like, you're from a small daycare, it's massive, so. All right, thank you. Yeah, good morning, everyone. I'm Steve Baxter, the healthcare services analyst at Wells Fargo. We're really pleased to have Universal Health Services with us today. UHS operates a portfolio of acute care hospitals and behavioral assets. From the company, we have CFO Steve Filton. Thanks again so much for being here. Did you wanna make any kind of opening remarks or just skip, kind of, right into the questions?
Get right into it.
Okay, great. All right, so then maybe we'll start on the acute side of the business and do a few here and then pivot to behavioral. So just to start, you know, the first half, you know, volume backdrop, demand backdrop, feels like it's been pretty strong across the industry. It's been fairly strong for you. As we sit here thinking about the second half of the year, can you talk a little about the assumptions you've embedded in the back half of the year around demand and any kind of update on what you've been seeing would be great.
You know, we revised our guidance at the end of the second quarter, and I think we were clear that in terms of sort of the core business, particularly volumes, we were sort of reverting back to our original guidance, which for the acute care business for the year was adjusted admissions in the sort of 3%-4% range. Adjusted admissions grew in Q2 by 3.4%, which you know solid, but I think particularly you know strong in light of the comparison with the prior year quarter, which was like 7.7%, something like that. And you know I think we've been a little bit more conservative about our outlook on acute care volumes.
In part, that's a nod to our experience at the back half of last year when our volumes were really quite strong. And I think the volumes that were really strong in the back half of last year were a reflection of some of our slower to recover markets, like Nevada, California, D.C., coming back a little bit more slowly than some of the other, I'll call them, for-profit markets like Texas and Florida, which had come back sooner because they had nothing shut down as much during the pandemic. So, you know, we're looking at, I think, what, you know, are historically, you know, solid acute care volumes, maybe a little bit more conservative than some of our peers, but I think some of that's because of the difficult comparison we have with the back half of last year.
Okay. And when you go to the Two-Midnight Rule, you know, your first half same-store admissions, you know, 4.6%, the adjusted admissions, 4% for the first half. What impact do you think Two-Midnight is having on your business in the first half? And I guess, how are you thinking about whether that is any different in the back half or maybe into next year?
You know, and I know that our answer to this question is a little bit different than some of our peers, but I think we've consistently said that we don't really detect sort of a material change in our volumes as a result of the expansion of the Two-Midnight Rule earlier. So we measure that based on you know, metrics and you know, in terms of how many observation stays we record, how many appeals we're successful on, et cetera. And that none of those metrics seem to have really changed.
Subjectively, we talk to our folks who are involved in this all the time to say, "You know, are you seeing different behavior from our payers?" They tell us, "You know, not really." And, I don't know why, 'cause I do know that some of our peers have said they've seen-
Yeah
... a more material impact from the change in the Two-Midnight Rule and expansion of it. I will say that we've really been focused on this area for several years now. We engage a third-party consultant who really helps us determine what are appropriate admissions versus observation stays. They help us appeal the ones that we dispute with the payers, et cetera. So maybe, you know, we're not being impacted because we've been a little bit more focused on this issue than some of our peers in the last few years. But, but again, the bottom line answer is we just don't think that whatever strength we're seeing in acute care volumes, we don't think any sort of material amount of that is because of the Two-Midnight Rule.
Okay, got it. And as you've built the guidance, you know, obviously it's a little bit difficult with some of the noise around, like, Medicaid supplemental payments to look at the underlying margin trends. How are you thinking about margin trends in acute, I guess, on an underlying basis, kind of first half and what you've built into the guidance for the second half?
I mean, I think, you know, we have said we believe that acute care margins will continue to improve. We have said that we believe we'll get, you know, close to or get back to something pretty close to pre-COVID margins on the acute side. You know, and then we'll talk about behavioral separately, but-
Yeah
... you know, we have said that I think there are some structural challenges to getting acute care margins all the way back to pre-COVID numbers, the increase in physician expense being probably maybe the biggest, the continued shift from inpatient to outpatient is a pressure point on profitability. Obviously, as you alluded to, the Medicaid supplemental payments offset that some. But I think broadly, and I know we'll talk about the behavioral piece separately, I think we've had the view that we'll get back over the next year or two, pretty close to acute care pre-COVID margins, and on the behavioral side, the hope is that we can get, you know, above where we were in pre-COVID margins.
Okay, yeah. So as we think about the building blocks to do that on the acute care side, I know you're waiting on a couple of supplemental programs as well, so maybe this would be a good time to maybe get an update on where those stand. But as we think about building from your current margins, potentially layering on a couple of incremental programs, what's gonna solve for the rest of the delta on the acute margin side of things?
Yeah, so, so my previous comments about getting back to pre-COVID margins really exclude any benefit we'd get from additional supplemental programs.
Okay.
The one program that would affect the acute care business materially is in Washington, D.C. We've sized that program as being worth something in the $80-$90 million a year range. We believe that that program is likely to get approved sometime later this year, maybe next year, early next year, and we anticipate that it would be retroactive to October one of this year. So, you know, we would only have a quarter's worth of effect. But broadly, more broadly, the keys, I think, to getting those acute care margins back are really you know overcoming the things that disrupted those margins so significantly during the pandemic. We talked about volumes earlier.
I think, you know, acute care volumes have clearly now recovered largely from the pressures of the pandemic. Although people have pointed out that if you simply took pre-pandemic volumes, 2019 volumes, and indexed them forward for, you know, a reasonable growth rate, we're still below that.
Mm-hmm.
Now, so it does imply that there's still some additional recovery and catch-up to go, which, you know, obviously should help the business. You know, obviously, the other significant disruption, I think, during the pandemic was a dramatic reduction in the labor supply-demand dynamics. We saw, you know, wage inflation accelerate dramatically. We saw the use of premium pay increase dramatically. You know, both of those metrics have really, you know, stabilized. We've reduced premium pay, you know, by, I think, almost two-thirds from its height during the, you know, the height of the pandemic.
Mm-hmm.
Wage, I would say we're experiencing wage deceleration. What I really mean is the rate of wage acceleration and inflation is clearly slowed.
Yes, mm-hmm.
It feels like that's gonna continue, and obviously, and not that I'm rooting for it in any way, but if we see some weakness in the economy, some increased unemployment, historically, that has generally been helpful to our business in terms of, you know, increasing the supply of labor hours and making it less of a pressure point. So, you know, my sense is if acute care volumes can continue at the relatively strong rates they've been at, which I think most people anticipate they will, we certainly do. Expenses have been, you know, moderating-
Mm-hmm
... both from a sort of external factor, and I think, you know, we talked a lot about, in our second quarter call, a lot of the steps that we've taken to drive greater efficiencies. You know, I think we drove a lot of productivity improvements in Q2. You know, that, you know, we should get the continued benefit of. So all those things, I think, will contribute to the continued progression of getting back to those pre-COVID, something close to those pre-COVID acute care margins.
Okay. And obviously, an important driver has been, you know, the lagged improved commercial rates that you've seen in the acute care business over the past couple of years. Can you update us on, as you're, you know, getting further along with contracting for 2025 and maybe even 2026 at this point, how your expectations look there compared to the past couple of years?
You know, I would say that beginning in the middle of 2022, we began to get an elevated level of price increases from our payers, which was really a, you know, an acknowledgment or a reflection of the fact that they were acknowledging that inflation had had-
Mm-hmm
... you know, clearly ticked up. So if you assume that the average length of our, you know, or the average managed care contract has a length of about two and a half years, you know, we probably still have a little ways to go there and,
Mm-hmm
... still getting those. Now, I think as we start to get into the cycle of 2025 and beyond, you know, we'll start to get some pushback from our payers, who will argue appropriately so that inflation has slowed some. But, but I think we'll still get the benefit of those elevated inflationary increases for another six or 12 months at least.
Okay, and just, can you remind us for your contracts, generally, like, first year increase versus increases in the latter stages? Like, are you still blending up to a higher rate of commercial update, or is it something that's more stabilized at this point?
No, and I think that's. And maybe I didn't.
Yeah
... wasn't artful enough, but that's the point that I was trying to make, is we, you know, we negotiated these increases-
Yeah
... multiyear increases beginning in 2022.
Mm-hmm.
We'll continue to get the benefit of that for a little while.
Okay, got it. And then, you know, when we think about, you know, labor, obviously, you made the point that to the extent that the economy softens a little bit, like historically, that's been a source of easing wage inflation for you. Absent something like that occurring, how much more progress do you think you could see on moderating labor over the next couple of years?
Yeah, I mean, I think there is still incremental improvement to be made on premium pay. You know, our temporary, we, you know, call registry nursing expenses-
Mm-hmm
... are still, you know, 70%, two-thirds higher than they were pre-pandemic, and so I don't know that we can get all the way back to those pre-pandemic levels, but there's-
Mm-hmm
... still some room to go. You know, I think we talked a lot about the productivity improvements that we made in Q2, and I think one of the reasons that you're seeing that is that I don't wanna say that our operators ignored the productivity, you know, metrics that we've historically, you know, focused on during the pandemic, because I don't think that's fair to them.
Mm-hmm.
But I think, you know, we sort of suspended some of that focus because we were finding it so difficult to fill all of our open positions during the pandemic.
Mm-hmm.
I think we've returned to kind of a more normalized dynamic now, and so we're managing productivity in a more efficient, aggressive way than we had been. You know, really, I think returning kind of to historical practices. So, you know, we're getting the benefit of that as well.
Okay. And then, obviously, professional fees were, you know, a surprise for the industry, you know, a couple of years back now. As we think about, you know, the future for professional fee expense, you know, it's a little bit hard, I think, externally for people to understand whether the providers of those services are now on a little bit firmer footing, like much firmer footing. How do you get comfortable that, you know, you might not see another step function increase in those costs at some point over the next few years?
I think that the reason that those professional fees and the increase in those professional fees came as a surprise to investors, but I think-
Mm-hmm
... you know, to providers themselves, is that I don't know that we collectively had a full understanding of how much of the profits of those what we call physician-based or hospital-based physicians-
Mm-hmm
... the emergency room physicians, anesthesiologists, how much of their profits came from out-of-network billing? And as a result, when the No Surprises Act was enacted and was implemented, the profitability of that business, regardless of who was running it, you know, would diminish dramatically. And, or you can look at it another way, the expense of providing that service increased dramatically. Again, and regardless of who was providing that expense, whether it was a third party and, you know, we've seen some pretty high-profile third-party bankruptcies in that space. But, you know, even to the degree that hospitals took over those physicians, you know, we were facing those same dynamics. But I think what happened is essentially over a period of time, I'm gonna say, you know, for us, most of 2023, the business was sort of reset.
Mm-hmm.
And we reset it to a lower reimbursed business. That was the level of expense that rose, and now it's sort of stabilized and, you know, the business is what it is. I don't think it's gonna face, you know, further headwinds. As a matter of fact, I think there are some efficiencies we might be able to wring out of the business. We still use a relatively high degree of locums, you know, temporary physicians. We still don't necessarily always have the right mix of, like, particularly in the anesthesiology of, you know, anesthesiologists and CRNAs, et cetera. We can probably do that a little bit better.
So maybe we can make the business a little more efficient, but I don't think that the no pun intended, but the surprise that the Surprise Billing Act wrought is gonna be repeated in any significant way. So I do think that the business has settled in at a sort of new normative expense level.
Okay. So then on the cost side, I mean, we've mostly talked about things that are more traditional blocking and tackling for hospitals. As you think about the opportunity to, you know, attack your cost structure differently in light of, you know, new technologies or AI, like, what's the company's current stance on that, and whether there's opportunities for, I guess, like, maybe step function change in your cost structure that wouldn't have been possible maybe five years ago?
Yeah, I mean, again, and I think, you know, what our results showed in Q1, and then again, I think even more dramatically in Q2, is we've driven, you know, more productivity, particularly on the labor side, but I think across our expense structure. I think there's certainly more to go. I think technology helps that. You know, one of the difficult parts about driving appropriate levels of productivity and staffing in our business as opposed to, you know, businesses that we sometimes get compared to, like an airline business or a hotel business, is it's a lot harder for us to anticipate demand. We don't, you know, we don't book a lot of our demand, particularly the emergent part of our demand, is difficult to anticipate.
I think, you know, one of the potential uses of AI is to help us, you know, better predict that. Even if we can better predict days ahead, it will help us to, you know, better manage our staffing and our productivity, certainly around the edges, so that's helpful. But yeah, I mean, I still think that there are...
You know, again, I'm gonna say that during the pandemic especially, we became less efficient, not because, you know, sort of intentionally, but we were facing, you know, certain challenges in terms of the patient population, but also challenges, as I alluded to before, in the sense of really not wanting to, you know, in any way, offend, it's probably the wrong word, but offend our labor, you know, complement, so that, you know, they would look to work elsewhere. Because, you know, lots of people were moving around and seeking the sort of highest paying jobs, you know, during the pandemic. So again, we've returned to kind of a more normal,
Okay
... dynamic that we're in right now.
Okay. And on the acute care side, you have, you know, a number of new hospitals you're opening over the next couple of years. Can you just help us think about the cadence of startup losses maybe into next year or the year after, and just an update on how much capacity you're gonna be adding to the system? How do you think that's gonna flow through over the next couple of years?
Yeah, so I think the relevant openings on the acute care side, you know, at least as it relates to 2025, is we'll open a hospital in West Henderson in Las Vegas late this year, mid-November or so. And then we'll open a second hospital in the Washington, D.C. market sometime in the spring of 2025. You know, as we get closer to giving our 2025 guidance in early 2025, you know, we'll be more specific about the impact of those openings. I'm gonna say in both cases, I would anticipate that they will be relatively minimal, and I base that on, you know, our openings in Las Vegas have tended historically to ramp up faster than our openings elsewhere.
Mm.
The hospital that we opened in Henderson, Las Vegas, four or five years ago probably ramped up faster than any other hospital we've ever owned. Hoping for something akin to that with the opening of West Henderson. And then with the hospital opening in DC, that's a hospital that we built really in partnership and at the urging of the District of Columbia government. They've protected us financially, sort of on the downside, both with Medicaid reimbursement and some sort of startup losses protection. So that, again, I think in both cases, we'll have, you know, relatively, you know, minimal drags. We'll be much more precise about those when we give our guidance.
Okay. And then it's been interesting, we've watched, you know, some really interesting acute care hospital transactions in the market. You know, with one of your competitors, created a lot of value, some really high multiples on some of these transactions. I guess, has the company seen any inbound interest on the acute side, and how do you think about overall managing the acute care portfolio, if there's opportunities like that to potentially create value?
Yeah, I mean, so, you know, the peer company, I think, you, you know, you're largely referring to, has been, you know, involved in a process, I think, for now several years of, you know, lessening their exposure to the acute care business and increasing it to ambulatory and, and to a lesser degree, I guess, the, the revenue cycle business. You know, we, I think, went through that exercise of, to some degree, lessening our exposure to the acute business decades ago when, when we invested in the behavioral business and continued to do that. I think that the acute business that remains for us are in markets and largely in markets and franchises that where, you know, we're quite confident in, you know, et cetera.
You know, I'm sure that if you know, we wanted to transact in some of those markets, we could get a very hefty price. But you know, I'll use Las Vegas as an example. You know, we love our franchise position in Las Vegas, the growth rates, et cetera, the returns we're earning in that market. You know, we're not looking to abandon it.
There may be, you know, one or two peripheral markets that we would explore and exit from, but I think, you know, quite frankly, that's part of the normal process in both the acute and behavioral business, where we look at the, you know, the bottom, you know, 5% of the portfolio and, you know, think about what the right way to, you know, if there's not a lot of opportunity for improvement, the right way to think about exiting those markets.
Okay. And then, you know, a couple questions, I guess, more, a little bit more election-focused. You know, the exchange has obviously been a much bigger part of everyone's business over the past few years. As you look at, you know, exchange portfolio, just remind us, you know, on average, like, how do the, the reimbursements there compare to maybe a more traditional managed care population? And anything notable, you know, about how those people use the system, as we're thinking about whether there could be changes or not in the absolute level of enrollment in that market?
Yeah, I mean, so we've said that pre, the ending of the Public Health Emergency and the Medicaid disenrollments that sort of started from that, our commercial exchange population, as a percentage of our total acute care adjusted admissions, was about 4%.
Mm-hmm.
It's risen to about 5% subsequently. I know some of our peers have sort of talked about an increase that's a little bit more-
Mm-hmm
... dramatic than that. Commercial exchange reimbursement is generally closer to Medicare reimbursement than it is to commercial reimbursement.
Mm-hmm.
A little bit above Medicare, but you know, not nearly as good as our average commercial reimbursement. So, you know, again, I guess our view is if there's an impact on commercial exchange enrollment because there's a change in the administration and the subsidies end or whatever, while we think, I think it could be a bit of a headwind, you know, just given the numbers, I don't think we think it's likely to be a material headwind.
Okay. Then, you know, another area that comes up a lot with the elections is just the Medicaid supplemental programs. You know, it seems like the industry has a perspective that they think these are durable, and they're not sensitive to the elections, but I guess, what's your latest perspective on that? And then, you know, as we've seen Medicaid enrollment come down a lot nationally as a result of redeterminations, do you think there's any linkages between the size of the Medicaid population and these programs, maybe on any kind of lag basis, to consider?
So I think the reason that the industry tends to view the programs as durable, as you described it, I mean, one is the hospitals that sort of come to most rely on these programs, you know, what I would describe as safety net hospitals, really is sort of, you know, you know, these programs sort of become their lifeblood, and if the programs were to end-
Mm-hmm
... or be reduced dramatically. I think what you would see is a lot of these safety net hospitals would no longer be economically viable, and I think that's a public policy outcome that regardless of party is really not an acceptable outcome. The other point that I think, you know, certainly my peers have made is that, you know, these are not programs that are specific in any way to, you know, certain, you know-
Mm-hmm
... states that lean one political way or another. You know, I think both Tenet and HCA made the point that their probably biggest Medicaid supplemental programs are in Florida and Texas, you know, two very red states.
Mm-hmm.
So, you know, again, the notion that even if there was to be a change in either administration or Congress, et cetera, that all of a sudden these programs would be viewed with disfavor, I think would be a tough political sell. You know, states like Texas and Florida, I think would lobby pretty, you know, vigorously to maintain these programs because, you know, again, their-
Mm-hmm
... their hospital communities have really come to rely on them, and again, the other point I would make, you know, particularly on the acute side of the business, is even with the benefit of these programs, you know, I can't speak for the other companies, although my guess is their experience is similar. You know, our Medicaid reimbursement remains, you know, well below even our Medicare reimbursement, and so, you know, we're, you know, in many cases, still just largely, you know, covering or maybe not even still covering-
Mm-hmm
... our costs with our Medicaid patients.
Okay. And then, just as you look at the programs that you have today, do you feel like that, you know, if you get there with D.C., that on the acute side, you've kind of reached the later innings into this? Or do you still think as you look across, like, there's certain programs that are well below the others in terms of, like, where they've gotten average Medicaid reimbursements to?
I think so on the acute side. I think DC would be the last of our geographies that where we don't have any programs at all or a program at all.
Mm-hmm.
But I think there is still some room for expansion. And, you know, again, you raised the point that with Medicaid disenrollments, some of these programs, you know, could see reduced reimbursement, and I think there's, that's true in some cases. But we've gotten the feedback from some of these programs that, you know, actually, over the last several years, Medicaid-
Mm-hmm
... utilization has increased dramatically. And so, you know, a lot of these programs are based sort of on historical utilization from three or four years ago, and they continue to update them.
Mm-hmm.
So if we're seeing more Medicaid utilization, even with Medicaid disenrollment, and I'll make the point that in states like California and Nevada, Medicaid disenrollment has not been nearly as large as it's been in Texas-
Yeah
... and Florida, et cetera. You know, I think there's a potential for expanded programs in those states.
And then, you know, to move to the behavioral side, you know, I think it's been a little bit of, on the volume side, at least, like, same-store patient day growth has taken a little bit longer to re-accelerate. Maybe just level set us on sort of the root causes of that. And I know you're optimistic that, you know, potentially, as we get towards the later part of this year, that could start to accelerate. Any, you know, confirmatory data points you can share on any of that?
Yeah, I mean, so, you know, if you go back for an extended period of time and look at our behavioral business, the normal same-store growth, you know, I'll call it just, you know, top line revenue growth, has been in that sort of six, seven, eight percent range. And it's been low-skewed more to volume than to price. We've generally, over the last couple of years, been exceeding that, and we've been running at 8%, 9%, sometimes 10%.
Yeah.
You know, what has, I think, differentiated it from historical periods is it's been skewed more to price than to volume.
Yeah.
The pricing strength seems to have a fair amount of durability associated with it. Although we've said over and over again, we anticipate that we'll start to see some declines in it, and when we do, you know, the burden on us will be to, you know, increase our volumes. And you know, as you alluded to-
Mm-hmm.
-that increase in patient day volume has been sort of slower to come than we've anticipated. Although, I think, you know, we, we've been incrementally getting there, particularly coming out of the pandemic. I think the most recent sort of shortfall from our expectations, which I'm gonna say that shortfall is not all that great, you know, maybe it's 75-100 basis points-
Mm-hmm.
Shorter inpatient day volume growth than we expected is attributable to a few different things. One is, while I think the overall labor supply-demand dynamic has improved, and we've done a much better job of filling vacancies overall throughout the division, we still find that in very specific geographies and very specific hospitals, we do sometimes struggle with filling certain positions. A lot of times it's nursing, but sometimes it can be-
Yeah
therapists or counselors. Other times it can be the non-professional folks that we call mental health technicians. I think secondly, we've been more impacted by Medicaid disenrollments, particularly-
Mm-hmm
-in Texas, you know, most notably, but other kind of, you know, red southern states like Mississippi and Arkansas and Louisiana than we anticipated. I think a lot of those folks are either being re-enrolled in Medicaid or are enrolling in commercial exchange products, but that's-
Mm-hmm
Taking some time, and it... And it's, again, a little bit longer process than we imagined. And then I think finally, you know, late last year or in the back half of last year, you know, we identified a handful, maybe half a dozen.
Mm-hmm
residential treatment facilities that had faced some, you know, very specific
Yeah
But, you know, nuanced sort of issues that had caused them to, you know, have reduced volumes and profitability. We've seen them recover, but again, at a slightly slower pace than we expected. So I think our sense is, and you know, what we said is, we had originally set a target for 2023 of, you know, 3% patient day volume growth for the year.
Mm-hmm.
We now say that that's gonna be difficult to achieve, but I think we still believe we can exit the year at that rate of growth.
Yeah.
That rate of growth is a pretty reasonable way to think about the business going forward. If we can grow at 3%, given the strong pricing, getting to that 6%, 7%, 8%-
Mm-hmm
historical level of behavioral pricing, which is a level at which you can have margin expansion and growth in the business, you know, shouldn't be, you know, a big stretch.
Okay. And then, you know, we talked about Medicaid Supplemental in the Acute business, which I think, you know, people struggle pretty hard to follow and model and track. The behavioral side seems like it's even more challenging, but you've had some benefits there. Just kind of level set us on where you are in behavioral with these programs, compared to maybe where you are in Acute, and whether you think there's still maybe more opportunity on behavioral than there might be on the Acute side of the business.
Yeah. So while, you know, the DC program is the one most damaged on the acute side, we've been talking about Tennessee for a couple of quarters, and that's in the behavioral for us, a behavioral impact. We sized that program between $42 million-$56 million annually. Expect that program to be approved again sometime late this year, early next year, and retroactive back, in this case, to July one.
Mm-hmm.
There are a couple of other behavioral states that we operate in that don't have programs, and again, much like I would say, on the Acute side, there are states that, quite frankly, either have programs that don't include behavioral or have programs that could be expanded. You know, so I think there is, you know, some upside. It's difficult to predict or project, but I think and honestly, just because I think of the broader geographic footprint we have in behavioral, there's probably more upside in behavioral than there is in Acute.
Okay, and, you know, we started to get more questions. You know, I believe there's a ballot initiative in California, starting to attract some attention that would potentially increase funding for the system overall. It's a little bit hard to know exactly how it flows downstream to providers like yourself. Can you talk a little about what you know about that program at this point and the potential materiality of it?
Yeah. So I think the, you know, the law that you're referring to is called Prop 1. It was passed, I believe, earlier this year, and I think it was, you know, basically provided for, like, a $6 billion bond issue, largely geared towards an expansion of behavioral care. And that's a lot of different things. I mean, it's housing and, you know, it's not necessarily just what the things that we think about in terms of, you know, mental health treatment and care. And even on the mental health treatment and care side of things, I think it is geared more towards expansion of facilities.
There's been a real dearth of new behavioral beds in California in the last decade, or maybe more, in part because it's so expensive to build in California, and therefore, it's hard to make the economics work. But then, to your point, you know, the way this program, I believe, is supposed to work is that monies are being allocated to counties and other local governments.
Yeah.
They're supposed to, I think, you know, have sort of public/private partnerships to allow and make the building of more behavioral capacity, you know, more sort of economically viable. We're in conversations with a bunch of facilities or a bunch of localities, both on sort of our acute and behavioral side, to build, you know, expand behavioral capacity. But as you said, it's still kinda early in the process. It's not clear to a lot of people, not necessarily clear to us, but not even clear to the local government, exactly how that money's gonna make its way down. But I think, you know, broadly, I think, you know, we're kind of a more intermediate and longer term.
It does, I think, bode well for the ability to, you know, profitably provide behavioral care in the state of California.
Okay. And, you know, we had the margin discussion on the acute care side. As you think about the key building blocks to getting back to, you know, where you wanna be on the behavioral side, you know, what's the rank order, I guess, of what you think drives that?
Yeah, so again, I think volumes are a big piece of it, you know, and a big focus, and again, you know, getting from where we are today, which has been sort of, you know, 1%-2% patient day volume growth to, you know, 3%-3.5%, not a huge leap or, you know, in theory, I don't think should be, you know, kind of such a tall order, but it makes a big difference in terms of the operating leverage it brings to the business, et cetera. The other way I think the business benefits is, you know, kind of in the same way as we were talking about on the acute side, I do think pressure on, you know, wage inflation and wage acceleration is diminishing.
Our use of temporary labor, I think on the behavioral side, where we use a ton of, you know, temporary labor, is not as impactful, but we were paying lots of incentives and sign-on bonuses and things like that, that you've seen diminish in frequency, and I think that's helping on, you know, on the behavioral side too. We've had some productivity improvements on the behavioral side as well. So I think all those things, you know, contribute to our ability, along with the improving volumes, to margin improvement on the behavioral side.
Okay. And then as we just step back and think about the total company guidance, you know, I asked a little bit about the margin trajectory on the acute side of the business, but if we take your, you know, your results and we strip, you know, Medicaid supplementals out from all periods, I think the first half, even without margins for the total company, we're up something like seventy basis points year on year. I believe the guidance implication for the back half of the year is more like twenty basis points. Like, how do we think about the, the opportunity there and maybe, like, what the headwinds and tailwinds would be that would maybe get to a different result in the back half than the front half?
Yeah. So, you know, and I think, you know, what I was saying earlier is, you know, what we tried to embed, and I think we acknowledged that the back half of the year guidance was relatively conservative. It really just assumed the known supplemental payment benefit that we would get. Didn't include the, you know, any of the new Tennessee, Washington, D.C. You know, and it really sort of reverted back to kind of the volumes that we had in the first half of the year for both acute and behavioral-
Mm-hmm.
which I think, again, are on the conservative side. So that, to me, is sort of the upside, you know, for the guidance in the back half of the year. The reason I think we've been a little bit more conservative and taking a more conservative tone in the back half of the year is I do think the comparison to last year is difficult.
Mm.
We had a very strong second half of the year last year. I think a lot of that due to the fact that some of these markets, like Nevada, California, and DC, were coming back, but you know, again, you know, we're looking forward to, I think, a strong second half of the year, but the comparison to last year will be, you know, a tough one.
Okay. All right, well, that's perfect. I think we can leave it there. Thanks so much.
Okay.
Appreciate your time.
Thank you.
Yeah.