Steve Filton:

Good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2024. During the conference call, we'll 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, and our Form 10-Q for the quarter ended March 31, 2024. 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 $4.26 for the second quarter of 2024. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $4.31 for the quarter ended June 30, 2024. Our acute hospitals experienced a moderation of the demand for their services in the second quarter with adjusted admissions increasing 3.4% year-over-year and surgical growth flattening out. Overall, revenue growth was still a solid 6.6%. Meanwhile, expenses were well controlled. Specifically, the amount of premium pay in the second quarter was $61 million, reflecting a 15% to 20% decline from the prior year quarter. On a same facility basis, EBITDA at our acute care hospitals increased 37% during the second quarter of 2024 as compared to the comparable prior year quarter. And the increase was 20% if you exclude the impact of the incremental Medicaid supplemental payments in Nevada. During the second quarter, same facility revenues in our behavioral health hospitals increased by 11%, primarily driven by a 9.3% increase in revenue per adjusted patient day. Even after adjusting for Medicaid supplemental payments not included in our original 2024 guidance, same facility revenues increased by 7.2% and same facility EBITDA for our behavioral health hospitals increased 13% in the second quarter as compared to the comparable prior year period. Our cash generated from operating activities increased by $422 million to $1.1 billion during the first six months of 2024 and as compared to $654 million during the same period in 2023. In the first half of 2024, we spent $450 million on capital expenditures and acquired 1.1 million of our own shares at a total cost of approximately $195 million. Since 2019, we have repurchased approximately 30% of the company's outstanding shares. As of June 30, 2024, we had $1 billion of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. In our acute care segment, we continue to develop additional inpatient and ambulatory care capacity. We currently have 27 operational freestanding emergency departments as well as 12 more, which have been approved and are in various stages of development. Also, construction continues on our de novo acute care hospitals consisting of the 150-bed West Henderson Hospital in Las Vegas, Nevada, which is expected to open late this year. The 136 bed Cedar Hill Regional Medical Center in Washington, D.C. which is expected to open in the spring of 2025, and the 150-bed Alan B. Miller Medical Center in Palm Beach Gardens, Florida, which is expected to open in the spring of 2026. In our behavioral health segment, we recently opened the 128-bed River Vista Behavioral Hospital in Madera, California, and we are developing the 96 beds Southridge Behavioral Hospital in West Michigan a joint venture with Trinity Health Michigan, which is expected to open later this year. I'll now turn the call over to Marc Miller, President and CEO, for closing comments.

Operator:

[Operator Instructions] One moment for our first question which comes from Ann Hynes of Mizuho Securities. Your line is open.

Steve Filton:

Yes, Ann, so I think we had mentioned before that I think from our perspective while we may understand that individual states are contemplating either new programs or expansion of existing programs, we tend to really not discuss them until there is some formal submission of a program to CMS and sort of pending approvals with -- from CMS within the state and both the Tennessee and Washington D.C. programs sort of fall into that category. As you suggest, Tennessee is a state in which we have exclusively behavioral business. Washington D.C. is a geography where we have both acute and behavioral business although the Medicaid supplemental program would be primarily beneficial to the acute business. Both programs we have been told that the expectation from state of the district is that the programs are likely to be approved either later this year or early next year. Both programs would be retroactive. We believe Tennessee would be retroactive most likely to July of 2024 and that D.C. would be retroactive to October of 2024 this year. And again, none of these things are guaranteed and they all depend on CMS approval. Those are the two I'll call them incremental or additional programs we would disclose. But we certainly are aware of other states and where expansion of programs or new programs are at least being considered.

Steve Filton:

Yes. So, we've disclosed in our 10-Q that we think the potential benefit of our prior 10-Q the potential benefit in Tennessee would be between $42 million and $56 million annually. The potential benefit in Washington D.C. is probably in the $80 million to $90 million range annually.

Operator:

And one moment for our next question. And our next question will be coming from Stephen Baxter of Wells Fargo. Your line is open, Stephen.

Steve Filton:

Yes. I think that the dynamics surrounding behavioral volumes have remained pretty much the same. You are correct in your description. We -- behavioral patient days on a same-store adjusted basis were up I think about 2% in Q1. We expect it be to equal and maybe better than slightly in Q2. We did not. I think the issues are very familiar to what we've been talking about for some time, while we've made I think a lot of progress on filling our labor vacancies around the country. We still find in very specific markets and geographies that certain labor positions sometimes nurses, sometimes therapists and counselors, sometimes nonprofessionals and mental health technicians are difficult to place and can sometimes limit capacity or our ability to admit patients. I think we've discussed in the last few quarters the fact that Medicaid disenrollments, particularly in the Southern states, Texas and Mississippi, Louisiana, Arkansas have had more of an impact on our business as people have gotten disenrolled from Medicaid and it's taken them some time to get either reenrolled in Medicaid or into a commercial exchange program, if they get into a commercial exchange program they often have the high co-pays and deductibles which make them meeting their financial requirements difficult behavioral hospitals. And finally, we have a handful of behavioral facilities that struggled with very specific issues in 2023, I believe they've all improved but are doing so at a somewhat slower pace than we originally imagined they would. I think ultimately we still believe that that 3% patient day growth target that we embedded in our original 2024 guidance is an achievable target, probably not in terms of full year growth. But I think we believe that by the end of 2024, we should be growing at that rate and we view that as a sustainable rate of growth going forward.

Ben Hendrix:

Thank you very much. Just wanted to see if you could elaborate a little bit on the moderation in acute demand and your surgeries flattening out with trending towards pre-COVID levels. Any trends you can call specifically in specific categories and any payer mix implications there, and how you're seeing that develop? Thank you.

Ben Hendrix:

Thank you.

A.J. Rice:

Hi, everybody. Maybe just first question and then I have a follow-up. First question on the updated guidance, I know you didn't raise the full year guidance after the first quarter and there was some outperformance, and then you've had some outperformance in the second quarter. And then there's also the supplemental payments maybe that weren't in the original guidance. Can you just parse out how much is just capturing year-to-date trends? How much is an adjustment for supplemental payment information? And then have you made any adjustment to your second half expectations in this updated guidance?

A.J. Rice:

Okay. There's been a lot of discussion this quarter about impact of two-midnight rule Medicaid redeterminations and so forth. Can you just maybe make some comments about what you're seeing there and how -- I know two-midnight rule wouldn't affect the behavioral business, but the redeterminations maybe it had some impact on both sides. Any updated thoughts on what you're seeing in those two areas?

A.J. Rice:

Okay. Thanks a lot.

Q – Justin Lake:

Thanks. Good morning. Steve, first on the guidance, in terms of just kind of isolating that DPP bucket, I think you started the year at about $810 million in the 10-K that you expected to get this year. You updated it to $860 million, with the ones with the 10-Q. Just curious, what that number is right now that you expect to get this year. So let's just do that in my first question. Then, I've got one for Marc. Thanks.

Q – Justin Lake:

Okay. Do you have a round number, you could share with us? Like does it go to -- do you think it goes much higher than $900 million? Or if I add those two numbers in there?

Q – Justin Lake:

Okay. So, if we look at your guidance raise of $215 million, you started the year at around 810. If it goes to low to mid-900s, is it maybe fair to say that, maybe half give or take of that guidance raise is coming from these supplemental payments? That a reasonable way to think about the rest [indiscernible]?

Q – Justin Lake:

Okay. And then Marc, you talked about the improvement in the hospital business in terms of the margins. Curious, if the -- there's still a potential way to go to get back to pre-COVID levels. What do you think a reasonable target is when you sit down with your hospital operators? And do you have a trajectory or a plan, at which you kind of time line is probably the best way to put it in terms of when you expect to get there? Maybe you could share a couple of the steps, you expect to take to get that. Thanks.

Q – Justin Lake:

Great. Thanks.

Q – Jason Cassorla:

Great. Thanks. Good morning. Maybe just to ask on the acute pricing and mix in the quarter up 3.5% or so, but kind of normalizing for the supplemental payment dollars this year maybe only up kind of slightly year-over-year. Is that just simply a function of that lower acuity volume continue to return? I know you made comments around surgical volume dynamic in the quarter? Or just maybe anything you can give on acuity and payer mix trends within a Q kind of outside of the supplemental payment programs would be helpful.

Q – Jason Cassorla:

Okay. Great. Thanks. And then maybe just a follow-up. With the $1 billion increase to the share repo program, I know you accelerated a little bit in terms of share repo activity in the quarter maybe with the Illinois lawsuit kind of dynamics going on. But with the increase there in the repo program, is the expectation that you're still aiming to spend around $500 million $600 million on share repo for this year? Or how should we think about the share repurchase dynamics? Thanks.

Q – Jason Cassorla:

Great. Thank you.

Sarah James:

Thank you. I was hoping you could talk a little bit about the embedded adjusted admissions growth baked into your guidance for the second half. Are you assuming that first half levels stay flat or decelerate? And could you talk a little bit about what the drivers are for that assumption?

Sarah James:

Got it. And on the behavioral side, do you think about getting to that 3% as mostly capacity driven? And do you have any updates on how you're hiring practices are going? Thanks.

Sarah James:

Thank you.

Andrew Mok:

Hi, good morning. Just wanted to follow up on the Medicaid supplemental payment programs. First can you give us a sense where these programs stand relative to average commercial rates? And second how does the higher Medicaid reimbursement change the relative attractiveness of patients in that payer class? Is this a category that you would lean into from a referral and service line perspective? Thanks.

Andrew Mok:

Great. Thank you.

Pito Chickering:

Hey. Good morning guys. So, on the acute labor side, can you talk about where turnover is today where hiring is and how to think about those in the back half of the year as well as contract labor? And also as length of stay comes down due to better staffing, how does length of stay reductions help your EBITDA growth?

Pito Chickering:

Okay. There's been some negative press recently including the Senate Finance Committee on results of care. Are you seeing that impact to your referrals at all?

Pito Chickering:

Perfect. Great. Thanks so much, guys.

Michael Ha:

Thank you. So on behavioral volumes still yet to slowly rebound pricing remains powerful. I was wondering if you could help us break out roughly how much of the volume headwind is Medicaid redeterminations versus labor-related constraints? Is it 50-50 maybe more of redetermination related? And would it be fair to say that redetermination impact tails off into the back half of this year that it creates a positive backdrop? And against easier second half volume comps that should help the bounce back naturally in behavioral volumes. And then, if you could discuss the source of behavioral pricing strength I think you said 7.2% as the supplemental payments. So if you could just test some of the dynamics there is it what's happening in par pricing that would be helpful. Thank you.

Operator:

And one moment for our next question. Our next question will be coming from Kevin Fischbeck of Bank of America. Your line is open.

Steve Filton :

Yes, Kevin. So I think -- and part of the reason that I think we have been confident that behavioral volumes should and could increase to sort of more historically normative levels is that we believe the underlying demand is strong and we measure that in a couple of different ways. We measure it sort of from a macro basis, there's a lot of sources of incidence of behavioral illness and the need for treatment in a whole variety of diagnoses, including opioid illness and many others. And again, we believe that virtually across the board demand for behavioral treatment continues to increase. And so this really becomes an issue of can we -- what do we have to do to satisfy that demand and that sort of plays into the labor dynamic? Yes, we are. We continue to have net hires. I would say, our -- we have had positive net hires for between the last 18 and 24 months. Again, it's been incremental and a little slower than we thought, but we continue to add that. I think one of the major areas of focus more recently is we had a question earlier, I think, for Pito about acute care turnover. Behavioral turnover tends to be probably twice what acute care is. And that creates a lot of inefficiency. So even though we're hiring a lot of people they're leaving. And again, I think, this is not just a UHS issue. I think it's an industry-wide issue. But we are very focused on the things that we can do and want to do to reduce that turnover rate, which includes mentorship programs and educational opportunities and career development opportunities so that when we hire people they really have an incentive to want to stay with the organization to stay with the facility. And I do believe that we can reduce our turnover rate, which I think is a practical objective. That will be one way in which we'll be able to satisfy some of that outstanding behavioral demand that we've really been unable to satisfy as much as we'd like to in recent periods.

Steve Filton :

Yes. So I think it's sort of a catch 22. I think we dramatically reduced the pace at which we were adding beds during the pandemic, because we had a view that well what's the point of adding new beds if we can't staff the beds that we already have. I think as we make more and more progress, and again, this is an individual facility individual market kind of calculation in each phase, but as we increase our ability to fill those vacancies et cetera and sort of see a path and a ramp to being able to fill those vacancies, I think, we're going to be more willing to resume the pace of bed additions that we were running at before the pandemic.

Operator:

And one moment for our next question. And our next question will be coming from Whit Mayo of Leerink Partners. Whit, your line is open.

Steve Filton:

Yes. I mean, I think what you saw during the pandemic was people leaving subacute industries and that obviously included behavioral, but it included, I think, lots of other sub-acute industries like nursing homes and skilled nursing facilities and home health. And they were leaving those industries to work in acute care settings where they were able to make a significant premium to their existing salaries. And I think there's always been for sure a gap and that acute care compensation rates were always higher than sub-acute care compensation rate, but that gap widened dramatically during the pandemic. I do think it has since narrowed. And so really -- and that's I'm trying to answer your question in the sense of. So it really got to be an issue. It didn't matter when a nurse told us -- a behavioral nurse told us that she was leaving to make three times for salary in an acute care setting. Raising her salary by $2 an hour et cetera was not going to have any impact which is why I don't think you saw dramatic pressure on our behavioral rates during the pandemic and which is why as you're suggesting I think you're seeing moderation actually in our salaries and wages per patient day. Because the way we're solving this problem is not necessarily through higher premium payments and incentive payments. Although, we certainly did that during the pandemic and we do it in markets where we still think it's necessary. But I think our real focus is on how do we make people feel that working in a behavioral setting is rewarding is creating career opportunities for them is a place that they're going to be valued et cetera. And I think that's our focus. Look certainly and particularly with the availability of some of these Medicaid supplemental payments et cetera in some markets, if we believe that paying higher compensation and -- could be an answer we'll pursue that. But again I'm going to suggest that I think in most cases this is not a problem of throwing money at it just automatically solves it. But we'll invest more money where we think it makes sense.

Steve Filton:

I mean we've talked about the health plans and time to time. I think like any provider-sponsored health plan and this is really an acute care dynamic. We only operate the health plan in markets in which we have acute care hospitals. And it is a way for us to create narrow networks in which our hospitals participate. It's a way for us to create further alignment with Medicare physicians particularly in plants that are focused on Medicare Advantage patients. And we think ultimately even though the plan operates largely at a breakeven level currently that it's still less expensive and greater, sort of, return investment than some other options like physician employment or other similar options although we certainly do those things as well. And so, yes, the health plan continues to do that. It continues to provide us again I think a narrower network and a funnel of patients in certain markets and we'll continue to operate it with that aim.

Operator:

Our last question will be coming from Joshua Raskin of Nephron Research. Joshua, your line is open.

Steve Filton:

As far as the second question I don't really know the answer to that Josh. As far as the first one goes because I think commercial exchange reimbursement tends to be somewhere between Medicare and commercial probably a little closer to Medicare I would say I don't have this data right in front of me, but my guesstimate would be the 5% of admissions would be something pretty close to what percentage of revenue would be because I would think that sort of midpoint between commercial and Medicare is probably about the midpoint of our reimbursement.

Steve Filton:

Yes. Yes. I'm sorry, but yes.

Operator:

We did get an additional question from Ryan Langston and that's Ryan Langston of TD Cowen. Your line is open, Ryan.

Steve Filton:

Yes. I would say generally the ramp of the facility to breakeven is probably in the 6-month to 12-month range and then to what I would consider to be divisional averages probably the 18-month to 24-month range. In markets like Las Vegas that time frame tends to be compressed. Again I think there's little impact this year in 2024 because the facility that we're opening in Las Vegas will be very late in the year. So I don't think it's going to have much of an impact on earnings this year. And we'll get more precise feedback on the impact of both West Henderson and the Washington D.C. facility when we give our 2025 guidance early next year.

Operator:

Okay. And I'm showing no further questions. I would now like to turn the conference back to Steve Filton for closing remarks.

Operator:

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Marc Miller:

Thanks, Steve. In our year-end 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, but remain robust compared to historical levels. We also believe the acuity trends will continue their recovery trajectory.

Operator:

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

Ann Hynes:

So obviously, you beat consensus EPS and EBITDA meaningfully. Can you tell us what you beat versus your internal expectations? Is my first question.

Steve Filton:

Thanks, Ann. Yes, I mean, our internal budget for the quarter was not far off from consensus. I think maybe it 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 2-Midnight Rule and the 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 [Indiscernible] call them claims that are on the bubble of being inpatient or observation. We use a third party to help us with that.

Operator:

Our next question comes from the line of Stephen Baxter of Wells Fargo.

Pito Chickering:

Can you talk about the acute OpEx changes that you saw in this quarter? How much did [Indiscernible] increased year-over-year? And is this the right level going forward and any other pressure points [Indiscernible] should be thinking about?

Steve Filton:

Yes. So what I would say is we've often pointed out, and I think there are a couple of analysts on this call who will routinely point out that over the last several years, especially our original forecast of supplemental payments have tended to only increase as the year has gone on as states either implement new programs or refine their existing programs and calculations and I think that's our expectation for this year as well.

Operator:

Our next question comes from the line of A.J. Rice of UBS.

Steve Filton:

Yes. So again, a few different issues here. I'll try and address them discretely. Yes, I mean I think clearly, what the income statement reflects as you alluded to, A.J., is more operating leverage and efficiency on the labor line. I think it's a result of a few different things, premium and pay.

Benjamin Hendrix:

Just a quick follow-up on the Illinois litigation. I appreciate that this is unprecedented and different, in fact, and jurisdiction from Acadia settlement, but that was also kind of equally unprecedented. I was just wondering if this is changing at all your approach to the RTC business, your strategy, capital allocation and how you expect to kind of grow in your approach to behavioral health over the long term?

Kevin Fischbeck:

I was wondering if you can talk a little bit about margins. I guess both segments saw some nice margin improvement in the quarter. You've talked about a significant margin opportunity in both segments of time. Just want to get a little more color update about how you think about build to an opportunity for margins, the pace of that margin improvement? And it does feel like -- and I don't know if this was in your original assumption, but it does feel like the supplemental payments are coming in maybe better than one might have thought a year or 2 ago. So I want to get your thoughts about how that might impact your view on where margins ultimately can be?

Steve Filton:

Yes. So Kevin, we have said for some time that we felt like the margin deterioration that we saw during the pandemic could and would largely be recovered in both business segments as we return to sort of more normal levels of growth, and I think you specifically have pointed out that acute care volumes broadly, not just ours, still haven't necessarily returned to prepandemic levels. So we still think there is a decent amount of runway there for continued acute care volume growth as well as behavioral volume growth, which I addressed in a previous question.

Operator:

Our next question comes from the line of Jason Cassorla of Citi.

Benjamin Mayo:

Steve, maybe just comment on the Medicaid rule that was released this week on state-based programs. Maybe too early to have much insight, but it seems like some positives and some less positive things. Just curious how your team and legal advisers are looking at this.

Steve Filton:

So West Henderson is scheduled to open late in the year, maybe in late November, December. So it shouldn't have much of an impact, there will be some level of preopening costs and then a month or 2 of probably operating losses as it opens. I think we didn't really highlight that in our call a couple of months ago, in part because I think we have a view that continued improvement of our hospital in the [renal market] will largely offset that. And as a consequence, neither was likely to have a material impact on this year's results.

Operator:

Our next question comes from the line of Sarah James of Cantor Fitzgerald.

Steve Filton:

Yes. So I actually think, Sarah, that the $68 million in premium pay in Q1 is pretty similar to what we've been running the last few quarters. You're right, we have talked kind of about a goal of getting into sort of the mid-50s. But I think what's prevented us from doing that is these really robust acute care volumes. And I'll make the point that the 4.5% adjusted admission increase in Q1 of this year is compared to, I think, in excess of a 10% increase in adjusted admissions last year's first quarter. So you're really talking about, I think, some pretty historically high acute care volume numbers.

Operator:

Our next question comes from the line of Joshua Raskin of Nephron Research.

Steve Filton:

Sure. So I think from a CapEx perspective, Josh, I think we continue to invest on the acute side in those areas where I think acute invasion hospitals really differentiate themselves, meaning emergency room services, emergency room capacity, surgical services, both in and outpatient, and again, for the higher acuity, higher-end services that we don't have as much competition in. But we also continue to invest in outpatient. We have a very successful freestanding emergency department initiative that has been underway for a number of years. I think we'll finish this year with probably 30 freestanding EDs around the country, whereas 5 years ago, I think we didn't have any, and we can also continue to invest in some freestanding surgical services facilities, freestanding imaging centers, et cetera.

Andrew Mok:

I think you commented that the quarter was above your internal expectations. You're expecting behavioral volumes to improve from here, and there's potential upside to initial forecast for supplemental payments. So just putting all those together, any updated thoughts on where you think you sit within the unchanged guidance for the year.

Steve Filton:

Yes. I think I forget if the comments that I made were specifically about the acute segment. But I think the trends more similar in both. I think I commented in some conferences earlier this quarter that the behavioral business got off to a bit of a slow start with some bad weather -- in bad winter weather in states that don't necessarily usually expect bad winter weather in the south central part of the country. But [April volumes] recovered in late January and certainly in February, but I think have the same calendar issues as the acute segment did in March, softer volumes, et cetera, particularly in that child and adolescent population, which tends to really soften when school is out.

Operator:

I'm showing no further questions at this time. I would now like to turn it back to Steve Filton for closing remarks.

Operator:

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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.

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.

Operator:

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

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.

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.

Operator:

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

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. So, in my mind, ignoring them as we think about our growth year-to-year is not necessarily the correct way of doing it. But I’ll try to answer your question the way you asked it. What I would say is, I do believe that, after a couple of difficult years and difficult operating environments and elevated costs, again, in labor, physician costs, just general inflation sort of across the Board, we’ve been a little bit cautious about our ability to expand margins. I would say that if we’re able to achieve the revenue targets that we’ve set in our guidance, we’d be hopeful that we could do better than the margins that are embedded in guidance. But as we’ve faced over the last several years, some of these expense increases have been a bit unpredictable, physician subsidies in 2023 are a perfect example. So I think we’ve been prudently cautious about how we look at the profitability growth in both businesses.

Steve Filton:

Yeah. So, look, I think, you make a good point. I mean, I think, if you look, and I appreciate your commenting on our disclosures, because I think we’ve provided probably more expansive disclosures in this area of Medicaid supplemental payments than any of our public peers. But if you go back, however many years you want to track it, it has, as you’ve suggested, an upward trajectory and that’s not by accident. I mean, I think it’s an acknowledgment by the states and by CMS that Medicaid reimbursement, again, in specific states, has really been inadequate and -- has really been inadequate over the last several years in an elevated inflationary environment with significant expense pressures, particularly in labor. And the states are providing these monies, not as bonuses for hospital providers, but quite frankly, as necessary supplemental reimbursement to keep them in a position, to keep the providers in a position to be able to provide absolutely necessary services to a population that otherwise will not receive them. So, quite honestly, there are other states that do not have these programs that are talking about adopting them. We don’t really disclose them until they get further down the road and sort of are submitted for approval and that sort of thing. But we know that conversations are happening in a number of other states. CMS, to your point, has certainly talked about the impact of the growth in these programs and has talked about, I think, limiting the growth. I don’t think they’re really talking about cutting back these programs, but they’re talking about capping the growth, maybe capping the growth so that Medicaid reimbursement can’t exceed commercial reimbursement. I don’t think we’re at risk of that in any of our states or just sort of capping the overall growth rate, et cetera. So I could see that happening where the rate of growth slows, but it strikes me that once these programs are implemented, the safety net hospitals that they are really designed to target become so reliant on them that it would be extremely difficult for the states and/or CMS to stop the programs or curtail them in a terribly material way.

Justin Lake:

Thanks, guys.

Joshua Raskin:

Hi. Thanks. Good morning. Question just started, I’m looking at the longer term as you sort of think about capital deployment. I’d be interested in your updated views on the relative attractiveness of the behavioral health and the acute care segments and specifically thinking, whether you believe either one of those segments has either a different growth or return profile one more attractive than the other?

Marc Miller:

I’ll just add one thing to what Steve said. We’re looking, and I obviously agree with everything Steve said, but we’re looking at more outpatient opportunities now than we probably have done in the past. And so I think more of them are being presented to us, and again, if we think that there are good returns there and that they make sense for increasing our success in our markets, we’ll continue to look at those and deploy more capital to outpatient, maybe at a greater percentage than we did historically.

Marc Miller:

In both things. Sorry.

Steve Filton:

Yeah. I mean, so we -- as you know, we’re opening a new hospital in Las Vegas late in 2024 in West Henderson. That’s on the heels of opening Henderson Hospital five years ago, if I’m getting my chronology correct and that’s been a very significant success. We’ve continued to expand our presence in South Texas and Riverside County, California, where we have significant market positions. We’re building a new hospital in Palm Beach Gardens, Florida. And one in the DC market where we’ve had a significant amount of historical success. So, and then, on the behavioral side, we continue to add beds and do joint ventures with non-hospital -- non-profit hospital partners. So, again, I think, there are lots of opportunities. I think, the challenge for us is to be judicious about where we do that. And to your point, Joshua, I mean, I think, our competitors are also investing in markets. I think HCA has invested heavily in Las Vegas as well, because it has been a very lucrative return market for both of us. So, we see that, it really varies by market, it would be difficult to characterize the sort of capital deployment of our competitors in a broad way. But yeah, we certainly see our competitors expanding as well, and again, our whole sort of view is we don’t want to chase what our competitors are doing, we want to really take advantage of the strong franchise positions that we have and build on those and earn greater returns by investing where we’ve had success.

Operator:

Thank you. One moment for our next question. Our next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Steve Filton:

Yeah. I think that the notion of contracting visibility in terms of the physician subsidy expense is a little bit flawed. The reality is 18 months ago, if you had asked us and asked, frankly, any acute care hospital in the country, you know, are your hospital based physician contracts locked in, do you have rates locked in? The answer would have been yes. And what we found were because of changes in the operating environment, in particular, the No Surprise Billing Act, et cetera, that made those businesses far less profitable. The providers of those businesses, the physician groups, the companies that were providing those services simply were unable to do it and they were coming to hospitals and saying, look, you either have to provide us greater subsidies or we can’t do this. There were a number of bankruptcies, et cetera. So what I will say is, I believe that over the last year and a half, most of our hospital-based physician arrangements have been recast. They’ve either been renegotiating with the incumbent providers. We’ve either gone out for RFPs and put in new providers or we’ve employed in some cases the physicians ourselves. We’ve done so, I think, really beginning late in 2022 and early in 2023, such that the increased costs of doing all that is now largely reflected in our financial statements and shouldn’t increase again dramatically in 2024. But I will say again, back to the comments that I made in response to a question that Justin asked, I do think that the volatility in that area is one of the reasons why we’ve been a little more cautious in our overall guidance in 2024, because I think, all hospitals would say, that was a cost that really surprised us in 2023. We think we have it under control. We think it’s much more stable going into 2024. But we’re certainly concerned about that popping again or happening again in some other areas.

Steve Filton:

Sure.

Steve Filton:

And I know your question was not directed at the behavioral business, but I would make the point that, we’ve done quite a bit of portfolio management in the behavioral business over the last five years or 10 years. If somebody wants to take our 10-K list of properties from 10 years ago, behavioral properties and compare them to today, you can see that they’re quite different. We’ve closed facilities, we’ve sold facilities, we’ve merged facilities where they’re underperforming and where we’re looking to increase efficiencies. We tend not to disclose that, because individual transactions are non-material, but there has been a fair amount of portfolio management on the behavioral side and then, again, we’re open to that. I think we’re ready for the next question.

Kevin Fischbeck:

Great. I was wondering if you could give us an update on where wage growth is across both the acute and the psych businesses today and to the extent that, labor is still a gating factor on the psych side of things. How do you think about the incremental return of just raising wages a couple of percent to potentially drive more volume back to the facilities? Thanks.

Marc Miller:

No. Well, the question is, we look quite often as to whether or not it makes sense to raise wages as a way to increase capacity and we have done that in certain areas. It’s not as easy as one might think, but we definitely look at that and we try to figure out if there are areas where that would make more sense. The other factor for us is we have high occupancy in a lot of these facilities. So we’re constantly looking and reviewing ways that we can add beds to the facilities to increase capacity. And one of the things when Steve talks about the portfolio rationalization that we’ve done on the behavioral side in the last few years, what that also allows us to do is spend less time on facilities that are not growing and really spend more of our time figuring out how to do programmatic growth, not just beds, but just changing program offerings at certain facilities and changes like that that we think will have a positive effect. So we’re doing a lot of that as well.

Kevin Fischbeck:

Okay. Great. And then I guess I just want to maybe push back a little bit on the guidance for acute care hospital volume growth, kind of just being more pre-pandemic growth rates of 2% or 3%. I guess when I look at your same-store volume growth going back to 2019 and just trying to get forward, I think, you’re only like about 4% above where you were in 2019 five years later, when you would normally be thinking you’d be growing 2% or 3%. So you’re still -- in 2019, we might’ve thought your volumes would be 10% or 15% above those levels. So, why is normal growth off of only 4% up like the right number? Shouldn’t there be more pent-up demand or normalization in demand within your markets while in normal growth?

Kevin Fischbeck:

I’m sorry. My question was kind of more around the volumes, like, it feels like to me, like your volume guidance, it feels like your volumes haven’t really rebounded to the long-term trend line yet. So I’m still not sure why you’re only growing normal. Wouldn’t you still be trending back to the long-term growth rate in volume? Shouldn’t you be growing fast in 2% to 3% for another couple of years?

Kevin Fischbeck:

Okay. All right. Thanks.

Jason Cassorla:

Great. Thanks. Good morning. I just want to ask on behavioral, you’ve talked in the past around the labor backdrop as the gating factor for bed growth. You’ve discussed the portfolio rationalization efforts. I guess occupancy rates are still some 200 basis points to 300 basis points below pre-pandemic levels, with labor improvement, I know you’re expecting volume growth to accelerate in 2024. Can you just give us a sense on what you’re contemplating on the behavioral bed growth side moving forward and maybe just the opportunities a little bit more around that expansion at current facilities against maybe perhaps the pipeline of JVs or potential M&A for behavioral business as well? Thanks.

Jason Cassorla:

Okay. Fair enough. And then just following up on an earlier question a bit, just curious on what your expectation around payer mix dynamics for acute next year, obviously, redeterminations, exchange growth. You’ve talked about this return of low acuity of Medicare volumes in 2023. Just any kind of expectation around how that trends into next year or into 2024? And then can you remind us what percentage of admissions are uninsured at this point, and if -- just given the backdrop, if you’re seeing any indication that those uninsured admissions could be picking up, just any color, that would be great? Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from A.J. Rice with UBS. Please go ahead.

Steve Filton:

Yeah. So just to clarify, A.J., the $153 million was the first quarter of 2022, not 2023.

Steve Filton:

So, yeah, that number -- obviously that number has come down considerably. I think we still think that there is -- we ultimately have talked about getting to a premium pay number in the $50 million quarter range. So there’s still $50 million or $60 million of opportunity. A lot of that is dependent on what happens to volumes. I think that premium pay has remained a little bit higher than we originally anticipated because acute volumes have been as strong as they’ve been. But, yeah, I mean, we certainly have the goal of further reducing premium pay. I’m not sure we’re going to get back to the pre-pandemic levels where it ran about $35 million a quarter, but we should be able to get at least part of the way there.

Steve Filton:

Yeah. So I think that would probably -- I’m doing this all the time. I think that would probably on its own be like a $30 million, $40 million improvement, because I think in the first half of the year, we were running about $85 million a quarter.

Steve Filton:

Yeah. So as I think somebody earlier has suggested, I mean, we did some pretty robust disclosure about these Medicaid supplemental programs in the 10-K that we filed last night. I’d refer people to that. But we have a table that shows the supplemental increase from 2023 to estimated 2024. It’s about a $200 million increase. Obviously, the $150 million of the lot is the biggest piece of that. But you can see a lot of the detail…

Steve Filton:

… if you take a look at that schedule. And as far as Medicaid redeterminations, I think, what we’ve said, A.J., is that in the states, which probably is most notably Texas on the acute side and some other Texas and some other southern states like Louisiana, Arkansas on the behavioral side, it’s largely affected the child and adolescent population from our perspective and that’s had a relatively minimal effect on the acute business, a bigger effect on the behavioral business. We’ve seen a softness, I think in the last six months of 2023 in our child and adolescent business in the behavioral business that we attribute to a large extent to these redeterminations. We think we’re sort of out of the works with that. The redeterminations for the most part or the disenrollments have taken place. We’re already starting to see some of these populations re-enrolled either in Medicaid or alternative programs like CHIP or in commercial exchange programs. So I think that we’re imagining that the impact of redeterminations in 2024 will be limited.

Operator:

Thank you. One moment for our next question. Our next question comes from Pito Chickering with Deutsche Bank. Please go ahead.

Steve Filton:

Sure, Pito. So again, I think, as we’ve commented, the strong behavioral pricing I think has really been driven in 2023 by two things. One is actual sort of softness in our residential and that’s where a lot of the child and adolescent businesses is. And so a higher weighting of acute patient days to residential patient days and that by definition sort of increases what we would describe as pricing the revenue per adjusted day. As we emerge from the disenrollment challenge, as we emerge from the handful of residential facilities that had particular regulatory challenges in 2023, I think, we’ll see residential growth starting to outpace acute growth and that will have a kind of muting effect on pricing. The other issue that we have talked about pretty consistently, I think, for the last 12 months or 18 months is, a pretty aggressive effort on our part to go back to payers, particularly in markets and in facilities where we are already capacity constrained and negotiate higher rates and that’s, I think, particularly managed Medicaid payers who have been giving us, I think, historically, less than adequate increases. We’ve had a lot of success doing that, but to some degree, we’re starting to anniversary that impact. So, again, while we are certainly going to continue to strive for the maximum increases we can get from our payers, our general sense of our 2024 budget is that, pricing and acuity will decline a little bit on the behavioral side, but be offset by increased volumes.

Steve Filton:

Yeah. Again, as I think I tried to frame it before, Pito, I think it is kind of a broad caution and conservatism that we’ve taken, but informed by the pressures of the last couple of years. And when we were sitting here in, a good example is the physician expense. When we were on this exact call a year ago, we were projecting a pretty big increase in physician expense, a $50 million, $60 million increase. It turned out to be twice that. So even when we’re aware of issues, et cetera, the last couple of years have created a little bit more volatility than we’re accustomed to. So I think we’re -- we were trying to account for some of that in what I view as a fairly cautious approach to guidance.

Steve Filton:

Yeah. I think that’s a hard question to answer, Pito, because it’s sort of, how do you define normal? We’re in a high inflationary environment, et cetera. I’ll just repeat what I said before. I believe that our view is if we can achieve the revenue targets that are embedded in our guidance, we’d be hopeful to bring out more efficiencies and therefore higher margins from the business than are currently reflected in the guidance.

Operator:

Thank you. One moment for our next question. Our next question comes from Whit Mayo with Leerink Partners. Please go ahead.

Steve Filton:

Yeah. I mean, there are a couple of individual facilities and markets that I think have been affected by IMD waivers. I would say that, broadly it has had probably not a material effect on this segment, but there are specific examples I could point to. But, yeah, no, I wouldn’t say it’s broadly a material impact.

Steve Filton:

Yeah. I mean, it really, I think, is the full continuum. We have always had what we call intensive outpatient programs in our behavioral facilities or Partial Hospitalization Programs, which are sort of a means of step down from the inpatient facility. But I think what we’re focusing now on, besides those programs, which we continue to maintain, is more sort of pure outpatient. In many cases, not necessarily even affiliated with an existing facility, et cetera, but standalone outpatient. And to your point, it’s the Medicare advantage, it’s the Medicare opportunity. But it’s also, again, we’re finding the need for behavioral care to be growing across all segments of the population and across all diagnoses, including addiction and others.

Operator:

Thank you. One moment for our next question. Our next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Steve Filton:

Yeah. I think those characterizations are fair. So if we’re talking about overall -- an overall pricing assumption in our guidance, 2.5% to 3%, we’re probably getting twice that on our commercial business, so 5%, 6%. And in terms of specifics about whether we’re able to cover increases in our physician subsidies, et cetera, that really varies contract by contract, et cetera. But the mid-single-digit commercial increases that you’re saying our peers are citing seems to be consistent with our experience.

Steve Filton:

Yeah. So I would highlight, I mean, we have a lot of technology investments, but I think specifically in behavioral, and we’ve talked about this before, we are implementing an electronic medical record in our behavioral facilities. That project is already underway. We are experimenting with and testing a number of technological solutions to more efficient patient grounding in our behavioral facilities where patients will wear something like an Apple Watch kind of device and we’re able to track their location and we’re able to track when we lay eyes on those patients, et cetera. So that’s improving the efficiency of our patients and in our behavioral facilities as well.

Operator:

Thank you. I’m showing no further questions at this time. I’d now like to turn it back to Steve Filton for closing remarks.

Operator:

Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.

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. 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.

Operator:

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

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.

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?

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? .

Operator:

Our next question comes from Stephen Baxter of Wells Fargo.

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.

A.J. Rice:

Maybe two things. Just to put a finer point on your revenue per adjusted admission trend in acute you're talking about MCO behavior. I think you also commented on volumes coming back tend to be a little lower acuity. Is there any way to parse that out? Do you think the underlying apples-to-apples pricing in acute care is still in that sort of 2% to 3% range. and how much are each of those being a drag. And then the flip side on the behavioral side, it looks like it's more of a volume question. And you mentioned Medicaid redeterminations, but there's been times when it's been constrained somewhat by staffing challenges. And just maybe comment on the underlying demand. This is still there to the same degree has been historically on the behavioral side.

Operator:

Our next question comes from Jamie Perse of Goldman Sachs.

Steve Filton:

Yes. So Jamie, the comment that we made in Q2 was that we had originally anticipated and what we included in our 2023 original guidance was that physician expense would be $55 million to $60 million higher in 2023 than it was in 2022. As it turned out, I think this has been a bigger issue than we anticipated, and I think virtually all of our peers anticipated around the country. And what we said is that we anticipated that the second half of the year would also reflect like another $55 million or $60 million increase over the second half of 2022. And we are tracking very closely to those numbers in the third quarter. So in other words, I don't think we've had a material sequential increase in our pro fees or in our physician expenses. Our expectation, what we said at the time was we thought -- not necessarily that physician expenses would absolutely flatten out in 2024. But certainly, that the rate of increase, which is running in the 35%, 40% range this year would moderate significantly. And while I think we were not prepared to suggest exactly what it would be right now, I think, something in the 10% to 15% range of increase would be sort of more of what we would expect. And it's really a function of -- the industry, I think, has largely sort of had to reset itself since the No Surprise Billing Act passed and the impact of that on the profitability of these physician billing businesses or physician services, the impact of the lower billings paves its way through the system. So what we're finding is we're replacing those contracts that are most expensive. We're putting them out to bid. We're in some cases, in-sourcing the service. We believe that we'll be able to -- through those activities drive greater efficiencies, and that's why we have this general view that 2024 will not be as volatile and will not have as many material increases as we saw in 2023. But certainly, as we get closer to our 2024 guidance, we'll have a better sense of that, and we'll give more detail. But again, at the moment, we're tracking for the back half of the year, sort of exactly where we said we'd be last quarter.

Steve Filton:

Sure. So the only hospital that will actually open in 2024 is our West Henderson facility in Las Vegas, which I think at the moment is scheduled to open either late in Q3 or early in Q4. So I think it will have a bit of a drag in our 2024 results. But given that it's relatively late in the year, given our historical success in opening hospitals in that market, I don't think it will be a tremendous drag. Again, as we get closer to our actual guidance, we'll put some more concrete numbers around that. But I don't think it should be terribly impactful to our 2024 guidance.

Philip Chickering:

Can I go back to Medicaid redetermination again for a second. Is this primarily inpatient or is it residential? And looking at the referral channels and basing in Texas, are you -- is there any of your patients in the ER that can't get discharged and inpatient behavioral because they don't have coverage or any other color on which channels you're seeing the referrals due to Medicaid redetermination in Texas.

Philip Chickering:

Okay. So just to make sure I understand that. So the number of inbound inquiries are basically the same, but the financial ability to pay was lower.

Philip Chickering:

Okay. Got it. And then a quick follow-up to Jamie's questions on the business pressures. Thanks for giving us this number is about 30% to 40% increase for this year, moderating sort of 10% to 15% for next year. I guess, what percentage of contracts are locked in either typically multiyear contracts? So what percentage contracts are already locked in for next year? Or you've already gone and in-sourced this group yourselves?

Operator:

Our next question comes from Sarah James of Cantor Fitzgerald.

Steve Filton:

Yes. I mean, so I've said before that it is virtually impossible for us to precisely say whether a particular procedure is a catch-up of something that was postponed or deferred during the pandemic. So in other words, when we schedule an elective surgery or an elective diagnostic test. We have no idea when that patient sort of originally contemplated that procedure or discussed it with their physician, et cetera. What we do know is that the volume of elective procedures clearly declined certainly in the early stages of the pandemic and they have been picking up since. And so we conclude and I think it's a reasonable conclusion that there is some element of catch-up. And to be fair, if you look at it, acute care adjusted admissions for us were up like 10% in the first quarter. Which was really kind of an extraordinary number. It's moderated a little bit in Q2, down to like 8%, which is still a very high number, moderated to a little less than 7% in Q3. Which, again, still a very robust number from a historical perspective, but seems to be moderating a little bit. Your question about how quickly it continues, how much is left in the pipeline. The truth of the matter is I'm not sure that anybody can answer that question with precision. I just don't know that, that data is out there in a meaningful way that anybody can capture. So look, when we, again, give our 2024 guidance, we will make some guesstimate based on trends and how it's going and what we think acute care volumes will look like in 2024. But I think broadly, our view is that those lower acuity volumes will continue to get caught up and moderate, and we'll get back to again, mid-single-digit acute care revenue growth that ultimately will be split between price and volume pretty evenly, whether that happens early in '24. Late in '24, I think that's yet to be determined. Your question about denials, particularly in the acute business, the issue that I think is probably, first and foremost, tends to be classification of patients between an inpatient admission and observation status. With obviously a patient who -- and this is frustrating for us because A lot of these patients are in the hospital for multiple days. But from the managed care perspective, don't meet inpatient admission criteria even though we're treating them for multiple days and maybe then getting paid for them as if they were simply an outpatient in our emergency room. But that's the main issue. We do get sort of flat out denials where an insurance company would say that a patient shouldn't have been treated at all. But the vast majority of issues that we have with insurance companies on the acute side are over patient classification between inpatient and observation.

Ann Hynes:

Can you just give an update on the behavioral hospitals that had some issues in Q2, how they are progressing -- I'm sorry, progressing back to normal emission trends. And also maybe to that same effect, I know in Q2, you hired a bunch of nurses that take a while to train and a while to ramp up. Can you talk about how that's going? And when you think that group of nurses will be able to take on a full patient load that we'll be able to see in the admission trends?

Ann Hynes:

All right. And I'm not sure if you said this, but can you just provide the contract on premium labor as a percentage of total labor for nursing and acute care?

Operator:

Our next question comes from Kevin Fischbeck of Bank of America.

Steve Filton:

Yes. I just think they're discrete issues, Kevin. I think again, Medicaid redeterminations, I think, again, in just certain geographies are creating, we believe, relatively temporarily a bolus of patients who lack coverage, who didn't lack coverage, let's say, a quarter ago or 2 quarters ago. And so where -- we seem to be turning more patients away in Q3 for lack of financial resources than we have had in the past. But again, we think that's sort of a temporary issue. The staffing issue tends to be more of an issue in the acute behavioral business just because we rely more on RMs in that patient care model. And so yes, I mean, the staffing constraint and the deflection issue in behavioral tends to be more skewed to the acute behavioral business than the residential business.

Steve Filton:

Yes. So two things. Number one, in terms of the first question, yes, I should have been clear this is the physician expenses really, as we've been discussing, it is really ER coverage, anesthesiology coverage and by definition, is an acute care issue, and those percentages were meant to be percentages of acute care revenue. Your second question about sort of isn't just like any other expense. I mean, again, as I was mentioning, I think in a previous response, I think what really drove this sort of immediate pressure and position expense and the timing of it was the passage of the No Surprise Billing Act. And what I think we all collectively learned was that these physician coverage businesses had relied on their profitability in large part for their billings to out-of-network patients. I'm not sure collectively, we have a full understanding of that. So when that ability was reduced dramatically by the No Surprise Billing Act, those businesses to the degree that they were run by third parties or even to the degree that hospitals were insourcing, became much less profitable, and we had to absorb those costs. I mean in our case, in almost all cases, we were just having to pay third parties more. But I think once that gets reset, I'm not sure there be pressure continues. I mean, to me, that's a onetime reset. I think that's what you're seeing play through our numbers in 2023, et cetera. I do think there's also an element, I mean, there is, I think, a finite -- there's a shortage of these kinds of doctors much like there was a shortage of nurses that we felt during the pandemic, and that exacerbated the dynamic a little bit. But again, I think that expense rose by 35% or 40% for us in 2023. I can't think of another expense that rose by anywhere near that amount. And so again, I think we have a view that this is a largely kind of onetime notion. That's not to say that there won't be pressure on physician expense next year that, as I said earlier, it couldn't increase by 10% or 15%. And something above the rate of inflation. But I just don't think we think that this is something that we're going to have to face 35% or 40% increases multiple years in a row.

Steve Filton:

Yes, I don't think anybody is suggesting that physician expenses are likely to decline anytime soon. I don't think that's anything we have suggested. Like I said, we said earlier, when people talk about what's it likely to be in 2024, I said a 10% or 15% increase is not an unreasonable way to think about it.

Benjamin Mayo:

I know you guys are still going through the planning process for 2024, but I just wanted to sort of dial in to maybe some of the top strategic priorities you have for the behavioral health business that might be different than some of the initiatives in prior years? You've covered your labor agenda pretty well on this call and the progress -- the small progress, I think, that you're seeing there. But just anything else you'd call out, any organizational changes, anything that gets you excited or less excited about next year?

Benjamin Mayo:

Got it. Steve, just looking at the guidance, I know that you're reiterating it, but my math, if I just apply very simple normal seasonality looking at the DPP program in Florida you can easily get to the high end of the range. And I know that you're very respectful of the volatile operating environment, but just sort of anything that I'm missing or any refresh views as you kind of look within the range and kind of how you feel like you're tracking next.

Operator:

Our final question comes from Joshua Raskin of Nephron Research.

Steve Filton:

Yes. So first of all, for us, Josh, all of these contract services have historically been outsourced at least ER and anesthesiology. We have, in the last 3 or 4 months, brought some of those services in-house where we thought it made economic sense to do it, but historically, they've all been outsourced. I think it's a very different dynamic. And I think again, it's very specific to these house-based physicians, anesthesiology, ER being by far the highest ones. But we're seeing it some in radiology, some in intensivist or labors or whatever. But clearly, ER and anesthesiology being the two largest. Our employed physicians who are just either regular primary care or specialists. I don't think they've been affected in a material way by the No Surprise Billing Act. Essentially, those physicians are in network with virtually all of the payers that we're in network with. So it's really not an issue with them. So this dynamic, I think, is very specific to the hospital-based physicians.

Steve Filton:

Yes. And again, I think I made those comments earlier. I mean, I think, yes, I think we think that in both cases, revenue growth, whether it's exactly in the beginning of 2024 later. But I think we think it moderates to sort of more historically normative levels. And I would also say a more historically normative split. So on the acute side, I do think volumes are likely to come down over time, but I think acuity will come up. And again, we'll get back to kind of mid-single-digit pricing. I think in behavioral, we're likely to see pricing moderate a little bit, but also see volumes come up and again, get to kind of mid-to-upper single-digit pricing or upper single-digit revenue growth. And in both cases, I think with the moderation in costs with physician expense on the acute side coming into better control with contract labor coming down and overtime coming down, it should put us in a position where we're back on that trajectory of getting -- being on a path to get back to pre-pandemic margins in both segments.

Steve Filton:

Thank you. We'd just like to thank everybody for their time and look forward to speaking with everybody next quarter.

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 second quarter ended June 30, 2023. During the conference call, we'll be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and 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 March 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 $2.42 for the second 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 $2.53 for the quarter ended June 30, 2023. Our acute hospitals experienced strong demand for their services in the second quarter with adjusted admissions increasing 7.7% over the prior year. Even though the volume growth was skewed somewhat to lower acuity procedures, overall revenue growth was still a very robust 9.7%. While overall surgical volumes were solid, increasing about 5% from the prior year quarter, there was a continuing shift from inpatient to outpatient. Meanwhile, the amount of premium pay in the second quarter was $75 million, reflecting approximately 10% to 12% decline from the amount in the previous several quarters. The continued robust increase in acute volumes is the major reason that premium pay has not declined further. It's worth noting that our average hourly rate, which includes premium pay, was 4% lower than the second quarter of 2022. On a same-facility basis, EBITDA at our acute care hospitals increased 16% during the second quarter of 2023 as compared to the comparable prior year quarter. During the second quarter, same-facility revenues at our behavioral health hospitals increased by 7.8%, primarily driven by a 6.2% increase in revenue per adjusted patient day. The patient day growth in the quarter was greater at our acute care -- our acute behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day beyond the already relatively robust levels we've been posting for several periods. With a similar level of revenue growth in the first quarter, same facility EBITDA for our behavioral hospitals has increased 12% in the first half of the year compared to the comparable prior year period. Our cash generated from operating activities was $654 million during the first six months of 2023 as compared to $478 million during the same period in 2022. In the first half of 2023, we spent $337 million on capital expenditures and acquired $1.4 million of our own shares at a total cost of approximately $192 million. Since 2019, we have repurchased approximately 20% of the company's outstanding shares. As of June 30, 2023, we had $946 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. In our acute care segment, we continue to develop additional inpatient and ambulatory care capacity. We currently have 24 operational freestanding emergency departments as well as three additional, which are expected to be completed and opened over the next six months and nine more which have been approved and are in various stages of development. Also, construction continues on our de novo acute care hospitals consisting of the 150-bed West Henderson Hospital in Las Vegas, Nevada, which is expected to open next fall; the 150-bed Alan B. Miller Medical Center in Palm Beach Gardens, Florida; and the 136 beds Cedar Hill Regional Medical Center in Washington, D.C., both of which are expected to open in 2025. In our behavioral health segment, we recently completed and opened the 120-bed River Vista Behavioral Health Hospital in Madera, California, and we broke ground on the 96-bed Southridge Behavioral Hospital in West Michigan, a joint venture with Trinity Health, Michigan, which is expected to open later next year. I will now turn the call over to Marc Miller, President and CEO, for some closing comments.

Operator:

Thank you. [Operator Instructions] Our first question comes from Jason Cassorla from Citi. Your line is open.

Steve Filton:

Sure. I mean I think part of what we're experiencing in -- certainly in the first half of this year is what both, I think, providers and payers have anticipated for some time, and that is during the pandemic, there was some amount of deferral and postponement of procedures. And I think what both providers and payers have been reporting in the last quarter or two is that we've seen an uptick in volumes, particularly lower acuity volumes, elective, and surgical procedures. Again, I think particularly skewed towards the Medicare population that probably was most prone to defer and postpone during the pandemic. It's very difficult for providers like us. And I think, quite frankly, for almost everybody, except for individual physicians to really try and precisely determine how much of current volume is an exhaustion of demand that was sort of postponed or deferred during the pandemic. I think the comment that we have made simply is that we had 10% adjusted admission growth in acute care in Q1, close to 8% in Q2. Those are really historically unprecedented numbers. So, our expectation -- and again, I think Marc's comments were in Q2, for the first time, we had kind of an apples-to-apples comparison with last year in terms of low COVID volumes. We're expecting, I think, volumes to moderate in the future, but also for acuity to rise and to return to sort of that mid-single-digit level of topline growth in acute care that has sort of long been the model. Whether that occurs in the next couple of quarters, whether we have a run of somewhat extended and enhanced volumes, I think is difficult for anyone to project. Obviously, it's been pretty strong for the last six months, early indications in July that remains that way. But we'll see. So, again, I think some of our caution about guidance in the back half of the year is also informed by this idea that we're not exactly sure at what pace acute care volumes moderate, but there is some sense if they will. But generally feeling pretty good about overall acute care volumes which did suffer -- at least non-COVID volumes, which did suffer definitively during the pandemic.

Steve Filton:

Yes. So we have certainly been talking about and anticipating that 2023 would be a challenging year when it came to this issue of physician subsidy expense. We talked about back in February when we gave our 2023 guidance providing like a $55 million to $60 million increase in our guidance in physician expense. The reality is the rate of increase is probably running at about twice that. I do think that this is to some degree, sort of a transitory pressure. These contract service providers who provide much of our specialty emergency room and anesthesiology coverage are -- many of them are facing pretty significant financial stress. There have been a number of high-profile bankruptcies in that area by these contract providers. And in this interim period, where we're having to replace or kind of substitute and either pay greater subsidies to our existing providers or to new providers or your question alluded to in source and hire these physicians ourselves, there's this sort of kind of onetime, hopefully, expenditure of money and dollars to make this transition. But at the end of the day, I think we have a point of view that there's x number of ER providers in the country, there's x number of anesthesiology providers in the country. And when this sort of current disruption settles out, those dollar increases like in 2024, will at a minimum level off and hopefully will actually decline. But we're not going to see this rate of increase over an extended period of time.

Operator:

Thank you, one moment for our next question. The next question comes from Ben Hendrix from RBC Capital Markets.

Steve Filton:

Yeah. Well, I'll go back to the point that Marc made earlier. The first quarter comparison was a bit anomalous because we were comparing kind of a low COVID volume in Q1 of 2023 with a very high volume in COVID quarter in 2022. So particularly on the behavioral side, that comparison was very favorable and volumes, revenue, EBITDA growth all looked very favorable in Q1. Q2 volume growth was a little more normalized, frankly, a little softer than we anticipated. I think that our acute behavioral volumes, and I made this comment in the prepared remarks, we're actually in line with our expectations, but the volumes in our residential treatment centers were somewhat lower than expectations as we kind of, delved into those numbers. It really seems like they were focused on a handful of facilities that we're having specific issues with referral sources or regulatory issues that we believe will be corrected and largely resolved in the back half of the year, but didn't seem to be pervasive in any sort of company-wide or industry-wide sort of dynamic. So I think our view as we think about the behavioral business trajectory, the point that we've made for some time during the pandemic is that as COVID volumes eased, we would be able to hire more people. As we would be able to hire more people, we'd be able to generate more patient days, more volume, greater efficiencies, greater EBITDA growth. I think if you look at the first six months of the year, which, again, I made the point in my prepared remarks, EBITDA is up 12%. I think if you look at the last four quarters, EBITDA is up substantially. And I think that's how we're looking at the earning power of our behavioral business. A bit of a slowdown in Q2, but I think we think the long-term trajectory is much more reflective of the experience we've had over the last two to four quarters.

Operator:

Thank you, one moment for our next question. We have a question from Andrew Mok from UBS. Your line is open.

Steve Filton:

Yeah. So what I said in my prepared remarks was that overall surgical growth was up about 5% Q2 over Q2, which we view as a pretty solid outcome skewed more towards outpatient growth so outpatient procedures -- outpatient surgical procedures were up 8%, inpatient were only up 1%. But that obviously affects acuity. And again, I think in my mind, this is sort of an intuitive result. If what we're seeing in terms of the volume growth in acute care is, to some degree, a recapture of postponed and deferred procedures, it makes sense that those deferred and postponed procedures were of the lower acuity nature. Almost by definition, if people had emergency health care needs during the pandemic, those were attended to. But the things that were deferred were more elective, more discretionary procedures, both surgical and medical. And again, I think that's the dynamic you're seeing in terms of very high volumes but somewhat more muted acuity.

Steve Filton:

Yeah. I don't have those exact admission numbers for the Reno hospital in front of me, but I'll say that -- what we have said was included in our 2023 guidance was about a $25 million or $30 million turnaround at the Reno Hospital. I think we're tracking I think we anticipated that, that would be a little back-end loaded, and I think that's right. I think we probably had about a $4 million to $5 million improvement in Q2. But I think we're generally tracking for that level of improvement for the full year, and that's our expectation. My sense is the Reno Hospital is not large enough to have had a significant impact on admissions one way or the other in the quarter.

Operator:

Thank you. Our next question comes from Joshua Raskin from Nephron Research. Your line is open.

Steve Filton:

Yes. I mean, so what I think we have said pretty consistently throughout the pandemic is that the pandemic itself -- and I should start by making the point that prior to the pandemic, in late 2019, early 2020, I think we would have described, and I think most of our provider colleagues would have described the labor market. It's pretty tight back then. The overall unemployment rate in the country was, I think, pretty close to full employment, clinical employment, particularly nursing employment was very tight. The pandemic then really exacerbates that tightness, particularly for sub-acute providers like behavioral providers because we started to lose a great many nurses, especially nurses to these high-level premium pay opportunities they were having working in acute care hospitals and COVID units or ERs or ICUs, et cetera. And the argument we made all along was that as COVID volumes declined, those opportunities for these extraordinary pay increases would decline and nurses would return to their – we'll sort of call it home base and employment. And I think that's what we've been seeing I'm going to say, for the last 12 or 15 months, I'm going to say at least back to the spring -- the early spring of 2022. And we're seeing that. Now what we're seeing is an increase in base wage rates in order for us to get those folks back. So I think wage inflation and behavioral or average hourly rate increase in Q2 over the prior year is more like 4.5%, 5%, which is certainly higher than it was running in the pandemic. And again, you see some of that in our salary, overall salary increases. But at the end of the day, and this is the point that I was trying to make before, I think what we've demonstrated, especially over the last three quarters, and to a lesser degree, in Q2 of this year as we're able to hire more people, we're able to generate more volumes and as a consequence, EBITDA growth, margin improvement, et cetera. It's not a directly, it's not a ratable increase every single quarter. But -- and again, there's some element of timing here as we hire new people, they have to be trained and oriented and that causes some level of inefficiency. But over time, I think we have the view that we're going to continue to be able to hire more people in behavioral and admit more patients and that's going to lead to a long-term growth trajectory in that business.

Steve Filton:

Yes. My recollection from reading the United transcript was that they specifically talked about that increase being skewed to outpatient procedures. And, obviously, I think outpatient is a more highly competitive market for behavioral, there's a lot more competitors. I think our view is over the long-term, the more people who are getting care and getting appropriate assessments, et cetera, is good for our business, which tends to have a much broader continuum of care that includes more intensive outpatient and partial hospitalization and all sorts of inpatient care across many diagnosis. So I think we have a view that while we didn't necessarily experience that same growth in outpatient that United referred to specifically, I think, in their first -- second quarter call, that ultimately down the road, we're likely to benefit from more and more people getting the appropriate level of behavioral care and assessment.

Operator:

Thank you. Our next question comes from Whit Mayo from Leerink Partners. Your line is open.

Steve Filton:

Yeah. So we're waiting Whit for the state to resume more specific guidance about how their specific methodology is going to work, et cetera. But based on our broad understanding of how this program is going to work as I think Marc commented in his prepared remarks, our expectation is that this could have a materially favorable benefit on our Nevada hospitals. But we're anxiously waiting for the state to issue more specific or more specifics surrounding the calculations and the methodology and the size of the pool, et cetera, which we think could be forthcoming going to sort of say in the near intermediate term. But certainly, we think there'll be a lot more clarity by the end of the year.

Steve Filton:

Sure. So as you said, this is not necessarily really new news. We originally committed to a behavioral EMR implementation with Cerner. Going back a couple of years and after Cerner's acquisition by Oracle, Oracle wanted to do this press release, which is fine. But to be clear, I mean, it's not new. We've already implemented a handful of facilities in 2022. We'll implement another round of facilities in 2023. If you read the press release, it doesn't refer to the number of facilities. I think when at least one of the news media outlets picked up the story based on the combine the fact that we were making this announcement with the fact that we've got 200 behavioral facilities here in the US, and said that we were committed to implement 200 facilities, as your question alludes to, we’re certainly have not yet committed to that. We have smaller residential facilities that may not be appropriate for an investment of this scale, et cetera. So I think the point -- I mean, I think that we will spend significantly less on behavioral EMR than we did on the acute care alone, I think, around $220 million, $230 million a number of years ago on the implementation of an acute care MR. I think we'll spend substantially less on behavioral and they'll be spread out over, I think, a five or six-year period. So, I don't think that the individual impact of the investment is going to have a significant impact. The other piece is we had an expectation that there are operating efficiencies that we'll gain and garner from the implementation. So a significant chunk of that investment should be offset with operating efficiencies.

Operator:

Thank you. We have a question from A.J. Rice from Credit Suisse. Your line is open.

Steve Filton:

Yes. I mean, A.J., I think our comments on rate increases and behavioral have been pretty consistent. They definitely -- historically, revenue per day in the behavioral division has generally increased sort of 2% or 3% a year, pretty consistently pre-pandemic. During the pandemic, we saw those numbers rise to something much closer to 5% to 6%. And then I think we've generally discussed that, and we think the main reason for that is we've been able to leverage the fact that there is capacity constraints in the industry as we've already talked about on this call because of labor capacity especially. And we've been going to our lowest payers and either demanding increases from them or canceling those contracts that we view to be inadequate and simply admitting patients whose insurance will pay us more, again, in an environment where we can only treat a limited number of patients, we can be more selective about who we treat and the fairness of what we think we're being paid. What we have said is we think that as we're able to admit more patients, our ability to leverage that diminishes a little bit and maybe that revenue per day increase that had been running 5% to 6% moderates more to 4% to 5%. We were again a little over 6% in the quarter, although that, I think, is a function not only of the rate increases we're getting but also of the mix of acute versus residential patients. as I mentioned before. But I think generally, our price -- the pricing environment in behavioral remains strong. We remain aggressive that we've terminated or issued notice of termination in a great many markets to a great many payers. We're pursuing this strategy pretty aggressively and feel like there's a runway to do so for the foreseeable future.

Steve Filton:

So I think like most of our -- or several of our public peers, HVA antenna, I think most notably have commented in the last year or so that their facilities in Texas and Florida have been recovering at a more rapid rate than in other geographies. I think as those states have emerged from the pandemic more around the economies in those states have emerged on the pandemic more rapidly. I think honestly, that has been sort of a bit of a negative comparison for us. Again, over the last year or so because we've got less of a relative footprint in Texas and Florida and more in Nevada and California than our peers, but I think what we're seeing now is the recovery in those geographies is starting to pick up pace, et cetera. I think our performance in Nevada was particularly improved in the quarter. And obviously, that's always a significant piece of good news for us. I will say that to have the sort of acute care performance we had, in particular, the top line and EBITDA growth of 16% that's got to be pretty broad-based. It really can't be specific to one single market, and I don't think it was. But again, the encouraging, I think, element for us specifically was the improvement in our Nevada results in the quarter.

Operator:

Our next question, one moment. We have a question from Jamie Perse from Goldman Sachs. Your line is open.

Steve Filton:

Yeah. Look, I made the point earlier, Jamie, that we anticipated a significant increase in those physician subsidy expenses in our 2023 guidance. But in the first six months, they're tracking at twice the rate that we anticipated. But I also tried to make the point that I think we believe that these really dramatic increases are a function of this current disruption. We've got providers who are telling us one of two things. One, that they just can't continue. They've declared bankruptcy, and they can't continue to provide the contract services that we're contracted for, and we're having to replace them generally at a higher cost, whether we're contracting out to somebody else, or hiring these folks in. And again, there's these sort of transition costs that I think are largely onetime in nature. But I think we're going to continue to experience these for the next quarter or so I think we have a general view that by the time we get to 2024, However, this has settled out either -- and I'm not sure there's a single answer, but I think either a lot of these providers, these ER and anesthesiology physicians will be employed by hospitals and by us or they'll be employed by more local and regional providers who are more healthy financially, et cetera. But we're going to see a leveling off of this expense. I don't know that we're able to predict exactly how you should model that in the future. And again, I think in my mind, the positive view of this in the quarter is acute care EBITDA 16% higher than it was last year's Q2 despite the fact that we've got this significantly increased burden of physician expense. We feel like when that levels off next year, that's going to provide a boost to our earnings power.

Steve Filton:

Yeah. I mean I think if you think about if -- however, you want to find our long-term acute care margins in the upper teens, I'm going to call it 17%, something like that. But I think surgical margins tend to be probably five to 10 basis points above that and medical margins tend to be five to 10 basis points below that. Obviously, there's a lot of difference depending on the specific procedure, the length of stay, the demographics of the patient base, et cetera. But historically, surgical margins have been measurably higher than medical margins.

Operator:

Thank you. Our next question will come from Scott Fidel from Stephens.

Steve Filton:

Yeah. So I'll tackle the parity one, which I know is the more recent one, Scott first. As you pointed out, I mean, I think the Biden administration announced yesterday that they were going to issue new rules on mental health parity, which they did this morning, and I appreciate your acknowledgment that we have not had a chance to review those. I think the broad context here is mental health parity legislation originally passed almost 15 years ago. But I think the industry has always been frustrated that the amount of adherence and an enforcement on the part of the government has never at least been as fulsome as the industry would have liked. And without reading the specific regulations or having a chance to read the specific regulations, I think the one positive that we take away is that the current administration seems focused on the fact that there needs to be better enforcement, there need – the mental health parity legislation originally was, I think, viewed very positively for the industry. And I do think it had a positive impact, but I think it should be more positive. And I think we would argue that there have been plans and payers that have sort of tried to dodge the – the intent of the legislation and we believe that any effort on the part of this administration to more aggressively enforce those parity laws is welcome. The intensive outpatient regulations, I'll sort of make repeat the same comments I was making just about United's commercial comments or commercial utilization comments before I think that any new developments that allow people or encourage people to get more access to in terms of outpatient or behavioral care in general are generally going to be positive for us. We have a lot of intensive outpatient offerings. But I think more than that, I think we had this complete continuum of care from very low acute outpatients or very high acute inpatient that the more people who are given access to care and behavioral diagnosis and assessment, I think that's generally good news for us. So I would say we view both of these developments as a positive. I think we view them consistent with I think general legislative and administrative sort of favorability to the behavioral business at both the federal and state level difficult to quantify the benefit for either of those in any sort of precise way.

Steve Filton:

Yes. I mean, so we saw, as we said, adjusted admissions increased by almost 8% in the quarter. Some of that is certainly driven by the outpatient activity. But obviously, pure admission growth was also pretty strong. again, I just feel like what you're seeing is it is a bit skewed towards the lower acuity procedures. And again, not by a tremendous amount. I mean, we saw overall revenue per adjusted admission on the acute side increased by 2% or so in the quarter. I think normally, we would expect that number to be more in the 2% to 4% range. So it's kind of on the low end. But there's a little bit more of that skew to -- I think it's not so much -- I mean, it is clearly an inpatient and outpatient issue, but I think it's more of an issue of skewing more towards those elective and deferred procedures that were postponed whether they were in or outpatient during the pandemic and are now being realized in greater numbers.

Operator:

Thank you. Our next question comes from Justin Lake with Wolfe Research. Your line is open.

Steve Filton:

Yeah. So two things or two comments that you made, Justin. I mean, one is we're not seeing, I think, at least a measurable impact that we can identify from Medicaid redeterminations so far. I do think again, we -- Marc commented on the rationale for not raising the upper end of our guidance, he commented on the Nevada supplemental payment. I do think that's a big piece of it. But I think we also have a view that there may yet be an impact from Medicaid redeterminations in the back half of the year in both of the businesses that we have not yet seen. So we're paying very close attention to that, and that's a focus. But, yeah, I think your other comment is also well taken, and that is with a lot of the payers reporting an increase in their own medical life utilization, we have an expectation that we're going to see more aggressive behavior on their part to whatever it may be limit length to stay on the behavioral side or challenge more inpatient versus observation classification on the acute side. I can't say that, we can say definitively that we've seen that change in a measurable way just yet. I think it sometimes takes a quarter or two for that information to sort of play out. But I will tell you that we're very prepared for and very focused on it. I think in all sorts of ways, I think we're trying to change our contracts, so that these issues are more defined that are in upfront in the contract, but also in the way that we provide billing information and we go through the appeal process. So all those things are a significant focus of ours. But I think you are suggesting that managed care payers are likely to become more aggressive in their utilization review procedures is something we're very sensitive to and prepared for.

Steve Filton:

Yeah. So I think that, we generally concur, as your question sort of alluded to with the sort of broad way that a number of analysts both, I'm going to say, dispassionate analysts like CMS and the Urban Institute, et cetera, when they looked at the potential impact of redeterminations and then the number of sell-side folks have done exhaustive studies. And I think they all conclude largely the way you framed your question that ultimately, there will be a sufficient number of people who are redetermined off the Medicaid roles but who can requalify on better paying commercial products, commercial exchange products that the net impact to positive one. I think our sort of skepticism or concern or caution is more short term or timing related in nature and that is as we go through the process and people get redetermined off, how quickly can they requalify for commercial products, et cetera. And again, I just don't think we've had enough time to really measure whether there could be sort of a short-term bump or a drain on this. But I think in the long run, we think we probably come out at least whole, if not somewhat ahead. The good news from my perspective is based on the redetermination data that I've seen while there have been a lot of people redetermined off, a lot of those redeterminations a good chunk of them are sort of more for administrative reasons. Their paperwork is not up to date. Their address is not up today, whatever it may be. And so it feels like those people will be able to get back on the Medicaid roles quickly. So, it feels like maybe the impact in the long run is not going to be as significant as we might have thought. But again, our point of view is maybe some short-term uncertainty over the long term, I don't think we think this is really going to be a net negative for providers.

Steve Filton:

Sure.

Kevin Fischbeck:

Great. Thanks. I want to go back to, I guess, Marc's comments about both segments starting to transition to that post-pandemic world. Do you guys -- how are you thinking about what the company's two businesses look like in that world? Is it right to just assume that from a margin perspective, things look like 2018, 2019, is there reason to believe that margins might be higher or lower over time? And how do you think about that path and the timing of getting to whatever that normalization is?

Kevin Fischbeck:

Yeah. So it sounds to me like to some degree in both cases, it's the volume number that's going to get you back to where you were. I guess the behavioral one makes sense, labor is a constraint you fix that. The Q1 though, it's still a little bit unclear to me. I understand the concept of pent-up demand, but when you just finally got above 2019 levels when historically, you've been growing volumes a couple of percent per year, kind of well below that long-term trend line. What is it that makes you cautious to say that you wouldn't get back to that long-term trend line? Are the population growth, demographics and fundamental demand drivers in your markets really unchanged? So why do you get concerned at this as a bolus rather than the new normal?

Kevin Fischbeck:

Okay. All right. So I think I got it, but just to make sure to it up, you're not saying that this year's volumes become a headwind to next year because there's some sort of unsustainable bolus. This is probably a good base, but we just shouldn't assume 7% volume growth, we should assume from here more normalized volume growth or are you saying that there could be a headwind next year from a comp perspective?

Kevin Fischbeck:

All right. Perfect. Thank you.

Stephen Baxter:

Yes, hi, thanks. A follow-up on an earlier question. I wanted to see if you could expand a little bit more on the behavioral margins in the quarter. Usually pre-COVID margins increased sequentially in the second quarter. Obviously, you had a different experience this quarter with SWB and other OpEx as a percent of revenue up sequentially. Wondering what drove those increases? And how did margins internally compare to your expectations? And do you think we should see something closer to typical seasonality in the balance of the year? Thank you.

Operator:

Okay. I'd like to turn it back to Steve Filton for any closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Steve Filton:

Thank you, and good morning. Marc Miller is joining us this morning. We welcome you to this review of Universal Health Services results for the first Quarter ended March 31, 2023. During the conference call, we’ll 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. 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 $2.28 for the first quarter of 2023. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.34 for the quarter ended March 31st, 2023. During the first quarter, our behavioral health hospitals produced strong results. The decline in COVID activity allowed our behavioral hospitals to continue to reduce their labor vacancies, resulting in a reduction of the capped bed capacity and a 4.7% year-over-year increase in adjusted patient days. Combined with a healthy 5% increase in net revenue per adjusted patient day, overall revenues grew by almost 10% over the prior year quarter. And with that level of revenue growth, same-store behavioral EBITDA margins increased from 20% to almost 23%. Our acute hospitals experienced strong demand for their services with adjusted admissions increasing 10.5% year-over-year. For a variety of reasons, revenue growth was more muted at 3.5%. As a percentage of total admissions, COVID diagnosed patients made up 14% of our admissions in the first quarter of 2022, but only 4% of admissions in the first quarter of 2023. This decline in COVID patients resulted in reduced revenues due to the lower acuity and less of the incremental government reimbursement associated with COVID patients. The impact of the COVID support payments, including HRSA, Medicare sequestration, and the 20% Medicare add-on was a $42 million headwind in the first quarter compared to the same prior year period. There was also $15 million of out of period Texas TERP reimbursement recorded in Q1 of 2022 that did not recur in this year's quarter. While overall surgical volumes were robust, increasing a little over 10% from the prior year quarter, there was a continuing shift from inpatient to outpatient resulting in further overall revenue pressures. Meanwhile, the amount of premium pay in the quarter, which declined from a peak of $153 million in the first quarter of 2022 was $85 million in the first quarter, similar to what it was in the third and fourth quarters of 2022. The dramatic increase in volume is the major reason that premium pay has not declined further. It's worth noting that our average hourly rate, which includes premium pay, was 7% lower than it was in the first quarter of 2022. In total, the robust volume growth offset by lower revenue per adjusted admission resulted in flat same-store acute care EBITDA compared to last year's quarter. We also note that the first quarter acute non-same-store results included approximately $10 million of a headwind for the impact of the Desert Springs Hospital closure and approximately $5 million of losses related to startup facilities. Our cash generated from operating activities was $291 million during the first quarter of 2023 as compared to $445 million during the same quarter in 2022. The decline was largely due to an unfavorable change of $183 million in other working capital accounts, primarily due to the timing of disbursements for accrued compensation and accounts payable. In the first quarter of 2023, we spent $169 million on capital expenditures and acquired 650,000 of our own shares at a total cost of approximately $79 million. Since the inception of the current share repurchase program in 2014, we have repurchase more than 20% of the company's outstanding shares. As of March 31st, 2023, we had $875 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. I'll now turn the call over to Marc Miller, President and CEO, for closing comments.

Operator:

Thank you. [Operator Instructions] We have a question from Jason Cassorla with Citi. Please proceed.

Steve Filton:

Sure, Jason. Look, I think we've made the point for some time that we felt that as COVID volumes continue to decline and sort of continue at a kind of a lower, we'll call it endemic level, that the non-COVID volumes would begin to recover. I think that recovery quite frankly has been a bit slower than we anticipated. But clearly, taking into account what our public hospital, acute care hospital peers have said as well in the first quarter, I think there seems to be a broad-based recovery across the space. And I think our expectations is that we are going to begin to see acute care volumes track at their sort of pre-pandemic patterns with volume growth in the low to mid single digits and sort of pricing growth at a similar level. So, ultimately, and particularly I think once we get beyond the first quarter with that difficult COVID comparison, we'll begin to see an acute care business model that resembles something a lot closer to our pre-pandemic experience.

Steve Filton:

Yeah. Again, so we've talked about this I think on a number of prior calls, I think prior to the pandemic revenue per adjusted day in the behavioral division tended to increase, so about 2% to 3% annually during the pandemic. I think, we've seen that number jump to 5% or 6% in a number of quarters. And we've attributed in many cases to a more aggressive stance on our part as we renegotiated contracts with some of our lowest payers, with the idea that in an environment of capacity constraint, an environment where we were turning patients away because of a lack of adequate staffing, it gave us more leverage to take a more aggressive stance with our payers. And again, I think you saw that in the 5% revenue per day -- per adjusted day increase in first quarter. Obviously, I think the sort of the crux of your question is as we continue to hire more people and those capacity constraints are eased some, does it change the dynamic with the payers? And I think the honest answer is to a degree, but I'll also say just broadly, I think across the space, the behavioral space, we have a view that demand across the space exceeds the supply of beds in many geographies and in many instances. And so, I think we're going to still have leverage with the payers in many of our geographies. If they want a place to have their patients treated, they're going to have to pay, at a minimum market rates to providers and to us. But we also did say, I think in -- when we talked about our 2023 guidance in our last call that we were projecting in our guidance that that revenue per day growth would moderate some. So, if we see some moderation, it is certainly something that's been anticipated in our guidance. But right now, it's a pretty strong environment in terms of our negotiations with payers.

Operator:

Thank you. One moment for our next question, please. And it comes from the line of Josh Raskin with Nephron Research. Please proceed.

Steve Filton:

Yeah. I think it's a reasonable question. Obviously during the pandemic and during the significant capacity constraints we had and the issues we had in hiring sufficient clinicians, especially nurses to treat our patients, we did put on hold some of our development activities, building new capacity at existing facilities or building de novo facilities, although we certainly continued with some. But I think your question is right. I mean, we just had a meeting recently in which we reviewed a whole chunk of facilities that are running at an excess of 80% occupancy on the behavioral side to consider, I think the exact point of your question whether it merited study of building more capacity in those facilities. So, I think you're right, this is a bit of a compounding kind of dynamic. As we're able to hire more people and fill more of our permanent vacancies, I think we'll be able to treat more patients. And as we're able to treat more patients, we may need to increase capacity in some of our facilities in some of our de novo projects. So, I think that's certainly a possibility over the next several years.

Steve Filton:

Yeah. I mean, so, the traditional, I think, approach to temporary labor in the acute business for us, and I think largely for our peers always was that when there were temporary surges in volumes, which there often are, COVID activity aside, it always made sense to solve those sort of temporary demands on your staffing with the use of temporary and traveling nurses, et cetera. What became really sort of a disrupting kind of factor during the COVID surges was that the price or the cost of that temporary labor rose to two and three, and I think sometimes four times what traditional rates have been. I think as we see those numbers come down, and we certainly have seen them come down quite a bit, although I don't think we're at pre-pandemic levels. I think we're going to get back to that sort of traditional approach that when we need temporary labor, we'll go to these outside agencies for it. But it'll be on a less frequent basis, et cetera. And I will say that there were times during the pandemic where the cost of temporary labor got so expensive that we just refused to use it if it got above a certain level. And again, I think we're largely past that point. And like many other things that I've referenced on the call, I think that as we progress in 2023 and we go beyond that, we're going to see that temporary labor supply/demand dynamic and pricing and inflationary dynamic return to much more of a pre-pandemic sort of level than what we have seen in the last few years.

Operator:

Thank you. One moment for our next question, please. All right. And it comes from the line of Andrew Mok with UBS. Please proceed.

Steve Filton:

Yeah. So, I think the sequential improvement reflects some of the normal seasonal patterns. I think, in any normal year, our first quarter is our busiest year on the acute side. And there's generally a pretty significant step up from the fourth quarter and some of the reduced activity during the holidays and the fourth quarter, et cetera. So, I think you did that. Absolutely, see some of that. I also think you just continue to see a return of normal patterns, patients who had delayed in deferred procedures during the pandemic, beginning to schedule those and at least get into the pipeline for some of those more elective and scheduled procedures, et cetera. So, I think you saw that dynamic. So, I think the acute care performance clearly, in my mind, was more favorable when you look at it from a sequential basis. When you looked at it from a year-over-year basis to the first quarter of last year when we had the Omicron surge, when we had the very high acuity, the comparisons that I think were much more challenging. You had the COVID reimbursement in the first quarter of last year. But to your point, the fourth quarter improvement over -- for the acute division was encouraging to us. And I think sort of reinforces our view that we've created an appropriate sort of guidance trajectory in 2023 with the acute care performance improving as the year goes on.

Steve Filton:

Yeah. I mean, so those are two very different dynamics. As I think we discussed in our last call, the Desert Springs dynamic, it's really related to the new hospital we're building in West Henderson, which is sort of between our existing Henderson hospital and our existing Desert Springs Hospital. As I think physicians and patients and employees, all came to the realization that ultimately West Henderson would be replacing Desert's function in the market. They began to make other decisions and move to other hospitals, very often our own hospitals elsewhere in the market. And so we made the decision to close Desert as an acute care hospital, but we still operate a freestanding emergency department on the site. As I mentioned in my -- in our prepared remarks that those shutdown costs and severance costs, et cetera, created about a $10 million headwind in the first quarter compared to last year. Essentially I think after that, as the year progresses, Desert Springs will have much less of an impact. And I think we're very much looking forward to the positive impact that West Henderson will have when it opens in either the spring or the middle of 2024. In Reno, our new hospital had a bit of a drag compared to last year. But certainly not at the level of 2022 when it was $7 million or $8 million drag per quarter on average. And we think, again, that will improve over the year. And as I think we indicated in our guidance, we're expecting about a $30 million favorable tailwind in 2023 from the Reno hospital. Broadly, I would just say, and I think this is consistent with what our peers have said, we've seen our Texas and Florida markets recover, and this is, I think particularly from an acute care perspective, recover from the pandemic dynamics faster than our other markets around the country, including in our case, Nevada and California. There's been a shift in population to places like Florida and Texas. I think those economies tended to recover more quickly from the shutdown. They didn't shutdown as completely or as quickly as some other markets around the country. So, again, I think our experience in those markets is consistent with what, at least a couple of our peers have talked about as well.

Operator:

Thank you. One moment for our next question, please. All right. And it comes from the line of Stephen Baxter with Wells Fargo. Please proceed.

Steve Filton:

Yeah. So, as is our practice, we didn't address guidance in our press release, which means that we're maintaining our existing guidance. I will say that -- and because we don't give quarterly guidance, I will say that our internal forecast for the quarter were somewhat ahead of the consensus estimates, although our actual results were ahead of both consensus and our internal forecast. In term -- I know that a couple of our peers raised their guidance in the first quarter. As you all know, I've been at UHS for more than three decades. I don't recall that we've ever changed our guidance after the first quarter, for better or for worse. Obviously, in this case it would've been for better had there been any change. But generally, we were pleased with the first quarter results. I think as Marc's comments on the call indicated, and -- but I will also make the point that unlike other years, the earnings trajectory that we're expecting in 2023 is that earnings will continue to improve as the year progresses. And so, we feel very comfortable with our full year earnings. We're very pleased with the first quarter results. But certainly it didn't feel from a either a -- sort of historical practice perspective or any other that, there was any need to change the guidance after the first quarter results.

Unidentified Analyst:

Yes. Thank you.

Ann Hynes:

Hi. Good morning. Could you talk about nursing trends maybe in each segment? Which segment do you think is be covering faster than the other? And I know you said turnover improved, but can you give us some stats? Maybe what turnover was at the height of the pandemic? What it was before the pandemic, and what it's trailing now? Thanks.

Ann Hynes:

Great. And just on the inpatient side, inpatient trends, admissions improve sequentially, can you just describe what delta, like what do you think is coming back versus what was not in 2022?

Ann Hynes:

Great. Thanks.

Unidentified Analyst:

Hey, guys. This is Austin on for Justin. I appreciate the question. Steve, sticking on that like scheduled elective mix that you just described. I know that was a little bit of a focal point in 2Q, 3Q and through back half of last year. You noted some improvement there, but wondering if you can kind of quantify where that's maybe tracking versus the pre-pandemic level? And is that shift to outpatient, maybe shifting that run rate going forward? Thanks.

Unidentified Analyst:

Great. Thanks. And then maybe just as a quick follow-up. Commercial contracting cycle kind of in focus, I'm just wondering if there's any update there and if you're still seeing some favorability on that front. Thanks.

Unidentified Analyst:

Great. Thanks for the color, guys.

Joanna Gajuk:

Hi. Good morning. Thank you. This is Joanna Gajuk filling in for Kevin today. Thanks for taking the question. So, I guess, first just follow-up on the behavioral business. So, the volumes pretty strong there. We just talk about that acute, but any color there in terms of the regions or business lines, or is it kind of across the board, just kind additional color on the site volume strength?

Joanna Gajuk:

And would you say that with the strength, because you made -- it sound like things were talking better, but in segment by sounds like maybe margins. So, any change to kind your view for the year for this segment, or it's kind of in the ballpark?

Joanna Gajuk:

Great. Thank you. And the last question on Behavioral segment. When it comes to the redeterminations, so states are starting this process now, many of them delaying it, but I guess, we've been talking about this quite a bit. So, can you talk about how you think this will play out for behavioral business specifically? Do you assume anything in your guidance? Or is it more 2024, if at all? And then also, I guess, any comments on how this could impact the acute care business? Thank you.

Joanna Gajuk:

Thank you for this color. I appreciate.

Steven Valiquette:

Great. Thanks. Good morning. Not to get too granular on labor, but our monthly labor tracker showed the company had better momentum later in the quarter in February and March, especially on filling nurse job vacancies in both segments. So, I would think that would also bode well for volumes in the second quarter. So, I'm not asking you to comment on monthly trends, obviously, but just curious if you're able just to comment on the momentum for the company exiting the quarter on the labor front, and whether that also to give a positive bias for volume trends in the second quarter as well. Thanks.

Steven Valiquette:

Okay. Got it. Okay. Thanks.

Pito Chickering:

Hey. Good morning, guys. Thanks for taking my questions. A follow up to both Ann and Joanna’s question here. Can you combined both the new hires and the turnover to quantify with a net hires was specifically in behavioral now compared in the first quarter versus the fourth quarter? And then how many behavioral beds are you still unable to staff at this point if any, and kind of how does that track throughout the year?

Pito Chickering:

Okay. Great. And then a follow-up question here. As you think about sort of margin expansion in behavioral, so over the next sort of 12 to 24 months, how much is this coming from sort of getting those beds filled up and sort of getting the fixed costs leveraged there? How much is it coming from the spread of pricing running in the mid single digits versus wage inflation running in the sort of 3% range?

Pito Chickering:

Okay. Great. Thanks so much, guys. Nice quarter.

Jamie Perse:

Hey, thank you. Good morning. So, Steve, you previously guided to about 1% to 2% revenue per adjusted admission in 2023. You also said that was kind of one of the more aggressive assumptions in your thinking for 2023. So, getting through the tough 1Q comp, and I'm just curious how revenue per adjusted admission played out versus your expectations and how to think about that metric for the rest of the year for the Acute segment?

Jamie Perse:

Okay. Thanks for that. And then, just on contracting tactics with commercial payers. You previously mentioned there were some contracts where you're potentially willing to walk away if payers didn't kind of meet you halfway. I'm curious how some of those types of negotiations have played out since. Are payers becoming more receptive to meeting providers at better rates? Have you actually walked away from contracts? Just any update there on the behavioral side in particular.

Marc Miller:

And I just want to piggyback on this point, because we have just decided a little bit more forcefully now that, that we're just going to push this issue. We need to be paid fairly for the work that we're doing. Our expenses are up, and some of the payers don't meet us halfway all the time. And we've been clearly explaining to them that that's not going to be adequate going forward. But in addition to that, we're having a lot of different discussions with payers, I'd say in the last six to 12 months, that we've not had before. And it goes to a lot of what Steve is saying, their needs are growing on the behavioral side, we are the largest provider in the United States, in behavioral. So, the leverage is shifting a little bit. And we're trying to work with them to show them how it is more conducive for them to pay us a little bit more, but have their patients serviced in a much better way than to try and continue to nickel and dine and ultimately, that's not going to satisfy their needs. So, those discussions are, I would say, escalating. And they're different discussions and I think that we're going to have more positive results from the types of conversations that we're having now.

Operator:

Thank you. And at this time, I would like to turn the conference back to Steve Filton for closing remarks.

Steve Filton:

Okay. Thank you. We'd like to thank everybody for their time this morning and look forward to speaking again next quarter.

Marc Miller:

During the fourth quarter, our acute care hospitals experienced a decrease in the number of patients with a COVID diagnosis treated in our hospitals as compared to the prior year quarter. As a percentage of total admissions, COVID diagnosed patients made up 7% of our admissions in the fourth quarter of 2021, but only about half of that percentage of admissions in the fourth quarter of 2022. This decline in COVID patients resulted in reduced revenues due to the lower acuity and less of the incremental government reimbursement associated with COVID patients. While overall surgical volumes tended to recover to pre-pandemic levels, there was a measurable shift from inpatient to outpatient, resulting in further overall revenue softness. Meanwhile, the amount of premium pay in the quarter, which declined from a peak of $153 million in the first quarter was $85 million in the fourth quarter, similar to what it was in the third quarter. In total, there was insufficient revenue growth to offset the accelerated rate of wage increases and other inflationary pressures, leading to an acute EBITDA result in the quarter below our internal forecasts. At the same time, this decline in COVID activity allowed our behavioral hospitals to continue to reduce their labor vacancies, resulting in a reduction of the capping of bed capacity. The effect of the increased revenue largely offset higher labor costs, leading to a behavioral EBITDA result in the quarter more in line with our internal forecasts.

Marc Miller:

Our 2023 operating results forecast, which was provided in last night’s release, Envision’s 2023 as a year of continued transition into a post-pandemic world. We anticipate that volumes in both segments and acuity in our acute business will continue their recovery trajectory and gradually begin to resemble the patterns we experienced before the pandemic. Similarly, we expect to be able to reduce premium pay by about one-third in 2023 from 2022 levels as we continue to increase hiring rates and reduce turnover as a result of multiple recruitment and retention programs that have been implemented over the last few years. Again, we’ve assumed these improvements will occur incrementally during the year. But will be partially offset by wage pressures created by a continued shortage of nurses and other clinical personnel and by broader inflationary pressures affecting our other expenses. We note that in our Acute segment, physician subsidy expense is specifically anticipated to increase by a substantial amount. Other headwinds that are reflected in our 2023 forecast are approximately $100 million in COVID-related reimbursement received in 2022, but phased out in 2023 as well as a reduction of about $30 million in supplemental reimbursement payments as disclosed in our 10-K. Finally, we will incur a significant increase in interest expense in 2023. About three quarters of which was due to rising interest rates and the remainder to increased borrowings. Despite these challenges, we note that some of the operating indicators in early 2023 have been encouraging, especially in our behavioral health business. During the pandemic, we have found the pace of recovery from several of the aforementioned challenges has often been slower than we originally anticipated and have reflected that gradual cadence of recovery in our forecast. However, we remain confident in the fundamental strength of both our business segments, given our well-positioned hospital franchises around the country. We are pleased to answer questions at this time.

Andrew Mok:

Hi good morning. You mentioned softer revenue in the Acute segment due to lower acuity. Can you elaborate on the trends in surgical volumes and underlying acuity that you saw in the fourth quarter? And what do you have embedded in the guide for 2023? Or when do you expect that to normalize? Thanks.

Operator:

Our next call comes from the line of Stephen Baxter with Wells Fargo.

Steve Filton:

Yes, Steve, I think we missed the beginning part of your question somehow. So if you wouldn’t mind repeating it, I apologize.

Steve Filton:

Yes. So, I think on the acute side, there are specific headwinds, again, most of which I think Marc elaborate on, one – and probably the biggest one is $100 million of COVID-related reimbursement that includes the Medicare 20% add-on, the Hertz [ph] reimbursement and Medicare sequestration waver all of which get phased out at one point or another already phased out in 2023. I’ll throw into that, although not COVID related, another $10 million or so of 340B reimbursement that’s going to get recouped in 2023. In addition to that, there’s – Marc noted about $30 million of supplemental Medicaid reimbursement that declines next year. That’s about $20 million in the behavioral business and $10 million in the acute business. I think the other main issue is that even though, again, as Marc commented, we’re expecting premium pay to decline another one-third, maybe another $150 million, $160 million in 2023, what our experience has been is that the savings from that, and there certainly are some savings, but the savings from that are offset to a large degree by increased base wages, recruitment incentives, sign-on bonuses, that sort of thing. I think what our guidance, particularly in the acute business implies or assumes is that all those trends sort of incrementally improve as the year goes on. But those are the headwinds, I think, specifically on the acute side of the business that mainly sort of tend to suppress the margins. And on the behavioral side, it’s really more on the labor side. I mean I think we’re at in both businesses is that at the moment, even though revenues are recovering, particularly on the behavioral side, salary expense or wage expenses still outpacing the growth in revenues. I think we believe that by the second half of 2023, that begins to sort of stabilize and we start to sort of get to a more normalized historical pattern of revenue growth exceeding salary growth. But in the first half of the year, that’s not the case. And again, I think that’s probably the main driver of the margin pressure next year.

Jason Cassorla:

Great. Thanks for taking my question. I just wanted to ask about the move to wind down in patient operations at your Desert Springs Hospital. Maybe just can you unpack that a bit more in the decision there? What the EBITDA lift could be on the go forward? And then anything else to note from a competitive perspective as we think about your Las Vegas market broadly? Thanks.

Steve Filton:

Yes.

A.J. Rice:

Hi everybody. Thanks. Maybe just two items. And when I think about your outlook, I think you mentioned that you’re assuming an uptick in physician subsidy expense. I wondered what’s happening there? I know in the back half of the year, your other operating expense in 2022 seemed to step up. Are you just assuming that continues? Or is there something else going on there and chances to mitigate? And then any update on your capital deployment thoughts? I know you probably got some share repurchase in the 2023 outlook. Can you just comment on that? And anything else that you’re thinking about from a capital standpoint?

Operator:

Thank you. Our next question comes from the line of Steven Valiquette with Barclays. Steven?

Steve Filton:

Steve, can I interrupt? You’re breaking up. So unless we can get a better connection, I can’t hear your question. I apologize.

Steven Valiquette:

Not sure it’s better or not.

Operator:

Please, go ahead.

Steve Filton:

Steve, I apologize. You’re breaking up again. Maybe you can try to call back with – on a different line.

Justin Lake:

Can you hear me okay?

Justin Lake:

Good, thanks. So Steve, I was hoping – it sounds like there’s a very different trajectory between the acute business, given the headwinds there in the behavioral business, which seems to be acting better. So within the full year guidance, can you give us a little color on the growth we should expect year-over-year broken down between the acute business, the behavioral business and then maybe even the kind of corporate segment would be helpful as well. And then, Marc, maybe you could give us a little more color on what you’re seeing on the shift from inpatient to outpatient and what’s driving that? How big an impact is it having? And how are you thinking about it into 2023? Thanks.

Marc Miller:

And with regards to your question on inpatient versus outpatient, I mean, I think we’re seeing what many are seeing, which is a continued shift to outpatient that has been accelerated through the pandemic we’re trying to continue to do a lot of the things that we’ve been doing in the last few years, which is to ensure that we have the proper paste load in our inpatient surgical areas especially with the increases in costs for staffing those areas, we want to make sure that we have the proper acuity. We’re not doing low-level cases, really outpatient cases in an inpatient setting where we can’t cover the cost properly. So our shift, I think, is pretty similar to a lot of others. We are also trying to accelerate our development of surgical centers so that we have more opportunities and more platforms for all of our surgery cases in as many markets as possible. So we continue to develop those as we find opportunities to do so.

Pito Chickering:

Behavioral – can you hear me?

Steve Filton:

Yes, we can hear you now.

Steve Filton:

Yes. So Pito, it’s – I’ll give you a number. I mean, I think we’re down to a few hundred beds in behavioral that we would consider capped on most days. Now to be fair, that number can change literally day-to-day, et cetera. So we do still feel like the patients are turned away in certain situations because we don’t have appropriate staffing a lot of times that may be specific to, let’s say, weekend or overnight staffing it really does differ by facility. But you’re right. I mean that’s probably been the single biggest headwind for the behavioral business during the pandemic in large part because we were losing employees, mostly nurses, but other clinical personnel, therapists, psychologists, et cetera to other settings where either they have the opportunity to work remotely or they had the opportunity to work in an acute care setting, making sort of premium dollars. As those opportunities have declined and I think telemedicine procedures have intended to decline as the pandemic has eased and certainly, the demand from acute care hospitals for COVID treating nurses, I think, has declined as well. We’re seeing more of those nurses return to what I would describe as the behavioral fold. To your sort of last question, yes, I mean, obviously, we’ve been more tempered, if you will, about behavioral capacity addition during the pandemic because the thought was what’s the point of adding additional capacity if we’re not going to be able to staff it. But as those staffing pressures continue to ease, I think we’ve made the point throughout the pandemic that we think that the underlying demand for behavioral services across the full continuum is quite strong and robust, and we still believe that. And so yes, we are certainly looking and trying to gauge in individual markets where additional capacity may be called for because the demand is there and because we feel like we can adequately staff any additional capacity that we’ve built.

Operator:

Thank you. Our next call will come from the line of Kevin Fischbeck with Bank of America. Kevin, please wait until you hear your name announced. Kevin?

Steve Filton:

Yes. So as far as your first question on start-up losses, Kevin, we mentioned in – or I mentioned in today’s call that we had $10 million in the quarter, I think we had said at the in our third quarter call that we had $45 million of year-to-date start-up losses. So $55 million for the year. The biggest chunk of that is our acute care hospital that we opened early in 2022 in Reno, that’s probably a $30 million, $35 million swing from 2022 to 2023, a positive swing. The other $15 million, $20 million of losses are a handful, maybe three or four behavioral openings in the year, maybe four or five, and we probably have a similar number of openings next year. I think we believe we’ll do a little bit better in emerging from the pandemic and getting these things ramping up faster. But I wouldn’t necessarily describe that as a material tailwind. So I think we’ve got about a $30 million, $35 million tailwind in the budget for our turnaround in our Reno hospital. As far as just sort of how we think about 2023, is it sort of kind of a clean post-pandemic year, Marc made comments in his opening remarks about the idea that, number one, I think we view 2023 as a transition year, and we do so because I think one of the lessons that we’ve learned during the pandemic is that even as COVID volumes decline, there is this sort of transition period as nurses returned to their regular jobs and physicians return to their regular practices and patients return to their regular utilization practices, et cetera. So I think we think about that occurring gradually over the course of 2023. I would say probably the back half of 2023 looks a lot more like maybe the back half of 2019, the last sort of COVID-free half a year that we’ve experienced. And then in 2024, I would imagine, unless there is some unforeseen development begins to look like a really true post pandemic year.

Operator:

[Operator Instructions] Our next call comes from the line of Jamie Perse with Goldman Sachs. Jamie, please stand by. Jamie?

Operator:

Yes.

Jamie Perse:

Okay. Great. First, just a quick numbers question. Can you provide the revenue base for the insurance subsidiary and what the margin looks like on that? And then my longer-term question is just for in this structurally higher wage inflation environment for nurses, given the tightness in that market, what can you do over the medium term to just get more efficient? What does that mean for care team design or investment in labor-saving technologies? Just anything you’re doing to become more efficient on the labor front?

Marc Miller:

But I’ll just add, there are a number of technological solutions that are being bandied about on both sides, both segments. And we continue to evaluate a lot of those as some of our peers do as well. I do think in the coming years, there will be some that we go forward with. I’m not sure that there – any of them are going to be a real panacea, but I do think that they can be helpful depending on cost to alleviate some of the staffing issues that we’ve had over the past few years going forward. So we are excited about the possibility of some of those adding to the mix in the coming years.

Ben Hendrix:

Yes, thank you. Just a quick regulatory question. There was a proposed rule from CMS concerning the 1115 waiver payment and implications there for calculation of a disproportional share payments for acute. Just wanted to see if you guys had any initial thoughts on that? I think you may have probably less exposure to that than some of your peers, but I just wanted to get any initial takes on that proposed rule. Thanks.

Ben Hendrix:

Thank you.

Steve Filton:

We’d just like to thank everybody for their time this morning, and we look forward to speaking with you again at the end of the first quarter. Thank you.

Steve Filton:

Thank you, Michelle. Good morning. We welcome you to this review of Universal Health Services' results for the third quarter, ended September 30, 2022. 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 those 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, 2021, and our Form 10-Q for the quarter-ended June 30, 2022. 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 $2.50 for the third quarter of 2022. 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 $2.54 for the quarter-ended September 30, 2022.

Steve Filton:

We also note that the third quarter included approximately $8 million of losses related to startup facilities and $4 million to $5 million of losses related to the impact of Hurricane Ian, in late September. For the nine months ended September 30, 2022, we've incurred approximately $45 million of losses in connection with the startup facilities. Our cash generated from operating activities was $221 million during the third quarter of 2022, as compared to $442 million during the same quarter in 2021. The decline was largely due to the timing of payroll disbursements, the opening of new facilities, and the timing of certain -- or the receipt of certain supplemental reimbursements. We spent $570 million on capital expenditures during the first nine months of 2022. In reaction to the earnings softness experienced this year, we reduced the pace of our capital expenditures by about 22% to -- or $165 million for the first nine months of the year. Similarly, although we moderated the trajectory of our share repurchases, we plan to continue to be an active acquirer of our own shares. For the full-year of 2022, we estimate that we will acquire approximately 80% of the numbers of shares projected in our original guidance. During the third quarter of 2022, we repurchased approximately 1.6 million shares at an aggregate cost of approximately $158 million. During the first nine months of 2022, we repurchased approximately $5.85 million share at an aggregate cost of approximately $704 million.

Operator:

Thank you. [Operator Instructions] And our first question comes from the line of Kevin Fischbeck with Bank of America. Your line is open. Please go ahead.

Steve Filton:

Sure, Kevin. You know, it has never been UHS' practice to give guidance for the following year until our fourth quarter earnings announcement in February. And we're not going to depart from that this year. I think we've been pretty clear about the non-recurring items in our financials for the year. I'll just sort of comment on the third quarter. The QIF, or Q-I-F reimbursement that we received in Texas, for $25 million that Marc mentioned in his opening remarks, we believe should be a recurring reimbursement item, which is why we did not suggest tossing it out of the third quarter consideration. Other than that, we've identified the startup losses; we've identified the impact of the hurricane, in theory, and they should not reoccur next year. And then finally, I know at least one of our peers described this DPP reimbursement, in Florida, another sort of special Medicaid program. We do not record any of those funds in Q3 of this year, although we expect to record something in the neighborhood about $30 million of those next quarter, in the fourth quarter, and a similar amount next year.

Steve Filton:

See, I think it's the latter, Kevin. I mean, those government programs that were meant to subsidize hospitals, whether it was HRSA or the 20% add-on or the sequestration waiver, all were designed to help hospitals deal with the higher acuity and higher expense of COVID patients. As there are fewer COVID patients I think there's less of a need for that. I think the real variable as we think about the Acute business is, particularly in 2022, as COVID volumes have declined, non-COVID volumes, electives and other procedures have been a little bit slower to recover and snap back than they were in 2021. I think we see them slowly coming back. And I think we think that will continue into 2023. But in my mind, the pace of that recovery is probably sort of the most important variable as we think about the performance of the Acute Division, in addition to the other prevalent item which, of course, is just the labor -- the tightness in the labor market.

Operator:

Thank you. And our next question comes from the line of Ann Hynes with Mizuho Group. Your line is open. Please go ahead.

Steve Filton:

Yes, and so I think, and consistent with our prior practice, as we don't mention guidance in the press release, we're affirming our previous issued guidance, which is what we're doing. I think, during the third quarter, and in some public appearances at conferences, et cetera, I think I conceded that the top end of the guidance was practically not a reasonable target. But I think we feel like as long as the trends that we saw in Q3 continue to a reasonable degree in Q4, some place in the lower half of guidance, it should be very achievable, especially with some of the non-recurring items, particularly the DPP moneys, in Florida, that I mentioned in my previous response.

Steve Filton:

Yes, and so just to clarify what I said in the prepared remarks was our original guidance for the year presumed about $1.4 billion in share repurchases, obviously at a higher price than what we've been currently trading at. What I said is that we'd likely repurchase about 80% of the original number of shares. Probably from a dollar standpoint, that's more like 60%, $800 million-$850 million of the original $1.4 billion. Similarly, I think we've trimmed our CapEx forecast, from $1 billion originally, to something, again, more in like the $800 million range. In both cases, we've done that, I think, as out of an abundance of caution. Obviously, in an environment of rising interest rates and just on certain operating trends, we want to be appropriately cautious. We continue to believe that investing in our own EBITDA growth and our own earnings stream is still one of the most prudent investments we can make. So, I think we'll continue to be an active acquirer of shares into next year. We'll be much more specific about what our precise assumptions are when we give our guidance, in February. But I'd suggest it as people think about their models today, you think about CapEx and share repurchase in those sort of ranges of 2022, $800 million-some-odd for CapEx and $800 million-$850 million for share repurchase.

Operator:

Thank you. And our next question comes from the line of Noah Comen with FactSet. Your line is open. Please go ahead. Noah, your line may be on mute. Okay, we'll go ahead and move to our next question. And our next question will come from the line of Austin Gerlach with Wolfe Research. Your line is open. Please go ahead.

Steve Filton:

Yes, Justin. So, I think on the first question, yes, I think we intend and plan to further reduce premium pay. Premium pay was running about $35 million a quarter in the Acute segment pre-pandemic. I don't think it's realistic to get down to those levels, but I think it's not a stretch to say that we should still be able to get down maybe another $15 million-$20 million at least in the next quarter. To your second point, yes, I mean not all of that reduction sort of falls to the bottom line because some of the cost of reducing that premium pay is increased wages that we're having to pay to recruit and retain talent. I think we've said a number of times over the last several quarters that probably base wage rate inflation in both segments has been running, I'm going to say, 175 to 200 basis points higher than pre-pandemic levels. So, I think, if in Acute it was 3%-3.25% pre-pandemic, it's closer to 5% now. And in April, it was 2%-2.5% pre-pandemic, it's closer to 4%-4.25% now. I think one of the reasons that we're not prepared to talk about specific 2023 guidance is we'd like to see how those trends sort out over the next several months. I think we have a perspective that, given some of the inflationary and other economic pressures out there, that it may actually contribute to somewhat of a lessening of the pressure on wages, and maybe we'll see that number, probably not return to pre-pandemic levels the wage inflation number, but maybe somewhere between where we are today and pre-pandemic levels. But I think that's to be seen over the next several months.

Steve Filton:

Yes, I mean if you look at our income statement, clearly the biggest pressure is on the salary and wage line. But certainly we're experiencing inflation on an overall basis throughout our portfolio. As an example, utility costs, although it's a very small percentage of our overall costs, but they have clearly risen by significant numbers in many of our facilities. But again, that the key driver, I think, is wages as our focus is on, again, reducing premium pay, filling as many permanent vacancies as we can. And I think if we can do that, number one, that will drive higher volume growth which will help us offset some of this inflationary pressure.

Jason Cassorla:

Great, thanks. Good morning. Just on your prepared remarks around the measurable shift in surgical volumes, the outpatient setting in the quarter, do you believe this move is a sustained construct moving forward, or would you call this as more of a onetime consideration and you would expect a reversion back to a more gradual shift over time?

Jason Cassorla:

Yes, okay, thanks. And then, just as a follow up here just as we think about the potential wind down of the COVID public health emergency early next year, you have talked in the past about some of the considerations on Medicaid re-determinations and on volumes, but I guess that the incremental dollars that is also rolled in the States are also coming to an end. I know it’s early, but I was wondering what your outlook is for Medicaid rates next year for both side of the business. And if you think there could be pressure there just given the ending of SMAP?

Jason Cassorla:

Got it. Okay, thanks for all the color.

A. J. Rice:

Thanks. Hi everybody. First may be just to ask you about the Behavioral trends in the quarter. Obviously, that bounces back very nicely. Strong -- revenue up 8% and good margin leverage, I assume some of that is because COVID crowded out some psych cases last year and you're just against an easy comp, but any updated thoughts on where we are at in terms of getting back to a normal growth cycle mid single digits or a little better even in the psych hospital businesses and the mix between revenue and volumes? I know historically sort of describe that as about equal 2% to 3% of age. But any updated thoughts on that, given the strong quarter?

A. J. Rice:

Okay. And maybe just a question on the Acute side, if I look at some of the metrics length of stay showed a meaningful improvement that obviously is a favorable benefit for you. Any comment on what was going on there? And then some of the companies are talking about even if not year-over-year, because last year had a lot of COVID. Sequentially, they're starting to see stabilization and metrics like payer mix, and in revenue per adjusted admission, particularly on the commercial side was some a little bit of optimism around rate updates for next year. Any comment on any of those metrics that you would want to give?

A. J. Rice:

Okay. Thanks a lot.

Andrew Mok:

Hi, good morning. Wanted to follow-up on Justin’s labor question, Steve, I think you mentioned another $15 million to $20 million in potential improvement in the fourth quarter. Do you have visibility into that level of improvement today based on the current trend and anything else you would point to that’s going to drive sequential EBITDA improvement in the fourth quarter? Thanks.

Andrew Mok:

Got it. Okay. As a follow-up, I think, Steve, you mentioned earlier this year that you’re starting to enhance your footprint in the Medicaid assisted treatment line. Can you update us on your progress there and how would you characterize the broader MAT opportunity over the next 18 months? Thanks.

Andrew Mok:

Great. Thanks for the color.

Stephen Baxter:

Yes. Hi, thanks for the question. Wanted to ask a follow-up on the pricing discussion earlier, I think you suggested that it might be challenging for your pricing yield to keep up with inflationary pressures, but just wanted to clarify that. Was that commentary specific to your government yield or your overall pricing yield? And I guess my actual question would’ve been just wanted to get an update on your commercial rate negotiations for 2023. I guess what percentage of your commercial book will be in the first year of a new contract in 2023? And then what do you think the incremental yield would be compared to a typical update? Thank you.

Operator:

Thank you. And we’ll go to our next question. And our next question comes from the line of Whit Mayo with SVB Securities. Your line is open. Please go ahead.

Steve Filton:

Yes. I mean I think and in my mind, this is sort of intuitive that the improvement in premium pay is a combination of both rate and utilization. Obviously, as the demand for those temporary and traveling nurses comes down, the rates that are required or being demanded for them comes down as well. So, I would say it’s a pretty even mix of rate and value coming down. I don’t have the specific month by month premium pay numbers in front of me with, but as you know, I was sort of referring to in my -- in a previous response, I mean what we -- I think have seen is a steady incremental decline in premium pay since the beginning of the year when COVID volumes peaked. And so I think our exit rate in the quarter was certainly higher or how we going to view it a lower amount of premium pay or a greater reduction than it was in the beginning.

Steve Filton:

Yes. I mean I think historically it’s been about a third of what it is in the Acute side, but I don’t have the specific number in front of me.

Steve Filton:

Yes. I don’t think anything terribly specific. I will say that the decline in corporate overhead in Q3 of this year was pretty consistent with what we experienced last year, but as we’ve analyzed those numbers, there’s nothing terribly material driving that.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Gary Taylor with Cowen. Your line is open. Please go ahead.

Marc Miller:

That’s correct, Gary. We didn’t suffer fortunately any significant physical damage in any of our facilities. So, I think all the impacts were temporary and most should be recovered in the fourth quarter.

Steve Filton:

Yes, so that $30 million is the EBITDA impact.

Steve Filton:

Sure. So, clearly and we have talked about this on previous calls the most significant driver and I think the biggest distortion is the insurance subsidiary where we record our medical loss ratio in that line. And because the medical loss ratio for our insurance subsidiary like any insurance subsidiary is 85 or 90% of revenues. And otherwise, that other operating expense line for our hospitals is more something like 20% revenue. And to a degree that there is a revenue increase in the insurance subsidiary, it sort of distorts that line. So, in the third quarter, there is about $30 million to $40 million increase in insurance subsidiary revenues and expenses. If you adjust that out of other operating expenses, I think rather than like a 15% increase quarter-over-quarter it’s certainly like 10%. And I think that’s probably a reasonable go-forward. I don’t have the year-to-date numbers in front of me. But, we can certainly provide those. We will make a point I think when we give guidance for 2023 of trying to separate out the impact of the insurance subsidiary and those numbers. So, it’s easier for people to follow. I understand the difficulty that creates.

Steve Filton:

Yes, I would say after adjusting out the insurance, there is a bunch of miscellaneous things. Probably the other most volatile item in the most recent past has been physician payment. So, our payments to physicians including locum physicians and increased subsidies for hospital-based physicians et cetera would be recorded on that line. And so you are seeing some impact of that, and then just the impact of broad general inflation.

Operator:

Thank you. And one moment for our next question. And our next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open. Please go ahead.

Steve Filton:

Yes, I mean -- look, I think we made these comments broadly. And I think most hospitals have made these comments broadly. July volumes in both Behavioral and Acute were really rather soft. August tracked better. And I think September was sort of a reflection of the two month -- the two earlier months combined. So, I think the trend is upward. But I think what we have learnt during the pandemic is the trends are a bit more volatile than they have been historically. But again, I think the thing that we say with some confidence is that in periods of lower COVID utilization, Behavioral volumes will tend to trend upward. And that’s been our experience. As far as the sort of question about if we continue to have mid single digit and upper single revenue growth as we did in Q3, should that be enough to allow for margin improvement? I think the answer is yes. I mean I think we saw that in the quarter. And I don’t think there is any reason why we shouldn’t continue to see that going forward.

Steve Filton:

Yes, I mean we definitely saw our acute care peers raising wage rates, often multiple times during 2022, and again particularly during COVID surges. As I said, I mean I think that our hope is that with COVID volumes more stable, and hopefully without another really significant surge, like we saw in January '20 and January '21, wage rates will be more reasonable, and wage rate increases will be more reasonable in 2023. Look, the other issue is, I think as most people know, I mean I think most of our not-for-profit peers are struggling financially, and then that may be an understatement. So I think, again, the hope is that their willingness to give what we believe will be characterized as outsized pay increases, they're going to have much less of an appetite for that in 2023 than maybe they did in '21.

Operator:

Thank you. And one moment for our next question. And our next question comes from the line of Sarah James with Barclays. Your line is open. Please go ahead.

Steve Filton:

Yes, Sarah, we generally don’t give those metrics because I think they're hard to measure across the portfolio consistently, not every hospital tracks it the same way, et cetera. We do try and track it, but internally. But I've been reluctant to give those metrics out publicly. And what I will say is what we do know during the pandemic is that the percentage of inbound call volume or -- we call it call volume, but it could be over the internet, et cetera, that we were able to satisfy was significantly lower than it was pre-pandemic. And the main reason for that was because of again, I'm going to describe it as capped beds. And the beds could have been capped either because we were isolating COVID patients in certain units or because we didn’t have enough staff. And again, what we have manifested many times when COVID volumes decline is we know that the number of uncapped beds increase as COVID volumes come down. It's difficult to give a precise impact of that. But again, I think you can see it in the 8% same-store revenue growth in Q3.

Steve Filton:

I think it's mostly a timing issue. I think that we have a view that CapEx investments that make economic sense that pencil out to a reasonable return, et cetera, make sense. They may not make sense from a timing perspective to add capacity in an environment in which we're already having difficulty staffing the existing capacity we have. But ultimately, they'll get built. So, I don’t know that there's any 2022 -- because the reality is 2023 large expansion projects that would be adding capacity -- scheduled capacity are probably already well-committed too. I think that our deferral or delay in CapEx probably pushes out some '24 projects to '25, and '25 to '26, it's that sort of thing, rather than, I think, an immediate impact in '23.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Noah Comen with FactSet. Your line is open. Please go ahead. Noah, your phone may be on mute.

Steve Filton:

We'd just like to thank everybody for their time this morning, and look forward to --

Steve Filton:

Thank you, and good morning, everyone. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2022. 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 those 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, 2021, and our Form 10-Q for the quarter ended March 31, 2022. 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 an adjusted net income attributable to UHS per diluted share of $2.20 for the second quarter of 2022. As previously disclosed in our preannouncement on June 30, 2022, our acute hospitals experienced a significant decline in COVID-related patients during the second quarter of 2022. As a percentage of total admissions, COVID diagnosed patients made up 13% of total admissions in the first quarter of 2022, but only 3% in the second quarter of 2022. The decrease in COVID-related patient volumes during the second quarter was not offset by an equivalent increase in non-COVID-related patients resulting in significant shortfalls in revenues and earnings compared to our original forecast for the quarter. And even though we did make progress in reducing premium pay in the acute segment, which went from $153 million in the first quarter to $117 million in the second quarter, overall costs did not decline sufficiently to offset the weaker revenues. Specifically, a surge in patients with the Omicron variant of the virus, which began in December of 2021, tended to peak in most of our geographies in January of 2022. In our acute segment, we would note that in general, the Omicron patients were less acutely ill than the COVID-related patients treated in previous surges and thus displayed somewhat lower acuity. Meanwhile, the amount of contract nursing hours used and even more importantly, the rate we had to pay for those hours increased significantly in the first quarter, both on a sequential basis as well as on a year-over-year comparison. In our behavioral segment, we also made progress in filling our vacant positions, but patient day volumes still does not recover as quickly as we originally expected. We do note that our reported second quarter results were benefited from approximately $10 million of revenues from supplemental Texas Medicaid reimbursements, which were not reflected in our estimates for the quarter in the preannouncement. These revenues were originally contemplated to be recorded in the second half of the year. So the $10 million represents a shift in timing only. The second quarter also included approximately $20 million of startup losses incurred by recently opened de novo acute and behavioral health facilities as well as a $16 million pretax charge incurred to increase our reserves for self-insured professional and general liability claims.

Operator:

[Operator Instructions] Our first question comes from Marco from Nephron Research. Your line is now open.

Steve Filton:

Yes. So, what we said in the first quarter was that we had $115 million or $153 million of premium pay in the acute segment, and we said that our guidance presumed that, that number would be cut approximately in half by the fourth quarter, so that we’d have something like $75 million or $80 million of premium pay in the fourth quarter. We’re pretty much on track for that trajectory. As I said, we had $117 million of premium pay in Q2, which is about 20%, maybe a little bit more reduction. I think that reduction came from a combination of both rate declines and hours utilized, I think split pretty evenly in terms of their impact. And I think that’s where we are. As far as underlying base wage rates, I think as we’ve noted before, they have gone from sort of pre-pandemic increases also on the acute side specifically, from, let’s say, 3%, 3.5% to something more like 4.5% to 5%. On the behavioral side, they probably started at somewhat lower. But again, something in the neighborhood of 125 basis point, 150 basis point increase in base rates, pre-pandemic, post-pandemic comparison.

Steve Filton:

We do track that internally. We don’t disclose those numbers in part, because I think different hospitals track them a little bit differently, et cetera, and we don’t view them as the most precise statistics. But we do know that we have turned away during the pandemic, a significant number of patients either because we didn’t have the staff to treat them or because we had certain beds blocked because patients couldn’t be exposed to other patients with COVID, et cetera. I think, what I would say is, we continue to believe that the historic levels of growth that we’ve experienced in our behavioral business of mid-single-digit volume growth, 3%, 4%, 5% same-store patient day growth year-over-year, we believe there’s certainly still achievable once we can get beyond the current labor scarcity. And I think the second quarter represents an incremental improvement towards that goal still a ways to go. But I think the trend is a positive one.

Operator:

Thank you. [Operator Instructions] Our next question comes from Andrew Mok with UBS. Your line is now open.

Steve Filton:

Yes. I mean the insurance subsidiary was somewhat of a drag on earnings. It certainly was not the significant – most significant or even close to the most significant, I think, obviously, as we discussed, both in the preannouncement and our remarks again today. It was – difficulty we had in replacing COVID patients with non-COVID patients. The insurance subsidiary winds up being a drag because as we add new subscribers or establish new accountable care organizations in our markets, there are generally startup costs and losses associated with that. But that drag in the quarter was, in my mind, no more than $10 million.

Steve Filton:

Yes. I mean probably a chunk of that and probably the most significant chunk is if people recall and we did disclose, we recorded that special reimbursement, special Kentucky reimbursement, in June of last year. And in the comparison between years, at least some of that is included. So, as we’ve noted, the recording of that Kentucky revenue is much more ratable in 2022. So, we’re comparing a more ratable reimbursement rate in 2022 with that big chunk received in 2021. So probably that drives down the revenue growth rate more than anything else.

Operator:

Thank you. [Operator Instructions] Our next question comes from Stephen Baxter with Wells Fargo. Your line is now open.

Steve Filton:

So the insurance subsidiary results are certainly included in our same-store acute results and always have been, obviously, except for when they first started. What I said in my prepared remarks was we had $20 million of startup losses at new acute care and behavioral facilities. The biggest chunk of that is our new hospital in Reno, which opened, I believe, very late March or early April. And one of the things that we’re experiencing, just yet another difficulty of the pandemic, is a slower process in getting a new hospital certified and getting their Medicare numbers and therefore, being able to bill patients in a more timely way. Historically, that used to be literally just a few day process between opening and getting your Medicare number certified. I think in the case of our hospital in Reno, it took us almost a couple of months. And as a consequence, I think we suffered more significant losses than we really anticipated, and that’s a big chunk of that $20 million that I mentioned in my prepared remarks. One of the significant improvements we’re expecting in the back half of the year is that, that hospital will ramp up fairly significantly in our forecast of leases that it will be profitable by the back half of the year.

Steve Filton:

Yes. I mean the acute care, other operating expenses appear to be going up fairly significantly. But as you pointed out, I think the biggest chunk of that is the impact of the insurance subsidiary. The insurance subsidiary records its medical losses or we record is medical losses in that other operating expense line, because their medical losses tend to run 85%, 88% of revenue as opposed to other operating expense at the hospitals, which tend to run at 20% of revenue, something like that. When we have an increase in subscribers and increased revenue on the – in the insurance subsidiary, it tends to distort that other operating expense line. So as an example, in Q2, if you exclude the insurance subsidiary from on our acute care reporting, our same-store revenue growth, which we reported 3% would be adjusted to 2%, but our other operating expense growth, which we report as 14% would be at 6%, which I think is probably much more in line or what would be an in-line expected number for that other operating expense. There’s nothing else extraordinary in that other OpEx line that I can think of.

Benjamin Rossi:

Hi, good morning. Thanks for taking my question. Just going in for Matt Borsch here. Just regarding inflationary pressures for 2023. I know it’s early, but how do you think we should be thinking about key inflationary pressures for 2023 versus historical trends? And with managed care negotiations and ability to pass some of these inflationary pressures through pricing, can you just give us some timing on how we should think about that?

Benjamin Rossi:

Got you. Great. And then quickly on recruiting. We’ve been continuing to hear about tight labor conditions for clinical staff, particularly LPNs. Just looking for a quick update on how your internal initiatives for recruiting retention are playing out? Thanks.

Benjamin Rossi:

Great. Thanks for your comments here.

Jason Cassorla:

Great. Thanks. Maybe just for the acute business. Can you discuss the utilization by payer across commercial, Medicare and Medicaid? And if there’s any particular payer buckets where you’re seeing outsized pressure on volumes. And then just a follow-up on mix. Acuity seems to remain elevated. But are you seeing any relative pressure on the medical versus surgical side of the business worth noting? And then maybe how we should think about those trends for the balance of the year? Thanks.

Jason Cassorla:

Got it. I appreciate that color. And maybe just a follow-up, just on the CapEx side. If I heard this correctly, it sounds like you’ve reduced CapEx spend the expectations by about 20%. And I think last quarter, you discussed that you’re taking CapEx spending in account on an episodic basis given the labor and volume backdrop. And perhaps, if you can give any more detail around the CapEx reduction and the developments there, that would be helpful.

Jason Cassorla:

Got it. Thanks. Appreciate all the color.

Whit Mayo:

Thanks. Steve, on the malpractice charge, is this a onetime prior year negative development? Or did you raise your estimates and reserves on a go-forward basis? I know we had a higher malpractice development last year. So just trying to understand kind of what you have in your plan now?

Whit Mayo:

So it’s the size of the claims, not the frequency of the claims.

Whit Mayo:

Okay. And maybe just two other quick questions. I’m curious how the UK operations are performing now and if there was any sizable impact from currency in the quarter? And then if you could just talk a little bit about the surgical trends in the quarter, any service lines stronger, weaker than your expectations.

Whit Mayo:

Okay, thanks.

A. J. Rice:

Thanks. Hi, everybody. Maybe first, you mentioned, Steve, you’ve seen progression throughout the quarter and July trends looked like there at least as strong as June, if not a little better. Normal seasonal pattern would have you stepped down in the third quarter, probably in both businesses and then have a strong finish to the year in the fourth quarter. When you’re thinking about the way guidance lays out for the back half of the year, I know you don’t guide on a quarterly basis. But can you give us any flavor for how you’re thinking about the trajectory? Will it be a normal seasonal year? Or would it be somewhat different than that?

A. J. Rice:

Okay. And then maybe I’ll ask on the behavioral business. You had a sequential improvement in margin of about 200 basis points that was encouraging. And that really didn’t come with a big rebound in volume or step-up in volume. Is that – how do you think then where do we go from here? Do you need volume to step up somewhat you get further margin improvement? Are there other things that are specific to the labor situation, whatever that suggest that you can see more margin improvement? And any sense of where you think that would ultimately settle out coming out of the pandemic?

A. J. Rice:

Okay. Maybe I’ll just slip in one last one because it hasn’t been addressed. It seems like some of the specialty hospital peers, whether it’s rehab or behavioral, they’re talking about seeing an uptick in acute care companies or entities being interested in doing joint ventures as they’re repositioning and trying to deal with their own labor challenges. Are you seeing that? Any update on discussions around potential JVs with other big health systems?

A. J. Rice:

Okay, thanks a lot.

Ben Hendrix:

Hey, thank you very much. Just to follow up on the behavioral side. Certainly, you mentioned that the volumes have got sequentially a little bit better since low point in January, but they seemed to trend a little bit better than we had expected. It seemed to be a little bit better than some commentary for your peers on behavioral. I was just wondering if you could – are there any particular areas that you saw or were a little bit different from your expectations. And just how that’s trending in general? And if there were any particular mix issues with payer mix or if there was any kind of patient mix that deviated from your original expectations? Thanks.

Ben Hendrix:

Thanks. And just a quick follow-up on the CapEx side. I know you talked about a reduction in CapEx and part of that going to discrete equipment spending. But is there any particular color you can give us on in priorities for those cuts kind of in the equipment side? Thanks.

Operator:

Thank you. And our next question comes from Kevin Fischbeck with Bank of America. Your line is now open.

Steve Filton:

Yes. So thanks, Kevin. It’s a good question, and I probably should have been a little more precise in my commentary. I think absolutely from the beginning of the pandemic, we have talked about the major headwind or gating factor on the behavioral side as being the labor capacity constraint and shortage. But I do believe that in Q2, and I think on the acute side, through most of the pandemic, the issue has been – we’ve been able to fill most of our vacancies, but we’ve had to do so at an extremely high cost. And therefore, on the acute side, most of the focus has been on that premium pay rather than sort of an absolute scarcity or vacancy sort of an issue. I will say that in Q2, we did see that issue arise in the acute care segment. I don’t know that we saw it pervasively. I don’t know that it was the single biggest issue by any stretch. But for instance, I think our surgical volumes overall were impacted in some of our markets by a lack of anesthesia coverage, anesthesiologists and their assistance, et cetera, tend to be independent contractors, not our employees. So it’s not necessarily something we’re in direct control of. But we were hearing feedback during the quarter that we were having to limit surgery schedules, et cetera, in some markets because there simply weren’t enough anesthesia – wasn’t enough anesthesia coverage. Same thing in some markets, we had to go on emergency room divert because we didn’t have simply enough staff in the emergency rooms, et cetera. Again, I don’t know that it was a pervasive issue in the acute care space in Q2. But I do think it contributed to the Q2 weakness in a way that we hadn’t necessarily seen before.

Steve Filton:

Yes. Look, Kevin, I think that the notion that where there’s a labor scarcity, you’re going to want to emphasize your high-margin service lines and deemphasize your low-margin service lines is sort of theoretically an attractive idea and something that I think we do and we do all the time to the degree that we’re able to. I do also believe that in a business in which at least half of our patients or more than half of our patients, but about maybe half of our admissions come through the emergency room, I’m sure you can understand that that’s not an easy business to control, and you basically take what comes in and you treat those patients same thing. OB, as an example, tends to be one of a lower-margin service lines in most hospitals. But when a woman comes into the hospital in labor, there’s really no option to do anything but to treat that women, and that’s of course, what we do. So again, I’ve heard what the other companies say, and I think we certainly try and do it to the degree that we can. But I also believe that in a hospital, there’s really a limit to how much of that you can do. I think what we can do in terms of being selective in our business is what I alluded to before in terms of managed care contracting. We don’t have to be in network with managed care payers who are not offering us adequate rates, et cetera. So I think in that regard, that’s an easier sort of function to manage because you can sort of do that in advance. And if somebody is out of network, they’re either going to pay a higher price or they’re going to go to another hospital. But that’s something that I think you can deal with in a more, in my mind, more sort of measured and rational way, and we certainly have talked about that now for several quarters.

Steve Filton:

Yes. So Kevin, I go back to late 2019 right before the pandemic, I’m going to say November, December of 2019; January, February of 2020. And you’re right; we were coming off some challenging years. We had seen labor shortages back in 2015 and 2016 that I think we had largely overcome. We saw length-of-stay pressures in 2017 and 2018 from our managed Medicaid payers; I think we have largely overcome. And I would say that four, five month period, late 2019, early 2020; I think we were generally feeling like we were firing on all cylinders for the first time in a long time. And it certainly was still a tight labor market. But there’s a difference between sort of a tight labor market and one in which there are extreme scarcity, which I characterized the way it was during the pandemic. So we had, I think, a four or five month period of kind of just a brief window to see what it would be like to be able to operate without any significant sort of overarching headwinds still in the tight labor market. And we were doing pretty well during that short period. And then, of course, the pandemic occurs in the middle of March of 2020. I think that’s really kind of what we’re shooting for. And I don’t know that we’re going to get back to that environment in the next month or the next quarter. But I think, we feel like it’s not something that’s so far away that we can’t see getting there. And I think we feel like there’s a lot of incremental improvement as we return to an environment where we ought to be able to grow the behavioral business revenues in sort of mid- to upper single digits, which we have done for a very long time for a decade and half or so before all this started. And I think that’s the overall plan. And we’re very focused on it. I think Marc alluded to all the money that we’ve invested in recruitment and retention initiatives. We think that there’s a real payoff to all those things over the next couple of years. And again, fundamentally, every measure that we have is that there’s still significant demand out there for behavioral and that, quite frankly, demand for behavioral services is probably in the general population increase during the pandemic rather than decreased.

Operator:

Thank you. [Operator Instructions] Our next question comes from Pito Chickering with Deutsche Bank. Your line is now open.