Universal Health Services, Inc. (NYSE:UHS) Q3 2023 Earnings Call Transcript

Universal Health Services, Inc. (NYSE:UHS) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good day, and thank you for standing by. Welcome to the Universal Health Services Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s 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, CFO. Please go ahead.

Steve Filton: Thank you, and good morning. Marc Miller is also joining us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2023. During this conference call, we will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and Risk Factors in our Form 10-K for the year ended December 31, 2022, and our Form 10-Q for the quarter ended June 30, 2023. We’d like to highlight just a couple of developments and business trends before opening the call up to questions.

A team of healthcare professionals in lab coats and masks meeting at a hospital ward.

As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $2.40 for the third quarter of 2023. 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 $2.55 for the quarter ended September 30, 2023. During the third quarter, same facility revenues at our behavioral health hospitals increased by 7.6%, primarily driven by a 6.5% increase in revenue per adjusted patient day. The patient day growth in the quarter was greater at our acute care behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day beyond the already robust levels we’ve been posting for several periods.

Additionally, as we have anticipated in our original 2023 guidance, we’re beginning to see a negative impact of Medicaid redeterminations in certain states on behavioral health volumes. With 8.3% revenue growth, same-facility EBITDA for our behavioral health hospitals has increased approximately 10% during the first 9 months of 2023 compared to the comparable prior year period. Our acute hospitals experienced strong demand for their services in the third quarter with adjusted admissions increasing 6.8% year-over-year. in part because the volume growth was skewed somewhat to lower acuity procedures, overall revenue growth was 7.5%. While overall surgical volumes increased about 3% from the prior year quarter, there was a continuing shift from inpatient to outpatient.

Additionally, we note that managed care behavior has become more aggressive in 2023 as it relates to denials and patient status classification changes. Meanwhile, the amount of premium paid in the third quarter was $69 million, reflecting a 15% decline from the amount in the previous several quarters. The continued robust increase in acute volumes is the major reason the premium pay has not declined further. It’s worth noting that our average hourly rate, which includes premium pay was slightly lower than in the third quarter of 2022 — in 2023 as compared to the comparable prior year quarter. Our cash generated from operating activities was $815 million during the first 9 months of 2023 as compared to $699 million during the same period in 2022.

In the first 9 months of 2023, we spent $537 million on capital expenditures and acquired $2.7 million of our own shares at a total cost of approximately $367 million. Since 2019, we have repurchased approximately 26% of the company’s outstanding shares. As of September 30, 2023, we had $721 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. Despite what remains a difficult operating environment, our consolidated results continue to track our revised earnings guidance. As we anticipated, acute care volumes have continued their recovery trajectory and have gradually begun to resemble the patterns we experienced before the pandemic. As Steve has previously commented, we recognize the need to counter the increasingly aggressive behavior on the part of our payers and seek appropriate price increases to offset the impact of inflation on our cost structure and to seek further contractual protection to ensure we are properly reimbursed for the level of care provided to our patients. We previously highlighted the upward pressure on physician expense, which tended to run at a rate of about 6% of revenues, pre-pandemic but is running closer to 7.6% in 2023.

In our behavioral segment, we have been pleased with our strong pricing and related earnings growth to date but acknowledge significant upside opportunity in our existing occupancy rates, particularly as we continue to improve our recruitment and retention metrics. As previously disclosed, we expect our operating results for the fourth quarter of 2023 to include revenues earned by our hospitals in connection with the Florida Medicaid Managed Care directed payment program. In addition, it is worth noting that we continue to believe a new Nevada state directed program, which we have previously disclosed appears to still be on track for 2024 implementation with a potentially materially favorable impact on our Nevada hospitals. We are pleased to answer questions at this time.

Operator: [Operator Instructions]. Our first question comes from Justin Lake of Wolfe Research.

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Q&A Session

Justin Lake: Appreciate all the detail. A couple of questions on 2024. One, the — just — I know it’s early to give guidance, but just wanted to hear your view Steve, on headwinds, tailwinds. And specifically, Marc, the — I appreciate the comments on Nevada that it does sound fairly material. Wanted to get some color, historically, when a state goes to CMS and tries to put one of these programs in place, can you talk a little bit about timing and probability? Have you ever seen a state be unsuccessful. Have you ever seen CMS turn one of these down and say, I know you have the money, but we’re not going to match type of thing. Can you give us some color there, historical background?

Steve Filton: Sure. Just in terms of sort of the first part of your question, in terms of 2024 guidance, Justin, as you know, we don’t — won’t formally give our 2024 guidance until our fourth quarter earnings call at the end of February. I think it’s fair to say that we continue to believe that the underlying metrics of the two businesses. As Marc kind of alluded to in his remarks, every sort of passing quarter, continue to resemble more of our pre-pandemic operating environment. And I think broadly, that’s sort of the way we’re thinking about 2024. I’m not going to go through a detailed list of puts and takes for 2024 at this point. Obviously, the most significant one is the one that you mentioned. This supplemental program in Nevada, which we’ve been disclosing in our Qs and Ks for a number of quarters now.

We believe the program has been submitted by the State of Nevada to CMS. We believe that the state has been talking with CMS so that they believe that the program meets the CMS requirements, and I think they’re anticipating CMS approval. Based on our experience with like programs, we don’t believe there’s anything in the program that CMS should fundamentally object to. But obviously, it’s not over until there is CMS approval. I think the state’s expectation is that approval is likely forthcoming early in 2024. The program is supposed to be retroactive. It’s created to be retroactive to January 1 of 2024. We are still waiting for the state to publish an impact file, which would show their estimate of the impact on individual hospitals. People have been using a number to, I think, estimate the impact on UHS in total in Nevada in the $100 million to $150 million range.

And based on our understanding of the program mechanics, that doesn’t seem like an unreasonable estimate. So again, the outstanding dynamic is CMS approval. We think it’s probably forthcoming early in 2024. But obviously, we’ll continue to keep people updated as we learn anything new.

Operator: Our next question comes from Jason Cassorla of Citi.

Jason Cassorla: Steve, I wanted to go back to your commentary on the Medicaid redeterminations impact on behavioral volumes. I guess are you able to work with those patients to help get them back on the coverage like you can with the acute care business. And as a result, see that volume headwind as more of a transitory issue? Or how should we think about the puts and takes on the redetermination impact on volumes for behavioral specifically?

Steve Filton: Yes. And to be perfectly candid, Jason, I think we’re guesstimating to a degree, the impact. What we have noticed during the quarter is that in certain states and probably for us, most notably, Texas, certainly being the largest one, and it’s been reported that I think there have been at least 1 million people redetermined off the rolls in Texas. But what we’ve noticed in a place like Texas is that the number of calls and inquiries that we’re getting that qualify from both a clinical and financial perspective, meaning there’s adequate coverage available [indiscernible] have declined a little bit in the quarter. We don’t know, I think, precisely that, that’s related to Medicaid redeterminations, but we sort of draw that conclusion kind of based on historical trends and metrics.

As has been reported, it seems like a lot of these redeterminations are for administrative reasons. And a great number of these people will be able to get back reenrolled. And when they reach out to us, we certainly can help them do that. We can also try and help them to get other coverage. But a lot of those things take a little bit of time. So I think our perspective on this is it’s probably, in large part, kind of a temporary dynamic. But I think we feel like there is a reasonable chance that our volume growth, particularly in our residential business amongst our trial on adolescent population might have been greater in the third quarter, had it not been for the impact of Medicaid redetermination, again, especially in Texas, but a handful of other states as well.

Jason Cassorla: Great Helpful. And then maybe just as a quick follow-up. Just on capital deployment. It looks like share repurchase activity picked up in the quarter. I guess just given the backdrop, how are you thinking about the uses of your free cash flow moving forward in areas where you perhaps see the best returns just at this juncture? .

Steve Filton: Yes, I would just remind people that we have slowed our share repurchase a little bit in Q2. It seems like ages ago, but there was the threat of a government shutdown at the time, and we were concerned potentially about some short-term cash flow crunch issues. But obviously, that got resolved at least for the time being, and we resumed our sort of regular share repurchase activity in Q3. And I think we generally sort of think about using the bulk of our free cash flow for share repurchase going forward.

Operator: Our next question comes from Stephen Baxter of Wells Fargo.

Stephen Baxter: Can you expand a little bit on the managed care environment? Any way to quantify, I guess, how much of a drag on your realized commercial rates you’re seeing from these tactics like if you thought you were getting a 5% rate increase. Is that effectively now 4% or some other number, given the drag there? And would you say this is getting back to pre-pandemic practices as the environments normalize? I think you’ve talked something about that in the past? Or do you think this is something that’s kind of gone well beyond that?

Steve Filton: Yes. I think the way you frame the question, Stephen, is quite appropriate. I think that what we experienced or observed was particularly early on in the pandemic when health care utilization dropped dramatically. I think we felt like the managed care payers eased up quite a bit in what — sort of what their historically more aggressive utilization review, audits, denials, patient status changes, that sort of thing. I think as utilization picked up for the industry in 2023 and seem to be getting more back to normal and I think created some pressure on the MLRs for the managed care companies they got — they returned to sort of what I would describe as their historical practices when it came to again, denial and claims reviews and that sort of thing.

And I think that’s what we’re seeing. And I think the way it’s reflected is. And it’s difficult to quantify in a precise way, but our acute care revenue per adjusted admission, which was up only modestly in the quarter, I think we would have been higher had it not been for this behavior. Now I think to a degree, we view it as again, relatively temporary in nature. You saw that our accounts receivable days outstanding ticked up in the quarter. A lot of this is I think, sort of an extended process, meaning we’ll appeal a lot of these claims denials. We’ll work to collect a lot of these moneys. And I think we will collect a substantial amount of them down the road. But again, in the current period, it did weigh I think, somewhat on our acute care revenue per adjusted administered.