Universal Health Services Inc (UHS) November 10, 2026 Conference Transcript

So, we're very happy to have Universal Health Services. Next up, Steve Filton, Chief Financial Officer, and Darren Larrick, Vice President of Investor Relations.

Well, just to maybe level set and kick it off, we're 10 months into the year. What have been some of the positives? What have been some of the challenges? Where have there been surprises, you think, Steve?

Yeah, I mean, so going into the year, there were a couple of sort of known headwinds. I think primarily for us, the anticipated decline in exchange patients. The California staffing ratios for behavioral facilities. We included those headwinds in our guidance. And then the year started off a little bit slow. Volumes in Q1 were kind of on the softer side, weather issues around the country. But I think as the year went on, volumes began to recover. And I think, you know, we've been pleased with volumes in both segments in the third quarter. I think sort of the biggest... Headwind that kind of developed during the year was the underperformance of a couple of our de novo facilities, a newer hospital in the Washington, D.C. market that opened last year, and then a hospital, quite frankly, right in this market that opened earlier in the summer. And then... A behavioral hospital in the San Antonio, Texas market that lost its Medicare certification earlier in the year. And so those three hospitals together have sort of, I think, had, you know, maybe $100 million of, you know, unanticipated or to some degree unanticipated losses for the year, slower ramp ups at the de novos. Obviously, the San Antonio losses were unanticipated. I think that's been the biggest hurdle. I mean, I think the nice thing is that with the good volumes, I think with the solid expense control that we've generally been experiencing, the underperformance of those facilities sort of creates a tailwind going into next year, and so we're looking forward to that.

Yeah, and that's a good segue into the next question I was thinking about was, We're, at this point in the year, starting to think about headwinds and tailwinds next year beyond just the normal business progression that you always expect. What would you single out? How would you describe some of the headwinds and tailwinds that we should take into account as we're moving into next year?

Yeah, I mean, so the tailwind, I think, primarily, the primary tailwind is the continued improvement of the three facilities that I enumerated. We've also got the Talkspace acquisition that we completed in August that I think we believe is going to ultimately be a significant accelerant to outpatient growth in our behavioral division. In this first year of ownership through the middle of next year, likely having, I think, a modestly accretive effect. But after that, I think really starting to get some traction and helping us build our outpatient volumes on the behavioral side. I think we've got pretty solid, you know, Medicare rate increases, you know, in the coming years, so that's a plus. The biggest, I think, headwind going into next year, and we talked about this on our Q3 call, is we've got about $175 to $200 million of out-of-period DPP or Directed Payment Program, Medicaid Supplemental Payments, that we received in 2026 that will not recur in 2027. Offsetting that, hopefully, will be a Florida DPP program for both 26 and 27 that has not yet been approved and we have not yet recognized, but would hope to do so at some point over the next several months or quarters.

Yeah, and maybe just to put a finer point on those facilities, the three that you've mentioned that have been a drag, how much could they represent and possible tailwind next year?

Yes, I mean, I think the way we framed it, AJ, is that to date, or, you know, through the third quarter, they've contributed about $80 to $100 million of losses this year, and that our expectation is that a meaningful portion of those losses, you know, will be made up next year and should create a tailwind. Again, I think both Cedar Hill, which is the D.C. hospital, and Allenby Medical Center, which is the hospital in this market, continue to improve. The hospital in this market opened in the beginning of the summer, not the ideal time to open a hospital in the South Florida market, but has been improving each month, volumes increasing every month, losses declining, and now as we move into the season here in Florida, you're looking forward to a strong season and ramping up during that time. As far as the San Antonio facility, it continues to operate, albeit with a small number of patients. We're going through the steps necessary to get recertified. So far, we've been completing those steps without. You know, any issues. And so the hope is that at some point in 2027, we get recertified, we ramp up and get back to this was one of our larger, more profitable facilities in the behavioral division. So again, looking forward to that, although the precise timing is difficult to say. Hopefully, by the time we give our guidance at the end of February for 2027, we'll have a little bit more precise view of how that facility will ramp up.

And, AJ, I would just add that, you know, when you think about those Three facilities. I mean, we're obviously talking about 2027 and recovering some of that $8,200 million of losses that we're incurring. In 26, but you should also think about those three facilities as embedded growth, you know, looking out beyond 2027, 80 to 100 million really is just the level to which they, you know, get back to break even or reach the break even level. And obviously we have longer term views on success of those facilities and the recovery of those facilities.

To that end, have you guys put any... Parameters around what, you know, a normalized earnings run rate from those three, what embedded earnings might represent?

No, look, we, you know, I think characterized in the San Antonio facility, we've disclosed in our SEC filings and what the facility made in 2025, which was $25, $30 million range. You know, there's no reason in my mind that the facility in this market, you know, shouldn't get up to, you know, divisional averages within the first 18 to 24 of margins within the first 18 to 24 months of operation. Cedar Hill in Washington, D.C. is a little bit different. Um, we've described the, uh, the arrangement. That's really a partnership with the District of Columbia. They built that hospital, uh, really because they felt that that part of the district. Board 7 and 8, to be technical, had really been underserved from a healthcare perspective for years. And so, given their long relationship with us at GW Hospital in the market, they built that hospital. They spent the $300 million or $400 million to build it. We own and operate it. And so when we get to or we don't need to get to the same level of absolute earnings and absolute margins that we would at a hospital that we built and invested in, our rate of return hurdle is going to be much lower because we've got much less invested in that facility.

Okay. Um, maybe a step back. I got plenty of operational questions, but obviously last week we had the midterm elections with the Democrats taking over the House and Senate. Is the changing political landscape changed the way the company's thinking about its outlook, strategy, anything else at this point? I know it's early.

Yeah, I think it is early, AJ, but look, certainly... You know, I think the Democrats largely, you know, ran against the current administration and didn't necessarily lay out a tremendous number of policy initiatives. But I think they've been pretty clear and have, I think, a pretty defined consensus of opposing the Medicaid cuts that were included in OB-3. That's both the sort of Medicaid work requirements as well as the cuts to the directed payment programs that are embedded in OB-3. Obviously, the Democrats also pushed for an extension of the exchange subsidies, which they were unable to achieve. So, you know, it would seem like those will be, you know, major initiatives, and I think the Democrats have made that clear, that those will be major initiatives of theirs coming into the new Congress. A little hard to know what the president's position is going to be on this. You know, he doesn't have a history of being terribly dogmatic about, you know, health care. So, you know, he may be. I'm open to some of these changes, but we'll have to see. I think to answer your question directly, not affecting our strategy, I think from a lobbying perspective on the issues that I enumerated, the industry has a pretty much of a consensus lobby. We are joined with our not-for-profit peers in lobbying for all these things. So I think the industry's position will be pretty clear, and I think Democrats will be receptive. So we'll see how the president comes out of this.

I mean, their traditional school of thought is, you think about Congress doing, waiting to the very last minute to do things, so those supplemental payment cuts don't occur until 2028, so you could theoretically develop a scenario where you've got to wait until the fourth quarter. Yesterday, one of our policy guys that did a fireside chat said he thinks the Democrats are going to be looking for a win early, and one thing they might do is... We're going to attack these two items, the subsidies on the ACA, and potentially also push off a year or two the DPP cuts. You guys hearing anything? I know it's early, but have you heard anything about either of those two directions?

Yeah, I mean, I'll let Darren weigh in. He tends to follow these more closely than I do. But I would say that... Yeah, I mean, I think that's, you know, again, I think a strong possibility. And certainly there's a history, as you know, AJ, you've been doing this as long as I have, of, you know, Congress delaying and deferring and sort of kicking down the road, you know, some of these issues. So, you know, they're certainly not out of the question, you know, from, I think, as we think about what might happen.

Yeah, no, AJ, I mean, you know, I've always put this in terms of the last major entitlement cut that we, you know, we had, and you and I were there when it occurred in BBA, and, you know, the midterms obviously altered the course of that legislation, and not sure that it'll play out exactly that way, But there clearly was the midterm was the pivotal point to alter the course of those entitlement cuts that were on the table back in the late 90s. And it feels like there's that potential here. I'm not exactly sure, as Steve said, how they'll tackle it and whether Lloyd House will participate in sort of the move.

All right. Um... One last thing that sort of happened in the last week or so that I wanted to just slip in here was the outpatient payment rate got finalized. I know there's been some discussion about whether those 340 B cuts would actually go through. Ironically, that's sort of the fact that they did largely go through with not much of a revision. It ends up accruing positively. Do you all, do you want to, maybe there's some new people in here that don't understand that, but maybe it's worth a minute on that. But have you sized what that potential boost might be from that?

Yeah, so I think in our previous public disclosures, we've talked about if the rule, you know, the preliminary rule held, you know, we'd get about an 8% or 9% increase, which it didn't hold, and we're getting that on the outpatient side. We've previously disclosed, because the inpatient rule came out a while ago, that that was going to result in about a flattish increase for us, because even though the increase itself was a little bit bigger, the broader increase was a little bit bigger, Some of the specifics, wage index, et cetera, into the nuance of these things, you know, we were disadvantaged by. So kind of flattish on the inpatient side, up 8% or 9% on the outpatient side, blended. We get back to kind of the historical Medicare rate increase of about 2% to 3%. So I think, you know, that's kind of steady as she goes, you know, for next year for us. Okay.

Volumes were... Solid adjusted emissions growth up 4.9% in 3Q, and I think you pointed to strength across your market. So when you drill down on that, was it underlying volume growth in the markets, the bed capacity additions kicking in, other things going on worth highlighting?

Yeah, I think probably the biggest metric impacting that was we did disclose that in the quarter, emergency room visits were up 4.6%, and because the majority of our admissions come from emergency room visits, those metrics are usually tied together. So, real strong emergency room visits, which I think is a reflection of both the success of our freestanding emergency department initiatives. We've got 37 freestanding emergency departments around the country. They've really helped to drive our ER volume. But, you know, ER volumes at our hospitals have been strong as well. We did open and talked about opening in the second quarter 177 new beds amongst three facilities in our acute care portfolio. That contributed another 20 basis points, I think, to the strength in our acute volumes, but probably those two issues are the most significant.

Your volume growth stood out, but volume growth's been reasonably solid across the board, but surgeries have been under some pressure. Can you comment on what you're seeing there, and do you think this is temporary, or do you think we'll start to see a turn in that in the fourth quarter and beyond?

Yeah, so I think as your question suggests, A.J., the sort of skew towards medical versus surgical was pretty much industry-wide, and then most of the providers disclosed metrics. I mean, I think our volume metrics were probably a little bit better than our peers, but the broad trends were similar. And there have been a number of different explanations. I think some of our peers have offered the suggestion that the decline in exchange patients and the loss of elective volume from those exchange patients contributed to kind of softer procedural and surgical volumes. I think when we look at our data, we find that at least our exchange population is not very elective-centric. They're very ER-centric. They don't have a lot of elective procedures. So we don't think that's driving sort of the softness and surgical volumes for us. Instead, you know, we tend to characterize it as more of just a continuation of a trend that we've been seeing for decades, quite frankly, which is procedures, certain procedures moving out of the hospital setting, both in and outpatient procedures moving out of the hospital setting and into alternate site settings. Could be ASCs, could be physician offices, etc. You know, we cited, I think, GI and certain orthopedic procedures as probably the most obvious places where that's happening. And I added, I think, on the call, you know, just kind of a little bit of an anecdotal sort of example of, you know, with GI procedures, even when we get an emergency. Or a GI patient in our emergency room, which there are examples of that, difficult for us to get a GI surgeon into the hospital to take that patient. And sometimes we're faced with having to transfer that patient out because we just can't get a doctor to come in and treat, or it's so expensive to get a doctor to come in and treat or be on call. So, you know, even when we're getting business in the emergency room and some of these specialties, GI again being most notable, we sometimes can't treat them. So I think that's what's really contributing to it. The other thing, you know, and I know Darren pointed this out in an earlier meeting that we had today, is to some degree the strength in our ER visits and the strength in our medical admissions, you know, has sort of exacerbated that gap between medical and surgical. I'm not sure that surgical procedures are so weak. They were down, I think, 0.7% in the first quarter, but compared to medical procedures, which are up over 5%, that gap is sort of bigger than it historically has been.

And I know in the case of universal health, there's some big concentrations you have geographically. Have you seen, is it sort of similar trends across the board, or Las Vegas, Southwest Texas, Southern California, has there been a divergence? How would you describe your geographic footprint and how it's trended in some of these trends we're talking about?

Yeah, I think, you know, as I said earlier, volumes have improved as the year has progressed. I think it's been a pretty broad-based improvement geographically, you know, across specialties. We've highlighted some specialties like cardiology and urology and neurology that have been particularly strong. But no, I think geographically pretty broad-based. And one of the things I think we're looking forward to in Q4 is that the Vegas market, which I think, as you point out, is by far our biggest market, had a pretty soft Q4 last year and a busier flu season last year. Nevada was one of the very few places that had a less than busy flu season. So I think the comparisons in Vegas in this year's fourth quarter are going to be more favorable.

I'm thinking about that fourth quarter trend. There's been this debate this year about seasonality and whether maybe because of the way people have traded on the exchanges down to bronze plans, maybe some of what's going on in the commercial markets, higher deductible plans, whether we would see some buildup in demand and then people hit their co-pays and deductible limits and start. You know, pushing procedures into the fourth quarter to get ahead of benefit resets in January. I don't know whether you can track that from your scheduling or anything like that. Are you seeing any of that phenomenon start to develop here?

So I think the phenomenon that you described is not a new phenomenon. I think every year within our broader commercial population, we generally see an acceleration of procedures starting around this time of the year and into maybe the first half of December as patients who have satisfied their co-pays and deductibles may shift elective procedures, colonoscopy or whatever. We're into the current year. You know, because it makes, you know, financial sense for them to do so. The argument or I think the suggestion that, you know, you highlighted was that the idea that in the exchange population and the shift of metal tiers, et cetera, we'd see more of that this year. As I was saying earlier, at least within our exchange population, we don't see a lot of elective procedures. So, you know, I don't think it's our expectation that there'll be a significant shift in elective procedures. And certainly, at least up to now, it's not one that we've detected, but also, again, not one that I think we're really anticipating.

Okay, okay. And overall, in your exchange volume, I know... Similar to what others have reported, you were down roughly 17% in Q3, and I think what you've described is consistent with expectations. Is there anything about the acuity, the bad debt consideration, the mix of uninsured, insured trends relative to your expectations on how the whole exchange dynamic would unfold this year?

Yeah, so if you recall, in our original 2026 guidance, we projected an unfavorable impact from the decline in exchange patients of $75 million, and I think for the most part, the assumptions that we made to get to that number have largely played out. As you suggested, the decline in exchange volume, 15 to 20 percent, the shift of most of those patients to uncompensated has played out. The one thing that I think we had an expectation of was that a small percentage of those patients would get other commercial insurance. They'd get other commercial insurance from their employer or in some way, you know, get some other commercial insurance. That has really not played out. And the decline in exchange business has translated almost on an exact one-for-one basis to an increase in uncompensated or uninsured volumes. And as a consequence, after the second quarter, we increased that annual estimate of the impact from $75 million to $85 million, really because of that one specific change. But I think other than that, the exchange dynamic has largely played out the way we originally anticipated.

Okay. And your payer mix dynamic of uninsured, is that primarily to the extent there's been a little bit of an uptick in uninsured, has that been around the exchange, or are you seeing anything beyond the exchanges that are impacting your payer mix?

No, I think it's that, again, I'm going to say one-for-one exchange between exchange patients and the client in exchange patients increase in uncompensated. I think other than that, you know, our Medicare volumes are up a little bit. Our Medicaid volumes and commercial volumes are up not quite as much. But, you know, again, I don't think any of those other payer mix changes I would describe as significant. Okay. Okay.

Any quick update on commercial negotiations on the acute side, how they stand? Are you seeing any difference in terms or rates as you move into 27?

I don't think so. You know, we earlier in the year sort of, you know, laid out our... You know, kind of models for the two segments, and on the acute side, sort of talked about our blended pricing in the intermediate term, increasing in that 3% to 4% range, and I think, you know, when you adjusted in the third quarter for the exchange volumes and out of period DPP in the med-surg mix, I mean, I think we were in that, maybe the lower end of that 3% to 4% blended range. So I think, you know, our contractual... Commercial contractual increases are sort of coming in where we expected.

Okay. On the behavioral health side, you saw some volume improvements in 3Q. I know there's been a big focus on investing and staffing over the last several years, certainly several quarters. Is that the principal driver of what's helping pick up? Is the demand still very robust in that space? It's just a matter of getting the staffing or any other things to call out there?

So, yeah, I think it's a couple of issues. You know, certainly the staffing issue is one. You know, during the pandemic, we really faced some staffing constraints, some pretty exacerbated staffing constraints. And I think, you know, since the pandemic has ended, as your question suggests, we've invested in hiring, in recruitment, and as well as in retention. And I think all those metrics have been improving. For a while, I think our headcount as recently as several quarters ago was up by over 4% when volumes were maybe up only 1%. I think in the last quarter, when our patient days were up roughly 2%, I think our headcount was up about 1.5%. So those two numbers have, you know, I think gotten to be more in line. The investments, I think, have, you know, now began to decelerate. And I think going forward, we're going to see, you know, staffing and headcount mirror more the, you know, the volumes. I think the other dynamic in helping our volumes is that, you know, outpatient volumes are beginning to increase a little faster than inpatient. I think we believe that, I had alluded to earlier in my comments, the acquisition of Talkspace. I think Talkspace and its virtual capabilities are really going to help us accelerate our outpatient growth over the next several years. So, behavioral volumes, which have been good, you know, I think for the year and at sort of the high end of our 1% to 2%, you know, patient day, adjusted patient day range of volume growth, and I think we were a little bit over that in Q3, I think we're expecting that the real upside to that range over the next several years is going to be on the outpatient side. So we've begun to see, I think, you know, the... Thank you. You know, the green shoots of that and expect to see more in the coming quarters.

Right. And AJ, I would just put a finer point on that just numerically. So outpatient visits in third quarter were up 3%, so a little bit more than patient day growth. Obviously, our outpatient revenue mix is still relatively small. If you take the pro forma effect of Talkspace, which has been growing their sessions at a much higher rate than ours, it would have added about 200 basis points to that outpatient visit growth. And, you know, we're optimistic that the outpatient visit growth can even do better than that. So that'll hopefully play out over the next year or two. Thank you.

When you think about the margin profile of The behavioral health division. Do you think there's an opportunity to get back to historical margins? How are you thinking about the progression of margin recovery in that business?

Yeah, and I think it's in some ways or many ways tied into the previous question, the previous conversation, AJ, in the sense that, you know, the emphasis on growing outpatient, and to be fair, our behavioral business for most of its history has been an inpatient-centric business with something like 90% of our revenues coming from inpatient revenues. The growth in outpatient, I think, accomplishes a number of things. Number one, it's a reflection of our desire to meet patients where the demand is. You know, more and more patients, and quite frankly, more and more payers, more and more employers would prefer, if it's possible, to have their patients treated on an outpatient basis. And so we want to meet those needs and the ability now to offer a virtual alternative for those patients who prefer that, I think, is a huge issue there. But the other thing is that the outpatient revenue business in behavioral is much less Medicaid-centric than the inpatient business. And so I think it tends to carry a higher margin. It's more commercial. It's more Medicaid. It carries a higher margin. It's not as exposed to some of the Medicaid cuts that we talked about earlier in the chat. And so I think as we think about improving behavioral margins over the next several years, the fact that our investment in staffing has sort of leveled out and is steadier and more predictable, and the fact that outpatient should be growing faster than inpatient, I think will contribute significantly to margin improvement in that business.

So I want to just take a minute on Talkspace. You've had it for a couple months now. Any surprises, any things that you're seeing there that were different than what you expected going in? It is the principal opportunity just directing more UHS patients as they're discharged to talk spaces at one of the... The primary drivers of growth and improvement here, or what's going to get you to that second half of next year, starting to see the synergy and revenue benefits kick in?

So I think there are a significant number of opportunities, but I think what we would identify as probably the most significant and probably the most easily capturable at the outset is the idea that A significant number of inpatients who are discharged from our inpatient-centric facilities require follow-up outpatient care. You have to think about, you know, patients who are inpatients in a behavioral hospital are acutely ill. Often chronically ill, and, you know, when they leave the hospital, it's not as if they're fully recovered, they're no longer schizophrenic, they're no longer addicted, etc. You know, and so they often require follow-up care. Historically, the follow-up care that we've been able to offer has been limited in a couple of significant ways. It's been limited geographically. Most of our outpatient facilities historically are on our campus of our inpatient facility or close by, and if a patient lives an hour or two or three hours away, that's often not convenient for them for an outpatient program that's going to be three days a week or five days a week. And being able to offer patients like that a... Virtual alternative is really a game changer for us going forward. The other issue is that we've often been constrained by simply not having enough therapists. So we discharge a patient, we have a therapist running an outpatient program on our campus, and it's a defined five-day-a-week or three-day-a-week, nine to 12, whatever the issue is. And if that didn't work for the patient, you know, that was a problem, and he or she would, you know, seek that care elsewhere or maybe not get the care, which was probably not good for anybody. But again, having the virtual option, having a panel of 6,000 therapists that Talkspace has really allows us, again, not just the virtual option, but, you know, a much larger group of therapists to be able to call on. And therapists, quite frankly, who often are willing and anxious to work. At night, on the weekends, you know, different sort of hours are more flexible with their schedules than some of our, you know, full-time employees who devote a significant amount of their time to our inpatient care.

Okay. We talked a little bit about this at the beginning, but I want to circle back on, you talked at this point, as you resized the exchange headwind for this year in the second quarter, it's been tracking in the back half. How are you thinking about next year, and is there another incremental headwind, or we're just anniversarying what you've seen this year? How do we think about that?

Yeah, so I think, as you know, AJ, that's been a matter of debate. So there are some people who suggest that there's going to be a significant amount of further premium increases next year, and therefore that will result in further declines in exchange business. But there have been other sort of folks who've suggested that the lack of coverage is hurting some people, and there's going to be some effort for them to re-enroll and some effort by the plans to re-enroll some of those folks who lost their coverage. We don't know. Honestly, we don't know. And I think we've assumed simply that we've got about a $15 million headwind going into next year on the exchange decline, the enrollment in exchange, because of the fact that it accelerated during the year. So we had about a $35 million negative impact in the first half of the year, $50 million in the second half of the year. The $50 becomes the run rate for next year. So that's about a $15 million headwind. In terms of any other impact from the exchange enrollment, I think we're going to have to address that in February when we give our guidance once we see more of the enrollment data and enrollment metrics that play out next year.

And on the Medicaid-related headwinds, I think you've said $175 million to $200 million of headwind from non-recurring supplemental payments you've got this year, catch-up payments that don't recur next year. Is that? I mean, I guess you have some visibility on that, but it's hard to react that quickly. Can any of that be offset through efficiencies or other things, or how should we think about that?

Yeah, I mean, and I know we're out of time, so, you know, there's a question I think that I could spend some greater amount of time on. No, I think there's a bunch of things that I think we're reacting to. We talked a little bit about the shift to outpatient and behavioral and how I think in many ways that, you know, tries to mitigate some of that impact. I think there are a bunch of efficiencies that we're generating in our business, you know, particularly technology-driven efficiencies. We've spoken in previous quarters about some of the efficiencies we're driving in our revenue cycle in both the acute and behavioral business as a result of technology, AI, and otherwise. We're beginning to just develop some, I think, clinical applications for new AI technologies that I think should drive, I'll say, lower length of stay in the acute business. So hopefully get to talk to people a little bit more in more detail about those opportunities. But yeah, I think there's a significant number of offsets or potential offsets to those Medicaid supplemental cuts if they hold.

I'm going to take O's prerogative and ask one more question here. With the share price where it is, the valuation, by historic standards, pretty discounted, frankly. So you guys have been active on the buybacks. How do you think about that going forward, capital deployment? Should we assume the pace of buyback stays the same? Is there any thought about stepping that up?

So I think it certainly, at a minimum, stays the same. I think our cash flow has improved. We've talked a little bit about the fact that our CapEx spending will begin to decline fairly measurably beginning next year as we finish up these big hospital de novo projects. That's probably a couple of hundred million dollars of additional cash flow that likely goes to share repurchase, and we may choose to accelerate beyond that. We agree with the observation that, you know, we're trading at a historically low multiple, and they're generally fairly bullish about the prospects of the company. So, you know, feel like our share buyback program is a pretty, you know, positive investment at this point. Okay.

All right. Well, I really appreciate Universal Health participating in our conference. Next up in this room is Bright Spring, and that'll be at 1015. Thanks, AJ. Thank you.