Okay. Hi, everyone. Thanks again for joining us at the conference. We are really pleased to have Universal Health Services with us today. UHS is a provider of acute care and behavioral health services. With us from the company are Steve Filton, CFO, and Darren Lehrich from Investor Relations. Thanks again for being here. You guys like to start with any kind of intro comments, or would you rather just hop right into Q&A?
I will make a few introductory comments . It just feels like ages ago at this point, but a quick recap of Q2. I think we were pleased in Q2 with the rebound in volumes in both of our segments. Solid expense control in both of our segments. We had the benefit of the Florida DDDP Program, the 2025 calendar year program that was approved, and we recognized that benefit in the second quarter. We had also some unfavorable discrete items, which I am sure we will get into in the Q&A.
As a result, we lowered the midpoint of our EBITDA as NCI guidance by about 3% at the midpoint, which now leaves us with a projection of growth for the year compared to last year of about 3% of EBITDA as NCI line. The other significant developments, I think post second quarter, were we closed the Talkspace acquisition, and we completed a $1.1 billion bond issuance, both in the mid-August timeframe. We talked about Talkspace at some length, but I will just remind people, very excited about the opportunities that Talkspace creates for us.
Again, I am sure we will get into more of that. Talkspace will add about $250 million in annual outpatient revenue to our behavioral results. We have said previously that in the first 12 months, we expect the Talkspace results to be slightly accretive. I think for the balance of 2025, it will likely be immaterial. We are very excited about the Talkspace acquisition. The access to their panel of 6,000 therapists, I think, really creates an accelerated opportunity for us to grow our outpatient business, which has really been a focus of our behavioral division for certainly the last several years, and really creating the first sort of end-to-end continuum of behavioral care that really exists in the industry.
It is really unparalleled. I will pause there, Steve, and answer whatever questions.
Great. Okay. Yeah. Well, maybe we'll start, try to keep it on the acute side of the business, then we'll come to behavioral for maybe the second half of the conversation. You mentioned that you're pleased with the improved volumes in the second quarter. I think second quarter adjusted admissions were 2.9%, and the first half of the year, it was 1.4% overall. You trimmed the guide a little bit, and I think now you're looking for the full year as 1.5%-2.5% on the volume side. I guess, how are you thinking about the back half volumes at this point in time and how you approach adopting the guidance there?
Yeah. So as part of our second quarter commentary, we reduced slightly the volume guidance for both segments by about 50 basis points. The midpoint of our acute volume projection growth, adjusted admission growth, went from 2.5% to 2%. Really, as I think your question suggests, in our minds, it was just an acknowledgment and sort of a clarification of the fact that with adjusted admissions in the first half of the year growing by 1.4%, even though the second quarter was stronger, 2% seemed a more reasonable sort of target for the full year.
Generally, we feel like volumes are pretty solid, and in line with historical volumes. I'd make the point that, over the last decade, our acute care-adjusted admissions have grown between 2% and 2.5% on average over a 10-year period. So, adjusting to the 2% is still well within range. We like the markets we're in. We like the overall demand environment. Feel pretty good about it.
Okay. When we think about the composition, that volume growth, I guess, how should we think about how that breaks across the different kind of insured profiles? How does it compare for commercial Medicare, Medicaid, I guess, like self-pay, to the degree you can comment on that?
Yeah. Putting the exchange dynamics to the side, which we'll probably talk about separately. I think outside of that, there haven't been significant changes to payer mix. I think in the first half of the year, we saw a bit of an increase in Medicare and managed Medicare, a bit of a decrease in Medicaid and managed Medicaid, and commercial volumes fairly stable. We didn't really have a specific guide in the back half of the year to payer mix dynamics, but expect them to essentially be relatively consistent with the trends we've been seeing.
Okay. On the surgery side, I think remained a bit soft. I think you were down kind of approaching 1% in the second quarter. I think inpatient was up and outpatient was down. I think there's a lot of questions just about how kind of more broad-based elective trends are maybe holding up versus things like emergency surgery. Could you expand a little bit on sort of the surgical experience you've had in the early part of the year, and how you're thinking about that, how schedules might look for the back half of the year?
I think as you noted, our overall surgical volumes were down 0.8% in the second quarter, and that was actually an improvement over the prior period, sequentially an improvement over the prior period. We were pleased, as you suggested or noted, that inpatient volumes were up in the more sort of acute procedures. I think we feel like that's potentially a reflection of the investments that we've made in inpatient surgeries, whether that's robotics or other equipment upgrades, etc.
We have not historically sort of disclosed elective versus non-elective or parse surgical growth out between elective and non-elective, but we do keep track of it and have not really noticed any significant issues in that regard.
Okay. Just in terms of, again, I guess what you assume in the back half of the year is relatively similar to a continuation of the second quarter trends, or any reason to think that's any different than maybe the exit rate on the quarter?
No, I think, as I noted before, we've scaled back our overall volume growth projections for acute care by about 50 basis points, and I think have taken into account the fact that surgical volumes have been a little lighter than maybe we anticipated at the beginning of the year. No, so I think that's been taken into account in our guidance revisions.
Okay. Then, another factor that's been discussed around some of the new facilities that you've opened would be the push out of break-even profitability at Cedar Hill. How do we think about the factors driving kind of the push out of the ramp? How much of it, if we wanted to kind of characterize it as things within the company's control, whether it's like the cost side and things that might be a little bit harder to control, like the pace of volume ramp, how would we think about the balance there, and what's a reasonable timeline, do you think, generating more company-like margins at that facility?
Yeah. So, just to remind people, Cedar Hill is the new facility that opened in Washington, D.C., in April of 2025, our second facility in that market, the first being George Washington University Hospital. I think what we've found at Cedar Hill from its opening was that its emergency business, the emergency room activity, has been fairly busy and encouraging. What has been somewhat less busy is the elective procedures, and I think we attribute that to a bit of a scarcity of physicians, both primary care and specialists in the market.
I think that's been the sort of delay in the ramp-up at Cedar Hill. We have been actively recruiting physicians to the market, and honestly, a busy emergency room in and of itself will attract physicians. It just takes some time for them to open offices and groups to branch out and have a presence in what has historically been an underserved, from a healthcare perspective, an underserved part of the D.C. market. Just reminding people about the structure of that facility or that arrangement, the district put up the capital or funded the capital for that hospital, and we have a long-term operating agreement there.
I would just remind people that as a consequence, it usually takes us between 18 and 36 months for a new facility, depending on its location, to ramp up to divisional margin averages. In the case of this hospital in D.C., because we didn't provide the CapEx for the hospital, we don't necessarily have to get to those same margins to earn our hurdle rate of return. So I think it's an important distinction.
In our revised guidance, have talked about anticipating that we'll get to break even at Cedar Hill by the fourth quarter of this year, obviously, to a greater level of profitability next year, and I think we'll continue to grow, albeit the ramp-up has been somewhat slower than we anticipated.
Okay. As part of the overall D.C. market, you're also taking control of a physician group there that's had some financial struggles. I guess first, what's the strategic rationale for doing this? Like, what was the company's thought process about why this was necessary? It does seem like there's a lot of moving parts financially. I think you're getting some interim support to kind of subsidize some of the financial performance of that asset. I guess, how should we think about how that impacts the model over the next couple of years and how to build that in?
Just to level set, we, in the July timeframe, transitioned a 350 multi-specialty physician group from the university to our ownership. As you point out, Steve, there's a lot of moving parts in the sense that historically, we had what we described as an academic affiliation agreement with the university in which we paid the university a significant subsidy to help fund that physician group. By taking the group over, essentially having them transition to our ownership, we feel like there's better alignment between their interests and the hospital's interests and our ability to provide quality care from the physician group to the D.C. population.
As far as the economics work, the payments that we've been making to the hospital cease, number one. You referenced the fact that the university will actually make some subsidy payments to us to help subsidize the performance of the physician as well. We also believe that given our experience with non-academic physician groups, we will be able to implement and effect efficiencies which will make the physicians more productive, allow them to see more patients, allow them to do it more efficiently.
With all those dynamics at play, at a minimum, we expect the transaction to be economically neutral, and with greater alignment. We view it as a plus.
Okay. Then, one focus in the second quarter, I think, was that you are increasing same-facility bed count a pretty good amount, I think maybe 2.5%. I would love to hear a little bit more about the markets where you are making these bed investments. I guess, where does utilization and capacity sit in those markets, and I guess how quickly do you think the occupancy of those new beds could start to translate into incremental volume for the company?
The 177 beds that you referred to have been added at three different hospitals in the portfolio. One is Lakewood Ranch in Florida, in the greater Sarasota market, where we built a new tower.
One is Henderson Hospital in Las Vegas, which has been very busy since its opening five or six years ago, and we have built out a sixth floor at the Henderson facility. We historically have done a tour in connection with another bank conference in Las Vegas. Some of you may have been to Henderson, and if you have ever been to Henderson, you will know that if you walk through the emergency room, we are historically holding patients in the emergency room, and dozens of patients at a time because we do not have available beds.
That was the impetus to our building out the sixth floor and adding 35 or 40 new beds. Then finally, in Southern California, in our Riverside County market, we built a replacement facility for our Inland Valley facility, which was about 35 or 40 years old. In each case, to your point, the capacity additions were done because there was documented and demonstrated need for that additional capacity. We think they will ramp up relatively quickly. Take some time to get to peak margins because you have to hire and etc.
There are some challenges to opening the new capacity, but I think the capacity will generally be filled and will help us get to our targeted same-store adjusted admission growth in the acute business.
Okay. To your point earlier, we have now reached the exchange part of the discussion. When you talk most recently about the exchanges, I think you are expecting the exchange EBITDA headwinds now be at the upper end of the initial guidance that you provided. I guess, how should we be thinking about the underlying components of how that is going, whether it is volumes and coverage transitions, maybe other forms of coverage, and I guess how you are thinking about the impact as you move from Q2 and whether that builds or not in the balance of the year?
Again, probably worth quickly reminding people what our original assumptions were for the impact of the decline in exchange enrollment. We assumed that there would be a 25%-30% decline in exchange enrollment as a result of the exchange subsidies lapsing. We assumed that 10%-20% of the people who lost coverage would replace that coverage with something. We generally felt it would likely be commercial coverage through their employers. We also assumed that there would be a shift in metal tiers, particularly from silver to bronze, and tried to take all those items into account and projected a $75 million unfavorable impact.
I think through the first six months of the year, the actual impacts have played out largely the way we anticipated. We did, as I think you note, increase our full year projection of the impact from $75 million to $85 million as part of our guidance revision. I think that revision was really the one assumption that I think we have tweaked is, it turns out that rather than seeing some of the folks who lost their exchange coverage converting to other commercial coverage, it really felt like there was almost a one-for-one exchange between those who lost their exchange coverage and increased uninsured or uncompensated volume.
The slight increase and uptick in our impact projection, I think, was a result of tweaking that aspect of the assumptions. So what we have is a $35 million impact in the first half of the year. We're expecting a $50 million impact in the back half of the year, and I think that's a function of just the progression of people losing their coverage. I think some people might have paid premiums for several months and then stopped. Not everybody stopped paying premiums in the first month.
Honestly, to some degree, we didn't necessarily know when people stopped paying their premiums, so it took us a bit of time to factor that in. Roughly, I think we think there'll be about a $50 million unfavorable impact in the back half of the year. That, I think, essentially becomes sort of the run rate then for 2027.
Okay. You mentioned this as part of the planning process, but for the exchange volumes that remain, obviously, there's been a big shift in metal tiers. In some markets, it's more pronounced than others. I guess, could you explain a little bit what you plan for inside of the headwind related to that? I guess when it comes to having patients with much higher co-pays and deductibles as they use services, how do we think about the collection timeline on those dollars and when you might have good visibility to them, or just maybe characterize your level of visibility to those collection trends now?
Yeah. As I said, I think I tried to take that into account. I think we assumed that there would be something around a 25% shift, particularly from the silver to the bronze metal tiers. That seems to generally be tracking our experience. Generally what we find is that the more of the ultimate bill that is the responsibility of the patient, the higher the level of uncollectibility is. Again, that's not anything new. We have factored that in, etc.
Like I said, the biggest change, I think, in our viewpoint was this idea that rather than some people losing their exchange coverage and converting to commercial, it's really almost been a one-for-one exchange between exchange coverage and uncompensated care. People that are pure uncompensated care have a very low collection rate, generally.
Okay. Maybe we'll switch a little bit more to the behavioral questions at this point. You mentioned a little bit off the top about the Talkspace acquisition and some of the strategic rationale for it. I guess, how do we think about the first couple of weeks of integration, how that's going, what the key integration milestones are going to be, and I guess how do you think about the KPIs and disclosure we might get on this business over the next few years?
First of all, and I think I said this earlier, I'll just repeat that our expectation is in our first 12 months of ownership, the impact of the Talkspace acquisition will be slightly accretive. I think for the 4.5 months of 2026, it's likely to be an immaterial impact. But over the longer term, I expressed great enthusiasm about the Talkspace acquisition. I think that the most significant impact in the short term, I'll call maybe the short and intermediate term, is that on what we've described as step-down patients, our inpatients or our patients who are discharged from our inpatient facilities but require follow-up care.
Very often, our ability to keep that, if you will, follow-up care sort of within, I'll call it the UHS family, has been limited historically, I think for a couple of large reasons. One is geographic. When we talk about follow-up care, we talk about programs that are described as partial hospitalization or intensive outpatient. And what distinguishes these programs from what I'll call sort of traditional outpatient, where you're seeing a therapist once a week or twice a week for an hour or so.
These are patients who are coming and getting therapy, both individual and group therapy, three times a week, four times a week, five times a week sometimes, for four hours a day, five hours a day, six hours a day. And historically, we lost patients who didn't live close to our facilities. Maybe they were willing to drive two hours to become an inpatient or to be admitted as an inpatient, but now that we're asking them to come back three, four, five days a week, they really didn't want to make that same drive.
Also, we've been a very inpatient-centric based business, haven't always had the same number of therapists on the outpatient side. As I said, one of the great attractions of Talkspace is a panel of 6,000 therapists who can provide and have capacity to provide that intensive outpatient partial hospitalization care that we weren't always able to provide. And just really having that virtual component and virtual alternative and virtual option is, I think, going to be a huge benefit for us.
But when we think beyond that and think about other opportunities, I think they're just, obviously overstating if I would say limitless, but there really are just a significant number of other opportunities. One of which, and I don't think I could cover all of them in this setting, but one of which is some integration with our acute care business. We discharge patients from our acute care hospitals, many of whom may require some level of follow-up psychiatric care. If you think about, there has been a lot in the news in the last week or so about women with postpartum depression, as an example.
A woman who is showing evidence of postpartum depression after delivery might extremely benefit from Talkspace follow-up. Somebody who has just received a cancer diagnosis is often devastated, et c., working through that from a mental health perspective, again, that sort of opportunity. We have a long-standing relationship with the military. We have what we call our Patriot Support Program, again, largely designed to provide inpatient support for active military, etc.
But if you think about, again, some of the news coming out of the USS Lincoln, et c., again, lots of opportunities, I think, for that virtual alternative to really be helpful to active duty soldiers who are suffering from PTSD or addiction issues or whatever. Again, very upbeat about the opportunities for Talkspace in 2027 and beyond.
Okay. When we think about the demand environment for kind of the base behavioral business, I guess, how would you characterize that, where we are kind of coming out of the first half of 2026? Obviously, you mentioned earlier you trimmed the volume outlook there a little bit. It seemed like labor and the investments you have made, that labor is a bit less of a gating factor than maybe it has been in the past. I guess, how do you think about what would be needed to really see an improvement on the volume side?
Yeah. If you go back and you look at it, our adjusted patient days in behavioral grew by 0.9% in 2025. They, in the first half of this year, grew by 1.5%. So they are accelerating. I think we have historically, or at least over the last several years, kind of had this 2%-3% growth target. I think in retrospect, that has proved to be a little bit aspirational. So we have scaled it back to more like 1%-2%. We are sort of smack in the middle of that in the first half of this year. And that is why we scaled our projection back to that 1%-2% range.
Again, what I would say, and it is not exclusively a result of the Talkspace acquisition, but I would suggest that where the accelerated growth in behavioral demand will occur over the next several years is on the outpatient side. A better and more efficient capture of those step-down patients on our part, more dedicated focus on capturing those patients. The Talkspace alternative certainly helps. We have also talked quite a bit in the last year or two about what we describe as our A Thousand Branches initiative.
These are freestanding outpatient facilities that we are building and standing up around the country. One of the things that we have found is that as patients enter the healthcare system, if they are entering the system in an outpatient program, very often they are reluctant to do so on the campus of an inpatient behavioral facility. Having these freestanding outpatient centers as an alternative, again, I think we think is another efficient alternative. Again, we can really now meet patients where they want to be treated, where their employers and payers want them to be treated.
In some cases, that can be in a virtual setting. In some cases, it can be in a freestanding setting. In some cases, if patients are comfortable, it can be on the campus of our hospitals, our inpatient facilities. The point being that we are really building out our outpatient capacity so that we really can offer patients, again, the most efficient and most comfortable setting for them.
Okay. You mentioned with the second quarter, some discussion around the San Antonio facility and the behavioral business that is right now dealing with some CMS certification challenges. I guess, how are you thinking about what might be a reasonable timeline for getting certification back, like how that is kind of played out in the past, and maybe how you are thinking about the opportunity to recover business in that market over the next couple of years if that occurs?
Right. As we've noted, the Laurel Ridge facility in San Antonio has continued to operate, albeit with a much smaller patient complement. The reason for that is we have been going through the process of going back to CMS and getting recertified, and they require that you have patients in order for them to come back and survey, etc. We expect that we've completed, I think, the first several steps of recertification. The next several steps involve some regulatory visits and surveys, et c., which we hope will take place over the next few months, and that ideally, we would hope to be back in business and sort of ramping back up in early 2027.
That sort of ramp-up is a little bit, not I think perfectly analogous, but a little bit like opening a De Novo facility . We obviously do have established referral relationships in that market, etc. , which should help us ramp up more quickly. I think, again, as we get to the third and fourth quarters, probably more likely the fourth quarter, we'll have, I think, hopefully greater visibility on when we can actually get our certification back, when we can start taking patients, at what pace, etc. When we give our 2027 guidance, I think we'll be more specific about it.
I think suffice it to say that our focus right now is on getting recertified, where we've been already working closely with the regulators, cooperating, etc. So feeling good about that process, but difficult to predict exactly the pace and how we'll go at this point.
Got it. Okay. Then, kind of more of, I guess, an overall question for the enterprise. You've seen a pretty big increase in professional and general liability expense. I guess we'd love to just understand a little bit better, what's the absolute level of that expense that's now running through the P&L? I know a lot of it's based on actuarial experience and things like that, but what's a reasonable way to think about what the expense profile and the growth of that expense could be over the next couple of years?
Yeah, look, it's worth noting, and I'm sure obviously the reason you're asking the question is that that expense has been growing, I think, faster than the rate of inflation, certainly over the last several years. I think that's honestly true for us as well as other healthcare providers. Honestly, we've seen that from providers outside of the healthcare space. There's just greater litigation activity. There's some element, I think one of our peers uses the term social inflation, juries willing to render verdicts that are higher than they have been in the past, et c., which tends to increase the overall expense.
I think it's worth sort of putting in context. Our malpractice expense generally averages about 1% of revenues, which puts it for us in the kind of $175 million- $200 million annual range. That's obviously not an inconsequential number, but certainly one of our smaller expense numbers compared to things like salaries and supplies, etc. I do think it's likely that malpractice expense continues to grow faster than inflation. So instead of growing at 4% or 5%, maybe it grows at 10%-15%.
Unlike most other expenses, we tend to recognize it in real time as best as we can through the help of third-party actuarial reviews, which we do twice a year. So it's a little bit harder to predict and project. But yeah, again, what I would just say is, I don't think we'll vary tremendously from that sort of 1% of revenue range, but it certainly may increase somewhat faster than the inflation rate.
Okay. Then we think about the guidance revision that you touched on with the second quarter. It looks like there's a bit of an acceleration required in the second half, and I know the concept of core growth kind of differs a little bit from analyst to analyst and investor to investor, but looks like core growth needs to be a little bit better in the back half of the year than where we think maybe it was in the first half of the year. Would love if you could just walk us through the factors contributing to what we perceive to be that ramp up and how the company's feeling about it at this pace.
Yeah, I think we've touched on several of the more significant elements. The acute capacity that we added and all those 177 beds and those three projects that I alluded to earlier, all opened in the second quarter of this year. So we think they'll continue to ramp up in the back half of the year. We'll get a benefit from that. We talked about the continued improvement at Cedar Hill. I think that should and will do better in the second half of the year than it did in the first. We talked about growth in behavioral.
While I don't think we'll get significant growth from the Talkspace acquisition itself, I do think we'll get growth from some of our own outpatient initiatives in the back half of the year. I think all those things combined lead us to believe that meeting that accelerated sort of uptick in earnings in the back half of the year, which is embedded in our guidance, is definitely achievable.
Okay. When we think about the policy headwinds are obviously in kind of material focus at the moment. I guess, how are you thinking about what you might see in 2027, whether it's the potential for the exchange market enrollment to take another step back or whether there could be some challenges in your business from things like Medicaid work requirements?
Yeah, as we talked about before, from an exchange perspective, I think our expectation is that the biggest dis-enrollment activity has already now taken place. Might there be an incremental step-up next year? That's possible, but I think, as I was saying before, what we'll see is because the impact of the exchange dis-enrollment has progressed and gotten larger as the year went on, not by a huge amount, but like I said, $35 million in the first half of the year, $50 million projected in the back half of the year. It'll continue to increase next year.
We think at that sort of exit rate for the back half of this year. That's a little bit of a headwind into next year. The other major issue which you've alluded to, Steve, is Medicaid dis-enrollment. I think most providers, both public and private providers, have been reluctant to really precisely try and size the Medicaid work requirements and the potential impact on Medicaid dis-enrollment. As we all wait to see, I think a lot of the specifics of how this is going to play out remain to be seen.
There's been, I think, estimates from CMS that somewhere around 4% of Medicaid enrollees could lose their coverage. But not exactly sure who those enrollees are, whether they're major utilizers of the system, etc. That remains to be seen. How different states implement the Medicaid work requirements, at what pace, remains to be seen. Some states are actually challenging the work requirements in court.
We're also seeing debate about how there are exceptions for medical frailty in the bill, in OBBBA, that we think a lot of behavioral coverage, as an example, may well qualify for the medical frailty exception. We'll have to see how that plays out. The expectation is that Medicaid work requirements and the dis-enrollment coming from them could be a headwind into next year, but probably just too early to be precise about what that could be.
Okay. Well, thanks for your time today. I think that's where I'll have to leave it. Appreciate it.
Okay. Thank you.
Thank you.