This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Ladies and gentlemen, thank you for standing by. I would now like to hand the conference over to your speaker today, Mr. Steve Filton. Thank you. Please go ahead, sir.
Steve Filton
Thank you, Natalia. Good morning. Alan Miller, our CEO, is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2020. During the conference call, we will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the sections on risk factors and forward-looking and risk factors. 10K for the year ended December 31, 2019, and our form 10Q for the quarter ended March 31, 2020. 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 $2.95 for the quarter. 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 $2.93 for the quarter ended June 30, 2020. As of June 30, 2020, we have received approximately $320 million of funds from various governmental stimulus programs, most notably the CARES Act. Included in our reported income for the second quarter is approximately $218 million of net revenues recorded in connection with these stimulus programs. Approximately 157 million of these revenues were attributable to our acute care facilities, and 61 million were attributable to our behavioral health facilities. In addition, during the second quarter of 2020, we received approximately 375 million of Medicare accelerated payments, which had no impact on our earnings during the quarter. As previously discussed in our first quarter conference call, Beginning in mid-March, the incidence of COVID-19 and suspected COVID cases increased in our acute facilities, and correspondingly, the volume of non-COVID patients declined significantly. These declines in patient volumes generally continued into the first half of April. Beginning with the second half of April, our admission and patient day metrics began to rebound. By the first half of May, local authorities had lifted restrictions on elective surgeries and other procedures, and those volumes began to rebound sharply as well. ER visits, while also gradually improving, have been the volume unit slowest to recover. But the increased acuity of our patient population suggests, at least in part, that the more severely ill patients who tended to return to the emergency rooms and the less acute patients were the ones continuing to avoid that level of care. In late June and continuing into July, most of our hospitals experienced a second wave of COVID cases, although to date, this second wave has not been accompanied by the same magnitude of non-COVID case declines that we experienced in the first wave in the March-April timeframe. Generally, our hospitals were better able to prepare for this second wave with greater ICU and isolation room capacity as well as more ample inventories of PPE. Obtaining timely COVID test results as demand has increased does remain a challenge in certain instances. The behavioral health segment experienced a similar pattern of volume changes with patient day metrics hitting a trough in early April and incrementally recovering for the rest of the quarter. Despite a number of headwinds, including a decline in referrals from acute care emergency rooms and from schools, which mostly remain closed, and from travel restrictions on potential patients, behavioral patient days returned to close to pre-COVID levels by mid-June, prior to the late June second COVID wave. As we noted in the first quarter, our paramount concern throughout the COVID crisis has been taking all the necessary steps to keep our patients and employees as safe as possible. We did, however, also recognize the severe financial stresses created by the COVID crisis, and we undertook a series of steps to mitigate the dramatic revenue declines and to protect our capital structure, including one, cost reduction initiatives across all of our expense categories. Our approach in this regard, especially as it relates to labor expenses, has been a balanced one. reflecting our expectation that the dramatic declines in volumes would, in many instances, be temporary in nature, and also recognizing the severe strains that the crisis has created on our employee caregivers. Two, a reduction in planned capital spending. This effort was somewhat transparent in the second quarter as most of our existing and committed projects continued on schedule, but we expect the pace of spending to slow in the second half of the year as newer projects are repriced and possibly postponed. And three, a suspension of share repurchase and quarterly dividend programs. As a result of these actions, as well as the funds received during the second quarter in connection with the governmental stimulus programs and Medicare accelerated payments, the company had close to $1.4 billion of aggregate available borrowing capacity as of June 30, 2020, along with almost $600 million of short-term cash investments on the balance sheet. While we are encouraged by the improving volume trends in the quarter, we acknowledge the potential impact COVID-19 could have on our future operations and financial results. And since the nature of these future COVID developments are largely beyond our ability to control, We have continued to withhold any further earnings guidance for the balance of 2020. Alan and I would be pleased to answer your questions at this time. Natalia, whenever you're ready.
Operator
Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, that is star 1 to ask a question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from the line of Andrew Mock with Barclays.
Andrew Mock
Hi, good morning. Thanks for all the color on the quarter. First, can you put some numbers around the acute and behavioral volume trends exiting June and how they've performed so far in July against the backdrop of rising cases?
Steve Filton
Yeah, so Andrew, I think that in terms of patient days, as an example, I would say in mid-June, both our acute and behavioral patient days were averaging something like 95% of pre-COVID levels. I think there were some days where we were even higher than that. Same thing with elective and elective surgical and other procedures had climbed back to those levels. ER visits, as I noted in my remarks, were still, you know, probably 25% short of pre-COVID levels. But then, as we saw this second wave hit in the last maybe 10 days of June and into July, most of those metrics took a step back. I would say that, for instance, elective procedures were now running in the July timeframe maybe 85 to 90% of pre-COVID levels. Behavioral patient days were running, let's say, 90 to 95% of pre-COVID levels. So a bit of a step back from where we were, but not that dramatic decline that we saw in the March-April time frame.
Andrew Mock
Got it. That's helpful. And then just wanted to follow up on the behavioral segment. You mentioned that your behavioral patient days rebounded in mid-June to near pre-COVID levels. even though ER volumes were still down meaningfully and schools were closed. What does that say about underlying demand for behavioral in this environment, and what are your expectations for volumes once all the referral sources are open and at full strength? Thanks.
Steve Filton
Sure. I think it says a few things. I mean, one is that our facilities and our operators took steps during the crisis to reach out to our potential patient population who might have had concerns or anxiety about going to hospital ERs and tried to deliver the message to that population that there were other ways that they could enter the system and get care, get the assessments that they needed and the ultimate care that they needed. And I think that as the quarter went on, those efforts were more and more successful. But also, I think as your question sort of alluded to, I think it suggests, and I tried to say this in my prepared remarks, that despite the headwinds that existed, fewer referrals from ERs, schools being closed for the most part across the country, travel restrictions, that behavioral demand really was restored to something close to pre-COVID levels, and I think it suggests that that underlying behavioral demand is quite strong And I think our belief is that we'll continue to face some of these same headwinds, including incidents of the COVID virus amongst both our employee population and our patient population, but that the fundamental demand for behavioral services across the board and all sorts of diagnoses and illnesses seems to be growing. And that seems to be consistent with what one might expect. It's an incredibly stressful environment for all of us. And so if you are someone who is predisposed to having a chronic behavioral illness, you can only imagine how difficult this environment is. And the fact that lots of those patients are being stressed now and need some extra care is not surprising, at least in my mind.
Andrew Mock
Great. Thanks, Robiculler.
Operator
Your next question is from the line of Justin Lake with Wolf Research.
spk03
Thank you, and good morning. This is Eugene for Justin. Just a quick follow-up on Andrew's question earlier. Fourth of July decline in volume, are these declines driven by a few states? Are you seeing elevated level of COVID, or is it more broad-based in your facilities?
Steve Filton
Sure. Well, the reality is is that in our acute division, almost all of our facilities, the vast majority are located in hotspots in Florida and in Texas and in Las Vegas and in Riverside County, California and South Texas. All those areas have been hotspots. And so we've, you know, we've experienced this, the trends that I noted, really across the acute division. Our behavioral division is more geographically disparate, but obviously the fact that there's been a resurgence in COVID cases across the South and the West means that we certainly have a large number of facilities that have been affected in the states that I mentioned, also in Arizona and in a number of other places as well. So it's been pretty broad-based, this second wave, although certainly not in every single facility.
spk03
got it thank you and i wanted to quickly ask about margins on lost revenues for the quarter it appears uh decremental margins have improved quarter over quarter but still remain pretty high at north of 50 percent um can you give us a little more color on how we should think about this going forward if there's room for to first improve in the back half if the volume doesn't fully recover
Steve Filton
Yeah, I mean, so the margins in the first quarter, and I think we discussed this at some length on the call, were really dramatically impacted in a negative way, I think for two reasons. One is we saw the rise in COVID cases in mid-March, but saw this dramatic commensurate decline in non-COVID business, the cessation of elective surgeries, the decline in ER visits, the decline in behavioral patient days, etc., I think the other issue in Q1 was because it happened so suddenly and happened so late in the quarter, there was very little cost adjustments and cost reductions that took place in Q1. In Q2, I think margins certainly looked sequentially better, as you know, for a variety of reasons, excluding the government stimulus funds, obviously. But, you know, volumes rebounded during the quarter. elective surgeries came back on the acute side. We made a significant amount of adjustments to our cost structure. But I think, you know, we said this at the end of the first quarter, the nature of the hospital business is such that because so much of our costs are fixed and semi-fixed in nature, it's almost impossible for us to reduce costs at the same rate that revenues are being reduced, particularly in this sort of environment where revenues have been reduced by a fairly dramatic amount. So as long as that's the case, we're gonna face that margin headwind. Obviously, if volumes are restored to sort of pre-COVID levels, we would have every expectation that we should be able to get back to a margin profile that also looks like the pre-COVID margins.
spk03
Got it. Thank you for all the color.
Operator
Your next question is from the line of Pito Chickering with the Deutsche Bank.
Peter
Good morning, guys. Thanks for taking my question. Can you talk a little more about expense management? Can you walk us through the main actions you've taken in acute during 2Q? Talk about premium labor, what you paid for in 1Q versus 2Q. And as you roll into the back half of the year, are there any areas for additional cost savings on acute and or behavioral? And at the same time, can you talk about any stress points that could actually lead to increased expenses for both businesses in the back half of the year?
Steve Filton
Sure, Peter. A pretty broad question, so I'll try and cover all the points. I think when the COVID crisis first began and we saw this dramatic reduction in revenue, we tried to take a broad look across all of our expense categories and reduce expenses wherever that was possible. Obviously, you're looking to reduce expenses first in those places where expenses are more naturally variable, supply expense sort of being obvious, labor being kind of the next obvious one. And it was a little bit difficult because you know, what we saw was a very uneven pattern of demand. So, in other words, our emergency room volume was down, but it was high with COVID patients and suspected COVID patients. Our ICU volumes tended to be down, but, you know, the activity in a lot of the elective and procedural areas were down significantly. So, we tried to make labor adjustments where that was you know, most appropriate. But also, as I noted in my prepared remarks, I think we did so with the notion that in relatively short order that demand would be restored and we wanted people to be able to come back to work as that occurred, et cetera. So I think we were fairly cautious in how we reduced labor hours, et cetera. As your question alludes, one of the early things that we did was try and reduce the amount of premium labor and that includes things like overtime, the use of temporary nurses, the use of traveling nurses, and those were significantly reduced in the second quarter and I think contribute to a lot of the labor reduction in the quarter. As we look to the back half of the year, the biggest challenge, I think, is in predicting and in planning for what the level of volumes will be. And again, these COVID surges and the ebbs and flows make it a little bit more difficult than predicting and preparing for a sort of a normal hospital season, which in and of itself tends to fluctuate some That's a challenge, but we'll continue to deal with that. I think our operators are doing a really remarkable job in the face of these challenges. Finally, when you ask about potential stress points, I really think it's in the labor force. I don't think it's possible to overstate how difficult this environment is for folks working on the front lines in hospitals, clinicians. support staff, et cetera. It's an incredibly stressful environment. They're being asked to do a great many things. They're responding, in my mind, magnificently. But the longer this goes on, the more challenges that creates in terms of their ability to continue to work in that stressful environment. Employees have been exposed to the virus. They need time to recuperate and to quarantine and all those things. So that probably is the single biggest stress point that we worry about in terms of the continuation of the virus.
Peter
Because the last question was pretty broad, my follow-up will be a lot more targeted. Behavioral demand has been pretty robust relative to COVID. Can you give us any breakout of geographical differences you've seen across your portfolio? Or maybe more importantly, what specialties are you seeing elevated to demand and where are you seeing lower demand? Thanks so much.
Steve Filton
Yeah, we talked, I think, a little bit about this in Q1. I think our residential business was less impacted by the COVID crisis. That's why I think in large part our length of stay appears to be longer. Our residential business carries a much longer length of stay. The acute business, the acute behavioral business, which tends to rely more on emergency room referrals, et cetera, has been more impacted. The addiction treatment business, particularly the Legacy Foundation addiction treatment business, which involved and depended on a lot of travel for treatment, and as you might imagine, you know, that sort of aspect of their business was diminished significantly. So, you know, that came under some pressure. But generally, as I sort of answered in my last question or in my last response, we're seeing demand for behavioral services across all diagnoses to be fairly robust. And I think it's because, as I said before, I think if you are predisposed to having a chronic behavioral illness, whatever it might be, schizophrenia, severe depression, addiction illness, and you're under the kind of stress that most people are under in this environment, you know, the likelihood that you're going to suffer some sort of traumatic episode or require incremental care, et cetera, I think is much greater. And I think we're seeing a lot of evidence of that. Great. Thanks so much.
Operator
Again, to ask a question, please press star, then the number one on your telephone keypad. Again, that is star1.com. Your next question is from the line of Kevin Fishback with the Bank of America.
Kevin Fishback
Great. Thanks. So I guess, you know, obviously the rates were quite strong. You know, I guess we have that high acuity volume staying in and the lower acuity volume was delayed. I mean, how should we think about modeling that? I guess the pent-up demand in theory is probably going to be lower acuity. So that would mean that when volumes come back, maybe rates should be lower. Is there any way to think about what impact that should have on margins when we have this pent-up demand? Is it more about that, or is it more about just revenue growth, which is going to determine the margin expectation?
Steve Filton
So, I mean, you didn't specifically say, Kevin, but I assume this is mostly an acute care question because rates or pricing on the behavioral side look what I would consider to be pretty normal or historically normative. Yeah, so, you know, as your question sort of, I think, presumes, You know, the revenue per adjusted admission on the acute side of the business was historically strong in the quarter. It's a reflection, again, as I mentioned in my prepared remarks, of the high acuity of our patients, which I think is a combination of a couple of things. One is the COVID patients themselves that we are seeing are quite sick, many of them. Particularly, as everybody reads, you know, the elderly and those with chronic underlying conditions tend to have a longer length of stay. They tend to have a lot of complications. And I think that's being reflected in the revenue numbers and the pricing numbers that you're seeing. I think the other issue, as I sort of talked about in my commentary about ER visits, is the less acutely ill patients, tend to be sort of staying away from the hospital in greater numbers and therefore they're not sort of creating that balance in pricing that has existed normally. In terms of how to model that, it's difficult to do. I think it's one of the reasons why we're reluctant to give any sort of precise guidance as we move forward because I think it very much depends on The level and the amount of COVID patients we see, the kind of COVID patients we see, are they going to be sort of the older cohort, more elderly than we saw in the first wave, kind of a younger cohort than we saw in the second wave? How sick are they going to be? You know, how comfortable are people going to be to come back to hospitals and emergency rooms for what I would describe as a little bit more normal care? All these things are difficult to predict. And, you know, I would think that over time our acute care pricing will return to more normal levels as the COVID crisis eases, et cetera. But exactly how quickly that occurs and over what period of time, again, difficult to predict without knowing sort of what the trajectory of the virus is going to be.
Kevin Fishback
Okay, great. And then I guess, you know, on the – on kind of that dynamic. If we have a situation where, you know, for the next few quarters, you know, kind of core volumes, if you will, are 90, 95% and COVID volumes are five or 10% so that your, your occupancy overall is kind of normal. Can you get normal margins on a payer mix or patient mix like that? Or, you know, does it need to be really more kind of core volumes, if you will?
Steve Filton
Yeah, look, I think that, you know, we were headed in June to an experiment or however you want to think about it, or a month, I think, in our own minds that we felt was going to closely resemble, again, it's not the greatest term, but I'll call it a normal month. Volumes were returning to something close to pre-COVID levels, and I think if we had finished June early, without the second wave of COVID cases, that would have been the experience. We would at least probably have exited the month at something close to pre-COVID levels. And I think that would have been a good test. And my own sense is that we would have gotten back to something approaching that pre-COVID kind of margin profile. We didn't get a chance to really experience that because of the second wave. So it's difficult for me to say that with great or precise certainty, but my sense is if we can get most of our volumes, patient days, admissions, on the acute side elective procedures and surgeries, on the behavioral side patient days back to something approaching pre-COVID levels, there's no real reason why we shouldn't get close to pre-COVID margins. There's some amount of incremental expense associated with treating COVID and COVID-suspected patients, but I don't think it's really what's moving the needle. What's moving the needle in terms of that margin shortfall, again, is the sort of notion of COVID cases pushing out or squeezing out to a degree non-COVID cases, which happened in great numbers early on in the March-April time frame and in much smaller numbers in the May-June time frame.
Kevin Fishback
Okay, thanks.
Operator
Your next question is from the line of Grant Hesser with JP Morgan.
Grant Hesser
Hey, Steve. Maybe as a follow-up to Peter's question, and you mentioned the length of stay impact of the mix into the residential business, but have you also continued to see a relaxing of managed care policies in terms of controlling length of stay? And when do you think that sort of normalizes?
Steve Filton
Yeah, I think probably the biggest impact has been the shift in business. And as I said, the residential business tends to have historically a much longer length of stay than the acute business. So having the volume decline focused on the acute side of the business, I think just naturally has created this greater growth in length of stay. But you're right. I mean, I think we see in some of our other payer categories length of stay has crept up a little bit. It's hard to say whether that is reflective of a somewhat more acutely ill population or a relaxing on the part of managed care companies of some of their utilization review procedures in the crisis. I think ultimately the payers will behave the way they always behave, which is trying to manage as efficiently and effectively as they can their medical spend. So I don't think that whatever benefit that is, and I don't think it's that great to us. I don't think it's sustainable over a long period of time. But again, I think what's driving the increased length of stay is probably other factors, more than a relaxing on the part of the payers who, you know, if you follow, you know, obviously as I know everybody on this call does, you know, their earnings, et cetera, you know, they're quite good. So they've been pretty successful at controlling their medical utilization, whether that's actively or just naturally in this COVID crisis.
Grant Hesser
Got it. That's helpful. And then I guess just at a high level, I'd be interested in sort of your updated views of, sort of telehealth as it relates to the behavioral health strategy and how COVID has sort of obviously changed the environment as it relates to telehealth and how you're thinking about utilizing that moving forward?
Steve Filton
I think from our perspective, the biggest impact from telehealth in this last few months has been to provide an alternative access point or portal into the system, particularly for patients who were anxious about entering the system in a more traditional way, going to an acute care ER or a community mental health center, or kids who were not in school, whatever it might have been. And what telehealth did was enable our facilities and our clinicians to access a patient population in another way and assess them if they needed assessment and direct them to the sort of care that they needed or in some cases to provide an outpatient therapy session to a patient who needed outpatient therapy but again was reluctant to receive that therapy in an in-person setting. I don't think, you know, telehealth really replaced in any way our core business of inpatient care, but what it did, and I think what we've done very effectively in a short period of time, is create a much more robust telehealth infrastructure that gives a potential patient population more optionality about how to enter the system, how to be assessed, how to receive outpatient treatment in a broader way than they had four or five or six months ago.
Grant Hesser
Got it. Thanks.
Operator
Your next question is from the line of A.J. Rice with Accredit Suisse.
A.J. Rice
Hey, everybody. Just a couple quick questions, if I could ask. On the $477 million grant, that you're highlighting as Medicare accelerated payments and deferred government stimulus. Is there any way to disaggregate or say how much is each of those and the part that's the stimulus grant that's been deferred? When do you expect to recognize that? What's the gating factor on that?
Steve Filton
Yeah, so the 375, which I alluded to in the script, AJ, is the Medicare accelerated payments. Those are just what they say they are. They were meant to be prepayments for Medicare patients. They begin to get repaid, we believe, I think as early as August and then repaid over some time. There is some conversation in Congress about altering the payment terms, et cetera. The other issue which we talked about in Q1 is that we did not receive all the Medicare accelerated payments that we had applied for. we believe have been appropriately approved for, so it's conceivable that there is more of those to come. The other roughly $100 million are stimulus funds that we've received but have not recorded into income yet because we could not attest to the fact that we had either incremental COVID expenses or lost revenues as a result of COVID that would justify those amounts. We have some time to do that. In other words, if as this crisis continues, we incur more incremental expenses or lose more revenue, we may be able to justify some more of that. It's also possible that some of that will ultimately be returned. We're being very prudent about how we treat these things and are only recognizing the fund that we believe can be clearly justified in terms of the criteria that CMS has set forth.
Kevin Fishback
Okay.
A.J. Rice
All right. And my other question was, and this I understand has all been put on hold, but last fall you brought in new management in the behavioral business. And I know there was some discussion about potential initiatives looking at recontracting. and managed care somewhat, maybe using the leverage of the market strength or even the national strength you have to try to get some better advantages than you had historically. And there was also discussion about better use of data. Is that moving forward? And how much of that have you done? Or has it mostly gotten put on hold because of the COVID crisis?
Steve Filton
I think the answer is a little bit of both. Matt Peterson started with the company back in September, and I think in that September to March timeframe, created a number of initiatives, including some of what you talked about, which is entering into conversations with a number of large payers about different ways of sort of approaching the business in a way that would create sort of a win-win for both the payer and us as the provider. I think, as your question sort of alludes to, however, a lot of those conversations, a lot of those initiatives were put on pause, you know, beginning into the mid-March with the COVID crisis. And while I think we continue to have some conversations with our payers in that regard, the focus has primarily over the last several months been on just the sort of blocking and tackling of running facilities in this very difficult sort of COVID environment. So the hope obviously is that we will see uh, and easing, uh, this, these COVID cases at some point in the next few quarters. And those conversations and initiatives can be, uh, restored. Um, but, but I think they have largely been put on, on hold over the last three or four months.
A.J. Rice
Yeah. Maybe just, uh, another, uh, aspect to the behavioral business. Uh, and I'm sorry, I got on a little late, so I may have missed this. You talked about it already. Don't worry about it. But, uh, You obviously got the schools closed, which are a referral source for you. A lot of the acute care guys are reporting that ER volumes are down. You've seen some pressure in your behavioral business, but it's held in maybe better than you might expect given those other two variables. Is there any way to sort of give an assessment of is this crisis resulting in more demand for the service on an underlying basis? And if you see those other two start to come back, you might end up coming out the other end in a stronger demand environment, or do you have any view on that?
Steve Filton
Yeah, look, I will share my view, and I'll caveat it by saying I'm not sure that it's entirely supported by objective evidence, but as I think about an environment where emergency room visits across the country are down 25 or 30 percent, and schools are closed, and travel is severely restricted, and still am able to say that sort of pre this second wave of COVID, our behavioral volumes were back to something pretty close to pre-COVID levels. I think, and I did say this to somebody earlier, I think that's a reflection of the fact that the underlying demand for behavioral services is rather robust, because those are some pretty significant headwinds. Now some of that is a credit to our operators and our facilities who I think have worked very hard over the last three or four months to work around those headwinds and to reach patients who were not entering the system through acute care emergency rooms and reach adolescents who were not necessarily in school. And they've done a good job of that, but I think the mere fact that volumes have climbed back to the level that they had is a reflection that behavioral violence you would think would be as strong, you know, pre-COVID and post-COVID. And I think there's a legitimate argument to be made. And, you know, both intellectually and intuitively, I believe the notion that behavioral demand has increased in this crisis is not hard to speculate. And I think we've seen that. And I think we'll continue to see it grow as the COVID patients are stabilized and are dealt with.
Andrew Mock
Okay.
Steve Filton
All right. Thanks a lot.
Operator
There are no further questions.
Steve Filton
Okay. Well, we thank everybody for their time and hope that everybody stays safe and look forward to speaking with everybody next quarter.
Operator
Good job, Steve. Thank you for your participation. You may now disconnect.
Disclaimer