For RBC Capital Markets Global Healthcare Conference, I'm Ben Hendrix, RBC's Healthcare Services and Managed Care Analyst. We are pleased to kick off our conference this year with acute and behavioral hospital operator Universal Health Services. With us this morning from management is Steve Filton, Executive Vice President and Chief Financial Officer. Thank you for being with us today.
My pleasure. Thank you.
We'll start with only the acute segment. UHS's acute segment, same-store revenue, grew almost 10% year-over-year on strong inpatient volumes. You noted that volume in the acute segment has been trending a little above your internal budget to start the year. Can you give us some color on how you characterize the demand backdrop and where the favorability is across categories?
Yeah, I mean, I think the trends that we're experiencing now began probably early in 2023, maybe late in 2022, as you know we were emerging from the pandemic. We had pretty much put the COVID surges behind us. And I think, again, beginning late 2022, early 2023, we began to see, particularly among the older, primarily Medicare population, trends of increasing utilization that I think we and I think collectively the industry speculated was that population, which had been probably the most reluctant to seek care during the pandemic, catching up and seeing their physicians and getting the routine procedures and follow-up sorts of procedures that maybe they had postponed or deferred during the pandemic. And I think we saw that strength, again, not exclusively in the Medicare population, but I'm going to say primarily in the Medicare population.
Throughout 2022, it's, I think, persisted into the early part—excuse me, throughout 2023, and it's persisted into the early part of 2024. So acute care volumes, I think, have generally been strong on what I'll call post-pandemic through 2023 and into 2024. And there's much debate over how sustainable this is, how long it will last. We've probably, I think, been more cautious than some of our peers in saying that we do expect at some point for this current strength to moderate some back to something closer to more historically normative levels. But that certainly hasn't occurred yet. And obviously, we're not necessarily pushing for it or hoping for it. And so we're trying to take advantage of the demand as we're experiencing it.
On your call, you noted strong volume in January and February before some softness in March on calendar impacts. I think that narrative is well understood now. You said you expect to recover any shortfall in March volume through the second quarter. Now that we're halfway point in the quarter, are we still on track to recapture that March shortfall? Anything in the second quarter suggests that we may begin to see the acute moderation that you've versus your outlook?
Yeah, I mean, there's been an enormous, really precise focus on volumes this year that I don't really recall ever experiencing before. I think every year has sort of kind of natural ebbs and flows in volumes. I think you've enumerated the things that have impacted us so far this year. A little bit of weather in the first quarter, again, not terribly unusual. And then calendar issues with Easter and spring break falling in March of this year versus April of last year. But I think we step back and take a look at our volumes and activities, let's say, year- to- date through April, particularly on the acute side. They seem very consistent with what we expected. They continue, as your first question kind of referenced, to be these strong, relatively robust volumes.
We have definitely seen some recovery in April from the softness in March, which we think was largely due to the calendar. We had a very strong February. And again, I think those trends have been pretty much reiterated by most providers. But we tend to look at sort of volume trends in my mind with a longer-term perspective. And when we look at the first quarter in April and even the first week or so of May, I think our view is that volumes are playing out largely as we expected. And on the acute side, that means they're strong, they're robust. We're still, we believe, experiencing that sort of catch-up dynamic that I alluded to earlier.
Maybe if we can dig into the mix side a little bit. I know that we've clearly we're coming through the redetermination cycle. I know that one of your peers had talked about maybe a little bit of a lull in commercial volume as more exchange picks up. There may be some copay and deductible impact there. Is that consistent with what you're seeing on the acute side?
Yeah, I think we honestly, we see that probably more on the behavioral side where because the patient bill amounts are smaller, that copay deductible dynamic tends to have a bigger impact. I would say on the acute side, again, we've seen more Medicare utilization, as I alluded to. We've seen some of those Medicaid enrollees who've been disenrolled over the last, I'll call it 6-8 months, re-enrolling in commercial products. So we've seen a tick up in our exchange utilization. But our exchange utilization in our acute business still runs in the mid-single digits, sort of 4% or 5%. So it's not a huge part of our business. I don't think it's changed dramatically.
Then could we see some enhanced seasonality because of these copay payments? I was just wondering if that could be a little bit of a tailwind, specifically around ASC investments that you've made recently.
Yeah, I mean, so there has always been some level of seasonality in the acute business, specifically towards the end of the year as people exhaust their copays and deductibles. We generally see a tick up in late third quarter, early fourth quarter in elective surgeries, et cetera, as people sort of manage through their personal insurance. I think what you're suggesting is, well, if the amount of commercial exchange utilization is ticking up, could that seasonality be exaggerated or exacerbated a little bit more this year? Yeah, I suppose that's possible. Again, I don't think the numbers are, at least for us, so great that they're likely to make a big difference. And I think if they are, it'll be a positive towards the end of the year. But yeah, I don't see it as a huge issue.
Another requisite question that's come up on just about every call was the Two-Midnight Rule. I know that CMS may have released some guidance recently. Anything in there that's surprising? Anything that adds more clarity or gives you any hope for some upside maybe later in the year?
Yeah, I think that the way that we've always viewed the recent Medicare or CMS pronouncements on the Two-Midnight Rule, where they're specifically saying that managed Medicare payers have to subscribe to the rule or comply with the rule in the same way that traditional Medicare providers had to since it was implemented, has always been, in our minds, kind of an incremental positive, but not necessarily sort of a landscape-changing mood, a move rather. I think our view is that being able to fall back on the Two-Midnight Rule and, as we appeal denials or work with insurance companies to qualify a patient for an inpatient admission, being able to point to the Two-Midnight Rule is a helpful tool to have.
But on the other hand, what payers will do, because the Two-Midnight Rule is not sort of on its own determinative, meaning it's not just that a patient is in the hospital for two midnights, it's that a hospital or a patient is in the hospital, meets inpatient criteria, and is there for two midnights. And so that debate over whether the patient is meeting inpatient criteria or not still exists. And I think will still be a source of dispute between providers and payers. Again, being able to rely on the Two-Midnight Rule, I think we always viewed as incrementally positive.
When we've been asked over the first 3, 4 months this year whether having that change in the Two-Midnight Rule has really been a significant contributor to the strong acute care volume, at least from our perspective, we've really been unable to validate or verify that. When we look at the amount of our observation patients, the amount of our inpatient admissions, the amount of our denials and denial appeals that are successful, all those sort of things, they are generally tracking with our historical numbers. We even use a third-party firm to help us with a lot of these, I'll call them sort of disputed inpatient observation patients. They echo the same sort of sentiment that it's not really obvious to them that we've seen a measurable and significant change in behavior on the part of the payer.
Again, I don't think in any sense it could be a bad thing. I think it probably is incrementally positive, but at least so far, not something that we feel is really contributing in a measurable way to either the total number of admissions or our earnings or anything like that.
Another topic that's top of mind for everyone, our professional fees and how they're playing out. Clearly, a headwind last year, and you saw a 12%-13% growth during the first quarter comping past, I guess, prior to the start of this headwind, though we would expect that to moderate in the back half. I think you noted on the call that professional fees would not be dragged for the full year of 2024 as it was last year. So how should we be thinking about maybe an exit rate for 2024?
Yep, so what we said when we gave our guidance a few months ago, our 2024 guidance, was that we expected professional fees to increase in 2024 versus 2023 for the total year at about the rate of inflation, we're going to call it 5%-6%, something like that. To your point, in the first quarter, it was up 12%-13%. And the reason for that, I believe, is that if you look at our professional fees last year, they trended up sequentially every quarter. And this year, I think we expect them to be much flatter as the year goes on. So we'll get that benefit as the year goes on. I'm making these numbers up at the moment, but you get the point.
If we were up 12% or 13% in Q1, we'd expect to be up 7% or 8% in Q2 and 3% or 4% in Q3 and maybe flat in Q4 to work out to a yearly increase of about 5% or 6%. Don't expect it, as your question suggested, to be a significant drag to our earnings the way that it was in 2023.
I know it's a stress to ask about 2025, but maybe you could help us frame how the new normal looks for this physician piece. Would you expect 2024 exit to be kind of a good as a % of total SWB or as a total revenue comp for that number?
I think so. I mean, I think essentially, and I think most investors understand this, that those fees really I'll sort of suggest that the economic or business model for those fees and how we compensated those physicians either directly as employees or through third-party providers, that business model really was reset late in 2022 as the No Surprises Act took effect and some of the major managed care companies renegotiated their fees with some of the major hospital-based physician providers. And I think because that business became far less profitable because reimbursement declined, the cost of running that business, whether that cost was being paid by a third-party provider like Envision or TeamHealth or it was being paid by a provider who directly employed the physicians, the cost went up. And that's reflected in our increased physician expense.
Look, we're always looking to better control that expense to get competitive bids where we feel like there are efficiencies to be wrung out, to drive efficiencies in other ways with better staffing, less anesthesiologists and more CRNAs, less use of locums physicians, all those things. And we do it in, frankly, every area of the usage of labor. But no, I think the crux of your question is, is the level of expense that we're experiencing this year, is that essentially the new norm or is that the base to use going forward? I think the answer to that is yes.
Gotcha. Is there any efforts? I know a lot of your competitors have talked about kind of onboarding efforts to bring more of these internally. Kind of how are you following that same strategy and kind of how is that progressing?
Yeah, I mean, so that tends to be, I think at the moment, that has been a bit of a fragmented decision as we dealt with this issue. And I think as many of our peers dealt with this issue late in 2022, early in 2023, we were doing it on a case-by-case basis. In every market, we were scrambling to make sure that we kept the service intact, that our surgical services and our emergency room services were never disrupted in any significant way. And we did it differently in every market. In some market, we kept the incumbent provider in place and just raised the fees to them. In other markets, we went through an RFP process and brought in a new provider. And in some markets, as you suggested, although a small number, we employed the physicians ourselves.
I think ultimately, what makes the most sense is generally to have a single solution for the entire portfolio. If you think about physician employment as a solution, there's a lot of infrastructure that goes with that. You have to have the billing and collection that's specific to hospital-based physicians, physicians, or anesthesiologists, which is very different than hospital billing, professional fee billing, very different than hospital billing. So you have to have that infrastructure in place or you have to pay a third party to do it for you. You've got to have physician credentialing and physician recruiting in place, et cetera. So I think ultimately, we will move in a single direction. That is, we'll concentrate on probably one or two large outside providers. We'll bring all the physicians in. But we'll work that out.
I think right now, our goal in 2023 was just to stabilize the environment in every market and every hospital. I think we've done that. In the future, I think we'll look to have a more, I'll call it, sort of synthesized approach throughout the portfolio.
Gotcha. And as we transition over to the behavioral side, I know that one huge development that you've made in your 10-Q since your earnings was that the Medicaid supplement, you've recently set a $40 million-$56 million target from Tennessee, and that's pending governor's approval. Just wanted to see how you're thinking about that estimate range, kind of what the swing factors are there for you and kind of where that benefit falls.
Yeah, I mean, so the reason that often when these programs are in the process of being implemented, we don't have exact estimates of what the benefit to us will be is that they're generally based on the amount of Medicaid utilization that hospitals have and sort of a total pool and how that total pool is allocated. And the piece that we obviously know the Medicaid utilization of our own hospitals, we can project them, we can look at the state plan. But until the state puts out what we generally refer to as an impact file where they sort of show the total amount to be allocated, what all the other hospitals are getting, it's a bit of an estimate on our part. And that's really what we're waiting for in Tennessee.
So we gave, as you suggested, this estimate, the range of $42 million-$56 million benefit, annual benefit. We think most likely we would get a half a year of that benefit this year, but waiting to see the state's impact file before we're able to say more precisely what that benefit will be.
This is probably a good segue into the next question of kind of how do we think about when you might start to accrue for these updates rather than kind of bring them in piecemeal. I think one of your competitors, HCA, said they were starting to accrue in Florida. Just wanted to see kind of what your thoughts are on that and kind of when does that become possible?
Yeah, so our historic practice has been we wait for CMS approval of the programs before we do so. And so specifically in the case of Tennessee, the best guess, which we usually generally follow the lead of our hospital, the State Hospital Association, and State Hospital Association is guessing that that approval in this case will come in the back half of 2024 and the program will be retroactive to July 1. So again, we'll wait for that approval. And depending on the timing of it, if it's in the third quarter or before the third quarter, we'll recognize it in the third quarter. If it's later, we'll recognize it and essentially catch up.
Moving to the behavioral side, you noted the favorability this year came from continued rate strength. Clearly, the supplemental Medicaid that you've recognized plays a big part in that. What else is driving the strong rates? Any high acuity categories to call out there?
Yeah, I mean, acuity tends not to have the same sort of impact in behavioral that it does in acute other than if acuity is sort of the mix of acute behavioral versus residential behavioral patients. And part of the reason that our acuity has been somewhat higher in the last, I'm going to say 6 or 9 months, has been a slightly higher accelerated rate of growth of our acute business versus our residential business. I think that will catch up. The reasons I think our residential business has been a bit softer in the last 2 or 3 quarters are some Medicaid disenrollment impacts, some specific facilities that we're struggling with, regulatory or referral issues that are, I think, getting back on track. So I think naturally, a little bit of that pricing strength will moderate. It'll also be offset, I think, by somewhat increased volumes.
The other dynamic that we've discussed a number of times, I would say in the last couple of years, is that during the pandemic when many of our hospitals were capacity constrained. I think when I say our hospitals, I'm really referring collectively to the behavioral industry. When I think many of the behavioral hospitals around the country were capacity constrained because they couldn't hire enough patient care, employees, and nurses, and therapists, and counselors, et cetera, we just had more optionality in negotiating with payers and being able to get our payers to pay us what we thought was an adequate rate for the care of their patients.
And in those cases where we couldn't get payers to pay us those adequate rates, we were probably more willing than usual to cancel contracts, et cetera, which also has the impact, if you will, of improving your case mix pricing. I think we've been seeing that as well. So the pricing in behavioral has shown a fair amount of residual strength. I think that's a function of the high level of demand for those services and doesn't seem to be diminishing anytime soon.
Are we back to kind of full capacity post-pandemic in the behavioral side? I know that we had a lot of cutback on just labor availability and issues, as you discussed. Is the clinical capacity back completely? You noticed that labor or you noted that labor inflation was around the 3% range, which is a little better than expected this quarter. Should we expect a full return to capacity on the behavioral?
I mean, I think it's fair to say that the labor constraints that I just alluded to have diminished dramatically, largely as the pandemic and the pressures of the pandemic have eased. Because if you recall, what really created the exacerbated pressure in our behavioral segment is that during the height of the pandemic, when there was such great demand in the acute care setting for emergency room nurses and ICU nurses and just nurses to work in COVID units, et cetera, the subacute industry, including behavioral, but I think also including nursing homes and home health and skilled nursing facilities, were losing many employees, nurses in particular, too, who were leaving to work in these acute care settings, very often as temporary and traveling nurses, not so much even as permanents, but as traveling nurses making premium over their current salary, often at 3, 4, or 5 times.
As those opportunities, well, first of all, as I think the COVID surge has diminished, as we've clearly reached, I think, much more of a status quo when it comes to COVID patients, those opportunities in the acute setting have dramatically diminished. So we're not struggling nearly as much with filling our vacancies. I do think when you look across the portfolio, we will find in individual markets and individual geographies that we still struggle with sometimes it's nurses, sometimes it's psychologists, sometimes it's counselors, and sometimes it's non-clinical, it's non-professional people. We utilize in our behavioral facilities people we call mental health technicians. These are non-degreed people who are very critical to the care plan. Keep in mind that in a behavioral facility, patients are mobile. They're physically healthy generally. They're moving around. Sometimes they're not easy to keep track of
mental health technicians play an enormously important role in doing that. And so having them and having the appropriate number of them in place is also critical. So I would say broadly, the labor situation has improved quite measurably in behavioral, but we still find pockets where it can be a challenge.
In the last minute here, maybe we could talk about capital deployment. You've talked about a lot of outpatient capabilities that you're adding across freestanding EDs, ASCs, and additional behavioral capabilities. Kind of what's your preference and how are you thinking about that this rest of the year?
Yeah, I mean, so in both of our business segments, again, this is not a terribly insightful observation on my part, but we have seen a continued migration of what have historically been inpatient services being delivered in some sort of outpatient setting, whether that surgery is being delivered in an ambulatory setting, imaging being delivered in a freestanding imaging setting, different access points. You talked about freestanding EDs, which have been very successful for us, or urgent care, et cetera. So we, I think, have just been in both of our business segments investing in building out the continuum so that we can most effectively treat patients all along the continuum. If they want to access an acute care hospital in some other way other than an acute care hospital emergency room, we want to provide that opportunity.
If at the end of their behavioral care, a patient is looking for intensive outpatient or what we call partial hospitalization care, we're looking to be able to provide that. If a patient is looking for simply freestanding outpatient behavioral care, we're looking to be able to provide that in many of our markets as well. So the investment is really trying to take advantage of our ability to provide care along the broadest continuum. There are a lot of niche providers out there who are providing very specific segments of care in the continuum. But we think that there's an advantage both to a patient and to whoever pays the bill for the patient, whether that's their insurance company, their employer, et cetera, to really have a provider who can provide a much more fulsome continuum of care. And that's our goal.
Well, thank you very much. I really appreciate you being here today.
Thanks, Ben. My pleasure.