Universal Health Services, Inc.

Good morning and thank you for standing by. Welcome to the first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw the question, simply press star 11 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to Steve Felton, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you and good morning. Mark Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the first quarter ended March 31st, 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, 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 their first 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 $2.34 for the quarter ended March 31, 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 CHRP reimbursement recorded in Q1 of 2022 that did not occur 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 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 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 repurchased more than 20% of the company's outstanding shares. As of March 31, 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 Mark Miller, President and CEO, for closing comments.

Thanks, Steve, and good morning. In our year-end conference call, we said we envision 2023 as a year of continued transition into a post-pandemic world. We anticipated that volumes in both segments and acuity in our acute business would continue their recovery trajectory and gradually begin to resemble the patterns we experienced before the pandemic. The comparison to last year's first quarter for our acute hospitals, which were experiencing the significant surge in COVID patients with the Omicron variant, is particularly challenging. But many of those COVID-related headwinds will become much less of a factor as the year progresses. We expected 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. And while the decline in premium pay has leveled off for the time being, we continue to make progress on overall wage pressures. In our acute segment, we highlighted the upward pressure on physician expense, which tended to run at a rate of about 6% of revenues pre-pandemic, but is budgeted to run and actually is closer to 7.5% in 2023. Overall, we were pleased with our first quarter results, which were largely in line with our internal expectations, with our behavioral results somewhat ahead and our acute results slightly behind. We are pleased to answer questions at this time.