We good? All right. Well, thanks, everybody, for joining us here and joining us for the TD Health Care Conference. My name is Ryan Langston. I'm the senior analyst covering health care facilities and managed care. Very happy to have Steve Filton with us, Executive Vice President, Chief Financial Officer of Universal Health Services. Very quickly, UHS, one of the largest acute care and behavioral health providers, operates more than 400 acute care hospitals, behavioral health facilities, ambulatory centers around the U.S., Puerto Rico, and U.K. And with us today, like I said, we have Steve. So, Steve, thanks for joining us.
My pleasure.
So, only two or three things, I think, to talk about. But I guess, you know, you just reported recently, but maybe just kind of start at the top. Why don't you remind us maybe kind of the building blocks of the 2025 guidance? Obviously, you threw out some pretty good guidance measures in terms of modeling. But just maybe kind of step back and just give us kind of the overall building blocks for that.
Yeah, look, Ryan, I think, as you alluded to, you know, obviously, there's a great deal sort of happening around us, particularly kind of legislatively and from a public policy perspective. But as far as the business itself goes, it feels like we've, in both of our business segments, returned to what I would describe as sort of a historically normative business model. And that is, and we talked about this on our call last week, you know, revenue growth in sort of the mid-single digits, I would say, for our acute business, that's, you know, probably 5%, 6%, 7%. For our behavioral business, that's 6%, 7%, 8%. For acute, I think that's split pretty evenly between price and volume, adjusted admissions and pricing. And I think on behavioral, it's probably, as we said, 2.5%-3% volume, patient-day volume, and maybe, you know, 3%-4% price.
And then, you know, I think from an expense perspective, we've seen, you know, kind of a moderation in wage inflation and the use of premium pay and some of the things that were really had come under pressure during the pandemic, during the sort of inflationary cycle that we started to see sort of post-pandemic. On the acute side, physician expense had been a real pressure point in 2023. I think, you know, generally stabilized in 2024. We view that as, you know, relatively stable going forward. So, you know, I think the point that we tried to make on the call is that in creating our 2025 forecast, for the most part, we tried to ignore kind of what's happening around us, not because we're trying to ignore it, but because, you know, there was no way to sort of precisely include it in our guidance.
So, you know, we, I think, tried to create a 2025 model that includes some level of conservatism or caution so that if there are incremental sort of challenges, whether they be in Medicaid reimbursement or tariffs or whatever, we can absorb that. Obviously, if there are more significant changes, you know, we'd have to revise guidance at some point. But the business itself feels, you know, kind of as stable and predictable as it's felt in, you know, certainly in the post-COVID era.
You know, I want to touch on one thing you said there. So, we're talking about behavioral pricing. You know, I think maybe even last couple of quarters up until the fourth quarter, you talked about maybe kind of some moderation coming there. It's been fairly strong recently, but now you're saying, you know, 3%-4%. So, I guess on that, like, what maybe kind of changed between what you were saying and maybe what you're seeing now in terms of being able to keep that relative sort of mid-single digit strength on pricing?
Yeah. So, what we have said now for, you know, a number of years, where pricing has been really rather robust in the behavioral space, is that we've been aided by what I think is a relative lack or scarcity of supply of beds, really inpatient beds in the behavioral space, not just at our own hospitals, but I think, you know, more broadly in the industry writ large for a variety of reasons. I mean, you know, I think some of it is labor scarcity. You know, there's just not a lot of, I think, new beds, et cetera. So, what I think that scarcity has allowed us to do is to be more aggressive with at least some of our payers.
And, you know, so we've gone back to payers in markets where our hospitals are running relatively full, et cetera, and have said to them, and these are mostly managed Medicaid payers, although there are certainly some others, and said, "Look, if you're not willing to pay us the market rate or what we perceive to be the market rate in this market, you know, we'll terminate our contract with you because we have other payers, other patients who are, frankly, better paying whose, you know, insurance companies are willing to pay what we consider to be a fair market rate." You know, there's essentially a line, you know, at least figuratively, a line of patients waiting to get into the facility.
I think the notion has been all along that at some point, as that bed scarcity sort of alleviates itself and, you know, payers have more optionality in that regard, some of that leverage will decline. And I should also make the point that I think that scarcity also creates an advantage for us or an opportunity for us to really manage or maybe kind of maximize our payer mix. So, when you have a scarce number of patients to admit, you have the option to admit, you know, better reimbursed patients, et cetera, you know, focus on those service lines, et cetera, and, you know, those age groups that are going to have the best reimbursement. And so, again, the notion was that as, you know, volumes increased, there would be some diminution in our optionality, both in contracting and sort of managing the patient and payer mix.
What we've really seen, I think, as most people know, is that, you know, volumes have not grown. They've grown incrementally, but they've not grown, you know, really in a very significant way. And therefore, I don't think our leverage has increased. So, to your point, even though we're still talking about 3%-4% pricing growth next year, that would still be a moderation from what we've seen over the last several years. So, I think I said on the call last week that if there was kind of an upside in the guidance for next year, I think behavioral pricing broadly would be probably the biggest source of upside.
And not, you know, trying to get into 2026 and beyond, but do you think that's a dynamic that if kind of holds now almost equal, that might carry forward at least in terms of, you know, maybe not the proportion, but sort of a little bit higher strength than what we thought?
Yeah. I mean, I think, and again, if you go back, you know, for several decades, if you like, you know, looking at the behavioral model, I think behavioral, same-store revenue growth, again, in that sort of 6%, 7%, 8% range is not at all, you know, kind of a stretch or really sort of a heroic, you know, reach. I do think that as we move forward, it'll be skewed a little bit more towards volume and a little bit less so to pricing. But I think overall, that 6%, 7%, 8% revenue growth is certainly, you know, a very achievable target.
Okay. Maybe more kind of what's going on right now. You know, one of the things we're getting more from investors now is the flu, right? We're seeing flu data out in the market that it's the highest it's been in 15 years or pick your year. But I guess, what do we think about flu in terms of, you know, the impact on your business? One of your competitors, I think, said in the fourth quarter it was actually a one-point drag to volume. So, where do we think the flu is at now and what might that be doing to your business in the first quarter?
Yeah. So, and nobody's going to do this, but I think if you go back and you look at our commentary and generally my commentary over the years, I think we tend to, you know, generally not highlight the flu as something that has a significant impact on our results one way or the other. Busy flu season is not a busy flu season. I think for a variety of reasons. I mean, number one is, you know, flu patients tend not to be the most acute, the most profitable patients. You know, broadly, medical patients are less profitable than surgical or procedural patients. And I think flu patients even more so. The other issue that I think sometimes people ignore is, you know, flu creates challenges for us, a busy flu season. Sometimes it can crowd out other business in a really busy flu season.
You know, when everybody gets the flu, our employees get the flu as well, and that sometimes creates problems for us, and we have to curtail procedural schedules sometimes on relatively short notice, or we have to use more premium pay, et cetera, so, bottom line, you know, as I think back, you know, I can recall, you know, some years where we said maybe we had an $8-$10 million benefit in a really busy quarter of a flu season or a quarter with a busy flu season, but ultimately, I think, you know, when you're going to look back at the end of 2025 and we're describing our experience, you know, I think it's highly unlikely we will cite the flu one way or the other as being, you know, really important or really unimportant. It is a busy flu season.
I certainly acknowledge that, but it doesn't feel like that should have a material impact on our first quarter results.
Okay. In terms of investor inquiries for us, at least, I think the most, especially recently, the most important thing we're talking about is state-directed payments, right? We just saw Thursday, Friday, there was a lot of news flow. The Republicans are finally starting to talk about these state provider taxes and SDPs and things like that. So, where do we sit just in terms of you are assessing the viability, the risk to those programs? As we said, again, we said Thursday, Friday, they started to talk about it publicly. Obviously, the stocks reacted to that. So, where are we at just sort of in that thinking of, you know, zero to 100, no risk to, yeah, really at risk?
Yeah. Look, I would sort of start by saying that I don't know that our perspective or point of view on this subject is terribly more insightful or meaningful than anybody else. We read largely the same news reports and news flow that you all do. And I think what we've taken away from that, you know, over the last week or so is that in passing this bill, the Republicans passing this bill in the House, there were a number of Republican congressmen and women who were very pointed in saying that they only voted for the bill because they were assured there would not be significant Medicaid cuts.
And in fact, Speaker Johnson himself, you know, and not just an individual congressman, but Speaker Johnson, you know, began to eliminate, I think, you know, he appeared on CNN one night last week and talked about, you know, FMAP was off the table and per capita caps, per capita rate caps were off the table. And, you know, essentially, I think sort of suggesting that, you know, really significant Medicaid cuts, you know, were off the table. President Trump himself has sort of suggested that, you know, other than sort of targeting fraud and abuse and waste, which I think is not nearly as great as the $800-plus billion in Medicaid cuts in the bill, you know, he's not really in favor of those. So, again, you know, you're right.
You know, as these sort of other areas have been eliminated, there was a turn to talk about the supplemental payments. But I think our general sense is the same that, you know, might there be tweaks to the supplemental payment structures? Sure, you know, might instead of capping them at average commercial rates, they could be capped at something less than that, 90%, 85% of average commercial rates. Could the programs be capped in some other way to control the increased spending? But the idea that there would be really kind of massive cuts to the DPP programs and that would be acceptable to individual congressmen. And I think it's worth noting that, you know, in the Senate, where we still have to go, you know, to get a bill passed, I think there's even less enthusiasm for Medicaid cuts.
So, again, you know, we certainly are not, you know, anymore in a position to prognosticate than anybody else. But it seems to us that big Medicaid cuts, regardless of the source or how they're done, I think are not terribly likely and would really struggle to sort of pass the political hurdles.
You know, one question we've been getting is just sort of these would have to likely go through a rulemaking process, right? Because they were set through rulemaking processes. Obviously, they're approved by CMS. This isn't something that, you know, Trump or DOGE or pick your whoever can just sort of executive order these out of existence or make changes to them, right? This would have to go through a formal rulemaking process?
Yeah. I think to your point, it would be very difficult to do this simply by executive action.
Okay, and anything on these, and we'll move on, but anything you're hearing from the states? I mean, obviously, these don't just benefit you. They benefit the states, right, so anything from your state lobbying groups that you're hearing or just, you know, even up to the governor level, like any sort of commentary that you're hearing in your states?
No. And look, I think this goes for, you know, Medicaid programs in general. Medicaid, you know, subscribers are as present and important in red states and as they are in blue states. And our sense is that, you know, if you go back, if you look at our experience with Medicaid supplemental payments, we get significant benefits in very red states, big red states like Florida and Texas, but also a lot of smaller red states like Idaho and Mississippi, et cetera, and Tennessee or potentially Tennessee and Kentucky. So, yeah, I mean, our sense is that the states themselves would push back state legislators, but, you know, obviously, congressmen and senators from individual states would push back, you know, and there's a lot of support for, again, Medicaid reimbursement in general, not just the DPP programs.
Just maybe on that, you know, I think we've done some writing on this, but 19 or maybe only 20 states actually allow psychiatric IPFs to qualify for the STP programs. Do you think maybe over the next couple of years, assuming these programs sort of largely stay the same, that maybe you could actually see somewhat of a tailwind maybe in terms of other states sort of picking up these and qualifying them in certain locations that don't?
Yeah. Certainly prior to, you know, the last, call it six weeks or whatever, you know, that was our view that there would be, if anything, kind of an upside to these DPP programs because to your point, many of them don't include behavioral treatment or include behavioral treatment to a lesser degree. We tend to believe that at both the state and federal level, there's a fair amount of bipartisan support for greater behavioral access and, you know, more behavioral care, et cetera. So, yeah, I think that's, I think when this, you know, hopefully settles out, it's entirely possible that the programs that are out there begin to skew a little bit more heavily to coverage for behavioral patients.
Okay. I guess on the enhanced subsidies, right? I mean, you've, I think, been, and we appreciate, the only one really to size it in terms of, you know, what you think the overall impact could be. But maybe just remind us. I think you talked a little bit about this on the fourth quarter call, but maybe just some of the inputs that go into that. And let's just assume worst case, they just fall off in 2026. What sort of kind of plans could you have in place to sort of maybe mitigate that offset?
Yeah. So, and part of the reason I think we sort of proactively went and tried to size it is it felt like to us and to me that, you know, back in the fourth quarter, as, you know, people were speculating about the subsidies potentially going away, that in our minds, they seem to be overstating the potential impact. And even though when we, you know, gave, and, you know, and I think we stressed very strongly that we were giving a guesstimate with a lot of kind of broad assumptions, but doing so in a way to sort of, you know, ring-fence the issue that it was not an insignificant issue, but it also wasn't sort of a seismic issue. So what we said was about 5% of our acute care patients currently are exchange patients.
That's a little bit lower than what some of our peers, I think some of our peers have talked about, maybe closer to 7%. We assumed that if exchange subsidies were removed, that maybe we would, half of those patients would lose their coverage. Obviously, some of them would continue to have exchange coverage, and, you know, what we tried to do then is to say, all right, well, the 2.5% of our patients who would lose their subsidies, they would stop coming to the hospital for elective sorts of procedures, and we would lose the profits from those, but they would continue to come to the hospital for their emergency procedures, and, you know, we would have the cost of treating that without, you know, effectively any reimbursement.
So, you know, that was sort of the broad assumptions that we used to get to our kind of $45-$50 million impact. Now, again, there's a lot of sort of nuances to this. You know, could people get other coverage? Could they sort of, you know, kind of downsize their exchange coverage, you know, from gold to silver, silver to bronze, whatever? You know, but beyond that, I mean, particularly on the acute side, a lot of those patients are coming to the emergency room and to the degree they're coming to the emergency room, there's not a lot we can do to really control that.
But, you know, obviously, like I said, you know, to the degree that on the behavioral side, you know, first of all, we don't have nearly as many exchange patients on the behavioral side because I think the high copays and deductibles have always made that exchange coverage not terribly meaningful on the behavioral side. But, you know, we have a, you know, certainly more optionality on the patients we take on the behavioral side, et cetera, which is why our uncompensated or care or bad debt or whatever on the behavioral side is probably 20% of what it is on the acute side. So I think a much smaller impact on the behavioral side.
Okay. Sort of to that, I mean, obviously the acute, you know, sector has some pressures. We just talked about a couple of them, but obviously, you know, the payer side does too, right? I guess where are we at or sort of in the life cycle of dealing with your managed care partners? I mean, you've been doing this for a while now. You know, they're dealing with Two- Midnight and increased trend, and on the MA side, two years of negative rate updates. Where are we at in those sorts of negotiation cycles?
So it feels like taking a step back. You know, what we saw is that, you know, again, no surprise to anybody here. I mean, there's a significant amount of literally, you know, what I'll call day-to-day tension between providers and payers, you know, in terms of getting treatment authorized and patient days on the behavioral side authorized, you know, getting inpatient admissions authorized versus, you know, an observation status. And then once patients in the hospital and, you know, we're sending out bills, there's a significant amount of denial activity and denial appeals. And it's literally a, you know, kind of a day-to-day battle.
I think what we saw during the early stages of the pandemic was because utilization dropped so dramatically, the payers really kind of took their foot off the gas in terms of their really aggressive, what I'll call utilization review procedures, you know, sort of under that broad umbrella. Beginning, I don't know, late 2022 into 2023, you know, as utilization started to bounce back, I think we sort of, we saw the payers sort of revert to what I would consider to be their historical practices, all the things that I mentioned before. I don't think that behavior, you know, changed much. You know, people had asked me, you know, do we see it now incrementally change quarter to quarter as they, you know, struggle with higher MLRs or whatever issues? And, you know, it's hard for us to see that.
Part of it is, I mean, we've devoted an enormous amount of attention and resources and dollars to this activity, meaning, you know, striving to make sure that we get pre-authorizations for everything we're supposed to and that our, you know, claims, you know, you know, 99% of our claims go out clean and that our denial appeal processes are as efficient as they can be. We've been more aggressive in, you know, either suing some of our payers or going through arbitration, getting contract language changed to try and limit the amount of optionality they have in terms of some of this utilization review, et cetera.
So, again, you know, I don't in any way mean to imply that, you know, if you, again, if you talk to our operators and the folks who really kind of, you know, run our billing and collection procedures, you know, they'll tell you the sort of, you know, real struggle of doing this day to day. But I don't know that it's, we find that it's terribly different than it was three months ago or six months ago or, you know, nine months ago. It feels pretty much like this is now the new norm, which I think is, I would just say unfortunate because I think there's a lot of waste time wasted and dollars wasted on what I would consider to be nonproductive sorts of activities, frankly, on both sides, you know.
Hopefully this can improve and we don't spend as much time on this in the future.
Maybe specifically on the commercial side, obviously, you know, during the pandemic, we saw wage rates spike up. You weren't necessarily being paid for that, but a couple of years kind of post-2020, you had some good commercial rate increases. Broadly speaking, we've seen that in the industry, but it was just right before this on the GLP panel and they had talked about, you know, they're seeing all this pressure with GLPs and now they might look to the medical side and their contracts with health systems at this point to sort of shave off some of that trend. So maybe looking out past 2025, 2026, 2027, you know, where do we think commercial rate updates go?
And maybe if you're already starting to see some of that moderation or at least some of those commercial plans starting to push back a little bit on some of the premiums they were giving you.
Yeah. I mean, so we certainly made the point that I think, you know, beginning, you know, if I've got my sort of chronology correct in my head, you know, beginning in the kind of late 2022, early 2023, as we began to renew managed care contracts, we were getting, you know, a higher inflation update. I think as an acknowledgement that broadly inflation, you know, was higher. I think that has eased a little bit and we're certainly seeing that slow down. I guess I would again sort of stress the idea that I don't think we find contractual negotiations and contractual rate increases as challenging as we find the day-to-day behavior, you know. So, you know, you know, higher denial rates, you know, ultimately impact sort of what we would describe as your net yield, et cetera.
I think we find that payers use those utilization review tactics more aggressively to sort of, you know, get to their, you know, kind of target MLR numbers than they actually do the contractual pricing because those they can change, meaning that day-to-day behavior, those they can change kind of in real time. Obviously, contracts, you know, we're both, I'll call, stuck with or we're committed to for usually a multi-year period.
On the fourth quarter call, you would call that, I think, a $35 million increase in liability reserves. I think you said it was close to $80 million maybe for the year, maybe slightly below that. You know, one of your competitors obviously called out sort of a similar dynamic on fourth quarter. Talking specifically, I think you sort of referenced the same thing about sort of these claims and the amounts of the settlements or the verdicts, you know, sort of really going up. And I think we've seen that obviously with your disclosures and with some of your competitors' disclosures. But how do we think about that in terms of just risk that, you know, 2025 and beyond that you're just going to start to have to really sort of crank up those accruals and it's really going to kind of flow through the business?
Yeah, so, you know, I tried to make the point on the call that historically, you know, what we provide for in terms of malpractice expense and ultimately the reserves that we maintain are really largely driven by, you know, third-party actuarial estimates and, well, so I think what's happening and what, you know, some of our peers are addressing is that third parties who are, you know, they're obviously using UHS-specific data in doing their actuarial estimates, but they're also looking at industry trends, et cetera, and I think what we hear from our insurance brokers, from our, you know, actuaries is that the incidence of and frequency of malpractice claims is not necessarily rising, but the value of individual claims and verdicts, et cetera, seems to be going up.
And by the way, I think that's true in both the acute and the behavioral segments. And again, I think that's an industry-wide phenomenon, not just a UHS phenomenon. So I think our actuarial estimates reflect that. What we tried to do in 2024 was instead of reserving for and expensing at the midpoint of the actuarial range that we get from our third-party actuary, we've kind of tried to move into the upper end of the range, you know, as an element of being cautious and conservative. And sort of back to your point, in the hopes that we don't then have another surprise in 2025. I don't think there's a guarantee of that, but we've tried to be a little bit more cautious. But yeah, I think that's a trend that's with us.
Now, again, I think in the long run, you know, it is, I would hope likely, and I would like to think it's likely that we start to see some malpractice reform and tort reform at both the federal and the state levels because, you know, I think some of these verdicts, and again, I think this goes well beyond sort of the broadly, you know, the healthcare and the malpractice field, but, you know, you see these really, I'll call them nuclear verdicts in product liability and all kinds of other areas that I think it's just very difficult for, you know, private business to operate in such a volatile environment. And I do think there's evidence that some states are reacting to that and we'll see more tort reform in the future. To be fair, that's a multi-year process.
But, you know, hopefully that's kind of an offset if we're having this conversation two, three, four years from now.
Another thing that came up on the fourth quarter call was just leverage. I mean, you guys are in a great spot some two times, I think, right around two times, which is, you know, in services is about as low as you'll probably ever see. Where do we think, you know, in terms of just appetite, not even just for share repos, but M&A or just, you know, building some, you know, outpatient centers around your inpatient facilities or building a new hospital, right? You're building Cedar, I think opens in April. You have, was it Henderson that just opened in Vegas? So just in terms of maybe utilizing a little bit of that, maybe I'll call it under leverage.
Yeah. I mean, so if you look at it, I think historically, I'll sort of call it in kind of a base case, you know, we've tended to operate at leverage levels in the high twos, low threes. To your point, we're well below that. So that leaves us a lot of flexibility. I think in an environment where there is a lot of uncertainty at the moment, I think that the low leverage level tends to make sense. I think as things settle out, you know, we're probably, you know, more inclined to be a more aggressive acquirer of shares. We've been a pretty aggressive acquirer of shares. You know, I think we noted on the call that since 2019, I think we've repurchased about a third of our outstanding shares. So I think we'll continue to be an active acquirer.
Obviously, the low leverage level also allows us to respond to bigger opportunities as they arise. To be fair, we have not seen a lot of kind of external M&A opportunities requiring a significant inflow of capital over the last several years. But, you know, we always like to be in a position to, you know, have the option to respond to that. But I think, you know, in the short term, I would say past this prologue, you know, we'll spend something, you know, close to $1 billion in CapEx next year. You know, to your question, you know, I don't think we've neglected whether it's outpatient growth or any other sort of capacity growth that to us makes sense because of leverage levels. You know, that's certainly not been the case. I do think we're a judicious deployer of capital.
So we like to do it where we think there's going to be, you know, adequate or above adequate returns. And again, we'll continue to be an active share repurchaser whether we choose to lever up to do that. Nothing remains to be seen, but I think that's certainly entirely possible.
Just a couple seconds left. You know, you've been at UHS for quite a while. What are you most personally proud of at your time there?
Yeah. We talk about this a lot internally. You know, at the end of the day, you know, we interact with literally hundreds of thousands of patients a year. And these are patients who are generally at their most vulnerable. They're either, you know, medically compromised or psychiatrically compromised, and they're in need of, you know, care, et cetera. And, you know, we are very proud of the care that our, you know, facilities provide. And those of us, you know, in the corporate office who are not necessarily, you know, clinicians or, you know, directly involved, you know, feel very much a part of that effort. And, you know, we'll get testimonials from people and, you know, you know, that sort of thing that, you know, is very heartwarming.
Great. Well, we're at time. Thank you. Thanks, everybody.
Thank you.