Earnings Call Transcript - UHS Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Universal Health Services First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Steve Filton, Executive Vice President and Chief Financial Officer. Please go ahead.

Steve Filton, CFO

Thank you, and good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the first quarter ended March 31, 2024. 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, 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 $3.82 for the first quarter of 2024. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $3.70 for the quarter ended March 31, 2024. Our acute hospitals continue to experience strong demand for their services in the first quarter with adjusted admissions increasing 4.5% year-over-year on a same facility basis. When combined with the net revenue per adjusted admission increase of 4.6%, our acute care services net revenues increased by 9.6% during the first quarter of 2024, as compared to the first quarter of 2023. Despite these increases, we believe that both volumes and acuity in March were adversely impacted by the timing of Easter and spring break which occurred in March of this year compared to April of last year. In connection with the previously disclosed newly implemented Medicaid supplemental reimbursement program in Nevada, our acute care hospitals located in the state recorded approximately $38 million of aggregate incremental income during the first quarter of 2024. Meanwhile, premium pay in the quarter was $68 million as compared to $86 million in the first quarter of 2023. During the first quarter of 2024, same-facility net revenues in our Behavioral Health Hospitals increased by 10.4%, driven primarily by an 8.2% increase in revenue per adjusted day. Adjusted patient day growth in the quarter was 2.0% over the prior year quarter. We believe the patient day volume was muted somewhat by the aforementioned calendar timing issues. Our cash generated from operating activities increased by $106 million to $396 million during the first quarter of 2024 as compared to $291 million during the same quarter in 2023. In the first quarter of 2024, we spent $209 million on capital expenditures and acquired 700,000 of our own shares at a cost of approximately $125 million. Since January 1, 2019, we have repurchased almost 27 million shares, representing 30% of our shares outstanding as of that date. As of March 31, 2024, we had $733 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, CEO

Thanks, Steve. In our year-end conference call, we said we envisioned 2024 as a year of continued strength in both of our business segments. And during the first quarter of 2024, both segments increased their operating margins when compared to the comparable quarter of 2023. We anticipated that acute care volumes would likely moderate to a degree, but remain robust compared to historical levels. We also believe the acuity trends will continue their recovery trajectory. In our Behavioral Health segment, we anticipated that patient day volumes would gradually improve over the course of the year, returning to a more historically normal level of growth in the 3% range. We noted that both of our business segments have experienced a significant increase in Medicaid supplemental payments which are helping to compensate for several years of inadequate reimbursement levels that have failed to keep up with the costs we had to incur to properly care for our patients. Overall, we're pleased with first quarter results. We are now happy to answer questions at this time.

Operator, Operator

Our first question comes from Justin Lake of Wolfe Research.

Justin Lake, Analyst

First question on your acute care volumes in the quarter. Just to your point, Steve, I think it's pretty clear the calendar had some impacts, January, February stronger, March weaker. So I'm curious if you can maybe share with us what you were seeing monthly or maybe kind of Jan, Feb versus March. And then how does April kind of starting to look versus March? Are you seeing it kind of back to January, February levels or somewhere in between? And then secondly, we know you've got a bunch of Medicaid dollars in Nevada, curious what ran through the behavioral business in the quarter. For instance, Mississippi, I think, had at a program that was put in, can you give us some color on the impact of those Medicaid provider tax dollars and behavioral? That would be helpful as well.

Steve Filton, CFO

Okay, I'll try and tackle a bunch of different issues there. Yes, so definitely acute care volumes and behavioral volumes softened in March, I think, as a result of the Easter spring break timing. We're seeing some recovery in April, I would say April is probably volume-wise somewhere in between the January, February run rate and the March run rates. And I think that's what we would expect. I mean, the shortfall in admission and elective activity and surgical activity that we saw in March, I think we would largely expect to make up not necessarily completely in April, but mostly through the second quarter. And it seems like we're on track to do that. As far as the Medicaid dollars, the one thing I would point out is we probably had in the quarter on the behavioral side, maybe $10 million to $15 million of out-of-period behavioral dollars that is we're catching up, mostly from 2023 as programs sort of refine their calculations, etc. So I think that's the major point in terms of the activity. Obviously, we disclosed in our 10-Ks and 10-Q a great deal of detail about these Medicaid supplemental payments. And we'll update that disclosure in the 10-Q that we'll file in a week or so. Operator, we can get the next question.

Operator, Operator

Our next question comes from the line of Ann Hynes of Mizuho Securities.

Ann Hynes, Analyst

So obviously, you beat consensus EPS and EBITDA meaningfully. Can you tell us what you beat versus your internal expectations? Is my first question. And my second question is, inpatient grew higher than outpatient in the quarter. Could you let us know how much is from the 2-Midnight Rule?

Steve Filton, CFO

Thanks, Ann. Our internal budget for the quarter was close to consensus, possibly a bit higher, around 2 or 3 percentage points. It was a successful quarter, meeting both third-party expectations and our own. Regarding the 2-Midnight Rule and its effect on inpatient volumes, it appears there hasn't been a significant change in payer behavior affecting inpatient activity, based on our data and third-party analyses. Both our internal resources and consultants indicate no measurable change in payer behavior that impacts our inpatient volumes. Therefore, we believe that the growth in acute care volumes this quarter is largely independent of any shifts in payer behavior.

Operator, Operator

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

Stephen Baxter, Analyst

Two kind of quick ones, I guess. So first, the behavioral patient day, volume growth improvement that you're expecting throughout the year, I guess, just give us a little bit of color on leading indicators or potentially capacity opening up, I guess, like what is giving you the confidence to kind of point to that from here. And then secondarily, you obviously had this disclosure of a jury award during the quarter. I know that you discussed some measure of potential protection from insurance related to this. First, could you update us on where you stand from an insurance perspective related to that specific award? And any general comments you might offer about the litigation environment.

Steve Filton, CFO

So in terms of your first question about behavioral patient days and behavioral patient day growth, I think as you alluded to in your question, it improved slightly from the pace of the last few quarters, our expectation is that it will continue to improve during the year. Incrementally, I think Marc mentioned that our underlying guidance for the year assumes we'll get to like a 3% patient day growth level. What gives us that confidence is simply that, as we've said, many times over the last several years as we believe the underlying demand is there. That's evident in the amount and volume of inbound inquiries we get on the Internet and our 800 numbers, etc. And it's really about our ability to staff sufficiently to be able to treat that volume. We've mentioned a few other dynamics that have muted that volume a little bit in the last few quarters, including some specific residential treatment facilities that we believe continue to improve including the impact of Medicaid disenrollment, which I think we think is stabilizing, etc. So I think it's all those factors together that give us the confidence that behavioral volume will continue to grow incrementally throughout the year. Your second question was around the verdict in a malpractice case in Illinois that we disclosed in an 8-K a few weeks ago. That verdict was, as we noted in the 8-K, unprecedented; it was unprecedented, both in terms of our own history and cases with similar fact patterns, it was unprecedented in terms of verdicts in that specific jurisdiction, etc. And so we think there still is a great deal of uncertainty around how that specific verdict will be ultimately adjudicated and as a result, other than the disclosure that we had in the 8-K and in the press release, we'll have in our 10-Q, we haven't really had any measurable impact on our financial statements until there is some level of greater certainty around what the ultimate outcome will be. From an insurance perspective, we disclosed in our Qs and Ks, our insurance coverage by year. This is a 2020 incident, we disclosed that we had $250 million of commercial insurance for that year. The bulk of that insurance, around $225 million, is still available for coverage.

Operator, Operator

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

Pito Chickering, Analyst

Can you talk about the acute OpEx changes that you saw in this quarter? How much did increased operating expenses increase year-over-year? And is this the right level going forward and any other pressure points we should be thinking about?

Steve Filton, CFO

Yes. So I think, Pito, especially on the acute side, the increase in other operating costs are primarily driven by physician expense which we said for the year would increase by about 5% or 6%, and we believe that will still be the case. But because physician expense continued to increase every quarter last year, and we believe will be relatively flat this year, meaning flat quarter-to-quarter, the increase over last year will diminish as we get to the end of the year. And again, I think we're on target to get to that sort of 5% or 6% growth over the prior year. But in Q1, that growth was more like 12% or 13%. And then the other, I think, driver of OpEx increase, particularly in the acute division was increased claims having to do with our insurance subsidiary and that's mostly having to do with increased premiums; the insurance subsidiary was at sort of a breakeven level for the quarter, which is where we had it budgeted. So nothing unexpected there from our point of view.

Pito Chickering, Analyst

Okay. And then following up on Justin's question about supplemental payments, I estimate that it could be between $10 million and $15 million from the previous two periods. Looking ahead to '24 or '25, which states do you believe might be expanding or introducing new payments that could influence your operations throughout the year?

Steve Filton, CFO

Yes. So what I would say is we've often pointed out, and I think there are a couple of analysts on this call who will routinely point out that over the last several years, especially our original forecast of supplemental payments have tended to only increase as the year has gone on as states either implement new programs or refine their existing programs and calculations, and I think that's our expectation for this year as well. One of the tricky parts about this is I think we tend not to disclose what states they are or what expectations might be until the state really goes public or gets the approvals they required or goes public with their calculations. So we do believe, I think as we said on the last call, and I'll reiterate today, I think we do expect a number of states to implement either new programs or expand existing programs by the end of the year, but we'll give that detail as it becomes more certain in our public filings.

Operator, Operator

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

A.J. Rice, Analyst

Obviously, with the strong revenue number, that gives you leverage down the income statement. But I wondered if you look at labor, both permanent and your premium labor. Can you give us a little sense of what the underlying trends are year-to-year wage increases, how it's working out with your premium labor outlay and then similarly, I'll ask on the first second question. Pricing was strong in the quarter. Obviously, that was helped on the acute side by the supplemental payments, any updated thoughts on where commercial rate increases are coming out and the extent to which you think exchange-related coverage as people maybe pick up exchange coverage versus Medicaid is impacting what you're seeing there?

Steve Filton, CFO

Yes. So again, a few different issues here. I'll try and address them discretely. Yes, I mean I think clearly, what the income statement reflects as you alluded to, A.J., is more operating leverage and efficiency on the labor line. I think it's a result of a few different things, premium pay. As I said in my opening comments, is down roughly $20 million from the same quarter last year. I think we're seeing wage rate inflation decelerate from the peak levels that it was running at the height of the pandemic. I think that's helping. I also think we've made a number of productivity adjustments in both business segments over the course of the last 6 months. As we came out of the pandemic, I think we reevaluated our productivity in both segments, particularly in our nonclinical areas, some of which I think maybe grew ahead of the actual need for those resources during the pandemic. As far as pricing goes, we continue to get, I think, reasonable price increases in our contractual rates. I think the bigger issue, quite frankly, on the acute side, especially, is more this issue of as the managed care companies see their margins under pressure, we have tended in the past to see greater levels of denial activity, patient status changes, etc. We saw a lot of that in 2023. I think that activity has stabilized some in the fourth quarter and in the first quarter of this year, but it's something that we're watching very carefully. We are seeing, I think, as a result of Medicaid disenrollments, more patients moving to exchange coverage. I think that tends to be a net positive on the acute side because I think exchange coverage reimbursement tends to be slightly better than Medicaid or in some cases measurably better. On the behavioral side, I think it's a bit of a toss-up because a lot of these exchange coverages have pretty significant co-pays and deductibles. And given the fact that behavioral care on an absolute basis tends to have a much smaller bill. I think we find that patients who have exchange coverage often will not be able to cover their co-pays and deductibles. So sometimes, that switch from Medicaid to an exchange coverage is not a favorable development on the behavioral side, and may contribute a little bit to the slower growth in patient pay volumes on the behavioral side.

Operator, Operator

Our next question comes from the line of Ben Hendrix of RBC Capital Markets.

Ben Hendrix, Analyst

Just a quick follow-up on the Illinois litigation. I appreciate that this is unprecedented and different, in fact, and jurisdiction from Acadia settlement, but that was also kind of equally unprecedented. I was just wondering if this is changing at all your approach to the RTC business, your strategy, capital allocation and how you expect to kind of grow in your approach to behavioral health over the long term?

Steve Filton, CFO

No, I think it would be premature. Then again, as I commented earlier, I think that there still is a great deal of uncertainty surrounding this particular case and verdict that we had. I'm certainly not an expert and wouldn't comment in any great detail on the case that Acadia had other than to comment that it was a different state, it was the case with multiple plaintiffs. There were multiple cases. Our case was in a different jurisdiction, a single occurrence of a single incident, etc. So yes, I think broadly in response to your question, no, I don't think our approach to the business is being changed at the moment as a result of this verdict. We are very focused on the things we need to do to work through this verdict and to challenge it and appeal it if necessary, at several different levels of the judicial system. But at the moment, I don't think it's having an impact on the way we think about the business.

Operator, Operator

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

Kevin Fischbeck, Analyst

Could you provide some insights into margins? Both segments seem to have experienced good margin improvements this quarter. You've mentioned significant margin potential in both areas. I'm interested in a more detailed update on your perspective regarding margin opportunities and the speed of that improvement. Additionally, it appears that supplemental payments might be coming in better than expected compared to a year or two ago. How does this influence your outlook for margin levels? Furthermore, considering where we currently are versus potential, what are the key levers in each segment to facilitate that transition?

Steve Filton, CFO

Yes. We have mentioned for some time that the margin decline we experienced during the pandemic could be mostly recovered in both business segments as we return to more normal growth levels. You noted that acute care volumes, in general, have not fully returned to pre-pandemic levels. We believe there is significant potential for continued growth in both acute care and behavioral volumes, which I previously addressed. The positive aspect is that we are seeing strong revenue performance, and expenses are being managed better, thanks to our own initiatives and factors within our control, such as productivity. Additionally, wage inflation appears to be becoming more manageable. The increase in physician expenses, which was a major concern in 2023, is not expected to be a burden throughout 2024, creating opportunities for margin improvement. The increase in Medicaid supplemental payments also presents a substantial opportunity. As Marc mentioned in our prepared remarks, we believe these increased Medicaid reimbursements are compensating for inadequate reimbursement from previous years, which should aid in margin recovery since most of these supplemental payments do not incur new or additional expenses. This will significantly help us recover the margins that suffered due to insufficient reimbursement for cost increases. The first quarter showed marked improvement compared to our expectations. We will see how the rest of the year unfolds. Hopefully, we can recover more of the margin deterioration than we expected in our guidance, but we will need to assess the situation as the year progresses before making any conclusions.

Operator, Operator

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

Jason Cassorla, Analyst

I wanted to follow up on the supplemental payments and the acceleration there. Clearly, you guys are benefiting. But I guess your local market competitors might be benefiting as well. So I guess I'm just curious if you're seeing any changes from a competitive standpoint either competitors accelerating build-out of the outpatient or anything along those lines? And then if I could follow up quickly just on the Illinois litigation. I know there's a number of unknowns there on how that could play out. But does that change how you're thinking from a share repurchase argument or capital deployment in the near term as you wait to see how that all evolves. Any help there would be great.

Steve Filton, CFO

Yes. In response to your first question, Jason, I don’t believe we’ve noticed any significant changes in competitive behavior in our markets due to the increase in supplemental payments. These payments are designed to help providers who care for more Medicaid patients, which tend to use Medicaid services more. This is likely why we faced some challenges during the pandemic, as our Medicaid utilization is generally higher than that of some of our public peers. Currently, we seem to be benefiting from that. However, I don’t think the Medicaid supplemental payments are specifically influencing competitive behavior in our local market or impacting our strategic decisions in any significant way. Regarding the Illinois situation and its impact on capital deployment or share repurchase, I would reiterate what I said before. It’s too early for us to react definitively until we have more clarity on how the verdict and case will be resolved. While it might affect us in the future, for now, we prefer to wait, especially until we see the outcomes of the post-trial motions at the trial judge and court level. At this point, we will hold off on making any decisions until we know more about that situation.

Operator, Operator

Our next question comes from the line of Whit Mayo of Leerink Partners.

Whit Mayo, Analyst

Steve, maybe just comment on the Medicaid rule that was released this week on state-based programs. Maybe too early to have much insight, but it seems like some positives and some less positive things. Just curious how your team and legal advisers are looking at this.

Steve Filton, CFO

We are encouraged that the new rule did not impose a cap on supplemental programs within Medicaid. Instead, it focused on hold harmless agreements, which they have consistently opposed in the past. While I am not a legal expert, we have consulted with legal professionals who argue that CMS may be mistaken regarding the legality of these agreements. There is potential for successfully challenging CMS's objections to these hold harmless agreements in the coming years. It's also positive that CMS stated they would not enforce any actions against these agreements until 2028, giving states time to modify them if they believe they won't pass legal scrutiny. We conducted a quick analysis and found that approximately one-third of our current supplemental payments are related to these hold harmless agreements that CMS has targeted, while two-thirds are not affected. Overall, we view this situation as encouraging due to the flexibility and time states have to adapt to the new rule.

Whit Mayo, Analyst

That's helpful. And just one other quick one. Just thinking about the opening of West Henderson later this year. Is that still a good timetable and maybe the P&L consideration, start-up losses, and I'm kind of curious how you think about how the volume may get redistributed in the market once that hospital opens.

Steve Filton, CFO

So West Henderson is scheduled to open late in the year, maybe in late November, December. So it shouldn't have much of an impact, there will be some level of preopening costs and then a month or 2 of probably operating losses as it opens. I think we didn't really highlight that in our call a couple of months ago, in part because I think we have a view that continued improvement of our hospital in the market will largely offset that. And as a consequence, neither was likely to have a material impact on this year's results. There's some amount of cannibalization that will take place, meaning we'll take some patients probably from our existing Henderson Hospital. But the real play for West Henderson is significant population growth in that area that we think will allow the hospital to have a very successful opening. Quite frankly, the opening of Henderson at this point, I think, 5 years ago was very successful for the same reasons. And I think we're looking for West Henderson to have a very similar experience when it opens late this year.

Operator, Operator

Our next question comes from the line of Sarah James of Cantor Fitzgerald.

Sarah James, Analyst

Can you clarify the $5 million sequential uptick in premium pay, was that related to the acute volume strength? Then does your $50 million a quarter of premium pay goal assume a version to normal acute volumes? And how do you think about strategy and timeline to get to that $50 million?

Steve Filton, CFO

Yes, I believe that the $68 million in premium pay in the first quarter is quite similar to what we've experienced over the past few quarters. While we have mentioned a goal of reaching the mid-50s, the robust acute care volumes have hindered our progress. It’s worth noting that the 4.5% increase in adjusted admissions in the first quarter of this year is compared to over a 10% increase in adjusted admissions in the same quarter last year. This reflects some historically high acute care volume numbers. We recognize that it will be challenging to reduce the premium pay levels we're currently seeing unless the acute care volumes decrease. In fact, we would be quite content if they remain at these levels. Given the current acute care volumes, we are relatively satisfied with maintaining this level of premium pay.

Operator, Operator

Our next question comes from the line of Joshua Raskin of Nephron Research.

Joshua Raskin, Analyst

I was wondering if you could give a broader update on CapEx spending and maybe capacity increases in specific areas of focus and then just a quick follow-up on Las Vegas and West Henderson opening. I'm curious if Las Vegas on the acute care side, volumes or demand there running above company average? And maybe just a little bit more color on sort of shorter-term trends there.

Steve Filton, CFO

Sure. So I think from a CapEx perspective, Josh, I think we continue to invest on the acute side in those areas where I think acute invasion hospitals really differentiate themselves, meaning emergency room services, emergency room capacity, surgical services, both in and outpatient, and again, for the higher acuity, higher-end services that we don't have as much competition in. But we also continue to invest in outpatient. We have a very successful freestanding emergency department initiative that has been underway for a number of years. I think we'll finish this year with probably 30 freestanding EDs around the country, whereas 5 years ago, I think we didn't have any, and we can also continue to invest in some freestanding surgical services facilities, freestanding imaging centers, etc. On the behavioral side, it's mostly building more inpatient capacity now that we are at least in many markets and many facilities, more fully staffed, but also in that business, investing in freestanding outpatient developments, telemedicine, addiction treatment, etc. So I think, again, in both business segments, the CapEx really runs the gamut of the sort of full service continuum at our facilities and our integrated providers tend to provide in their markets. As far as the specific questions about Las Vegas, look, I think one of the comments that we've made over the last several years is that one of the reasons why I think we've been slower to recover those margins that we talked about in the previous question than some of our peers is that some of the geographies around the country that have recovered more quickly from the pandemic, Texas and Florida, most specifically, while we have a presence in those geographies, we tend to have a bigger footprint in places like Nevada, California, the addition of Columbia that have tended to recover more slowly from the pandemic just from a broader economic perspective. But I think in the last couple of quarters, the recovery trajectory in Nevada has definitely accelerated and separate and apart from the Medicaid supplemental program, which obviously is quite helpful in that market or that state. We've seen, I think, fundamental business metrics improve pretty dramatically in the last couple of quarters.

Operator, Operator

Our next question comes from Andrew Mok of Barclays.

Andrew Mok, Analyst

I think you commented that the quarter was above your internal expectations. You're expecting behavioral volumes to improve from here, and there's potential upside to initial forecast for supplemental payments. So just putting all those together, any updated thoughts on where you think you sit within the unchanged guidance for the year.

Steve Filton, CFO

Sure, Andrew. I mean, clearly, just from a mathematical perspective, the amount that we exceeded our own internal budget and consensus numbers for the first quarter would already put us on the trajectory towards the high end of our guidance. I think most people know, but I'll just repeat for everybody's sake. We had never revised guidance after the first quarter. It's just something that we don't generally think is a prudent thing to do. I think if the trends continue, however in Q2, that's certainly a possibility, guidance revision at the end of Q2 if these trends continue. Again, I think the trends that I would specifically highlight were better than we expected in Q1 of our acute care volumes, which I think we thought might moderate a little bit more than they actually did and behavioral pricing, which I think we thought might moderate a little bit more than they did. Obviously, we're pleased that neither did; we're focused on keeping both of those metrics as high as they can be. But to me, that's where we'll watch most closely in Q2. If those metrics remain strong and steady in Q2, I think it's much more likely that we'd have a guidance revision at that point in time.

Andrew Mok, Analyst

Great. And then just a follow-up. I think you commented on intra-quarter in April volumes in the acute segment. Just hoping you could do the same thing in the behavioral segment and maybe comment on trends exiting the quarter to help support the higher growth outlook?

Steve Filton, CFO

Yes. I may have forgotten if my previous comments were specifically about the acute segment, but I believe the trends are similar in both areas. Earlier this quarter, I mentioned at some conferences that the behavioral business started off slowly due to unfavorable winter weather in regions not typically accustomed to such conditions, particularly in the south central part of the country. However, we saw improvements in volumes later in January and definitely in February. That said, similar to the acute segment, we experienced softer volumes in March, especially within the child and adolescent demographic, which tends to decline when school is out. Nonetheless, I would maintain that we anticipate a recovery from this softness, if not in April, then certainly by the second quarter. As Marc mentioned in his remarks, our overall expectation at the beginning of the year was for behavioral volumes to gradually improve as the year progresses, and that remains our outlook.

Operator, Operator

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

Steve Filton, CFO

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 concludes the program. You may now disconnect.