Thank you for joining us today. It's my pleasure to be introducing Universal Health Services, one of the largest providers of acute care hospital services, as well as behavioral health services. Presenting today, we have Steve Filton, the CFO. I guess, Steve, I'm gonna jump into the Q&A with the same question I'm asking everybody basically, which is how is it that hospitals and med tech companies seem to be having great volumes, but managed care says that there's no problem? You know, is there any way to kinda reconcile how both of those things could be happening at the same time?
It's a great question. I will say, and I'm sure you know this, I mean, it's not the first time this has sort of come up. I think that it's often, and I think particularly sort of the shorter the timeframe that you're talking about, the sometimes the more incongruous the sort of commentary, you know, coming from, you know, what I'll call sort of the opposite sides of the spectrum seem to be. You know, some of this I think is, you know, an expectation sort of thing, which is, you know, we talk about, you know, increasing, you know, volumes and utilization compared to expectations. They, you know, talk about MLR as being in line with expectations, but that may be an expectation issue as much as an actual issue.
Look, I, you know, I also feel like managed care companies, and then maybe this is a little bit of a, you know, provider bias, but I think, you know, they feel like they're in a position where they can control utilization when they have to, you know, through things like, you know, more aggressive utilization management and, you know, more aggressive denials and that sort of thing. We certainly see that.
You know, that's another piece of this too, which is, you know, while I think, you know, the raw data that providers may be reporting in terms of admissions or procedures or whatever it may be, you know, I think, you know, at least, you know, my sense is that, providers are finding the payment process to be more challenging, and that's an sort of another way that I think, you know, another lever that the managed care companies, you know, feel like they're pulling.
Yeah. I guess, when we think about on the acute care side, I mean, the volume growth you showed in Q1 was just an incredible year-over-year growth. Is there a reason to kind of say why all of a sudden in Q1, from your perspective? If you forget about expectations, like, it's just a big number year-over-year. Why now all of a sudden?
Yeah, I mean, the truth of the matter is that from the very beginning of the pandemic when volumes dropped precipitously, you know, I think in those early months of the pandemic in the spring and summer of 2020, you know, we saw 40% and 50% declines in our emergency room traffic. We saw 2/3 declines in our procedural and, you know, elective volumes. I think we argued really from the beginning that, you know, fundamental demand really had not changed, and that these procedures were really just being postponed or deferred and, you know, at some point would be recaptured, for want of a better description. I think the truth is or the fact is that was slow to happen.
You know, we talked about, and I think our provider peers talked about, you know, getting back to pre-pandemic or 2019 volumes, and maybe at some point, we were at 102% or 103% of pre-pandemic volumes, and kinda we're counting that as a success. The reality is, and I think the providers expected, and I think, you know, many people in the audience expected, that at some point, providers were gonna get back to 120% or 125%, you know, in a month of pre-pandemic volumes, and that never really happened.
You know, it seems to have occurred, you know, maybe not to that magnitude, but it seems to have occurred in Q1 in a greater, you know, magnitude than, you know, we've experienced before. Why exactly in Q1? That's, I think, a hard one to describe. Sort of to your point, you know, our volumes are great and probably led the industry, but, you know, the strength in the industry was pretty broad-based. It, you know, just feels to me as if there's gotta be some element of catch-up there or this recapture of these postponed and deferred procedures. Honestly, without that explanation, I'm not sure, you know, how, you know, or why you would say this has occurred.
Does that mean if there's a catch-up, does that mean that there's a bolus that we have to work through, and that by Q2 it goes back to normal, or by Q3? How are you thinking about volumes?
Yeah. Look, I think it's, you know, we had same-store adjusted admission growth in Q1 in excess of 10%. I think that, you know, it's not a startling statement for me to make that I think that's not a sustainable level of growth. To your point, like, does it, you know, immediately diminish in Q2? You know, does it remain strong for a couple of quarters? It's, you know, I always make this point, it's, you know, hospitals, I don't think, have a tremendously long line of sight, you know, on volumes. Emergency volumes, by their nature and definition, occur when they occur. Non-emergent or elective volumes, we tend not to have a really precise view of that.
You know, we schedule elective and, you know, our scheduled procedures weeks in advance. Our physicians schedule them months, you know, sometimes six or eight months in advance, but they don't share that information with us, except anecdotally. You know, two or three weeks in advance, they give us the names of their patients that are scheduled over the coming weeks, and then we do preoperative testing and, you know, insurance verification and that sort of stuff. You know, other than what we hear from our physicians and also from our patient population, we know that I think there's a pretty healthy pipeline.
I don't know that I would describe it as a backlog, but it's a pretty healthy pipeline, because our physicians tell us they're booked, and our patients who are frustrated, because they can't get in to see their physicians or get a procedure for a number of months are, you know, are frustrated. In that sense, I don't, I don't think we're gonna sort of fall off a cliff, but I certainly feel like, you know, the first quarter performance, two things, I mean, was against a pretty easy comparison. Also, you know, it has got a, you know, contained some element of catch-up.
I will say that going forward, the comparisons I think are gonna become much more meaningful, apples to apples, both compared to the prior year and compared to the preceding quarter 'cause they're not gonna have any big COVID surges embedded in those numbers presumably.
Yeah. I guess to that point, 'cause it seems what some of the managed care companies are saying is that Q1 in their view was always going to be the highest year-over-year trend quarter, but no matter what they thought trend was gonna be for the year. I guess going back to how everyone talked about Q1, COVID spiked, then dropped. COVID non-COVID dropped and didn't rebound. Did you see that dynamic in your volumes? Was there a different year-over-year trend through the quarter or into April? Or like, is absolute utilization relatively stable but the year-over-year kinda changed? Is that the way to think about it or?
Again, I think it's a bit of an incongruous comparison. I think the comment you made is absolutely true. The surprising thing about 2022 from our perspective is that, which was, I think, different than 2021, is that in 2021 when COVID volumes declined in after January, February, they came back pretty quickly, in the spring and early summer, then there was another COVID surge. In 2022, that rebound seemed to occur much more slowly, even though the timing was very similar, meaning the COVID surge was in January, February, ended pretty quickly.
I think the difference, as best as I can tell, and this is certainly true on the behavioral side, but also I think somewhat true on the acute side, is the labor situation was much tighter in 2022 than it was in 2021. There was this huge increase in Q1 of 2022 in premium pay and the use of contract labor and all that kind of stuff. I think that had a dampening or tempering effect on volumes, certainly on the behavioral side, but I think on the acute side as well. Again, I think that's an element of it too. There are, I think a number of factors at play here.
I do think that another reason for the strong, you know, volume performance in Q1 is that the labor situation is getting better. You know, we're filling more of our full-time vacancies and that's allowing us to have more fulsome OR schedules and procedural schedules.
I guess that is a bullish sign for continued volume growth, that the labor market seems to be at least where it is if not continuing to get slightly better. Is that-
Yeah. Honestly, I mean, if you try and, you know, I think as Yogi Berra said, you know, it's hard to predict things, especially the future. I think that, you know, especially if there's not another COVID surge, which, you know, most people don't expect of a material, you know, nature. If there's any sort of softening, I think in the overall economy, I think historically, you know, economic weakness usually tends to make things easier for us from a labor perspective. We see a greater supply of nursing and other labor hours in a recession, so that's, you know, in that sense, generally a good thing for us.
you know, I don't think there's anything on the horizon, like I said, acts in another COVID surge that would really provide a threat to the improving, you know, labor situation.
I guess maybe, switching to the behavioral side of the business, kind of basically the same questions, 'cause it seems like It feels like demand maybe wasn't as depressed, during COVID as it was on the acute care side, but your ability to treat that demand was restricted. Is that strength, you know, this quarter, last couple quarters, really just about labor getting better?
I think the behavioral story is kinda more straightforward, less complicated. You know, we made the argument really from the outset of the pandemic, except at the very beginning of the pandemic where you had the sort of lockdown dynamic and people weren't going to hospital emergency rooms and mental health clinics and that sort of thing. You know, once after, I would say the initial three or four months, the major, you know, gating factor we had in building our behavioral volume was a lack of qualified staff, mostly nurses, but including people like therapists and psychologists and counselors and even including some non-professional people.
The argument that we made and the postulation that we put forth was that as we were able to fill more of those vacancies, and I would say for the last 12 months at least, we've had a very steady trend of net positive hires. We said that as COVID volumes declined, we would have more net positive hires, and as we had more net positive hires, we'd have more volume growth. We'd just simply be able to treat more patients. You saw that in Q3 of last year, in Q4 of last year, you saw that in Q1 of this year. We've suggested that's, you know, continued into the early part of Q2. You know, the challenge I think on the acute side is there's a few different sort of dynamics occurring all at once going in different directions.
You know, while you have improving volumes, you do have the loss of the COVID patients and their acuity and their, you know, additional reimbursement, and you have the shift from inpatient to outpatient, which is, you know, generally a drag, et cetera. Whereas on the behavioral side, and again, we've made this argument from the beginning. The impact of COVID was only negative on the behavioral business. As we emerged from it as a consequence, we always thought that that would really be a pretty steady upward trajectory, steeper than it would be on the acute side. Certainly over the last three or four quarters, that's the way it's been playing out.
No, I think that that makes sense. I guess there's two issues with that, I guess. The first one is, from a labor market perspective, it seems like there's clearly year-over-year improvement, but it also feels like the labor market's still not good, right? Like, it's still hard to find nurses. Like, is the labor market backdrop conducive to, if it stayed at these levels, conducive to continuing this type of year-over-year growth? If we want to see faster, it has to get better, or it has to get better to continue this type of growth?
No, it's a great question, and I think it's perfectly fair. you know, when I think back to late 2019 or early 2020, we certainly would have described the labor market at that time as tight and, you know, challenging. you know, we were coming, you know, still at, you know, several years out from the recession. We were at, I think, something close to what economists thought was full employment, maybe definitely at full employment. Unemployment was kind of 3.5%, 4%. Things were tight. The pandemic really exacerbated that to levels that, you know, we had never seen before.
It feels to me like we're sort of back to where we were in November, December 2019, January, February 2020, which again, I think your description is perfectly fair. It's a tight labor market, but kind of manageable. You know, we can work our way through that in a variety of ways, looking at different staffing models. If RNs are a problem, we can hire more LPNs or more mental health techs to support kind of a smaller number of RNs and still provide the same level of, you know, quality of care and that sort of thing. There are just things that we can do that, you know, during the pandemic, the shortage was so exacerbated, and, you know, none of that really, you know, made any sort of material difference. You're right.
I mean, I don't want to leave the impression, and I don't think people have it, but I don't want to leave the impression that, you know, we're able to hire anyone we want now, and therefore, you know, the volume growth on the behavioral side is unlimited. I do think demand is very strong, and so it's more the idea of to the degree that we can continue to hire, to the degree that we can find, you know, more effective and more efficient, treatment models that rely less, for instance, on registered nurses. I think, you know, those things will all be helpful to us to continue this. The other thing is, you know, people in the room who know me know I've been doing this for a long time.
I've been in the business for, you know, almost four decades. Every time there's been a nursing shortage in my previous experience, you know, there's a market reaction to that. The market produces more nurses, you know, which is what you would expect. I think in this current shortage, that didn't occur nearly to the same degree because of a shortage of nursing educators. Nursing schools will tell us all the time that they can increase their enrollment by 50% or 100% tomorrow if they had a sufficient number of teachers. They just don't, you know. Again, the market will ultimately correct for all that, not necessarily in the next quarter, you know, et cetera, but I think over time.
Back to, you know, the point that I was making before, I don't see it getting any worse from here, and I think it just sort of continues to ease. I think your point or question is entirely appropriate to say, you know, it may not be a dramatic easing. I think, you know, that over time will continue to improve.
I guess the second part, though, of that dynamic of like, okay, labor's getting better, volume should improve, is there's also bed capacity potential constraint at some point. You guys pulled back a lot on CapEx during COVID. How quickly I guess, how much capacity is there before you need to add beds, and how quickly can you add beds if all of a sudden labor becomes available and that's no longer a barrier?
Yeah. You know, if you look at our behavioral numbers, our occupancy levels, you know, in the last year or so, we're running in the 72%,73% range. You know, we've run in our behavioral business, it's been a while, but back in the mid-2000s, you know, we've run occupancy levels consistently on average in the mid-80s. Certainly, we can, you know, increase our volumes pretty substantially, without, you know, and still increase our occupancy levels.
The reason that in the mid-2000s we began to build beds, and frankly, our peers followed us in that, built new beds, is that we found that an 84%, 85% occupancy level was somewhat inefficient in the sense that we were turning a fair amount of patients away at those levels because, you know, we didn't have an available bed, et cetera. It made sense for us to build, you know, new beds. You know, we think that sort of the maximum efficiency level to run the business occupancy level is kind of in the mid-70s, you know, 75%, 76% maybe.
The answer to your question is, I think we have a little bit of room in our existing infrastructure to, you know, increase volumes without really being constrained or turning a, you know, significant number of new patients away. Also, I think we're getting close to a point where, you know, building new beds is, you know, which we've been doing a little bit during the pandemic, but certainly have slowed that pace down, is becoming a, you know, kind of a, a real significant consideration again.
I think I mentioned on our fourth quarter call a couple of months ago that we've recently gone through an exercise of identifying all of our facilities that run at occupancy levels over 80%, to see whether there's a need and, you know, a case to be made for adding capacity to those facilities.
How long does that take?
You and I were having this conversation yesterday. I mean, I think that what we tried to do during the pandemic was continue what I'll call the capacity expansion process without spending or making, you know, a really enormous investment in it. In other words, if we needed to apply for, in order to get new capacity, a CON in states that require a CON or local zoning where that's required, we, you know, continued to do that. Where we got those approvals, we would engage an architect to do the expansion plans. Where we stopped, I think largely during the pandemic, wasn't actually letting the, you know, construction contracts and going through the expense of the actual construction.
Most of the time, the construction piece of that timeline is actually the shortest piece. If you're talking about adding, you know, 20 or 30 beds to a facility, you know, most cases that's gonna be a 6 or 8-month process. That can be resurrected and completed, you know, relatively soon. I think if we decide that the labor environment continues to get better and we're able to staff these new beds, you know, I think, you know, you could see the impact of at least some of those new beds coming online, you know, as early as the back half of 2024.
Right, 2024?
Yeah.
Okay. I guess just maybe to wrap up the conversation about labor, where are we from your perspective on the use of contract labor, you know, year-over-year improvement versus, you know, pre-COVID levels? Where are we from a wage growth perspective versus those levels?
Yeah. I mean, premium pay for us and just to be clear, we've sort of always used that premium pay metric in our acute division. That includes what most people focus on, which is contract labor and temporary traveling nurses, that sort of thing. It also includes premium pay that we pay to our own nurses for overtime or shift differential, et cetera. That's the number we've consistently disclosed. That number peaked in 2022 in the kind of $435 million range. You know, we, I think, guided and presumed that that number could be lowered by about a 1/3 in 2023. You know, maybe it would drop to the $270 million/$275 million mark.
We don't think made as much progress in Q1 as we thought we would, but I think that was because our volumes were so much higher than expected. I think that's our view. Now, that view at least, you know, our current view is that, you know, that's still an achievable level of reduction, you know, given the decline in sort of COVID volume pressures, that sort of thing. That number is still probably twice, the $270, $280 is probably twice what we were running pre-pandemic, and I think there's still some question about how... I don't think that we feel today that we're gonna get back to pre-pandemic levels of temporary and contract labor, partly because, again, I think you have at least, you know, at any point in time, a fixed number of nurses in the country.
I think what the pandemic did is create a willingness on at least some sliver of that population, to sort of pursue the temporary traveling kinda lifestyle. You know, if they're gonna do that, you know, they're not, if you will, eligible or available for full-time employment. I think there are more nurses working in MLU today than there were. I think otherwise, the demand for those temporary and traveling nurses is clearly on the decline, and again, absent another COVID surge, will continue to decline.
What kind of wage growth are you looking at?
Yeah. I think, you know, wage rate inflation, you know, is probably 150 basis points, 175 basis points higher post right now than it was pre-pandemic. You know, I think on the acute side, if it was 3%, 3.5% pre-pandemic, it's, you know, closer to 5%. You know, today, I think on the acute side it was probably closer to, you know, 2%, 2.5% pre-pandemic and, you know, now is in the fours. I think our view is that it is sort of reached its peak, at a minimum, and if nothing else, it stabilizes at least as the year goes on.
I think, you know, we presume that if there is some level of continued economic weakness, if there's a recession, I think that rate of acceleration or rate of inflation likely moderates a little bit. You know, what we have again found historically during recessionary periods is that the supply of nursing hours tends to increase during recessionary periods. Nurses who often are the second wage earner in a house, will take on, you know, extra shifts, so retired nurses come back and work part-time, and part-time nurses will work full-time, and full-time nurses will take a couple extra shifts, all of which is helpful to increasing the number of nursing hours in the supply.
Mm-hmm. I mean, like, that comment is directly related to a kind of a slowdown in the economy. When you think about your guidance, are you also assuming that from any kind of volume or mix shift or whatever dynamic?
You know, I think we said that our guidance for the year shows some improvement in the back half of the year. Some of that is the timing of supplemental payments and things which are sort of unique. You know, some of that is this view that the labor situation continues to improve, the labor shortage continues to ease, and that has a salutary beneficial effect on volumes, which, you know, in a normal year, in kind of a normal seasonal trajectory, is not necessarily the case.
Okay. That makes sense. I guess as we think about some of the other things that are happening as the year goes on, redeterminations being one, I mean, how do you think about the impact of redeterminations on the acute care business and then on the psychiatric business?
We've been more cautious on the impact of redeterminations, I think, than most of our peers, and quite frankly than, I think, most of the analyses that have been done. There have been a number of analyses, some of them from sell-side analysts, some of them from third parties like the Urban Institute, I think CMS has done their own analysis, that generally, I think, tend to show that redeterminations have a net favorable impact on providers. The idea being that as people, and frankly large numbers of people are removed from the Medicaid rolls, that a significant number of those people will requalify or qualify for commercial exchange products which are better reimbursed for or which represent better reimbursement for hospitals. I think we've, again, been a little bit more cautious for a couple of reasons.
I mean, one is just the practicality of it. You know, while we don't really dispute any of the academic analyses that have been done, it's a pretty complicated process. You know, people are gonna come to the emergency room, they're gonna discover that now they don't have Medicaid coverage. They may not even be aware of that before. We're gonna have to try and get them qualified. I would make the point this is not a population that's gonna go on their cell phone and go to HealthCare.gov. That's not gonna happen. You know, they're gonna need a lot of help. We're certainly prepared to give that help and assistance just as we were when the ACA was implemented. I think all those things, you know, take some time.
There may be some timing gaps, you know, that sort of thing. The other issue I think, you know, which is I think more relevant on the behavioral side is while reimbursement rates, I think were It is true that they're generally better with commercial products than Medicaid products, it's worth keeping in mind that generally Medicaid programs do not have any co-pays or deductibles, and many exchange products do. As a consequence, particularly in the behavioral business where the bills tend to be a lot smaller, I think there is a, you know, that I don't think is fully factored into a lot of these analyses that are done. There's an element of the co-pays and deductibles that we know, we may, you know, struggle to collect.
On the other hand, I think, you know, the thing that we have optionality on the behavioral side is we have, I think, you know, more optionality on the behavioral side about who gets admitted and who doesn't get admitted. You know, we can, and to the degree that we're turning patients away, it's, you know, somewhat easier for us to manage that than it is on the acute side where we really, you know, can't manage the inflow of patients, particularly to our emergency rooms.
I guess when we think about that on the acute care side, I mean, if I just take a step back and say a Medicaid patient coming into your acute care facility, Do you make money on that patient?
I think we would argue, I think, that we make money and earn a profit on any patient who has insurance. Obviously less on a Medicaid patient than a Medicare or commercial patient. It also depends, you know, when you ask that question or anybody asks that question, you know, a lot of it is based on whether you're talking about the sort of the average cost or the incremental cost. We absolutely make money on every incremental patient because the incremental cost is relatively small. I would say our margins with fully loaded costs on a Medicaid patient are relatively small, but I think still profitable.
Okay, 'cause I would just still think that if you think a small margin versus a healthier margin on an exchange or a commercial employed margin, you could lose a lot of Medicaid patients, just get one exchange patient and would still be at worse net break even. I mean, like, do you think it's break even and maybe positive, or you're just saying you don't even?
Yeah. Again, like, you know, First of all, I mean, I think the point that you make is absolutely correct, and I think that's what these analyses suggest. Not that every Medicaid patient is going to, you know, get a commercial exchange coverage, but that, you know, a third of them are, some number.
Mm-hmm.
To your point, the math is such that the reimbursement is so much better than that, so that's enough of a conversion rate. Again, I think our point of view is really not that we dispute any of those assumptions, just that we've never really been through this before, you know, especially at this magnitude where, you know, we're talking about millions of people losing their Medicaid coverage. Just suggesting that especially in the short run, there may be more sort of choppiness and volatility here than I think some of these analyses are suggesting.
Mm-hmm. Then you alluded to it a little bit with your labor comments, but like when I've been asking this to all the companies, as we head into a recession, if you say net-net, there's a potentially an impact on volume, potentially an impact on payer mix, there's an impact on cost. Like, First on the acute side, then on the behavioral side, does your business grow better, earnings-wise, or worse, or the same in a recession for acute and then for behavioral?
you know, I think that the main way that a recession has impacted our business historically is an impact on or, you know, a declining payer mix. Well I think for the most part, we don't think it affects volume in a material way. What happens, you know, very sort of, you know, at a very high level is people lose their jobs, they lose their commercial insurance that comes with their job, and now a commercially insured patient becomes either a Medicaid or an uninsured patient. A couple of things I think are worth noting, I think that it's less of an impact on the behavioral business for what I suggested before. We're able to control our patient population a little bit more on the behavioral side, whereas the acute care emergency room really doesn't have that optionality.
The other issue is this would be the first recession that we'll go through post the ACA. You know, there just are. You know, even with Medicaid redeterminations, there still are, you know, 20 million or 25 million people who are gonna have coverage, either through Medicaid or through commercial exchanges, that didn't have it, let's say, in the last recession. That's, you know, that certainly should be a cushion as we think about it. I would argue that because of the acute care dynamic and the emergency room, a decline in payer mix is always gonna be more impactful on the acute business than on the behavioral business.
I guess, how do you offset that versus the cost dynamics that you were mentioning before, that labor becomes more available and wage growth goes down?
Yeah. Yeah. No, no.
Net, I mean, like, 'cause in general, hospitals grew EBITDA during the great recession at high single-digit, low double-digit ranges. Like, is there a reason why that wouldn't happen this time?
Yeah. Again, I think this gets back to the idea that, you know, hospitals are considered, you know, certainly not recession-proof, but recession-resistant because, I think because for the most part, demand doesn't change. To your point, when you go through the dynamics of, all right, demand remains the same, payer mix probably worsens a little bit, but costs probably come down a little bit as well, that, you know, it's probably not, you know, net-net, you know, terrible thing, which I think has, you know, generally been the view of it, which I think is why people like hospitals during a recession, is that they're sort of built to withstand this a lot better than, you know, other businesses which have, you know, much more elastic demand.
Yeah. Okay. I think that's all we have time for. Thank you very much.
Okay. Thanks.