Universal Health Services, Inc. (NYSE:UHS) Q1 2024 Earnings Call Transcript

Universal Health Services, Inc. (NYSE:UHS) Q1 2024 Earnings Call Transcript April 25, 2024

Universal Health Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Universal Health Services First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Steve Filton, Executive Vice President and Chief Financial Officer. Please go ahead.

Steve Filton: Thank you and good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the first quarter ended March 31st, 2024. During the conference call, we will be using words such as believes, expects, anticipates, estimates; and similar words that represent forecasts, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2023. We’d like to highlight just a couple of developments and business trends before opening the call up to questions.

As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $3.81 for the first quarter of 2024. After adjusting for the impact of the item reflected on the supplemental schedule as included with the press release, our adjusted net income attributable to UHS per diluted share was $3.70 for the quarter ended March 31, 2024. Our Acute Hospitals continue to experience strong demand for their services in the first quarter with adjusted admissions increasing 4.5% year-over-year on a same-facility basis. When combined with the net revenue per adjusted admission increase of 4.6%, our Acute Care Services net revenues increased by 9.6% during the first quarter of 2024 as compared to the first quarter of 2023.

Despite these increases, we believe that both volumes and acuity in March were adversely impacted by the timing of Easter and Spring Break, which occurred in March of this year compared to April of last year. In connection with a previously disclosed newly implemented Medicaid Supplemental Reimbursement program in Nevada, our Acute Care Hospitals located in the state recorded approximately $38 million of aggregate incremental income during the first quarter of 2024. Meanwhile, premium pay in the quarter was $68 million as compared to $86 million in the first quarter of 2023. During the first quarter of 2024, same-facility net revenues in our Behavioral Health Hospitals increased by 10.4%, driven primarily by an 8.2% increase in revenue per adjusted day.

Adjusted patient day growth in the quarter was 2.0% over the prior year quarter. We believe the patient day volume was muted somewhat by the aforementioned calendar timing issues. Our cash generated from operating activities increased by $106 million to $396 million during the first quarter of 2024 as compared to $291 million during the same quarter in 2023. In the first quarter of 2024, we spent $209 million on capital expenditures and acquired 700,000 of our own shares at a cost of approximately $125 million. Since January 1, 2019, we have repurchased almost 27 million shares, representing 30% of our shares outstanding as of that date. As of March 31, 2024, we have $733 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility.

I will now turn the call over to Marc Miller, President and CEO for closing comments.

Marc Miller: Thanks Steve. In our yearend conference call, we said we envisioned 2024 as a year of continued strength in both of our business segments. And during the first quarter of 2024, both segments increased their operating margins when compared to the comparable quarter of 2023. We anticipated that Acute Care volumes would likely moderate to a degree or remain robust compared to historical levels. We also believe Acuity trends will continue their recovery trajectory. In our Behavioral segment, we anticipated the patient day volumes would gradually improve over the course of the year, returning to a more historically normal level of growth in the 3% range. We noted that both of our business segments have experienced a significant increase in Medicaid supplemental payments, which are helping to compensate for several years of inadequate reimbursement levels that has failed to keep up with the costs we had to incur to properly care for our patients.

Overall, we’re pleased with the first quarter results. We are now happy to answer questions at this time.

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Q&A Session

Operator: Thank you. At this time, we’ll conduct a question-and-answer session. [Operator Instructions] Our first question customer line up Justin Lake of Wolfe Research. Your line is now open.

Justin Lake: Thanks. Good morning. First question on your Acute Care volumes in the quarter. Just to your points, Steve, I think it’s pretty clear the calendar had some impacts January, February stronger, March weaker. So, I’m curious if you can maybe share with us what you were seeing monthly or maybe kind of Jan, Feb versus March? And then how does April kind of starting to look versus March? You’re seeing it kind of back to January, February levels are somewhere in between? And secondly, we know you got a bunch of Medicaid dollars in Nevada. Curious what ran through the behavioral business in the quarter? For instance, Mississippi, I think had out a program that was put in, can you give us some color on the impact of those Medicaid provider tax dollars in Behavioral? That’d be helpful as well. Thank you.

Steve Filton: Okay, I try and tackle a bunch of different issues there. So definitely Acute Care volumes and Behavioral volumes softened in March. I think as a result of the Easter/Spring Break timing. We’re seeing some recovery in April. I would say April is probably volume-wise somewhere in between the January, February run rates and March run rates. And I think that’s what we would expect. I mean the shortfall in admission and elective activity, surgical activity that we saw in March, I think we would largely expect to make up not necessarily completely in April, but mostly through the second quarter. And it seems like we’re on track to do that. As far as the Medicaid dollars, the one thing I would point out is we probably had in the quarter on the Behavioral side, $10 million to $15 million of out-of-period.

Behavioral dollars that is we’re catching up most of them 2023 as programs sot of refine their calculations, et cetera. So, I think that’s the major point in terms of the activity. Obviously, we disclose in our 10-Ks and 10-Qs a great deal of detail about these Medicaid supplemental payments, and we’ll update that disclosure in the 10-Q that will file in a week or so. Operator, we can get the next question.

Operator: Thank you. Our next question comes from the line of Ann Hynes of Mizuho Securities. Your line is now open.

Ann Hynes: Hi, good morning. So, ,obviously you beat consensus EPS and the EBITDA, meaningfully. Can you tell us what you beat versus your internal expectations? It’s my first question. And my second question is inpatient grew higher than outpatient in the quarter. Can you let us know how much is from the Two-Midnight rule? Thanks.

Steve Filton: Thanks, Ann. Yes, I mean, our internal budget for the quarter was not far off from consensus, I think maybe was a little bit higher than consensus. So, maybe 2 or 3 percentage points higher than consensus, but obviously, it was a successful quarter both in terms of the third-party expectations as well as our own. As far as the Two-Midnight rule and impact on inpatient acute volumes, as best as we can tell, it did not have — and I think the question is, is there a change in payer behavior that’s resulting in a measurably increased amount of inpatient activity versus observation. And our own data as well as we use a third-party to help us adjudicate a lot of these of, sort of, call them claims that are on the bubble of being inpatient or observation.

We use a third-party to help us with that. And I think both our internal resources and our third-party consultants tell us that they’re not seeing a significant or measurable change in the behavior of our payers that’s really impacting our inpatient activity. So, I would say that in our minds, most of the growth in Acute Care volumes in the quarter is exclusive of any change in payer behavior.

Operator: Thank you. Our next question comes from the line of Stephen Baxter of Wells Fargo. Your line is now open.

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

Steve Filton: So, in terms of your first question about Behavioral patient days — Behavioral patient day growth, I think as you alluded to in your question, it improved slightly from the pace of the last few quarters, our expectation is that it will continue to improve during the year. Incrementally, I think Marc mentioned that our underlying guidance for the year assumes we’ll get to like a 3% patient day growth level. What gives us that confidence is simply that, as we’ve said, many times over the last several years as we believe the underlying demand is there. That’s evident in the amount and volume of inbound inquiries we get on the Internet and our 800 numbers, et cetera. And it’s really about our ability to staff sufficiently to be able to treat that volume.

We’ve mentioned a few other think dynamics that have muted that volume a little bit in the last few quarters, including some specific residential treatment facilities that we believe continue to improve including the impact of Medicaid disenrollment, which I think we think is stabilizing, et cetera. So, I think it’s all those factors together that give us the confidence that Behavioral volume will continue to grow incrementally throughout the year. Your second question was around the verdict in a malpractice case in Illinois that we disclosed in an 8-K a few weeks ago. That verdict was as we noted in the 8-K, unprecedented, it was unprecedented, both in terms of our own history and cases with similar fact patterns, it was unprecedented in terms of verdicts in that specific jurisdiction, et cetera.

And so we think there still is a great deal of uncertainty around how that specific verdict will be ultimately adjudicated and as a result, other than the disclosure that we had in the 8-K and in the press release, we’ll have in our 10-Q, we haven’t really had any measurable impact on our financial statements until there is some level of greater certainty around what the ultimate outcome will be. From an insurance perspective, we disclosed in our Qs and Ks, our insurance coverage by year. This is a 2020 incident we disclosed that we had $250 million of commercial insurance for that year. The bulk of that insurance around $225 million is still available for coverage.