Universal Health Services Inc (UHS) September 2026 Conference Transcript

Great. Well, good morning, everyone. I'm Craig Kettenbeck. I cover health care technology and providers at Morgan Stanley. I'm very pleased to have with us Universal Health Services this morning, so Steve Filton, CFO, and Darren Lerick in Invest Relations. For disclosures, you can see them at our website, www.morgansanley.com, backslash research disclosures. With that, Steve, I'll just pass it over to you for some intro comments before we get into the Q&A.

And, you know, I think maybe as a brief start, kind of a quick recap of Q2, which at the moment seems like ages ago. But, you know, we were pleased with our Q2 results in the context of rebounding volumes in both of our segments. We felt like both segments continued to demonstrate strong cost control. and pleased by the benefit that we got from the Florida DPP program, which we recognized for calendar year 25, still waiting for the approval for calendar year 26. We had some exogenous, unfavorable items in the quarter that caused us to revise our guidance downward by about $50 million at the midpoint. At that sort of midpoint of our revised guidance, we're now projecting on an EBITDA less NTI basis about 3% growth for this year over last year on an EPS basis at the midpoint, projecting about 6% growth. I think subsequent to the quarter, or at least the quarterly announcement, probably the most significant items of note were we closed the talk space transaction, which we're very excited about and the opportunities to really accelerate the growth in our outpatient behavioral business, and I'm sure we'll touch on that more, and the 6,000 therapists that Talkspace currently has on their panel that add a tremendous amount of capacity for us. And then we also did execute on a $1.1 billion bond deal. Both the Talkspace closing and the bond deal were in mid-August, and that sets us up for several years now of solid and comfortable financing. So I'll pause, and Craig can happen to entertain your questions at this point.

Great. Thanks for setting that up. I want to start on just the behavioral health side of the business. And if you look at the last couple of years, you know, growth, pricing has been a very important driver of that growth and volume has been a little bit on the lackluster side. So, you know, what are some of the key things that have been driving both those parts of the equation?

Yeah, so on the volume side, we did adjust our guidance for volume for adjusted patient days on the behavioral side down about 50 basis points. So we're now talking about something in the 1% to 2% range. We ran for the first half of this year about 1.5%. We ran 0.9% last year, so we are incrementally improving. I think the real opportunity, as I alluded to very briefly already, to see adjusted patient-day growth in behavioral is in the outpatient side. We have been primarily, for most of our history, an inpatient-centric company. Ninety percent of our revenues today are inpatient prior to the Talkspace acquisition. And so I think we believe that a lot of the demand is on the outpatient side in behavioral. We also believe that by growing in the behavioral, we will limit our exposure to Medicaid and become a more Medicare and commercial-centric company, which I think is a great way to set up the next few years as there's more pressure on Medicaid over the next several years. From a pricing perspective, we're talking about revenue growth in the behavioral business in the sort of 3% to 5% range in our guidance. That's kind of 1% to 2% volume, 2% to 3% pricing, that 2% to 3% pricing is a little bit lower than it's been over the last several years. I think it's been somewhat inflated or it's been somewhat higher in the last several years as a result of Medicaid supplemental payments increasing over the last several years, as well as I think a bump in commercial payments as we came out of the pandemic and commercial contract pricing recognized sort of higher labor inflation and just, you know, higher, you know, inflation all around. But that's, you know, largely, I think, how in the near-medium term we think about, you know, the revenue growth and the behavioral business, both from a pricing and a volume perspective.

Got it. And then on the inpatient side, if I think about COVID, just some of the ups and downs and there was some pressure on labor, how do things stand today in terms of some efforts you've made, whether it's on staffing and things like that?

Yeah, so, I mean, you know, what we saw, and, you know, I think your question alludes to is, during the pandemic in particular, there was significant pressure on our behavioral volumes as a result of labor constraints. Very often, we couldn't admit patients because we had a lack of staff, and that could be nurses, could be therapists, could be non-professionals. Um, but, uh, I think, you know, we've largely, well, first of all, I think the market has, has settled down post COVID. The demand for, you know, providers in the sub acute facilities from the acute facilities is not as great as it was during the pandemic. But also, we've been very focused on, you know, getting to an appropriate level of staffing. I think we added about 4% to our headcount last year. We added about 3% to our headcount in the first half of this year. I think that's, you know, we certainly still have, you know, a handful of markets, facilities that face labor constraints at any particular time. But I think that issue is, I'm going to say, largely behind us. And, you know, honestly, I think that, you know, headcount now will start to move, you know, much more in sync with, you know, demand and volumes, and as a consequence, you know, that should be a help to our margins as well.

Got it. And you alluded to the 1.5% growth in the first half of the year, and for the full year, you're talking one to two. How does that kind of frame, if you will, like a multi-year outlook? Is this kind of the right run rate would be the first question. And maybe as part of that, is there anything you've observed kind of in the competitive landscape on the inpatient side of things?

Yeah, I think that our view is that the inpatient business is a very solid, steady business, likely to grow, you know, in small amounts. You know, that 1% to 2% that I think, you know, I would cite as a sort of near to midterm goal for us is really largely targeted at the inpatient volume. And, again, you know, what I would say is I think the upside for us is really on the outpatient side. I think that's where the demand is growing. I think patients more and more would prefer to be treated, if possible, on the outpatient side. I think payers and employers would prefer to see their subscribers and their employees treated on the outpatient side. It's less expensive if it's clinically appropriate. So our goal, both with the Talkspace acquisition and with our own standing up of freestanding behavioral facilities, is really designed to capture more of that outpatient demand and outpatient growth over the next several years. And that's, I think, where we have the opportunity to push that 1% to 2% up in the mid and longer term.

Got it. Before we shift over to the outpatient side of things, I do want to touch on just on the last call you talked about San Antonio and the issue there. And really the question is in the context, is that kind of a one-off? Any other back story there and how you think about that coming back?

Yeah, so we have a facility in San Antonio, Texas called Laurel Ridge that lost its Medicare certification back in April. It was something that we believe was very much isolated to this facility and the regulators of this facility. We don't believe that it has sort of ramifications or sort of a read-through to the rest of the portfolio. We believe that we have a long history of regulatory compliance and, you know, quality patient care and safety. And so, yeah, you know, our goal and our plan is at the Laurel Ridge facility, it has remained open throughout this time. We continue to treat patients, a small number of patients, albeit. And the reason we do that is it's an effort to continue to work with the regulators, state regulators, and CMS to get the facility relicensed as quickly as possible. We would hope that that could be as early 2007, and then we would begin to ramp the facility back up in terms of, you know, volumes and EBITDA, et cetera. So, you know, difficult to predict the exact timing of that at the moment or, you know, the exact pace of the ramp-up. I assume by the time we give 2027 guidance, we'll be able to be more specific about that. But that's, you know, where we are from a current planning perspective.

Got it. Just going back to the outpatient side of things, and I want to spend some time on 1,000 Branches in terms of that initiative, kind of, you know, where you're at, if there's any context you can provide in terms of number of centers you have today and ultimately where you'd like to see that kind of build out continue?

So I think it's worth just providing a little bit of perspective. As I indicated earlier, we have been for most of our history an inpatient-centric behavioral company. We have always had outpatient services, but most of them are related to what we describe as step-down services. So when we discharge a patient from our inpatient facilities, they often require some level of, and some, I'm going to say, relatively intensive level of continuing outpatient care, not just, you know, the hour-long therapy session a week that, you know, many of us might be, you know, accustomed to either personally or, you know, friends and family, you know, experiencing. But people who are being discharged out of an inpatient facility often require programs that we describe as either partial hospitalization or intensive outpatient. So these are patients who are getting care and treatment and therapy three hours a day, four hours a day, five hours a day, three days a week, four days a week, five days a week. And we, in many of our facilities, will provide that level of care at the facility level. And the gating factor we find and have found over the years is that there's only a small number of patients who choose to be treated that way. And it's usually two issues or, you know, two major issues. You know, one is on the patient's part, and it's often a geographical issue or a convenience issue. So the patient lives two hours from our facility. They were willing to make that drive or be driven for an inpatient admission for 10 days or, you know, 11 days or whatever, but unwilling to make that drive three days a week, four days a week, five days a week. So they're looking for something more convenient. Or, you know, it becomes a scheduling issue. So, you know, we will say, okay, we have a partial hospitalization program, but it runs Monday, Wednesday, Friday from 9 in the morning until 2 in the afternoon. And that, for whatever reason, doesn't work for the patient. He works. He does, you know, there's child care, whatever it may be. He'd prefer to go at night. He'd prefer to go in the afternoons. He'd prefer to go on the weekends. And what we've done over the last several years is really try and now create alternatives that can capture and solve some of those issues. So, you know, our first initiative, which is the one you asked about, was what we have branded as Thousand Branches. These are freestanding behavioral facilities that we're standing up around the country in generally high population areas, et cetera, where we think the demand is significant. And these are really for people who are entering the health care system as an outpatient. Certainly not everybody enters the health care system as an outpatient, or as an inpatient, rather. Many enter as an outpatient. And these facilities, I think, will capture more of those patients. What we have found is that patients who are entering the system as outpatients often don't want to do that on the campus of an inpatient hospital. They sort of fret about kind of being swept up in sort of the inpatient net is, I think, the way they think about it. I don't necessarily think it's a realistic concern, but it's a concern that they have. The other issue, and the one that, you know, I mentioned just very briefly earlier, is we acquired Talkspace. Talkspace is one of the largest virtual providers of behavioral care in the country. And, you know, really being able to offer that virtual alternative, again, either the patients entering the system as an outpatient or the patients who are stepping down as an outpatient, you know, now we can sort of meet them where they, if you will, live, work, want to be treated afternoons, evenings, weekends. We can sort of accommodate their schedules. And, you know, really puts us in a position where we're really the first behavioral provider in the country to have this end-to-end continuum of care going from, you know, the lowest acuity of care, sort of hour-long virtual sessions, to the highest acuity of care, acute and residential facilities that are treating inpatients, et cetera. So, you know, that's really how the Thousand Branches strategy as well as the Talkspace strategy fit into, you know, the overall strategic direction of our behavioral business.

Got it. How do you think about even, like, dual tracking in terms of some of the things you're doing with Thousand Branches and then Talkspace layers in to the business?

Yeah, no, no, it's a great sort of question and point, Craig, in the sense that, you know, we view all these things not as sort of discrete and distinct offerings, but integrated offerings along a continuum. So, you know, if we have patients who are discharged from an inpatient facility and would prefer to receive their care in a freestanding outpatient setting, we've got now 15 of these 1,000 branches facilities today. We're planning on standing up about 10 a year over the next several years, so we hope that that's an alternative. Patients from there can be, if you will, step down into a virtual setting with Talkspace. Patients who are in Talkspace today, Talkspace really has offered in their history mostly these relatively short, hour-long sessions to people once or twice a week, that kind of thing. But now they've got these therapists, these 6,000 therapists who are able to offer, again, partial hospitalization, intensive outpatient, et cetera. And so, again, I think, you know, our view is patients being able to move up and down this continuum of care based on their needs. And like I said earlier, we're really the only provider in the country that's able to do that. There are lots of providers who provide, you know, kind of one element of that continuum of care, but virtually none that provide it all. and hopefully in a seamless way with a shared medical record that's convenient for the patient, that's going to bring the highest quality of care for the patient, keep the patient the safest.

Got it. And you touched on before just the payer mix, which is different for Talkspace. So if I think about the inpatient and the base business, it leans a little bit more Medicaid. How do you think about that payer mix and what that means for the business, again, on more of a multi-year kind of basis?

Well, I think it's worth noting that outpatient revenue in behavioral tends to be much less Medicaid-centric and much more commercial and Medicare-centric. That's true for Talkspace as well as for our own outpatient revenues, et cetera. In most states, Medicaid does not pay for outpatient services. So one of the additional advantages of building out the outpatient business is not only, we believe, capturing demand, faster-growing demand for outpatient services, but also diversifying our payer strategy, reducing our reliance on Medicaid over the next several years when there will be some Medicaid headwinds from OB-3 and other factors. So, yeah, I mean, you know, the focus on outpatient has, I think, kind of a dual focus of both volumes and payer mix diversification.

Got it. And I want to weave in just capital allocation to the talk space discussion. If I think about an enterprise value of $835 million, so it was an important strategic deal, but there's also debates around using that money to buy Talkspace versus buying back your stock. How did you approach it in terms of the returns you expect to see in this business and what it means?

So I think it's worth noting and putting into context that while certainly we view the Talkspace acquisition as a significant one, probably the most significant acquisition we've done since the acquisition of Psychiatric Solutions, which was almost 15 years ago at this point, the $835 million represents less than, you know, one year of our free cash flow. It represents, you know, even though we levered up a little bit to do the deal, it's about a quarter of a turn of leverage increase as a result of the Talkspace acquisition. Our overall leverage today post-Talkspace is in the low twos. You know, I think We've talked generally about targeting leverage levels in the two to three range. So the point, and now I'm trying to be responsive to your question, Craig, is not that I think we ever viewed the Talkspace acquisition as sort of an either-or in the context of, well, if we did Talkspace, we wouldn't be able to be as aggressive and as active as we have been in share repurchase and return of capital to shareholders. I think we continue to believe that particularly, you know, our current share price represents a fairly significant dislocation in the price. We've been a very active acquirer of our shares for a long time now. We've repurchased about 40% of the company's shares in the last 10 years. We continue to be an active repurchaser. We'll continue to be an active repurchaser after the Talkspace acquisition. So, again, not either or. And I think the other point worth making is, you know, we'll continue to look for other, you know, we have not been terribly acquisitive in the last several years because we've not found a great many compelling acquisitions, but we still have the flexibility to do one if we find one. And I think the one other comment that's worth noting about our capital deployment is our CapEx has been somewhat, I'll call it exaggerated or inflated over the last several years because it's included or reflected a number of very large acute care hospital de novo projects. So we've opened three de novo facilities in less than two years, Henderson Hospital in Las Vegas, Cedar Hill Hospital in Washington, D.C., and a replacement facility in Riverside County, California. We don't have any of those large, again, whole hospital de novo projects in the pipeline for the next several years. So I think CapEx will kind of naturally start to come down over the next several years as well, again, just, you know, allowing us greater flexibility for share repurchase or for any other, you know, uses that we may deem to be appropriate in earning a return. And I'll just want one more comment before you get to your next question. Greg, we had sort of talked about returns. You know, the price that we paid for Talkspace was, you know, definitely on the pricey side when you look at their current earnings. But what really drove our analysis of the deal and our thinking and strategic thinking about the deal is this opportunity to, you know, what I call sort of revenue synergies, to take talk spaces, lower acuity patient population, and find ways to where they need appropriate treatment, you know, higher levels of more acute treatment, and to take our more acute patient population and find ways for them to be treated by the virtual therapist or, you know, the virtual therapy programming that Talkspace has. And so, you know, we thought that within a couple of years of being able to recognize those revenue synergies that, you know, the adjusted multiple for Talkspace would be more in the high single-digit multiples, which I think is sort of much more what we would look to as a target.

That makes sense. Maybe we can switch gears just to the acute side of the business. You're targeting kind of 1.5% to 2.5% adjusted emissions this year. We'll get into maybe the ACA in a little bit, but if I put that aside, how would you characterize the demand environment today? What are some key puts and takes into the back half?

Yeah, I mean, so we did, as part of our revised guidance after Q2, lower slightly our acute care volume projections for the year by about 50 basis points at the midpoint. So we're now predicting, you know, generally sort of, you know, one and a half to two and a half percent, two percent at the midpoint. and that really was really just a reflection in our minds of the weaker volumes that we saw in Q1, which I think, you know, had a number of reasons behind them, including some, you know, weather issues, et cetera, but it would be difficult to get to that, you know, 2.5% midpoint just mechanically, you know, given the softer volumes in Q1, but, you know, when you look back at our acute care adjusted admission growth over the last decade, I think it has averaged between 2% and 2.5%. So that sort of 2% midpoint that we've set for ourselves this year is fairly consistent with that. I think we think the demand environment or we view the demand environment in acute care as relatively solid and feel pretty enthusiastic and bullish about our particular markets, both kind of the patient population growth in our markets and the demand. So, yeah, we're generally feeling, you know, pretty bullish about acute care volumes and, you know, feel like they're very much in line with historical norms. Got it.

Anything you would call out on the acuity side or surgeries in terms of things you're seeing in the market?

Yeah, I mean, I think as most of our peers have indicated, you know, surgical volumes have been a little bit softer in the last few quarters. In Q2, I think our overall surgical volumes were down 0.8%, but that was actually an improvement over the previous couple of quarters. And I think we were encouraged by the fact that inpatient surgical volumes were actually up last quarter. We highlighted some service areas where they were particularly strong, including cardiology and neurology and urology. And not surprisingly, these are service lines in which the acuity of the patients tends to be higher. And I think we've been able to grow our surgical procedures in those areas, in particular partly because of the investments we are making in OR capacity and OR technology, robotics, et cetera. And the places where I think we see our surgical volumes a little bit softer tend to be in areas like GI and ENT, these lower acuity areas where, not just for us, but I think collectively for the industry, the vast majority of those procedures over the last several years have moved out of the hospital setting and into either ASCs or physician offices, et cetera. But, yeah, I mean, I think our view is that, you know, with the continued investment and focus on these higher acuity procedures, we think the demand in those service lines will continue to be strong.

Got it. You touched on before the elevated CapEx for some new hospital systems. So if I think about West Henderson, Cedar Hill, you have the Allen B. Miller Medical Center. Can you just touch on kind of where you're at with these systems and really the implications for kind of the growth and margin trajectory as they continue to ramp up?

Yeah, so thank you for mentioning the Allen B. Miller Medical Center. I forgot to mention that in my, you know, talking about the facilities that we opened. So, yeah, if you think about the facilities that we've opened in the last several years, West Henderson Hospital in Las Vegas, and I think we made the point that that opened in December of 2024 and it was profitable within its first quarter or so of operation, which is really extraordinary for a new hospital, although somewhat consistent with our experience in Las Vegas where we're the number one market share provider and it's been a fast-growing market, et cetera. um the cedar hill hospital which is our second hospital in the washington dc market opened in april of 2025 um that was an an arrangement and i think a different sort of arrangement with the district of columbia um the cedar hill facility is in an underserved part of the uh the district and underserved from a from a health care perspective the district was extremely anxious to have this facility. They're the ones who funded it. They built the facility. We have a long-term management and operating agreement. That facility has been somewhat slower to ramp up. We've certainly talked about that in our quarterly calls. It's been very busy from an emergency room standpoint from essentially the day that it opened, but we really need to find a better balance of emergent and elective procedures. Elective procedures have been somewhat lagging, and I think it's because there's a lack of both primary care and specialty physicians in the market because there really hasn't been a high-quality hospital provider in that part of the city. Physicians, for the most part, have not located there. They don't have their offices there. We're changing that. I think we're changing it relatively quickly. We're recruiting new physicians. Physicians are being drawn there by the busy emergency room, et cetera. But that will take a little bit of time to ramp up. I think it's worth noting that because the district has really been the one that built the facility and our CapEx investments in the facility are much less than they have been in a normal, I'll call it a de novo facility, we don't have to get to the same sorts of margins that we would need to get to at, I'll call it an average hospital, to get to our sort of normal hurdle rates of return. So we've talked about that hospital breaking even by the fourth quarter this year, and we would think that, you know, would continue to grow after that. The Allen B. Miller Hospital is our new hospital in Palm Beach Gardens, Florida. That hospital opened in July of this year. And, you know, as we're expecting, and again, with most new hospitals outside of Las Vegas, you know, we'll, you know, be a bit of a drag as it, you know, works through. Most of our brand-new de novo hospitals usually get to average divisional margins within about 18 to 36 months. That would be, as I said, our West Henderson facility got there much, much faster. Cedar Hill is probably taking a little bit more time. The ABM or Allenby Miller facility, we would hope, would be more in the norm of that 18 to 36-month ramp-up.

That's helpful. And then just the last one on acute business, I think, about Access Point. and freestanding ERs have been an important part of that strategy, kind of where things stand today and what that means for, you know, some of the growth in March and structure of the business.

Yeah, we've talked already about how on the behavioral side, you know, there's been, you know, a continued and I think an accelerated shift into more outpatient settings. That shift has been taking place on the acute side, you know, quite frankly, for I think, you know, a decade or longer. And we've participated in that on the acute side, I think, more aggressively than we have on the behavioral side. You mentioned freestanding emergency departments. We have 35 of those around the country. We have them in virtually all of our markets. They're a very convenient access point for patients. We find that patients who are not generally that acutely ill prefer to be treated in that setting. They can generally be treated more quickly, more conveniently, more safely, et cetera, without the long wait times, et cetera. So they've been very successful. We've also got about a little more than a dozen ambulatory surgery centers around the country with the hopes of, you know, adding another one in every one of our markets over the next several years. And finally, we've probably got a couple of hundred physician practices around the country that also obviously help to, you know, build our outpatient business. So, yeah, we, you know, have this, I think, very comprehensive approach to outpatient that includes the FEDs that I think were the crux of your question, but, you know, other elements of it as well.

Maybe we can switch gears just to technology in terms of how you're deploying tech and AI. And if I look at it through the lens of there's applications like revenue cycle management, there's things on the clinical side that are maybe a little bit more longer dated, but just, you know, where are you seeing it have the biggest impact on your business today?

We've talked, you mentioned revenue cycle. We've talked a lot about that probably being the area that we most kind of aggressively started adopting AI technology from the perspective of denial appeals and, you know, the completeness of our, you know, billing packages that go out, some of our medical records coding, our emergency room coding has been using, you know, an AI application. You know, and we just generally think that revenue cycle broadly is well-suited for artificial intelligence applications because there's thousands, you know, frankly, hundreds of thousands of transactions. They're recurring, you know, they generally fit a particular pattern, you know, et cetera, and I think that's, you know, well-suited for AI applications. We've also been, I'll call it dabbling, if you will, with clinical applications. I think originally I'll call them sort of peripheral applications, like, for instance, using AI technology that's been developed by Hippocratic AI, which is a company that we've been a shareholder in, an investor in, to instead of a human being, a nurse, making a post-discharge call to a patient, finding out how they're feeling, finding out if they've filled their prescriptions, finding out if they've made their follow-up physician appointments, following up on whether they're in pain, Those calls are now being made in many cases by an AI agent, and I think the latest data suggests that 50% of the people who pick up the phone and have an AI agent identified on the other end will continue the conversation. I've listened in on a bunch of those conversations. They're really quite fascinating, and people are very comfortable sharing, and the information that's being gathered and being imported is really valuable. I think, you know, helps to reduce readmissions, helps to make sure the patient's doing well. That's another example. Also using AI technology, I'll say, you know, kind of pseudo-clinically to help us project diagnoses and project length of stay so that, you know, we can better manage length of stay, which is a significant way for us to control expenses. So, yeah, I think, you know, we've got, you know, what I think, you know, in some ways is the biggest challenge from an artificial intelligence perspective today is managing and prioritizing the opportunities, you know, really focusing your resources, choosing the projects you're going to do based on, you know, what's likely to have the most significant, fastest return, et cetera. We've got kind of a whole structure in place, you know, oversight committee, et cetera, to try and do that very effectively.

Got it. When you think about the financial impact, is this something that just kind of gradually over time accrues to the business, or is there a tipping point? Like, how do you see it as we go forward here?

No, I think it accrues. Maybe that's a good word, and I think it compounds. And I think, you know, when we're asked, you know, sometimes about, you know, how we think about some of the headwinds that particularly we'll face over the next years as a result of Medicaid challenges in OB-3 and in other ways, I think we think about the efficiencies that AI can help us generate and help us realize as being a significant way that we're going to be able to offset some of those headwinds over the next several years.

Got it. Well, as we wrap up here on time, just quickly on the headwinds, you mentioned OB-3, the exchange marketplace. Any change in terms of your expected headwind that you're seeing in the business or how things are playing out?

I think the exchange dynamics have largely played out the way that we expected we did. We originally projected the impact from the loss of exchange patients would be about $75 million this year. We upped that estimate a little bit to about $85 million to $85 million in the second quarter revision. But other than that, I think it has largely played out the way that we expected. I think we envision that 26 would be the big cliff, you know, for the dramatic decline in exchange patients. We'll see what happens next year, but not expecting that number to increase other than perhaps incrementally.

Got it. Okay, we're right at time. So, Steve and Darren, thank you so much for your time.

Thanks to everybody.