Universal Health Services, Inc. (NYSE:UHS) Q4 2023 Earnings Call Transcript

Universal Health Services, Inc. (NYSE:UHS) Q4 2023 Earnings Call Transcript February 28, 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 Fourth Quarter 2023 Universal Health Services Earnings 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, 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 and we welcome you to this review of Universal Health Services results for the fourth quarter and to December 31, 2023. During the conference call, we’ll be using words such as believes, expects, anticipates, estimates and similar words that represent forecast 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 would 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 $3.16 for the fourth 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 $3.13 for the quarter ended December 31, 2023.

Marc Miller: Our acute hospitals continue to experience strong demand for their services in the fourth quarter. With adjusted admissions increasing 5.6% year-over-year. Overall surgical volumes were solid as well, increasing 4% year-over-year. Net revenue per adjusted admission, which has lagged for much of the year, increased by 3.7% as compared to the fourth quarter of 2022, as acuity trends and pressure from payers have started to stabilize. Meanwhile, the amount of premium pay in the quarter, which declined from a peak of $153 million in the first quarter of 2022, was $67 million in the fourth quarter of 2023, similar to what it was in the third quarter. For the full year 2023, our strong acute care revenues were largely offset by elevated expenses, especially physician subsidies, which resulted in flattish margins for the full year.

During the fourth quarter, same facility revenues at our behavioral health hospitals increased by 7.2%, driven primarily by a 6.1% increase in revenue per adjusted patient day. The patient day growth in the quarter was greater at our acute behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day to relatively robust levels consistent with our year-to-date experience. Additionally, as we discussed last quarter, we continue to see a negative impact of Medicaid redeterminations in certain states on behavioral health volumes, although it appears that impact has also begun to stabilize. With 8% revenue growth, same-facility EBITDA for our behavioral hospitals has increased approximately 9% for the full year of 2023 compared to 2022.

Steve Filton: We also note that in the fourth quarter, we recorded approximately $18 million in connection with the recently approved Mississippi Hospital Access Program covering the six-month period of July through December of 2023. Our cash generated from operating activities was $452 million during the fourth quarter of 2023, as compared to $297 million during the same quarter in 2022 and $1.268 billion during the full year of 2023, as compared to $996 million during 2022. We spent $743 million on capital expenditures during 2023, which was consistent with our original forecast for the year. For the full year of 2023, we acquired $525 million of our own shares pursuant to our repurchase program. Since January 1, 2019, we have repurchased more than 26 million shares representing almost 30% of our shares outstanding as of that date.

As of December 31, 2023, we had $701 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility.

Marc Miller: The core operating assumptions underlying our 2024 operating results forecast, which was provided in last night’s release, largely reflect the historical pre-COVID trends in the respective businesses. We anticipate that volumes in our acute segment will moderate from the elevated 2023 levels, but conversely, acuity and pricing in our acute business will increase, and for the full year, both metrics will resemble the patterns we experienced before the pandemic. Despite the continuing shift of services from inpatient to outpatient settings and pressure from payers to restrain reimbursement increases in a variety of ways. We expect continued improvement in premium pay labor trends and general cost trends that will remain largely stable in 2024.

Specifically, physician expenses, which were a major headwind in 2023, are expected to grow by the overall inflation rate in 2024. As noted in our press release, our 2024 operating results forecast includes an additional $149 million of Nevada supplemental revenues, which were approved by CMS in late December and disclosed by us in an 8-K filed in early January. We believe demand for our behavioral services remains robust and our same-store adjusted patient day growth in 2024 is forecasted to exceed the 2.1% growth we experienced in 2023. A significant driver of behavioral volume upside is due to our success in filling vacant positions. But we acknowledge that specialty workforce shortages in certain markets continue to be an obstacle to even more volume growth.

In both our business segments, we were pleased that measures of patient satisfaction and quality of care increased in 2023 and we are focusing on continued improvement of these metrics in 2024. We are pleased to answer questions at this time.

Operator: Thank you. [Operator Instructions] Our first question comes from Ann Hynes with Mizuho. Please go ahead.

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Q&A Session

Ann Hynes: Hi. Good morning. I just want to ask you about the Two Midnight rule. I know that throughout the year, you had a lot of denials for these short-stay inpatient stays. Did that get better in Q4 and do you actually think one of the large national managed care plans is saying they actually think hospitals might have billed early and start benefiting Q4? Do you actually think that happens? Did you receive actually a benefit in Q4 from kind of early billing for this regulatory change that’s starting in January 1, 2024? And also, can you tell me what your guidance includes for any potential benefit for this change, for this and also for Medicaid redetermination considering there’s like a big growth in the health exchange market? And are you assuming any kind of positive pay and makeshift benefit in guidance? Thanks.

Steve Filton: Yeah. So, as Marc commented in his prepared remarks, I think, what we saw in Q4 was improved revenue per admission — per adjusted admission in the acute business, which I think we attribute to a combination of increasing acuity, but also at least stabilizing pressure from payers. Again, I think we saw for much of 2024, excuse me, for 2023 and payers being more aggressive as their medical loss ratios were rising, et cetera, in a variety of ways, including denials and patient status changes, which would include recasting patients from inpatient to observation, et cetera. I don’t think we changed our billing practices during the quarter, but I think all you’re seeing is, effectively, I think, we’re starting to anniversary some of that more aggressive behavior of the payers in the fourth quarter.

As far as sort of how we’ve guided, again, I think, as Marc said in his remarks, I think, we’re assuming that in the acute segment, that volumes moderate a little bit in 2024 and that acuity pricing improves. So we returned to kind of what I would consider to be a more historically normative model of mid-single-digit growth in acute care, maybe 5%, 6% growth, split pretty evenly between price and volume. And I think what that really means is, we’re being a little conservative about volumes, which have sort of been running hotter than that, but we’re being a little bit more aggressive about pricing, which has been running less than that. But it’s not like we have included in our guidance a specific impact from sort of how payers will use the Two Midnight rule differently going forward, et cetera.

We believe there may be an incremental opportunity there, but I don’t think we necessarily feel it’s material until we really see the behavior on the part of the payers change.

Ann Hynes: Okay. Great. And just one follow-up. You talked about in your prepared remarks that the labor shortages are still impacting volume. Is this in both segments or is it mainly behavioral and maybe how much do you think your volume is being held back because of labor?

Steve Filton: Yeah. I mean, so as we’ve said, I think, throughout the last several years, it’s been a very tight labor market and I think it’s affected the two businesses differently. On the acute side, we’ve generally been able to fill all of our necessary positions, but obviously often at a higher cost using a temporary label and traveling nurses, et cetera. Although, as we indicated in our prepared remarks, those numbers have declined significantly. On the acute side, excuse me, on the behavioral side, in contrast, in a number of cases, we’re simply unable to fill our positions over the last several years and it has curtailed our volume growth. Again, I think our basic guidance for next year is mid-single-digit growth, probably, in the behavioral segment, that means, 6%, 7%, 8%, again, split pretty evenly between price and volume.

In the behavioral segment, I think that means we’re being a little bit more conservative about price, which has been running hot the last couple of years and a little bit more aggressive about volume, which has been relatively soft this year. I think, Marc said, our patient day growth in 2023 was 2.1%, so our guidance assumes something greater than that. But we acknowledge that in some markets, in some hospitals, there are positions that we still have difficulty filling. I don’t know that we can say precisely, but we do think that we could run higher volumes if, in fact, we could fill all of our positions, but we know that’s not a realistic outlook at the moment at least.

Ann Hynes: Great. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from Justin Lake with Wolfe Research. Please go ahead.

Justin Lake: Thanks. Good morning. I wanted to ask you first about the 2024 guide. The — specifically, Nevada ends up at the high end of the range you gave before, obviously, a great tailwind, ex that, it looks like EBITDA growths at the midpoints in the 4% range, too. Just trying to understand, I think, we’re probably only splitting hairs a little bit, maybe expected 1%, 2% better than ex-Nevada. Just curious if there were any kind of one-timers in 2023 where it’s not really apples-to-apples that you want to point out or anything within the guidance. For instance, Marc mentioned in a tough comp on inpatient, how — like maybe you can tell us what you think the EBITDA by business is going to grow and any thoughts on why that’s maybe 1% or 2% shorter than kind of typical?

Steve Filton: Yeah. So, first of all, Justin, I mean, I think, that there’s a series of arguments being made that excluding the $150 million increase from Nevada or quite frankly excluding any of our Medicaid supplemental payments is really an appropriate way to look at the business, because I think what we would argue quite strenuously is that, one of the reasons — one of the significant reasons that our margins and earnings have lagged over the last several years is that Medicaid reimbursement in particular has not kept up with elevated costs, whether that’s the labor costs across both businesses or the physician subsidy expense that Marc referenced and the acute business in his remarks. So, in our minds, the Nevada increase specifically but these Medicaid supplemental programs in general are simply bringing us back to adequate rates that at least partially compensate us for some of these increased expenses.