All right. Well, thank you everybody for joining us here on day two, TD Health Conference. My name's Ryan Langston. I'm the healthcare services analyst here. Very happy to have Universal Health Services with us. Up here on the dais, we have Steve Filton, Executive Vice President, Chief Financial Officer, and Darren Lehrich, Vice President of Investor Relations. Thanks for being here.
Pleasure.
I guess we'll real quick, you know, UHS, one of the largest U.S. healthcare providers, 29 inpatient acute care hospitals, 340 some inpatient behavioral, growing outpatient footprint, insurance offering, physician network, various related services, 39 states, Washington, Puerto Rico, U.K. I'm sure I missed something.
I think that's pretty comprehensive.
Quite extensive. Okay. All right. We'll jump right in. I You know, maybe a good place to start, you know, fourth quarter, maybe help us a little bit with the sequential earnings pattern, certainly on the acute side between the third and the fourth quarter. I think typical seasonality that's usually up, I think it was down around $45 million, if I have my numbers correct on the EBITDA line. You know, a lot of moving pieces, D.C., DPP, you know, flu, other items. So maybe just walk us through that sort of sequential move in the fourth quarter.
You know, I think, there were, as you point out, a number of sort of close good guys, you know, positive non-recurring items in the third quarter. When we adjust for those and adjust for any non-recurring items in the fourth quarter, we come up with a relatively flattish sort of third quarter to fourth quarter performance. You know, you called out the District of Columbia Medicaid supplemental payment in the third quarter. That was close to $90 million. You know, I'm not sure that everybody has sort of properly included that. We had an $18 million legal settlement, which was a bad guy in the quarter, but we also had an Accountable Care Organization payment in the $10 million range.
I think we had a payer settlement that I'm not sure we even disclosed in detail. Anything else that I'm forgetting, Darren, I think we talked broadly about all these things in the third quarter, but I'm not sure we spiked them out.
Yeah, that's right. To Steve's point, there were a number of good guys. I think if you kinda take those all together between the opioid settlement, some of the RCM improvements that, you know, included some other settlements, you know, you've got about a $30 million benefit from those items. Sequentially, we had about a $70 million sequential step down in supplemental payments. Altogether, about a $100 million of, you know, earnings that didn't carry into the fourth quarter from the third quarter. To your point, y eah, our EBITDA in the fourth quarter was down sequentially by about $45 million in the acute segment.
You know, Steve mentioned, the way we look at it was, it was relatively flat, maybe even slightly up on a, on an underlying basis. Normally, you would expect, the seasonality of the fourth quarter to be a bit stronger. Volumes were, in fact, you know, sequentially higher. As we pointed out in the call, volumes for us in the fourth quarter in acute were a little softer, than, you know, what our original planning was. You know, that was probably the biggest driver of the lack of, you know, general, uplift that you typically see in the fourth quarter.
You know, obviously, in the fourth quarter, you set the guidance for the year for 2026, included in that for both acute and behavioral volumes, 2%-3% adjusted admissions for acute, obviously APDs for behavioral. I guess maybe just certainly on behavioral, that's been the focus in my conversations with folks. Maybe walk us through how you're getting to those numbers, what gives you sort of that confidence. I do know you had disclosed, I think, 3.5% FTE growth on behavioral, so that probably sets you up nicely. Any other puts and takes that kinda gets you to that 2%-3% between the two segments?
I think on, in behavioral specifically, it's worth noting that our Adjusted Patient Day growth in every quarter in 2025 increased, albeit incrementally, you know, but we exited the year in the fourth quarter about 1.5% growth. You know, in our minds, we're now within shouting distance of that 2%-3%. I think the idea of sort of what gives us the confidence that we can make that relatively small, you know, or bridge that relatively small gap, I'll be the first to acknowledge that 2%-3% has been an elusive goal for the last several years, but we're within shouting distance. I think the two things that give us confidence that we can get there in 2026 are, one, that you mentioned.
You know, we invested, I think, a lot in hiring and improving our staffing in 2025 because that has been a real obstacle for us over the last several years. Not having all of our positions filled, nurses, therapists, the mental health techs, you know, has limited the amount of, you know, volume growth that we could engineer. We invested in hiring, and you alluded to it. You know, we disclosed, I think, in our 10-K that our behavioral headcount, our FTEs, you know, increased by four, a little over 4% in 2025, even though our volumes only increased by a little over 1%.
I think we were willing to make that investment because we think it positions us well for the 2026 growth. I think in 2026, our FTE growth will sync up much more closely to our actual volume growth. The other issue which we've discussed, I think, at length is, you know, continued emphasis on, you know, outpatient growth. We believe strongly that over the next several years, outpatient volumes and outpatient demand in behavioral will outpace inpatient demand. I think that's been the case probably certainly for the last year or two, and I don't think we've necessarily enjoyed that growth, that, you know, particularly that outpatient growth. We've really focused on it. We've restructured how we're incenting our people, how we're organized for outpatient growth.
We're investing in new freestanding facilities. While I think some of these things, you know, are a multi-year process and, you know, we won't enjoy the benefits immediately, but it'll take some time, I do think there'll be enough impact in 2026 that the outpatient growth will outpace inpatient and help us get broadly to that 2%-3% Adjusted Patient Day growth, which by definition, you know, reflects the outpatient side of things.
Is it fair to say maybe behavioral specifically, you think that generally this has been sort of a staffing issue, and maybe now with these FTE increases, you're kind of set up? Is that a fair way to
Yeah, I think so. I mean, you know, we have cited other issues, I think that, you know, more specific issues. I think broadly, the single most sort of pervasive issue has been, as, you know, a staffing constraint that was really exacerbated during the pandemic, but even coming out of the pandemic in, you know, the last couple of years has been. We've always said, you know, it's not in every one of our facilities and, you know, but probably a quarter to a third of our facilities have had to limit the amount of patients they see because of a lack of sometimes nurses, sometimes therapists, sometimes the non-professional folks that we call, you know, mental health technicians.
Got it. On the fourth quarter too, in the release, there was a fairly large gain, unrealized gain in the P&L. I think that's related to this Hippocratic AI investment that you have. I think you own about 3% of the company. Maybe walk us through that investment and I'm sure you're leveraging that in your hospitals and your facilities, but maybe just walk us through what that investment looks like.
Hippocratic AI is a company that was started by General Catalyst, a venture capitalist, and we were a seed investor, I think at this point, close to three years ago, you became sort of a 3% owner of the company, and have kept that ownership percentage with additional investments. Hippocratic AI, I think, was designed specifically to develop technology applications specific to healthcare. Obviously, the name Hippocratic AI, you know, with the healthcare orientation, and most recently, you know, particularly AI applications. The gain that you referred to is the last round of funding that we participated in.
Based on the valuation of that round of funding, you know, our sort of $20 million cost investment is sort of now worth about $110 million based on the latest funding. The instructions that we got from our, you know, outside accountants were that we needed to recognize that through the P&L. That's, that's the nature of the adjustment. Sort of at its core, our investment in Hippocratic AI allows us to really be on the cutting edge of some of these, you know, really sort of real-recent and cutting edge developments in AI. The one that we talked about publicly and, you know, we've implemented and has been, you know, successful sort of at the outset is a thing called AI Agentic. It is these AI agents.
In a, in an acute care facility, when a patient is discharged, within 24- 48 hours of their discharge, they have historically gotten a call from a nurse, who we call it a post-discharge call, who will, you know, say to them, you know, "How are you feeling? You know, what's your pain level? Have you filled your prescriptions that you were given on discharge? Have you made the doctor's appointments you were given on discharge or recommended on discharge?" Generally, we have found that that exercise and that process helps reduce readmissions, keep patients satisfied and healthy, et cetera.
A number of those calls in the last several quarters are being made by AI agents, and we find that the AI agent identifies itself as such, you know, on the call, and about 50% of the patients stay on the line. They have a conversation with the AI agent. I've listened to some of those calls, and I'm sort of an old school guy, and yet the calls are very seamless. You know, essentially what we've done there is we've been able to accomplish exactly what we were able to accomplish with a nurse, but now we've, you know, freed a nurse up to, you know, do something more productive, and, you know, with still the, you know, the same level of results.
That's the kind of application and use that I, you know, I think will continue to be developed over the next several years by Hippocratic AI, by vendors that we use and have contracted with who have AI applications, and as well as, you know, some internal AI development that we're doing on our own.
You sized the APTC expiration, I think around $75 million for the year. Talking about elusive, it seems to be, current situation seems to be elusive for most companies. Do you have any insight into what is going on versus that $75 million currently, or at least with your sort of building blocks to get to that number in terms of effectuation rates or just behavioral changes, volumes? Anything that you can give us currently on that particular situation. Doesn't even need to be necessarily financial.
Yeah. I mean, the two most significant assumptions that went into that $75 million impact estimate were, we've assumed that about 25%-30% of our current exchange population, and we, you know, frame that our current Adjusted, you know, on an adjusted admission basis, about 6%, little over 6% of our acute adjusted admissions come from exchange patients. We estimate that about 25%-30% of those people will lose their coverage. Those estimates are really based on kind of third-party estimates, either from the CBO or in like organizations who've tried to frame this. We assume that a small percentage, somewhere between 10%-20% of those people, will be able to get other coverage. Maybe they will go from a Gold medal plan to a Bronze medal plan.
We believe most of them will get commercial coverage through their employer. But it's a relatively small percentage. The largest percentage of people who will lose that exchange coverage, 75%, 80%, 85% of them will turn into uncompensated or uninsured patients, and we think that's the greatest impact. Most of the $75 million estimated impact will come from people who've lost their coverage, continue to utilize the hospital, in particular, utilize the emergency room. We will treat them as we're obligated to do both legally and ethically, you know, without any reimbursement. What was reimbursed a year ago won't be reimbursed now, will be converted to bad debt or uncompensated care. There's some element of reduced volumes that we've calculated in, again, we think the greatest impact is on that uncompensated care.
Your question is, I think, in the, you know, January and February, you know, what's our experience been? What I would say is we've definitely seen a reduction in the number of exchange patients immediately in January and February. I don't think it rises to the 25%-30% level, but I think we think it still will. I think we've said, and I think others have said that we need another couple of months at least of activity and experience because I think one of the things that everybody acknowledges will happen is that some people that the insurers are still saying are insured under the commercial exchanges will fail to make their payments, their premium payments, and will be deemed to be uninsured.
We think that, you know, 25%-30% will ultimately be the number. To be fair, we need another couple of months of data, as, you know, I think does the entire industry, to unpack it and to be more precise. At the moment, are comfortable that our experience in the first couple of months supports the $75 million estimate.
Got it. Fair to say you might have more commentary on the first quarter earnings call?
Yeah, I think we should know more. I don't know that we'll be sort of 100% informed at that point, but I think another two months at that point of data will be very helpful.
On the state-directed payments, I think you guided to a fairly nominal increase year-over-year. Obviously, there are some outstanding programs. You know, you did have some insight last year into the D.C. program. I guess, is there anything to comment on, certainly in Florida, California, a couple other states that are maybe more impactful for you?
Yep. The Florida program, we've, you know, kind of identified the potential for that now for several quarters. We've framed the potential benefit as between $45 million and $50 million. Along with all the other providers in Florida, we've been waiting for the program to be approved. The state of Florida has, you know, I think, repeatedly expressed optimism that the program will be approved. I think the fact that it's been delayed as long as it has while other programs have been approved is an indication that there probably is some objection that CMS has. We don't really know, you know, what the specific conversations between CMS and the state of Florida. We've obviously not included that benefit in our guidance. We've certainly not included it in our actual results.
You know, we'll do so if and when the program is approved, and, you know, we'll look for any further commentary either from CMS or from the state of Florida. The California program, we know that CMS has had very specific issues and objections to the California program. As a consequence, we believe that in order for a new program in California to be approved, it will have to be revamped and altered significantly from where they are today. We've made no effort, and I don't believe anybody has made an effort, any other provider has made an effort to quantify the potential benefit there. We think it could be material. It certainly could be beneficial to us. Until there's further clarification, you know, we've been very sort of nonspecific about the potential benefit in California.
Got it. I think you had talked about the California staffing issue that's going to impact not just you, but other folks. You know, we had heard from a competitor of yours that I think the state association was potentially trying to work with the state to see if they could get some relief there. I guess, is that your understanding? You know, if so, do we think there's actually a potential that that could come through at some point this year?
Yeah. I mean, look, it's worth noting that the California Hospital Association has lobbied very hard to oppose these regulations. By the way, it's not just the behavioral hospitals that have lobbied against them. Acute hospitals have been a strong voice against these regulations as well. The concern of acute hospitals is that if these regulations result in any sort of capacity constraint in behavioral hospitals, that burden is gonna fall back on acute hospitals and acute hospital emergency rooms, which will wind up having to house behavioral patients for longer than they you know, view as, you know, appropriate, et cetera. I will say this, I mean, the regulations originally were supposed to be implemented on January 1, and the state agreed to postpone that until June 1.
At the moment, however, you know, we have every expectation that they'll be implemented on June 1, and that's what we're preparing for. We've begun to hire, particularly RNs, you know, in anticipation of that. Obviously, the, you know, to whatever degree lobbying efforts continue and the state, in our minds, becomes more reasonable, you know, we would welcome that. We're proceeding along. Obviously, we've included what we believe the negative impact to be in our guidance and are assuming that until we hear otherwise. Excuse me. That the regulations will be implemented on June 1.
All right. On behavioral, you laid out your expectations for 2% to 3% pricing growth in 2026, but you've obviously been running well above that. That might strike some as a bit conservative, prudent, if you will. I guess, you know, remind us how maybe historically you've been able to sort of get those rates and maybe why you think at least at this point, the 2% to 3% is the right starting number?
I think it's a couple of issues, Ryan. I mean, one is, I think either you or Darren said that, you know, our overall projections for the increase in directed payment program reimbursement next year is relatively flat. I think it's up about $23 million. It is up more in acute. I think it's up $58 million in acute and down $35 million in behavioral. That accounts probably, you know, for about a 50 basis point boost in pricing on acute and a 50 basis point drag on pricing in behavioral. So that's a little bit of the softness contributor to behavioral next year. I think other than that, you know, we've been saying for some time that pricing over the last several years has been stronger, higher than it has historically been in behavioral.
We've talked largely about getting increased pricing from Managed Medicaid payers. I've made the point over and over again that when we talk about increased pricing, you know, in many cases we're getting a 5% increase from a Managed Medicaid Payers, but that's after a period of no increases for three or four years. I don't wanna, you know, I'm hesitant to describe them as outsized increases. We think they were overdue increases. One of the things that we made the point is, if we got those increases in 2024 and 2025, those benefits would start to anniversary, and at some point, we would see a moderation of our, you know, pricing strength in behavioral.
Honestly, I think people who follow us closely know, it's taken longer than we thought, and we've been, I think, sort of conservatively saying we're likely to see that moderation 1 year ago, 2 years ago, et cetera. I think finally we're starting to see it in 2026. I would make the point that the 2% to 3% pricing in behavioral and the 3% to 4% in acute, beside the impact of the DPP, I think once you adjust for that, you know, falls very much in the range of what the historical pricing increases have been in both of those segments.
On the acute side, just in terms of pricing, obviously, you know, during COVID, those rates were not keeping up. Post-COVID, I think you and, you know, some of your peers were able to sort of garner a little bit of premium yield. We're sort of at that place now, I think, where some of those contracts, or maybe the majority, are starting to be negotiated. The question becomes, are you able to sort of keep that, I'll call it, premium yield maybe versus pre-COVID, or is that gonna sort of normalize maybe over kind of a 2 to 3-year period?
I think you've described it properly. I think, you know, beginning towards the end of COVID, I'm gonna say late in 2022 into 2023, as we began to renegotiate acute care contracts at that point in time, I would say before that, you know, during COVID, maybe pre-COVID, our average price increase in an acute care contract was in the sort of 3%-4% range. Beginning 2022, 2023, maybe even a little bit into 2024, I think that rose to about 4%-5% on average as we were getting, I think, an acknowledgment from payers that inflation broadly had risen during that period and that wage inflation, I think, in particular, had risen and our rates, you know, renegotiated rates were reflecting that.
I think as we've begun to renegotiate those contracts, as, you know, I think you framed the question, as they've begun to expire, and we've renegotiated them in 2024, 2025 into 2026, I think we've regressed back to or moderated back to, again, I'll call it 3%-4% on average. And I think that's reflected, you know, in, you know, in our pricing. Now, you know, we do get the benefit again of increased DPP. We get the benefit of steady, albeit small, increases in acuity, you know, maybe 1% increase in acuity every year, which boosts pricing, you know, decent Medicare increases. So I, you know, I, I think, you know, we're comfortable in that, you know, 3%-4% pricing range for the acute business for 2026 with all those sort of factors coming into play.
In our January hospital survey, we had a fairly large, you know, health system respond and saying that denials activity was really a drag for them, on revenue accruals in January. I guess the question is: What are you seeing in terms of denial activity, medical necessity, just UM maybe in general from the plans, maybe taking into the backdrop that obviously the plans are, you know, sort of struggling, not in a great spot here for at least the last, you know, one to two years?
I think it's worth noting that, I'm gonna say a year and a half ago, you know, we embarked on a process where we hired a third-party consulting firm to review our revenue cycle processes. We have spent a great deal of time, and focus and dollars on improving across the board our revenue cycle, particularly for acute care, people, process, technology. To a degree, I feel like at, you know, at best, maybe what this has done is kept us current or sort of on a level playing field with the payers, who I think as your question alludes to, have been more aggressive in terms of their denials and patient status changes and kinda delays and deferrals in payments.
I think ultimately, because we've made, you know, a significant amount of improvements in our own processes, we haven't really seen a measurable increase in denials, patient status changes the way that some other providers have sort of talked about in the last few quarters or even, like you said, you know, as recently as the last couple of months. Honestly, you know, we're gonna embark on a very similar process in 2026 in our behavioral segment and their revenue cycles. I think that's helping us to kinda stay even with the payers.
I certainly acknowledge, you know, I would say whenever anybody asks me this question, you know, if, you know, one of our revenue cycle folks was sitting in this chair or, you know, and we ask them the same question, they would, you know, just describe a sort of ungodly kinda daily experience of, you know, this slog with the payers. That is really true. I mean, it really is a daily sort of back and forth with payers, et cetera. I think it's, you know, when we look at the overall metrics, we haven't seen a significant increase in denials, patient status changes, those sort of, you know, leading indicators.
Just sort of maybe looking into the future, I mean, obviously, the 2027 rate update, or at least the advance notice is tepid more than people thought. Looks like the payers could continue to struggle at least a little bit here. I guess, what's the expectation going forward? Could be use of AI for increased denials and maybe just more broadly, where do you expect those relationships with certainly the national payers to go as we move through 2026?
Look, you know, I don't know that anybody, and I'm certain nobody does know this for certain, but I think, you know, there are at least some who expect that the, you know, final rate from CMS for the Medicare Advantage plans will be better than the, you know, the initial proposal, which, you know, was, quite frankly, I think, you know, disappointing for the MA providers or payers. I do believe that if the rate stands and if the payers are forced to make changes, they certainly will, you know, I think, continue to be aggressive on the utilization management, you know, changes. I think, you know, the main initial way that they'll respond, and we've seen this, I think to some degree in 2026, is with benefit plan design.
As you know, the way the Medicare Advantage plans have really competed with each other and competed for traditional Medicare business is in expanding the sort of traditional benefits to include things like, you know, dental benefits and vision benefits and those kinds of things, which quite frankly don't generally impact us. To the degree that those benefits are eliminated in benefit plan design changes to make the product, you know, more, you know, price reasonable, if you will, for the payers, I don't know that it's gonna have an immediate impact on us.
Professional general liability reserve has been a topic certainly in behavioral, and I think you alluded to on the last earnings cycle, you know, a little bit more on the hospital side as well. Maybe walk us through what the accrual activity was in 2025, what's built into guidance for 2026, and I think the general question becomes: Is that pressure sort of still high but steady, or do we expect that to be high and potentially accelerate, you know, into the next couple of years?
Specifically, I think in 2025, we said that we added about $45 million in expense to our malpractice reserves in 2025, about $35 million of that in the third quarter and another $10 million in the fourth quarter. We make the point that, you know, we have a very formal actuarial review, a third-party actuarial review twice a year in our on our malpractice reserves and are looking at them even, you know, in real time more firmly. I think it's been a pressure point, you know, not as, I think your question suggested, not just for us, but for the industry, I think both the acute and the behavioral industry.
we've tried to stay ahead of, you know, the pressures on, you know, professional general liability expense, I think have done a reasonable job of doing that, but it's going to be something that will be continue to be evaluated in real time. In terms of our guidance for next year, I would say that we've got malpractice insurance expense rising faster than the rate of inflation, you know, instead of, I'll call it 5%, you know, maybe by 10% or 15%. we think and hope that that's adequate, but we'll continue to reevaluate that with our actuarial studies, you know, every 6 months.
Got it. Last minute or so, maybe touch on capital spending. I mean, the leverage ratio 1.7-1.8, somewhere in that range. I mean, extremely low versus your competitors, to be fair. You know, we get this question a lot. Obviously, you could buy back a pretty significant amount of shares if you felt you wanted to. There are some assets potentially out on the market. You could build, you know, some internally. So maybe last minute or two, where do you look at capital policy now, just given some of that backdrop?
I mean, I think, you know, we view the sort of, you know, ideal leverage level in the 2.5 range. We would acknowledge, you know, your comment that we're at a low level. We like to sorta keep the flexibility to respond to inorganic opportunities, M&A opportunities. I think particularly, you know, as we build in both of our segments, as we built out our outpatient footprint, you know, looking to see if there are opportunities, you know, inorganically to help do that, and, you know, and trying to keep the flexibility open to do that. You said we could choose to be sort of an active acquirer of shares. I think we've chosen to be and have been an active, a very active acquirer of our shares.
Probably over the last six years, we've bought back about a third of our shares. We consider that to be a pretty active level. I think we'll continue to be an active acquirer of shares, you know, regardless of what other opportunities are out there. You know, to whatever degree there are opportunities, we wanna be able to pursue those as well.
All right. I think then we'll have to leave it there. It's all the time we have. Steve, Darren, thanks a lot, and enjoy the rest of day two at TD Healthcare Conference. Thank you.
Thanks, everyone.