Universal Health Services, Inc.

Q4 2022 Earnings Conference Call

2/28/2023

spk12: I'm Steve Filton. Mark Miller is joining us this morning. Welcome to this review of Universal Health Services results for the fourth quarter ended December 31, 2022. 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 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 $2.43 for the fourth quarter of 2022. After adjusting for the impact of the items reflected on the supplemental schedule as included with the press release, primarily an asset impairment charge associated with an acute care hospital in Las Vegas, our adjusted net income attributable to UHS per diluted share was $3.02 for the quarter ended December 31, 2022.
spk10: 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.
spk12: We also note that the fourth quarter included approximately $10 million of losses related to startup facilities. Our cash generated from operating activities was $297 million during the fourth quarter of 2022, as compared to $322 million during the same quarter in 2021. The decline was largely due to the opening of new facilities and the timing of receipt of certain supplemental reimbursements. We spent $734 million on capital expenditures during 2022. In reaction to the earnings softness experienced during the year, we reduced the pace of our capital expenditures spend by about one quarter from our original plans for the year. Similarly, we moderated the trajectory of our share repurchases. For the full year of 2022, we acquired $811 million of our own shares pursuant to our share repurchase program. Since the inception of the current share repurchase program in 2014, we have repurchased more than 20% of the company's outstanding shares. As of December 31, 2022, we had $886 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. Our 2023 operating results forecast
spk10: which was provided in last night's release, envisions 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 is 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.
spk08: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first call comes from the line of Andrew Mock with USB. Your line is now open.
spk13: 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.
spk12: Yeah, Andrew. I think as Mark remarked in his commentary, and you can see in our press release metrics, revenue per adjusted admission was actually down for the quarter, I think attributable to a few factors. One is the decline in COVID patients. Those COVID patients, particularly last year, particularly the Omicron patients, tended to be higher acuity patients. And the loss of those patients and the loss of their good reimbursement reduces our acuity and our revenue. In addition to that, you know, Mark talked about the shift, the accelerated shift from inpatient to outpatient. You know, our surgical volumes in Q4 actually were probably 3% or 4% above what they were in Q4 of 2019, the last, you know, pre-pandemic quarter or full pre-pandemic quarter. But clearly there's been an accelerated shift. You know, I think that outpatient procedures are probably up 7% or 8% and inpatient procedures are sort of flattish. So I think those are the main drivers of the acuity softness in Q4. As far as what we have built into the guidance for next year, I think, again, as Mark's sort of comments reflected, I think we're projecting a gradual sort of return to normalcy. So for the year, I think our general notion is that acute care revenue per adjusted admission should increase probably in that 2% to 4% range, which would be you know, much closer to sort of the historical norms.
spk08: Our next call comes from the line of Stephen Baxter with Wells Fargo.
spk00: Or at least directionally by segment. You know, appreciating the color you gave on some of the one-time items in the acute care business. It sounds like that's likely the source of you know, maybe some of the fear on your pressure there, but it'd be great if you could elaborate a little bit on what you're expecting for year-over-year margin trends in both acute and behavioral business. Thanks.
spk12: Yeah, Steve, I think we missed the beginning part of your question somehow, so if you wouldn't mind repeating it, I apologize.
spk00: Yeah, sorry about that. So, yeah, the additional, you know, color on EBITDA growth and, you know, top-line growth by segment would be great. Just trying to understand a little bit when we look at the year-over-year margin pressure, where that's coming from. It sounds like with some of the items you flagged on the acute side. It looks like that's probably it, but just a better sense on the direction of margin trends in both businesses. Thanks.
spk12: Yeah, so I think on the acute side, there are specific headwinds, again, most of which I think, you know, Mark elaborated on. You know, one, probably the biggest one is the $100 million of COVID-related reimbursement. That includes the Medicare 20% add-on, the HRSA reimbursement, the Medicare sequestration waiver, 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, you know, Mark noted about $30 million of supplemental Medicaid reimbursement that declines next year. That's about 20 in the behavioral business and 10 in the acute business. I think the other main issue is that even though, again, as Mark commented, we're expecting premium pay to decline another one-third, maybe another $150, $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 tend to suppress the margins. And on the behavioral side, it's really more on the labor side. I mean, I think where 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 expense is still outpacing the growth in revenues. I think we believe that by the second half of 2023, that begins to sort of stabilize and, you know, 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.
spk08: Thank you. Our next question comes from the line of Jason Casola with Citi. Jason?
spk11: Great. Thanks for taking my question. I just wanted to ask about the move to wind down inpatient 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.
spk10: Yeah, sure, I can answer that for you. So we obviously, that's a very important market for us. We've been looking at the whole market, the market as a whole for many years. We continue to try to build where we can at current properties as well as some of our de novo projects. We have a new project that's going in that is really, we're looking at it as a replacement hospital for Desert Springs. Originally, we had hoped to keep Desert Springs operating longer into the future and closer to our opening date, if not all the way up to our opening date for our new West Henderson Hospital. But the market dynamics caused us to have to accelerate the plan there. So what we've done basically is we're moving that hospital to a glorified emergency services facility. and we'll continue to run those services even after we have our new hospital in West Henderson built. And we're really transferring just about all of those employees to other Valley System facilities. So it's been misreported that we're laying off a lot of employees. In fact, we're really not. And like I said, just about every one of those employees is finding a home in another one of our hospitals, which has helped. alleviate some of the staffing pressures that we've had. So that's really the situation. I don't know the timing on the numbers. West Henderson won't be open for about another year and a half. I want to say middle to late 24.
spk08: Our next question comes from the line of AJ Rice with Credit Suisse.
spk05: 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 22 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 23 outlook. Can you just comment on that and anything else that you're thinking about from a capital standpoint?
spk12: Sure, AJ. Yeah, so, you know, physician subsidy expense, I think, has been kind of an emerging challenge for Most of the acute hospital industry, I would say, for at least the back half of 2022, and I think most acknowledge it'll continue into next year. So when we talk about that, we're really talking about generally the contract service expense we pay to physicians who are providing services in our emergency rooms, anesthesiologists, radiologists. Those are probably the major groups. And you're right, we have seen some increase in those expenses this year. I think we continue to assume that 2023 will probably result in another 15 to 20% increase in those expenses. And the magnitude of that is probably a $45, $50 million increase in costs. Now, I think long-term, you know, we have a number of strategies to deal with that cause pressure, including insourcing, some of that activity to the degree that we can, and competitively bidding contracts, et cetera. I think at the moment we're caught in a tough situation because it's difficult to change those arrangements in the short term. But in the long term, I think a lot of those pressures are a result of some of the internal struggles that some of those larger physician staffing companies are having And I think as those work their way out and the market adjusts, you know, we will see, you know, some easing of that in future years. But, yeah, we've assumed, you know, as Mark said, a substantial increase in 23. As far as capital deployment goes, we've got embedded in the budget about $600 million of share repurchase assumed. You know, we've also, you know, got about $800 million of, you know, capital expense or capital expenditures assumed in the budget as we've disclosed in the press release.
spk08: Thank you. Our next question comes from the line of Stephen Villiquet with Barclays. Stephen?
spk02: Good morning, everybody. Just on the behavioral side of the business, obviously, prior to college, you talked about you know, one of the challenges obviously being, you know, with your shortage impacting some of the volume that you could generate otherwise.
spk12: Just curious to think about. Steve, can I interrupt? You're breaking up, so unless we can get a better connection, I can't hear your question. I apologize.
spk07: Would you please restate your question, Steven?
spk02: I'm not sure if it's better now or not. Yeah, that's better. Thank you. Please go ahead. I'm not sure what happened there. I apologize. Okay. Steve, I apologize. You're breaking up again. Maybe you can try to call back with it.
spk12: On a different line.
spk08: Yes, Stephen, you can re, enter the queue call back in and re, into the queue by dialing star 1 1 on your keypad. We'll go to our next questioner who is Justin Lake with Wolf research.
spk01: Can you hear me? Okay. Justin yes, we can. Yeah, good. Thanks. So. Steve, I was hoping, you know, it sounds like there's a very different trajectory between the acute business, given the headwinds there, and 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, you know, 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, Mark, maybe you could give us a little more color on what you're seeing on this shift from inpatient to outpatient and, you know, what's driving that, how big an impact is it having, and how are you thinking about it in 2023? Thanks.
spk12: Yep. So, you know, looking at the two segments discreetly, I think as we've suggested a number of times in the past, We thought that as COVID volumes declined, the recovery in the behavioral business would be more accelerated than in the acute, in large part because there was never any benefit to, you know, increased COVID volume on the behavioral business. We didn't get paid anymore for patients. And quite frankly, it created, you know, more staffing challenges. It created more sort of patient matching challenges, that sort of thing. What I think you saw in the fourth quarter, and, you know, I think a continuation, quite frankly, what we saw in the third quarter was as COVID volumes declined, you know, I think Mark commented on this at the outset of the call, we've been able to more successfully fill our nursing and other clinical vacancies, and as a consequence have been able to, you know, incrementally improve our volumes, particularly as measured by patient days. And that continues into next year with the challenge, as I indicated I think in an earlier call, is the price we've had to pay to fill those vacancies is higher base wages and some incentive payments and that sort of thing, which I think suppresses margins certainly at the beginning of the year, although hopefully they improve as the year progresses. But probably, you know, at the end of the day, you know, the The 2023 forecast assumes slightly increased margins in the behavioral business. The acute business, a little bit different, as we talked about. They have to replace the benefit of the COVID volumes that they had. They've got to deal with the headwinds that we were specific about, et cetera. So at the end of the day, I think that acute care you know, EBITDA and, you know, is relatively flat in 2023, which means margins are down slightly. We have some increase in corporate costs, things like our equity, stock equity compensation or, you know, incentive compensation because we're assuming that, you know, we'll meet targets more fully in 2023 than we did in 22. So that sort of thing. So, you know, I think, you know, you know, slightly increasing margins on the behavioral side, slightly declining on the acute side, and, you know, some kind of disparate sorts of cost increases on the corporate side to get to the full, you know, budget guidance that we've provided.
spk10: 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 the last few years, which is to ensure that we have the proper caseload 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. We continue to develop those as we find opportunities to do so.
spk08: Thank you. Our next call comes from the line of Peto Chickering with Dirt Bank.
spk07: Behavioral. Can you hear me? Yes.
spk10: Yeah, we can hear you now.
spk03: Okay, there we go. On behavioral. how many beds are left that you can't staff and how do you think that ramps are during 2023? And as staffing and behavioral becomes easier post-COVID, I'm wondering what areas of healthcare were the biggest source of those hires. And then finally, as you can start staffing again, do you increase your CapEx for behavioral beds to keep driving growth there over the next few years?
spk12: Yep. So, Peter, you know, 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, you know, that number can change literally day to day, et cetera. You know, so we do still feel like their 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, a weekend or overnight staffing or, you know, 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 had the opportunity to work remotely or they had the opportunity to work in an acute care setting, you know, making sort of premium dollars. As those opportunities have declined, and, you know, I think telemedicine, you know, procedures have tended to decline as the pandemic has, you know, eased, and certainly the demand from acute care hospitals for, you know, COVID treating nurses, I think, has declined as well. You know, we're seeing more of those nurses return to what I would describe as the behavioral fold. To your sort of last question, you know, yeah, I mean, obviously, we've been more tempered, if you will, about behavioral capacity addition during the pandemic, because the thought was, you know, 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, you know, 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 build.
spk11: Great. Thanks so much.
spk08: Thank you. Our next call will come from the line of Kevin Fishbeck with Bank of America. Kevin, please wait until you hear your name announced.
spk04: Hey, great. Hey. So I guess on the call last quarter, you mentioned that I think that there's a tail end this year from startup losses year over year. Can you just remind us kind of how should be thinking about that and then you met you kind of in your opening remarks mentioned that this year is kind of a still a normalization off of covid i mean do you feel like 2023 is now going to be a solid base off of which we should be expecting normal growth and acute and psych or do you feel like because of the way you're assuming progression through the year on these dynamics that that even 2024 could see some you know year-over-year um few comparisons thanks
spk12: Yeah, so as far as your first question on startup 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 startup losses, so 55 million for the year. The biggest chunk of that is our acute care hospital that we opened early in 22 in Reno. That's probably a 30, $35 million swing from 22, 23, a positive swing. The other $15, $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, you know, I think we've got about a $30, $35 million tailwind in the budget for our turnaround in our Reno hospital. As far as, you know, just sort of how we think about 2023, you know, is it sort of a, you know, kind of a clean post-pandemic year? You know, Mark made comments, you know, in his opening remarks about the idea that Number one, I think we view 23 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 you know, nurses return to their regular jobs and, you know, 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 2024, I would imagine, unless there is some unforeseen development, begins to look like a really true post-pandemic year.
spk04: Great. Thanks.
spk08: As a reminder, to enter the question and answer queue, please dial Star 11 on your keypad. Our next call comes from the line of Jamie Pierce with Goldman Sachs. Jamie, please stand by. Jamie?
spk06: Hey, good morning. Can you guys hear me okay?
spk07: Yes.
spk06: We can. 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, if we're 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?
spk12: Yeah, so in answer to your question about our insurance subsidiary in the acute segment, it has roughly or will have in 23 about $400 million of premium revenue and will run, as we sort of discussed in the past, kind of a modest margin in the low single digits. The real problem motivation in operating that insurance subsidiary is to create sort of a full continuum of care in our acute care markets, greater integration with our physicians, et cetera. It's not really designed to be terribly profitable on its own. As far as your second question about recruitment and retention, look, there's a lot of things, and we could have a whole separate hour-long call on, you know, Mark, I think, alluded to, you know, multiple recruitment and retention initiatives that we've implemented during the pandemic. But, you know, I think you specifically asked about sort of patient care, you know, sort of treatment structures and whatnot. And we've tried to, in both of our businesses, create staffing infrastructures that are not so reliant on registered nurses because those have been the most difficult positions to recruit to during the pandemic. So we're becoming more reliant on things like LPNs and LVNs and mental health techs in the behavioral business and EMTs and that sort of thing in our emergency rooms, all those kinds of things. So we certainly have been working to really improve the recruitment and retention of the nursing population itself, but also trying to reduce our reliance, particularly on registered nurses who've been the most difficult to recruit.
spk10: But I'll just add, there are a number of technological solutions that are being bandied about. you know, 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 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 you know, going forward. So we are excited about the possibility of some of those adding to, you know, the mix in the coming years.
spk08: Thank you. Our next call will come from the line of Ben Hendrix with RBC Capital Markets. Please stand by. Ben?
spk09: Yes, thank you. Just a quick regulatory question. There was a proposed rule from CMS concerning the 1115 waiver payments 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 just wanted to get any initial takes on that proposed rule. Thanks.
spk12: Yeah, so we've commented a number of times and would, you know, reference or direct people to our 10-K filing where, you know, we detail in pretty specific detail our supplemental Medicaid payments in the current year in 2022 and then what we expect for 23. I mentioned before, you know, we're expecting about a $30 million decline next year across a number of states. To your point, Ben, I don't think we're – expecting a big change in Texas from the 11-15 change. But in total, you know, there's about a $30 million reduction in supplemental payments next year, including disproportionate share over maybe two or three states.
spk08: Thank you. Thank you. There are no additional questions in the queue. At this time, I would like to turn the call back over to Steve for any closing remarks.
spk12: 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.
spk08: Thank you for your participation today. This does conclude the program.
spk07: You may now disconnect.
Disclaimer

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