Welcome back to the G- Barclays Global Healthcare Conference. My name is Andrew Mok, and I cover managed care and facilities here at Barclays. I'm pleased to welcome Steve Filton, CFO of UHS, on stage here with me. Welcome, Steve.
Thank you.
So maybe, touch on Change Healthcare and asking all the providers, in your experience so far, has this been disruptive at all to your operations? And, you know, do you think this is a transient impact? Any comments on Change Healthcare to start?
Yeah. So, you know, from a claims processing perspective, which seems to be generally the biggest impact on providers, we don't use Change for any of our outbound claims. We do know that certain of our payers use them for their inbound claims. We think it affects maybe 5% to 6% of our total claims. Obviously, not a terribly material amount, especially if this issue doesn't persist for a whole lot longer. And I think, in this commentary in the last few days has, you know, been more optimistic about being able to get a bunch of their applications back online this week, et cetera. That seems good.
I mean, you know, otherwise, kind of miscellaneous applications like, automated cash posting and, remittance posting, we use them for, and that's disruptive, but again, over the short term, I don't think it should be a big deal. You know, so, so yeah, I mean, it feels to me like this is a mostly transitory impact, you know, will extend over three, four, five weeks, but after that, you know, really shouldn't be much of an issue.
When you see something like this occur, does this force you to reevaluate just vendor usage more broadly? You know, maybe talk about that dynamic.
Yeah, I mean, I do think it causes you to think about maybe a greater level of redundancy among all these applications. I think, you know, it's easier if we had physician groups that were using Change for their, their outbound claims, and, you know, we were able to switch them over to another vendor because we had another vendor that we have, you know, have contracted with experience. I think it just makes sense that in a lot of these applications, you don't have a single user or single source vendor just in case something like this arises.
Great. With that out of the way, let's turn to the behavioral segment. How would you characterize the current demand environment for behavioral? It's been pretty strong out of the pandemic. Has that strength surprised you? Characterize kind of the forward outlook from here?
So for an extended period of time, I think we have argued that behavioral demand, has been, you know, underlying behavioral demand has been quite strong. I think, you know, during the pandemic, there's a lot of evidence, both, you know, our own internal metrics, but also a lot of macro data that suggests that the need for behavioral care actually grew and increased, in some cases dramatically during the pandemic. You know, our biggest challenge during the pandemic was not the demand itself, but our ability to meet that demand often was limited by labor scarcity dynamics, where we, you know, we simply couldn't hire enough nurses, therapists, psychologists, psychiatrists, in some cases, even non-professionals, mental health technicians, to treat the patients who were being presented to us.
I think the good news is that situation, that labor supply-demand disconnect, has been steadily improving, I would say, for the last certainly 15, 18 months. And, you know, makes us, I think, you know, more bullish about our ability to, to grow behavioral patient days in 2024 by more than we have really since, you know, the beginning of the pandemic. So, you know, I think that's a function of, again, the strength of the underlying demand and our ability to, our improved ability to meet that demand.
Can you walk us through the trade-off on that marginal volume and marginal labor? How does that marginal cost of labor compare to the existing cost base, and what prevents you from more forcefully hiring to meet that demand?
So I think that, you know, that incremental demand is sort of what has given rise to the use of temporary labor, you know, traveling nurses, temporary nurses. So when you have a temporary surge in labor, or excuse me, a temporary surge in demand, it makes sense to pay a premium rate. And that premium rate could either be to your own employees for overtime or a shift differential or to a traveling or temporary nurse. That's kind of an easy decision to make. I think the limiting factor in behavioral is because it's a much smaller industry, a lot of the big national companies that specialize in temporary nurse supply don't really, you know, have kind of a behavioral component to them.
So, you know, in a number of cases, it wasn't that we were unwilling or we didn't think it was economically prudent to use a temporary nurse, we just didn't get one. The maybe the more detailed question is, you know, how much should you be willing to increase your wages to be able to treat that incremental patient? And the challenge with that is there's really no such thing as sort of increasing the these incremental wages of, you know, the one nurse who's gonna treat, you know, your next three or four patients. Once you increase that nurse's salary, now you're obligated, maybe not obligated, but I think practically obligated to increase, you know, your base wage rates across the facility.
So that becomes, I think, a much more kind of nuanced, detailed calculation about how much, you know, you ought to be increasing your overall wage rates in a facility to allow you to accommodate, you know, seeing those incremental patients.
Right. How, how wide are those spreads, do you think, between just marginal cost of labor and existing cost of labor?
Yeah, I think historically, premium pay is usually paid on a blended rate at a rate of about, you know, maybe 40% to 50% higher than your underlying wage rate. You know, if it's overtime, it's probably a little bit less than that. If it's a temporary or traveling nurse, it's probably a little bit more than that.
... Great. Let's move on to margins. Margins in both the behavioral and acute segment have taken a step back over the last few years. It sounds like you're more optimistic that you can recover some of that on the behavioral side. One, is that a fair characterization? And two, what are the key factors that you need to drive margin expansion in that segment?
Yeah, so I think on the behavioral, and I don't mean to oversimplify it, but I, I do think it is pretty straightforward. I think it is largely a volume, a question of volume. If you go back, you know, and look at our behavioral business over an extended period of time, the last 10, 20 years, I think you'd see that in those periods where we were able to grow patient days by, let's say, 3% or 4%, or certainly more than that, but by at least 3% or 4%, then generally in those periods, we had EBITDA growth, we had margin expansion, et cetera. In periods where we grew patient days by less than 3% or 4%, which I think characterizes most of the pandemic, we don't. We, you know, we don't have EBITDA growth. We have, you know, EBITDA either flat or down.
We have margin contraction. And so, you know, again, I think that this is largely a volume play. Now, again, I think as your earlier question addressed, I think our view is now that the labor scarcity issue, I don't mean to imply that it's completely resolved by any stretch because it's still a pretty tight labor market. But now that I think, you know, or we've had a, you know, a number of consecutive quarters with net hires, where our retention rates and turnover - our retention rates are going up, our turnover rates are going down. I think we're in a much better position to be able to meet demand, so that, you know, that 3% to 4% patient day growth, which we have embedded in our 2024 guidance, is not an unreasonable stretch.
Great. And if we kind of similarly think about the acute care business, what have been some of the challenges to margins there, and what sort of time horizon do you have in mind for improvement in that segment?
Well, I mean, certainly they had the same, well, maybe not the same, but, but certainly they had similar labor supply-demand challenges in acute care. What I think different in the acute care business is we tended to be able to meet the vast majority of our vacancy needs, you know, so we would have a vacancy at, you know, more times than not, we'd fill that vacancy, albeit we'd often fill it with much more expensive labor, which is why premium pay, you know, has been so much higher on the acute side than it was on the behavioral side. But, you know, that has moderated significantly.
We talked about on our most recent call that, premium pay, which had reached a peak of, I think, $153 million plus in the first quarter of 2022, has declined to the $60 million to $65 million range in the last couple of quarters. So that's a significant improvement, and maybe there's more room to go there, especially if acute care volumes moderate so much further. You know, another big headwind for the acute business, not just for us, I think, but the acute business writ large, has been this increase in largely in 2023, in physician subsidy expense for hospital-based physicians, you know, primarily emergency room physicians, anesthesiologists, to a lesser degree, radiologists.
Yeah, that's probably cost us in the last 15 to 18 months, 150 basis points of acute care margin, and that's tough to recapture. I don't see that expense coming down anytime soon. We certainly will endeavor to make every effort to get some of our payers to contribute to that, but that I think is, you know, a bit of an extended process. And then I think we've also seen that the continued shift of inpatient procedures to outpatient or, you know, procedures from an inpatient setting to an outpatient setting, where it's generally less profitable for us, you know, that's, that's, I think, you know, another challenge. And finally, I would just say there's been sort of an acuity challenge over the last year.
We've seen a pretty strong increase in acute care volume, but acute care pricing has lagged that, and I think it's because a lot of that incremental volume increase has been in the older Medicare population, who is, I guess, exhausting some of their postponed and deferred procedure volume from the height of the pandemic.
Where do you think we are in that shift from inpatient to outpatient? And when you do lose procedures from the inpatient side, is that mostly... Are you recapturing some of that on the outpatient side, or did—what's the impact there in terms of outpatient recapture versus completely losing it to the ASC?
Yeah, no, I appreciate the question because I do think that there is sometimes a misconception that the idea when we say that there's been a shift from inpatient to outpatient is a confession that we've lost that business, that it has gone from inpatient in our hospital to outpatient somewhere else. You know, the fact of the matter is that our outpatient surgical volumes have been growing at a fairly healthy clip.
I think for the, you know, the 2023 year, they were up at least by mid-single digits, about 5% or 6%, which I think indicates that certainly some of this shift is occurring within the hospital itself, and it's just, you know, it's a hip implant that a year ago would have been done on an inpatient basis that today is being done on an outpatient basis, but being done by the same surgeon, being done in our facility, we're getting paid for it, but is likely to be, you know, less revenue, certainly less revenue and probably less, you know, operating income. Certainly, some of that business has been lost to other providers, you know, standalone ASCs, physician-owned ASCs, et cetera. But, you know, I think during the pandemic, that shift really accelerated, especially in the orthopedic service line.
You know, I think what you hear a lot of hospitals saying, and I think it's consistent with our own experience, is that five years ago, 80% of hip total joint replacements, hips and knees, would have been done on an inpatient basis. And today, you know, five years later, the absolute, you know, the difference has flipped. 80% of those procedures are now being done on an outpatient basis. But it feels like, again, the sort of the paradigm shift, which I think was most dramatic during the pandemic, has kind of, you know, played itself out. And while I think in all of our other diagnoses or, you know, services, we see, you know, we've returned to kind of a steady, you know, clip of inpatient to outpatient migration.
It's not nearly as dramatic as it was during the pandemic.
Great. Turning to the pricing side of the equation, I think your 2024 guide incorporates about 2% to 3% price range growth on the acute segment. Can you walk us through the underlying components of that? And do you think your underlying commercial rates are strengthening in 2024, or are you just slapping some of the mix and acuity headwinds that we just discussed?
Yeah, I think that the main issues that caused acute care, again, pricing or revenue per adjusted admission growth to lag in 2023, was not actual contractual pricing. As I think we've said, that I would say beginning in the back half of 2022, we've been getting what I would consider to be more inflationary, appropriate increases from our payers. You know, we've seen, I would say again, beginning in the back half of 2022, maybe 150-170 basis point increase in the contractual price increases we've been getting from payers. I think what has been more the cause of the lagging acute care, again, pricing or revenue per admission or adjusted admission is a little bit of the inpatient, outpatient shift that we talked about earlier.
A little bit of this acuity dynamic, where I think some of the strength, or maybe a lot of the strength in acute care volumes in the last couple of years have been these procedures, these lower acuity procedures, particularly in the Medicare population, that had been deferred earlier in the pandemic, but now were being performed. And then finally, I think, you know, the dynamic that we've talked about certainly in the last several quarters is, I think as acute care volumes generally increased in 2023, conversely, medical loss ratios and medical loss expense on the part of the payers increased. We saw their, I'll call it, you know, payer behavior, or processing behavior, become more aggressive in the context of an elevated level of denials, an elevated level of patient status changes.
Meaning, you know, we submit a claim as an inpatient claim, and they change it to an observation claim with, you know, lower reimbursement, et cetera. I will say that our Q4 pricing or Q4 revenue per adjusted admissions did increase significantly over where it had been running earlier in the year, and I think that function of these dynamic payer, aggressive payer behavior, you know, the acuity of mix of procedures, et cetera, kind of stabilizing and reversing after 29 to 12 months or so.
Maybe just a follow-up to that, too, to this behavior. I think the Two Midnight Rule. What's been your experience to date thus far? How have you seen that progress? And maybe, like, what flexibility do payers actually have here, given the rule?
Yeah, I think, you know, unfortunately, from our perspective, they still have a lot of flexibility. You know, the Two Midnight Rule, I think sometimes people misconstrue as a very sort of cut and dried kind of dynamic, where CMS benefits the patient, and the facility between midnight, that they have to be paid as an inpatient. But the thing underlying that is still a potential debate over whether they meet inpatient criteria. If they meet inpatient criteria, then Two Midnight sort of requirement is definitive, then they have to be paid as an inpatient. You know, if a payer is going to argue that someone doesn't meet the inpatient criteria, you know, then however long they're in the hospital really doesn't matter. And then, you know, again, we believe that payers will fall back on that argument more than anything else.
One thing payers have is, they have the advantage of, call it the retrospective look at a, you know, at a stay in the hospital. So in other words, if a patient comes into the emergency room, you know, the most obvious example, and the one I kind of use all the time, is, you know, with chest pain, suspected, you know, cardiac incident, et cetera. And again, depending on the age of the patient, their medical history, their comorbidities, a doctor is going to take his or her time trying to rule out in every way that they have had a cardiac. That could be, you know, a whole bunch of procedures, a cardiac cath, or whatever it may be.
If at the end of whatever that is, two or three day stay, they conclude that the patient didn't have a cardiac incident and get discharged, more than likely, we're going to get paid from the payer as if it was just an observation visit. Which sort of implies a shorter but intense visit, even though the patient had, you know, a significant amount of diagnostics, several days of nursing care, et cetera. And, you know, I think my view is so medically necessary to rule out what, you know, could be and, you know, potentially a very serious diagnosis.
So, in any of that, I think, you know, we as a provider community, certainly UHS specifically, I remain, I would call it healthily skeptical that payers will still find ways, despite CMS's stronger, you know, ruling and language on the Two Midnight Rule, to, you know, still deny a lot of inpatient or convert a lot of inpatient stays.
If that is the case, then they don't necessarily comply with maybe the spirit of the rule. What are the next steps that you would take as an organization? Leaving a formal complaint, pursue legal action, and kick them out of network, potentially? What's the follow-on impact of this?
Yeah, I mean, so a great number of our either denied claims or claims where patient status has changed, we do appeal. We have a pretty good record in terms of, I think, you know, we're generally successful or appeals. So we certainly do that. But, to a large degree, I still think that that process involves a lot of wasted time and effort. You know, in some cases, we feel like denials or patient status changes are really just, we have sued payers. I think we've brought legal action against payers more frequently in the last year or two than I can remember, and I've been doing this for a fairly long time. You know, that-that's the most, you know, sort of, litigation activity I can remember, you know, for years and years and years.
So, you know, there are those options. There are the options, as you said, if, you know, payer is really, in our minds, sort of, behaving egregiously, but not to, you know, renew contractually with them, you know, there, there's a host of options we have.
Great. Jumping back to the pricing discussion for a minute. Another item impacting revenue in both segments is supplemental payments. There was a big one for Nevada this year, but it seems like this is an area that's seen nice growth for several years now. Can you help frame these programs for investors? What's the historical experience been like in these programs, and why do you suspect states may be leaning more heavily on these programs in recent years?
I think it's driven by a couple of factors. I mean, one is I do think there is more and more of an acknowledgment on the part of states that their Medicaid reimbursement, particularly over the last several years, when there's been an elevated level of inflation, when there clearly has been much more wage pressure, that Medicaid reimbursement in most states has simply not kept up, even remotely, with those cost pressures. So, you know, I think there's an acknowledgment on the part of the states that if they don't increase their Medicaid reimbursement, then some hospitals, or maybe a significant number of hospitals, could be at risk of being unable to function and unable to treat, you know, this critical part of the population that is not going to be able to find care in, you know, other places.
So that's, I think, what motivates the states. Why they, I think, largely have put to these supplemental programs as opposed to, for example, just increase their rate, is the supplemental track, federal component. And so, you know, while there's a cost to the state, they're getting, the feds to bear at least half, state et cetera, or half, you know, half. So I, I think it's really a combination of those. And, you know, in terms of their sustainability, and I think this is true of almost all reimbursement programs, reimbursement benefit in place, whether it's Medicare outliers or disproportionate share, or paid share, or these, you know, supplemental payment programs, they're very hard to take away. You can look, you know, we probably have more, more disclosure, more detailed disclosure on these supplements than many public.
If you go back, whatever period you like, four years, five years, six years, you know, you'll see year-over-year volatility, you know, net reimbursement goes up and down in the net a little better, tweak them. But you really don't see any programs eliminated or reduced in dramatic fashion. Again, I think, you know, the reason for that is because I think if they were to be eliminated in dramatic fashion, the public policy outcome, which would be, I think, the closure or dramatic diminishment of the ability to treat that population, I think is a public policy outcome that's not acceptable. Now, what I do think you're likely to see, and certainly CMS has begun to talk about this and address this issue, is they do acknowledge that there's been a significant increase in these programs over the last couple of years.
They talk about capping the rate of increase and putting some sort of guardrails around it. That, I think, is certainly, you know, a likely outcome over the next couple of years.
I want to go back to the discussion around labor. Mentioned it was a constant in 2023 subside. How would you characterize that now? Do you think that's largely stabilized, and is there any potential moderation throughout 2024? Just curious what your biggest thoughts are on position.
Yeah, I think what happened with the physician subsidies is, again, you know, late in 2022, early in 2023, these companies that were providing our ER doctors and our anesthesiologists came to us, said that these services were unprofitable and they needed to be recast. And for the most part, and when I say we, in this case, I mean the industry, and we basically recast these arrangements. We either recast them to pay the incumbent vendor a greater subsidy, but still paying them a greater subsidy than we were previously paying. Or we brought the service in-house and we employed the doctors and then operating the service itself. But again, in those instances, at a greater cost. But I think what has happened is, from our perspective, most of these arrangements were recast back in late 2022, early 2023.
We've gotten now to the beginning of 2024. We really anniversaried big increase, and it's really a big increase. I think I mentioned earlier, it's about 150 basis points of acute care margin that we lost in about a 12-15-month period after these increased physician subsidies. But it does feel like they have largely stabilized. Now we're just looking at in a regular inflation increase.
Great. Staying on this topic, but there's been a lot of activity in that state over the last six months or so between the new healthcare minimum wages and some union headlines. Has your view of the operating environment in the state changed at all, and what's your latest take on just the overall state dynamic around labor?
Yeah, California has always been sort of a challenge in that there are elements of, you know, operating in California that are very attractive. Demand is good, you know, it's a growing population. We've been really situated from an acute care perspective, Southern California, and from a behavioral perspective, sort of across the whole state. On the other hand, you know, wage rates have been particularly high. You know, regulation is, can be oppressive, et cetera. I think overall, you know, we've viewed California as a pretty operable way to best navigate around these challenges. But to be fair, it's expanding.
Great. Maybe last question here. Most of your behavioral business is on the inpatient side. Yet, I'd like to know, when you think about the opportunities and view, is it similarly on the inpatient side, or do you see growing opportunities on the inpatient side that look compelling?
We do. I think we always had a view, and we have always had outpatient programs that are integrated with our inpatient programs. We generally sort of describe them as step-down programs. So, care and, you know, a step down into an intensive outpatient program, virtual hospitalization program, where they're not staying overnight, has always been a part of our continuum of care. I think what we're looking more at these days is either step-up programs, meaning step-up outpatient programs where treating patients on an outpatient basis, and if they suffer from a trauma, et cetera, they can step up into inpatient care, which is freestanding facilities, you know, freestanding outpatient facilities that really are associated, either physically or even from a control perspective, with our, you know, inpatient hospital.
Because there is certainly a need for great outcome care for patients who may be intensive acuity and inpatient.
Great. We're out of time, so let's wrap it there. Steve, thank you for joining us. Enjoy the rest of the conference.
Thank you.