Universal Health Services Inc (UHS) September 8, 2026 Conference Transcript

Hi, everyone. Thanks again for joining us at the conference. We're really pleased to have Conversable Health Services with us today. UHS is a provider of acute care and medical health services. So with us from the company are Steve Golkin, CFO, and Darren Larrant from Investor Relations. So thanks again for being here. If you guys like to start with any kind of intro comments or would you rather just kind of hop right into Q&A?

I'll make a few introductory I think we were pleased in Q2 with the rebound in volumes in both of our segments, solid expense control in both of our segments. We have the benefit of the Florida DDP program, the 2025 calendar year program that was approved, and we recognize that benefit in the second quarter. We had also some unfavorable discrete items, which I'm sure we'll get into in the Q&A. As a result, we lowered the midpoint of our EBITDA-LS NTI guidance by about 3% at the midpoint, which now leaves us with a projection of growth for the year compared to last year of about 3% at that EBITDA-LS NTI line. The other significant developments in the post-second quarter were we closed the Talkspace acquisition and we completed a $1.1 billion bond issue in the mid-August timeframe. We talked about Talkspace at some length, but I'll just remind people, very excited about the opportunities that Talkspace creates for us. And again, I'm sure we'll get into more of that. The Talkspace will add about $250 million in annual outpatient revenue to our behavioral results. We have said previously that in the first 12 months, we expect the Talkspace results to be slightly accretive. I think for the balance of 2025, it will likely be immaterial. We're very excited about the Talkspace acquisition. the access to their panel of 6,000 therapists I think really creates an accelerated opportunity for us to grow our outpatient business which has really been a focus of our behavioral division for certainly the last several years and really creating the first sort of end-to-end continuum of behavioral care for that really exists in the industry. It's really unparalleled. I'll pause there, Steve, and answer whatever question.

Okay. Yeah, well, maybe we'll start, you know, try to keep it on the acute side of the business and then we'll, you know, kind of behavioral for maybe the second half of the conversation. So, you know, you mentioned that, you know, you're pleased with the improved volumes in the second quarter. I think second quarter adjusted admissions were 2.9 percent in the first half of the year. You know, it was 1.4 percent overall. You trim the guide a little bit. I think now you're looking for the full year is one and a half to two and a half percent on the volume side. I guess, how are you thinking about, you know, the back half volumes at this point in time and how you approach adopting the guidance there?

Yeah, so as part of our second quarter commentary, we reduced slightly the volume guidance for both segments by about 50 basis points. So the midpoint of our acute volume projection growth, adjusted emission growth, went from 2.5% to 2%. And really, as I think your question suggests, in our minds, it was just an acknowledgement, sort of a clarification of the fact that with adjusted admissions in the first half of the year growing by 1.4%, even though the second quarter was stronger, 2% seemed a more reasonable target for the full year. Generally, we feel like volumes are pretty solid, and in line with historical volumes, I'd make the point that over the last decade, our acute care adjusted admissions have grown between 2% and 2.5% on average over a 10-year period. So adjusting to the 2% is still well within range. We like the markets we're in. We like the overall demand environment, feel pretty good about it.

OK. And then when we think about the composition, that volume growth, I guess how should we think about how that breaks across the different kind of insured profiles? Like how does it compare for commercial, Medicare, Medicaid, I guess self-pay to the degree you can comment on that?

Yeah, I mean, we have not, putting the exchange dynamics to the side, which we'll probably talk about separately, but I think outside of that, there haven't been significant changes to payer mix. I think in the first half of the year, we saw a bit of an increase in Medicare and managed Medicare, a bit of a decrease in Medicaid and managed Medicaid, and commercial volumes fairly stable. We didn't really sort of guide, you know, have a specific guide in the back half of the year to pay or mix dynamics, but expect them to, you know, essentially be relatively consistent with what, you know, the trends we've been seeing.

And then, you know, on the surgery side, you know, I think, you know, remained a bit soft. I think you were down, you know, like kind of approaching 1% in the second quarter. I think inpatient was up and outpatient was down. I think there's a lot of questions just about how kind of more broad-based elective trends are maybe holding up versus things like emergency surgery. Could you expand a little bit on sort of like the surgical experience you've had in kind of the early part of the year and how you're thinking about that and how schedules might look for the back half of the year?

I think as you noted, our overall surgical volumes were down 0.8% in the second quarter. And that was actually an improvement over the prior period. sequentially an improvement over the prior period. You know, and we were pleased, as you suggested or noted, that inpatient volumes were up in the more sort of acute procedures. And I think we feel like that's potentially a reflection of the investments that we've made in inpatient surgeries, whether that's robotics or, you know, other equipment upgrades, et cetera. You know, we have not historically sort of disclosed elective versus non-elective or parsed surgical growth out between elective and non-elective. But we do keep track of it and have not really noticed any significant issues in that regard.

Okay. And just in terms of, you know, again, I guess what you assume in the back half of the year is relatively similar to like a continuation of the second quarter trends or any reason to think that's any different than maybe the exit rate on the quarter?

No, I think, as I noted before, we've scaled back our overall volume growth projections for acute care by about 50 basis points, and I think have taken into account the fact that surgical volumes have been a little lighter than maybe we anticipated at the beginning of the year. So I think that's been taken into account in our guidance revisions.

Yeah. And then, you know, another factor that's been discussed, you know, around, you know, some of the, you know, the new facilities that you've opened would be the push out of breakeven profitability at Cedar Hill. I guess, you know, how do we think about, you know, the factors driving kind of the push out of the ramp? I guess how much of it, you know, I guess if we wanted to kind of characterize it as things, you know, within the company's control, whether it's like the cost side and things that might be a little bit harder to control, like the pace of volume ramp, like how would we think about the balance there? And what's a reasonable timeline, do you think, generating more company-like margins at that facility?

So just to remind people, Cedar Hill is the new facility that opened in Washington, D.C. in April of 2005. Our second facility in that market, the first being George Washington University Hospital. And I think what we've found at Cedar Hill from its opening was that its emergency business, the emergency room activity has been fairly busy and encouraging. What has been somewhat less busy is the elective procedures. And I think, you know, we attribute that to a bit of a scarcity of, you know, physicians both primary care and specialists in the market and I think that's been the sort of delay in the ramp up at Cedar Hill. We have been actively recruiting physicians to the market and you know honestly a busy emergency room in and of itself will attract physicians. It just takes some time for them to open offices and you know groups to to branch out and have a presence in what has historically been an underserved from a health care perspective an underserved part of the D.C. market, just reminding people about the structure of that facility or that arrangement. The district put up the capital or funded the capital for that hospital, and we have a long-term operating agreement there. And so I would just remind people that as a consequence, it usually takes us between 18 and 36 months for a new facility, depending on its location, to ramp up to divisional margin averages in the case of this hospital in D.C. because we didn't provide the capex for the hospital. We don't necessarily have to get to those same margins to earn our hurdle rate of return. So I think it's an important distinction.

So we've, in our revised guidance, have talked about anticipating that we'll get to break even at Cedar Hill by the fourth quarter of this year, obviously to a greater level of profitability next year and I think we'll continue to grow I'll be at the ramp up has been somewhat slower than we anticipated okay and then you know as part of the the overall DC market you're also taking control you know the physician group there that's had some financial struggles I guess first you know what's the strategic rationale for doing this I guess like what was the company's thought process about why this was necessary and then it does seem like there's a lot of moving parts financially yeah I think you're getting some interim support to kind of subsidize some of the financial performance of that asset. I guess how should we think about how that impacts the model over the next couple of years and how to build that in?

So just to level set, we, in the July time frame, transitioned a 350 physician, multi-specialty physician group from the university to our ownership. And as you point out, Steve, there's a lot of moving parts in the sense that historically we had what we described as an academic affiliation agreement with the university in which we paid the university a significant subsidy to help fund that physician group. By taking the group over, you know, essentially having them transition to our ownership, we feel like there's better alignment between their interests and the hospital's interests and our ability to provide quality care from the physician group to the D.C. population. As far as the economics work, the payments that we've been making to the hospital cease, number one. You referenced the fact that the university will actually make some subsidy payments to us to help subsidize the performance of the physician hospital. And we also believe that, you know, given our experience with non-academic physician groups, you know, we'll be able to implement and affect efficiencies, which will make the physicians more productive, allow them to see more patients, allow them to do it more efficiently. And so with all those dynamics sort of at play at a minimum, we expect the transaction to be economically neutral and with greater alignment. So we view it as a plus.

And then, you know, one focus in the second quarter, I think, was that you're increasing, you know, same facility bed count a pretty good amount. I think, like, maybe 2.5%. I'd love to hear a little bit more about, like, the markets where you're making these bed investments. I guess, like, where does utilization and capacity sit in those markets? And I guess how quickly do you think, you know, the occupancy of those new beds could start to translate into incremental volume for the company?

So the 177 beds that you referred to have been added at three different hospitals in the portfolio. One is Lakewood Ranch in Florida in the greater Sarasota market where we built a new tower. One is Henderson Hospital in Las Vegas, which has been very busy since its opening five or six years ago. and we've built out a sixth floor at the Henderson facility we historically have done a tour in connection with a with another bank conference in Las Vegas so some of you may have been to Henderson and if you've ever been to Henderson you will know that if you walk through the emergency room we historically holding patients in the emergency room and dozens of patients at a time because we don't have available beds. So that was the impetus to building, you know, or building out the sixth floor and adding 35 or 40 new beds. And then finally, in Southern California, in our Riverside County market, we built a replacement facility for our Inland Valley facility, which was about 35 or 40 years old. So in each case, to your point, the capacity additions were done because there was, you know, documented and demonstrated need for that additional capacity. So we think they'll ramp up relatively quickly, take some time, take some time to get to, you know, peak margins because you've got to hire and et cetera. And so there are some challenges to opening the new capacity, but I think the capacity will generally be filled and will help us, you know, get to our, you know, targeted, adjusted, same sort of adjusted admission growth in the acute business. Okay.

And, yeah, to your point earlier, we've now reached the exchange part of the discussion. So, you know, when you, you know, talk most recently about the exchanges, you know, I think you're expecting the exchange EBITDA headwinds now be at the upper end of the, you know, initial guidance that you provided. I guess how should we be thinking about the underlying components of how that's going, whether it's, you know, volumes and coverage transitions, maybe other forms of coverage? and I guess how you're thinking about the impact as you move it from Q2 and whether that builds or not and the balance of the year?

So, again, probably worth quickly reminding people what our original assumptions were for the impact of the decline in exchange enrollment. We assume that there would be a 25% to 30% decline in exchange enrollment as a result of the exchange subsidies lapsing. We assumed that 10% to 20% of the people who lost coverage would replace that coverage with something we generally felt that would likely be commercial coverage to their employers. And we also assumed that there would be a shift in metal tiers, particularly from silver to bronze, and tried to take all those items into account and projected a $75 million unfavorable impact. I think through the first six months of the year, the actual impacts have played out largely the way we anticipated. We did, as I think you note, increase our full year projection of the impact from 75 to 85 million as part of our guidance revision. And I think that revision was really the one assumption that I think we have tweaked is it turns out that rather than seeing some of the folks who lost their exchange coverage converting to other commercial coverage, it really felt like there was almost a one-for-one exchange between those who lost their exchange coverage and increased uninsured or uncompensated volume. And so the slight increase and uptick in our impact projection, I think, was a result of sort of tweaking that aspect of the assumptions. So what we have is $35 million impact in the first half of the year. We're expecting a $50 million impact in the back half of the year. And I think that's a function of just the progression of people losing their coverage. I think some people might have paid premiums for several months and then stopped. Not everybody stopped paying premiums in the first month. Honestly, to some degree, we didn't necessarily know when people stopped paying their premiums. So it took us a bit of time to factor that in. So roughly, I think we think there'll be about a $50 million unfavorable impact in the back half of the year. And that, I think, essentially becomes sort of the run rate then for 2027. Okay.

And then, you know, you mentioned this as part of the planning process, but for the exchange volumes that remain, obviously, there's been a big shift in metal tiers. In some markets, it's more pronounced than others. I guess, can you explain a little bit like what you plan for inside of the headwind related to that? And I guess when it comes to, you know, having patients with much higher co-pays and deductibles as they use services? Like, how do we think about the collection timeline on those dollars and when you might have good visibility to them or just maybe characterize your level of visibility to those collection trends now?

Yeah, so as I said, I mean, I think we tried to take that into account. I think we assumed that there would be something around like a 25% shift from particularly from the silver to the bronze metal tiers. and that seems to you know generally be tracking you know our experience and you know generally what we find um you know is that you know the more the more of the ultimate bill um that is the responsibility of the patient the higher the level of uncollectibility is again that's not anything new um we have factored that in etc like i said the the biggest change i think in in our viewpoint was this idea that rather than some people losing their exchange coverage and converting to commercial, it's really almost been a one-for-one exchange between exchange coverage and uncompensated care. And people that are pure uncompensated care have a very low collection rate generally.

Maybe we'll switch a little bit more to the behavioral questions at this point. So you mentioned a little bit off the top about the talk space acquisition and some the strategic rationale for it. I guess, how do we think about, you know, the first, you know, couple weeks of integration, how that's going, like what the key integration milestones are going to be. And I guess, how do you, you know, think about, you know, the KPIs and disclosure we might get on this business, you know, over the next few years?

So, you know, first of all, and I think I said this earlier, you know, I'll just repeat that our expectation is in its first 12 months or our first 12 months of ownership, the impact of the Talkspace acquisition will be slightly accretive. I think for the four and a half months of 2026, it's likely to be an immaterial impact. But over the longer term, I expressed great enthusiasm about the Talkspace acquisition. I think that the most significant impact in the short term, I'll call maybe the short and intermediate term, is that on our, what we've described as step-down patients, Our inpatients or our patients who are discharged from our inpatient facilities but require follow-up care, very often our ability to keep that, if you will, follow-up care sort of within, I'll call it the UHS family, has been limited historically, I think for a couple of large reasons. One is geographic. So, you know, when we talk about follow-up care, we talk about programs that are described as partial hospitalization or intensive outpatient. And what distinguishes these programs from what I'll call sort of traditional outpatient, where you're seeing a therapist once a week or twice a week for an hour or so, these are patients who are seeing, you know, coming and getting therapy, both individual and group therapy, three times a week, four times a week, five times a week, sometimes, for four hours a day, five hours a day, six hours a day. And historically, you know, we lost patients who didn't live close to our facilities. Maybe they were willing to drive two hours to become an inpatient or to be admitted as an inpatient, but now that we're asking them to come back three, four, five days a week, they really didn't want to make that same drive. Also, we didn't always have, you know, we've been a very inpatient-centric business, I haven't always had the same number of therapists on the outpatient side. As I said, one of the great attractions of Talkspace is a panel of 6,000 therapists who can provide and have capacity to provide that intensive outpatient partial hospitalization care that we weren't always able to provide. And just really having that virtual component and virtual alternative and virtual option is, I think, going to be a huge benefit for us. But when we think beyond that and think about other opportunities, I think they're just, obviously, overstating if I would say limitless, but there really are just a significant number of other opportunities, one of which, and I don't think I could cover all of them in this setting, but one of which is some integration with our acute care business. So we discharge patients from our acute care hospitals, many of whom may require some level of follow-up psychiatric care so you know if you think about been a lot in the news in the last in a week or so about women with postpartum depression as an example so a woman who is ever you know showing evidence of postpartum depression after delivery you know might benefit you know extremely benefit from sort of talkspace follow-up somebody who's just received the cancer diagnosis is often you know devastated etc you know working through that you know from a you know mental health perspective, again, that sort of opportunity. We have a longstanding relationship with the military. We have what we call our Patriot Support Program, again, largely designed to provide inpatient support for active military, et cetera. But if you think about, again, some of the news coming out of the USS Lincoln, et cetera, again, lots of opportunities, I think, for that virtual alternative to really be helpful to active duty soldiers who are suffering from PTSD or addiction issues or whatever. So again, very upbeat about the opportunities for talk space in 2027 and beyond.

When we think about the demand environment for kind of the base behavioral business, how would you characterize that, where we are kind of coming out of the first half of 2026? Obviously, you mentioned earlier you trimmed the... Volume outlook there a little bit. You know, it seemed like labor and on the investments you've made that, like, labor is a bit less of a gating factor than maybe it's been in the past. I guess how do you think about what would be needed to really see an improvement on the volume side?

Yeah, so if you go back and you look at it, our adjusted patient days and behavioral grew by 0.9% in 2025. They, in the first half of this year, grew by 1.5%. So they are accelerating. I think, you know, we have historically, I think, or at least over the last several years, kind of had this 2% to 3% growth target. I think in retrospect, that's proved to be a little bit aspirational. So we've scaled it back to more like 1% to 2%. We're sort of smack in the middle of that in the first half of this year. And that's why we scaled our projection back to that 1% to 2% range. Again, what I would say, and it's not exclusively a result of the Talkspace acquisition, But I would suggest that where the accelerated growth in behavioral demand will occur over the next several years is on the outpatient side, a better and more efficient capture of those step-down patients on our part, more dedicated focus on capturing those patients. The Talkspace Alternative certainly helps. We've also talked quite a bit in the last year or two about what we describe as our 1,000 Branches Initiative. These are freestanding outpatient facilities that we're building and standing up around the country. One of the things that we have found is that as patients enter the health care system, if they're entering the system in an outpatient program, very often they're reluctant to do so on the campus of an inpatient behavioral facility. And so having these freestanding outpatient centers as an alternative, again, I think we think is another efficient alternative. And again, we can really now meet patients where they want to be treated, where their employers and payers want them to be treated. In some cases, that can be in a virtual setting. In some cases, it can be in a freestanding setting. And in some cases, if patients are comfortable, it can be on the campus of our hospitals, our inpatient facilities. But, you know, the point being that we're really building out our outpatient capacity so that we really can offer patients, again, you know, the most efficient and most comfortable setting for that.

And, you know, you mentioned with the second quarter, you know, some discussion around the San Antonio facility and the behavioral business that's right now dealing with some CMS certification challenges. I guess, how are you thinking about, you know, like what might be a reasonable timeline for getting certification back? Like how that's kind of played out in the past and maybe how you're thinking about the opportunity to like recover business in that market over the next couple of years, if that occurs.

Right. So as we've noted, the Laurel Ridge facility in San Antonio has continued to operate, albeit with a much smaller patient complement. And the reason for that is we have been going through the process of going back to CMS and getting recertified, and they require that you have patients in order for them to come back and survey, et cetera. And so we expect that we've completed, I think, the first several steps of recertification. The next several steps involve some regulatory visits and surveys, et cetera, which we hope will take place over the next few months. and that, you know, ideally we would hope to be back in business and sort of ramping back up in early 2027. That sort of ramp up is a little bit, not I think perfectly analogous, but a little bit like opening a de novo facility. We obviously do have established referral relationships in that market, et cetera, which should help us ramp up more quickly. But, you know, I think, again, as we get to the third and fourth quarters, probably more likely the fourth quarter, you know, we'll have, I think, hopefully greater visibility on when we can actually get our certification back, when we can start taking patients at what pace, et cetera. And so, you know, when we give our 2027 guidance, I think we'll be more specific about it. But I think suffice it to say that our focus right now is on getting recertified where we've been already working, you know, closely with the regulators, cooperating, et cetera. So, you know, feeling, you know, good about that process, but difficult to predict exactly the pace and how it will go at this point.

Got it. Okay. And then, you know, kind of a, more of a, I guess, an overall, you know, question for the enterprise. It would just be, you know, you've seen a pretty big increase in professional and general liability expense. Yeah, I guess we'd love to just understand a little bit better, you know, what's the absolute level of that expense that's now running through the P&L. And, you know, I know a lot of it's based on, like, actuarial experience and things like that. But what's a reasonable way to think about what the expense profile and the growth of that expense could be over the next couple of years?

Yeah, I mean, look, it's worth noting, and I'm sure obviously the reason you're asking the question is that that expense has been growing, I think, faster than the rate of inflation, certainly over the last several years. I think that's honestly true for us as well as other health care providers. You know, honestly, we've seen that from providers outside of the health care space. There's just greater litigation activity, and, you know, there's some element I think one of our peers uses the term social inflation. Juries willing to, you know, render verdicts that are higher than they have been in the past, et cetera, which tends to, you know, increase the overall expense. I think it's worth sort of putting in context, I mean, our malpractice expense generally averages about 1% of revenues, which puts it for us in the kind of $175 to $200 million annual range. And that's obviously not an inconsequential number, but certainly one of our smaller expense numbers compared to things like salaries and supplies, et cetera. I do think it's likely that malpractice expense continues to grow faster than, you know, inflation. So instead of growing at 4% or 5%, maybe it grows at 10% to 15%. Unlike most other expenses, we tend to recognize it in real time as best as we can through the help of third-party actuarial reviews, which we do twice a year. So it's a little bit harder to predict than project. But, yeah, I mean, again, what I would just say is I don't think we'll vary tremendously from that sort of 1% of revenue range, but it certainly may increase somewhat faster than the inflation rate.

And then, you know, we think about the, you know, the guidance revision that you touched on, you know, with the second quarter. You know, it looks like there's a bit of an acceleration required in the second half. And I know the concept of core growth kind of differs a little bit from analyst to analyst and investor to investor, but it looks like core growth needs to be a little bit better in the back half of the year than where we think maybe it was in the first half of the year. I'd love if you could just walk us through, you know, the factors contributing to, you know, what we perceive to be that ramp up and how the company's feeling about it at this pace?

Yeah, I think we've touched on several of the more significant elements. We, the acute capacity that we added and all those 177 beds and those three projects that I alluded to earlier, all opened in the second quarter of this year. So we think they'll continue to ramp up in the back half of the year and we'll get a benefit from that. We talked about the continued improvement at Cedar Hill. And so, you know, I think that, you know, should and will do better in the second half of the year than it did in the first. We talked about growth in behavioral. While I don't think we'll get, you know, significant growth from the Talkspace acquisition itself, I do think we'll get, you know, growth from some of our own outpatient initiatives in the back half of the year. So, yeah, I think all those things combined, you know, lead us to believe that we should, you know, meeting that accelerated sort of uptick in earnings in the back half of the year, which is embedded in our guidance, you know, is definitely achievable.

And when we think about, you know, the policy headwinds are obviously in, you know, kind of material focus at the moment. I guess how are you thinking about what you might see in 2027, whether it's, you know, the potential for, you know, the exchange market enrollment to take another step back or whether there could be some challenges in your business from, you know, things like Medicaid work requirements.

Yeah, as we talked about before from an exchange perspective, I think our expectation is that the biggest disenrollment activity has already now taken place. You know, might there be a, you know, an incremental step up next year? That's possible. But I think, as I was saying before, what we'll see is because the impact of the exchange disenrollment has progressed and gotten larger as the year went on, not by a huge amount, but like I said, $35 million in the first half of the year, $50 million projected in the back half of the year, it'll continue to increase next year. We think get that sort of exit rate for the back half of this year. So that's a little bit of a headwind into next year. The other major issue which you've alluded to, Steve, is Medicaid disenrollment. I think most providers, both public and private providers, have been reluctant to really precisely try and size the Medicaid work requirements and the potential impact on Medicaid disenrollment. As we all wait to see, I think a lot of the specifics of how this is going to play out remain to be seen. There's been, I think, estimates from like CMS that somewhere around 4% of Medicaid enrollees could lose their coverage, but not exactly sure who those enrollees are, whether they're major utilizers of the system, et cetera. That remains to be seen. How different states implement the Medicaid work requirements at what pace remains to be seen. Some states are actually challenging the work requirements in court. We're also seeing debate about how there are exceptions for medical frailty in the bill, in OB-3. And we think a lot of behavioral coverage, as an example, may well qualify for the medical frailty exception. So we'll have to see how that plays out. So, yeah, I mean, the expectation is that Medicaid work requirements and the disenrollment coming from them could be a headwind to next year, but probably just too early to be precise about what that could be.

Okay. Well, thanks for your time today. I think that's where I'll have to leave it. Appreciate it.

Okay. Thank you.