology being the two largest. Our employed physicians who are just either regular primary care or specialists, I don't think they've been affected in a material way by the No Surprise Billing Act. Essentially, those physicians are in network with virtually all of the payers that we're in network with. So it's really not an issue with them. So this dynamic, I think, is very specific to the hospital-based physicians.

Joshua Raskin, Analyst

That makes sense. And then just one last one on '24. I know you're talking about this normalization. But when I look at some of the same-store revenue growth numbers, mid- to very — mid-to-high single digits in the acute side, very high single digits to low double digits on the behavioral side. It just seems like pretty tough comps. And so do you think this is just more of a catch-up reset year and that next year we'll be back in that, pick a number, 5%, 6% range overall?

Steve Filton, CFO

Yes. And again, I think I made those comments earlier. I mean, I think, yes, I think we think that in both cases, revenue growth, whether it's exactly in the beginning of 2024 or later. But I think we think it moderates to sort of more historically normative levels. I would also say a more historically normative split. So on the acute side, I do think volumes are likely to come down over time, but I think acuity will come up. And again, we'll get back to kind of mid-single-digit pricing. I think in behavioral, we're likely to see pricing moderate a little bit, but also see volumes come up and again, get to kind of mid-to-upper single-digit pricing or upper single-digit revenue growth. In both cases, I think with the moderation in costs with physician expense on the acute side coming into better control with contract labor coming down and overtime coming down, it should put us in a position where we're back on that trajectory of getting — being on a path to get back to pre-pandemic margins in both segments.

Operator, Operator

I am showing no further questions at this time. I would now like to turn it back to Steve Filton for closing remarks.

Steve Filton, CFO

Thank you. We'd just like to thank everybody for their time and look forward to speaking with everybody next quarter.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.