Well, good morning, everyone. I'm Craig Hettenbach. I cover healthcare technology and providers at Morgan Stanley. Very pleased to have with us Universal Health Services this morning. Steve Filton, CFO, and Darren Lehrich in investor relations. For disclosures, you can see them at our website, www.morganstanley.com/researchdisclosures. With that, Steve, I'll just pass it over to you for some intro comments before we get into the Q&A.
Yeah, sure. I think maybe as a brief start, kind of a quick recap of Q2, which at the moment seems like ages ago. But we were pleased with our Q2 results in the context of rebounding volumes in both of our segments. We felt like both segments continued to demonstrate strong cost control and pleased by the benefit that we got from the Florida DPP program, which we recognized for calendar year 2025.
Still waiting for the approval for calendar year 2026. We had some exogenous unfavorable items in the quarter, caused us to revise our guidance downward by about $50 million at the midpoint. At that sort of midpoint of our revised guidance, we're now projecting on an EBITDA less NCI basis about 3% growth for this year. Over last year on an EPS basis at the midpoint, projecting about 6% growth.
I think subsequent to the quarter, or at least the quarterly announcement, probably the most significant items of note were we closed the Talkspace transaction, which we're very excited about, and the opportunities to really accelerate the growth in our outpatient behavioral business. I'm sure we'll touch on that more. The 6,000 therapists that Talkspace currently has on their panel, that add a tremendous amount of capacity for us. We also did execute on our $1.1 billion bond deal. Both the Talkspace closing and the bond deal were in mid-August, and that sets us up for several years now of solid and comfortable financing. So, I'll pause, and Craig, happy to entertain your questions at this point.
Great. Thanks for setting that up. I want to start on just the behavioral health side of the business. If we look at the last couple of years, growth, pricing has been a very important driver of that growth, and volume has been a little bit on the lackluster side. So, what are some of the key things that have been driving both those parts of the equation?
Yeah. On the volume side, we did adjust our guidance for volume for adjusted patient days on the behavioral side down about 50 basis points. We are now talking about something in the 1%-2% range. We ran for the first half of this year about 1.5%. We ran 0.9% last year, so we are incrementally improving. I think the real opportunity, as I alluded to very briefly already, to see adjusted patient day growth in behavioral is in the outpatient side. We have been, primarily for most of our history, an inpatient-centric company. 90% of our revenues today are inpatient prior to the Talkspace acquisition. I think we believe that a lot of the demand is on the outpatient side in behavioral.
We also believe that by growing in the behavioral, we will limit our exposure to Medicaid and become a more Medicare and commercial-centric company, which I think is a great way to set up the next few years as there is more pressure on Medicaid over the next several years. From a pricing perspective, we are talking about revenue growth in the behavioral business in the sort of 3%-5% range in our guidance. That is kind of 1%-2% volume, 2%-3% pricing. The 2%-3% pricing is a little bit lower than it has been over the last several years.
I think it has been somewhat inflated, or it has been somewhat higher in the last several years as a result of Medicaid supplemental payments increasing over the last several years, as well as, I think, a bump in commercial payments as we came out of the pandemic and commercial contract pricing recognized sort of higher labor inflation and just higher inflation all around. That is largely, I think, how in the near medium term, we think about both the revenue growth of the behavioral business, both from a pricing and a volume perspective.
Got it. On the inpatient side, if I think about COVID, just some of the ups and downs, and there was some pressure on labor. How do things stand today in terms of some efforts you have made, whether it is on staffing and things like that?
Yeah. So I mean, what we saw and I think your question alludes to, is during the pandemic, in particular, there was significant pressure on our behavioral volumes as a result of labor constraints. Very often, we couldn't admit patients because we had a lack of staff, and that could be nurses, could be therapists, could be non-professionals. But I think we've largely, first of all, I think the market has settled down post-COVID. The demand for providers in the sub-acute facilities from the acute facilities is not as great as it was during the pandemic.
But also, we've been very focused on getting to an appropriate level of staffing. I think we added about 4% to our headcount last year. We added about 3% to our headcount in the first half of this year. We certainly still have a handful of markets, facilities that face labor constraints at any particular time. But I think that issue is, I'm going to say, largely behind us. And honestly, I think that headcount now will start to move much more in sync with demand and volumes, and as a consequence, that should be a help to our margins as well.
Got it. And you alluded to the 1.5% growth in the first half of the year, and for the full year, you're talking 1%-2%. How does that frame, if you will, a multi-year outlook? Is this the right run rate? Would be the first question. And then maybe as part of that, is there anything you've observed in the competitive landscape on the inpatient side of things?
Yeah, I think that our view is that the inpatient business is a very solid, steady business, likely to grow, in small amounts. That 1%-2% that I think I would cite as a sort of near to midterm goal for us is really largely targeted at the inpatient volume. And again, what I would say is I think the upside for us is really on the outpatient side. I think that's where the demand is growing. I think patients more and more would prefer to be treated, if possible, on the outpatient side.
I think payers and employers would prefer to see their subscribers and their employees treated on the outpatient side. It's less expensive if it's appropriate, clinically appropriate. Our goal, both with the Talkspace acquisition and with our own standing up of freestanding behavioral facilities, is really designed to capture more of that outpatient demand and outpatient growth over the next several years. That is, I think, where we have the opportunity to push that 1%-2% up in the mid and longer term.
Got it. Maybe before we shift over to the outpatient side of things, I do want to touch on just on the last call, you talked about San Antonio and the issue there. The question is in the context, is that kind of a one-off? Any other backstory there, and how you think about that coming back?
Yeah. We have a facility in San Antonio, Texas, called Laurel Ridge, that lost its Medicare certification back in April. It was something that we believe was very much isolated to this facility and the regulators of this facility. We do not believe that it has ramifications or a read-through to the rest of the portfolio. We believe that we have a long history of regulatory compliance and quality patient care and safety. Our goal and our plan is at the Laurel Ridge facility, it has remained open throughout this time. We continue to treat patients, a small number of patients albeit. The reason we do that is it is an effort to continue to work with the regulators, state regulators, and CMS to get the facility re-licensed as quickly as possible.
We would hope that that could be as early as early 2007, and then we would begin to ramp the facility back up, in terms of volumes and EBITDA, etc . It is difficult to predict the exact timing of that at the moment or the exact pace of the ramp-up. I assume by the time we give 2027 guidance, we will be able to be more specific about that. That is where we are from a current planning perspective.
Got it. Just going back to the outpatient side of things, I want to spend some time on Thousand Branches in terms of that initiative, where you are at, if there is any context you can provide in terms of numbers, centers you have today, and ultimately where you would like to see that build-out continue.
I think it is worth just providing a little bit of perspective. As I indicated earlier, we have been for most of our history, an inpatient-centric behavioral company. We have always had outpatient services, but most of them are related to what we describe as step-down services. When we discharge a patient from our inpatient facilities, they often require some level of, and some, I am going to say, relatively intensive level of continuing outpatient care, not just the hour-long therapy session a week that many of us might be accustomed to, either personally or friends and family experiencing. But people who are being discharged out of an inpatient facility often require programs that we describe as either partial hospitalization or intensive outpatient.
These are patients who are getting care and treatment and therapy three hours a day, four hours a day, five hours a day, three days a week, four days a week, five days a week. Many of our facilities will provide that level of care at the facility level. The gating factor we find, and have found over the years, is that there is only a small number of patients who choose to be treated that way. It is usually two issues or two major issues. One is on the patient's part, and it is often a geographical issue or a convenience issue. The patient lives two hours from our facility.
They were willing to make that drive or be driven for an inpatient admission for 10 days or 11 days, whatever, but unwilling to make that drive three days a week, four days a week, five days a week. They are looking for something more convenient. Or, it becomes a scheduling issue. We will say, "Okay, we have a partial hospitalization program, but it runs Monday, Wednesday, Friday from 9:00 A.M till 2:00 P.M ." That, for whatever reason, does not work for the patient. He works, there is childcare, whatever it may be.
He would prefer to go at night, he would prefer to go in the afternoons, he would prefer to go on the weekends. What we have done over the last several years is really try and now create alternatives that can capture and solve some of those issues. Our first initiative, which is the one you asked about, was what we have branded as Thousand Branches. These are freestanding behavioral facilities that we are standing up around the country in generally high population areas, et c, where we think the demand is significant.
These are really for people who are entering the healthcare system as an outpatient. Certainly, not everybody enters the healthcare system as an outpatient or as an inpatient, rather, many enter as an outpatient. These facilities, I think, will capture more of those patients. What we have found is that patients who are entering the system as outpatients often don't want to do that on the campus of an inpatient hospital. They sort of fret about being swept up in the inpatient net, is I think the way they think about it.
I don't necessarily think it's a realistic concern, but it's a concern that they have. The other issue and the one that I mentioned just very briefly earlier, is we acquired Talkspace. Talkspace is one of the largest virtual providers of behavioral care in the country. Really being able to offer that virtual alternative, again, either to patients entering the system as an outpatient or the patients who are stepping down as an outpatient. Now we can sort of meet them where they, if you will live, work, want to be treated, afternoons, evenings, weekends. We can accommodate their schedules.
Really puts us in a position where we are really the first behavioral provider in the country to have this end-to-end continuum of care going from the lowest acuity of care, sort of hour-long virtual sessions, to the highest acuity of care, acute and residential facilities that are treating inpatients, et c. So that's really how the Thousand Branches strategy, as well as the Talkspace strategy, fit into the overall strategic direction of our behavioral business.
Got it. How do you think about even dual tracking in terms of some of the things you are doing with Thousand Branches and then Talkspace layers into the business?
Yeah, no, it's a great sort of question and point, Craig, in the sense that we view all these things not as sort of discrete and distinct offerings, but integrated offerings along a continuum. If we have patients who are discharged from an inpatient facility and would prefer to receive their care in a freestanding outpatient setting, we've got now 15 of these Thousand Branches facilities today. We're planning on standing up about 10 a year over the next several years. We hope that that's an alternative.
Patients from there can be, if you will, stepped down into a virtual setting with Talkspace. Patients who are in Talkspace today may. Talkspace really has offered, in their history, mostly these relatively short hour-long sessions to people once or twice a week, that kind of thing.
But now, they've got these therapists, these 6,000 therapists, who are able to offer, again, partial hospitalization, intensive outpatient, et c. Again, I think, our view is patients being able to move up and down this continuum of care based on their needs. Like I said earlier, we're really the only provider in the country that's able to do that. There are lots of providers who provide one element of that continuum of care. But virtually none that provide it all and hopefully in a seamless way with a shared medical record that's convenient for the patient, that's going to bring the highest quality of care for the patient, keep the patient the safest.
Got it. You touched on before just the payer mix, which is different for Talkspace. If I think about the inpatient and the base business, it leans a little bit more Medicaid. How do you think about that payer mix and what that means for the business, again, on more of a multi-year kind of basis?
Well, I think it's worth noting that outpatient revenue in behavioral tends to be much less Medicaid centric and much less commercial. Or excuse me, much more commercial and Medicare centric. That's true for Talkspace as well as for our own outpatient revenues, et c. In most states, Medicaid does not pay for outpatient services. One of the additional advantages of building out the outpatient business is not only we believe capturing demand, faster growing demand for outpatient services, but also diversifying our payer strategy, reducing our reliance on Medicaid, over the next several years when there will be some Medicaid headwinds from OB3 and other factors. Yeah, the focus on outpatient has, I think, kind of a dual focus of both volumes and payer mix diversification.
Got it. I want to weave in just capital allocation to the Talkspace discussion. If I think about an enterprise value of $835 million, it was an important strategic deal, but there's also debates around using that money to buy Talkspace versus buying back your stock. How did you approach it in terms of the returns you expect to see in this business and what it means?
So I think it's worth noting and putting into context that while certainly we view the Talkspace acquisition as a significant one, probably the most significant acquisition we've done since the acquisition of Psychiatric Solutions, which was almost 15 years ago at this point. The $835 million represents less than one year of our free cash flow. It represents, even though we levered up a little bit to do the deal, it's about a quarter of a turn of leverage increase as a result of the Talkspace acquisition. Our overall leverage today post Talkspace is in the low two's. I think we've talked generally about targeting leverage levels in the two -three range.
The point, and now trying to be responsive to your question, Craig, is not that I think we ever viewed the Talkspace acquisition as sort of an either/or in the context of, well, if we did Talkspace, we wouldn't be able to be as aggressive and as active as we have been in share repurchase and return of capital to shareholders. I think we continue to believe that particularly, our current share price represents a fairly significant dislocation in the price. We've been a very active acquirer of our shares for a long time now.
We've repurchased about 40% of the company's shares in the last 10 years. We continue to be an active repurchaser, we'll continue to be an active repurchaser after the Talkspace acquisition. Again, not either/or. I think the other point worth making is, we'll continue to look for other. We have not been terribly acquisitive in the last several years because we've not found a great many compelling acquisitions, but we still have the flexibility to do one if we find one.
I think the one other comment that's worth noting about our capital deployment is our CapEx has been somewhat, I'll call it exaggerated or inflated over the last several years because it's included or reflected a number of very large acute care hospital de novo projects. So we've opened three de novo facilities in less than two years, Henderson Hospital in Las Vegas, Cedar Hill Hospital in Washington, D.C., and a replacement facility in Riverside County, California. We don't have any of those large, again, whole hospital de novo projects in the pipeline for the next several years.
CapEx will naturally start to come down over the next several years as well. Again, just allowing us greater flexibility for share repurchase or for any other uses that we may deem to be appropriate in earning a return. Just one more comment before you get to your next question, Craig. We had talked about returns. The price that we paid for Talkspace was definitely on the pricey side when you look at their current earnings.
What really drove our analysis of the deal and our thinking and strategic thinking about the deal is this opportunity to, what I call sort of revenue synergies, to take Talkspace's lower acuity patient population and find ways where they need appropriate treatment, higher levels of more acute treatment, and to take our more acute patient population and find ways for them to be treated by the virtual therapist or the virtual therapy programming that Talkspace has. We thought that within a couple of years of being able to recognize those revenue synergies, that the adjusted multiple for Talkspace would be more in the high single-digit multiples, which I think is much more what we would look to as a target.
That makes sense. Maybe we can switch gears just to the acute side of the business. You are targeting kind of 1.5%-2.5% adjusted admissions this year. We will get into maybe the ACA in a little bit, but if I put that aside, how would you characterize the demand environment today? What are some key puts and takes into the back half?
Yes. We did as part of our revised guidance after Q2, lower slightly our acute care volume projections for the year by about 50 basis points at the midpoint. So we are now predicting, generally sort of, 1.5%-2.5%, 2% at the midpoint. That really was just a reflection in our minds of the weaker volumes that we saw in Q1, which I think had a number of reasons behind them, including some weather issues, et c. But would be difficult to get to that 2.5% midpoint just mechanically, given the softer volumes in Q1.
But when you look back at our acute care-adjusted admission growth over the last decade, I think it has averaged between 2% and 2.5%. So that sort of 2% midpoint that we have set for ourselves this year is fairly consistent with that. I think we think the demand environment or view the demand environment in acute care as relatively solid, and feel pretty enthusiastic and bullish about our particular markets, both the patient population growth in our markets and the demand. We're generally feeling pretty bullish about acute care volumes and feel like they're very much in line with historical norms.
Got it. Anything you would call out on the acuity side or surgeries in terms of things you're seeing in the market?
Yeah, I think as most of our peers have indicated, surgical volumes have been a little bit softer in the last few quarters. In Q2, I think our overall surgical volumes were down 0.8%, but that was actually an improvement over the previous couple of quarters. I think we were encouraged by the fact that inpatient surgical volumes were actually up last quarter. We highlighted some service areas where they were particularly strong, including cardiology and neurology and urology, and not surprisingly, these are service lines in which the acuity of the patients tends to be higher. I think we've been able to grow our surgical procedures in those areas, in particular, partly because of the investments we are making in OR capacity and OR technology, robotics, etc .
The places where I think we see our surgical volumes a little bit softer tend to be in areas like GI and ENT, these lower acuity areas where, not just for us, but I think collectively for the industry, the vast majority of those procedures over the last several years have moved out of the hospital setting and into either ASCs or physician offices, et c. I think our view is that with the continued investment and focus on these higher acuity procedures, we think the demand in those service lines will continue to be strong.
Got it. You touched on before the elevated CapEx for some new hospital systems. If I think about West Henderson, Cedar Hill, you have the Alan B. Miller Medical Center. Can you just touch on kind of where you're at with these systems and really the implications for the growth and margin trajectory as they continue to ramp up?
Yeah. Thank you for mentioning the Alan B. Miller Medical Center. I forgot to mention that in my talking about the facilities that we opened. If you think about the facilities that we've opened in the last several years, West Henderson Hospital in Las Vegas, and I think we made the point that that opened in December of 2024, and it was profitable within its first quarter or so of operation, which is really extraordinary for a new hospital, although somewhat consistent with our experience in Las Vegas, where we're the number one market share provider, and it's been a fast-growing market, et c.
The Cedar Hill Hospital, which is our second hospital in the Washington, D.C. market, opened in April of 2025. That was an arrangement, and I think a different sort of arrangement, with the District of Columbia.
The Cedar Hill facility is in an underserved part of the district, and underserved from a healthcare perspective. The district was extremely anxious to have this facility. They're the ones who funded it. They built the facility. We have a long-term management and operating agreement. That facility's been somewhat slower to ramp up. We've certainly talked about that in our quarterly calls. It's been very busy from an emergency room standpoint from essentially the day that it opened.
But we really need to find a better balance of emergent and elective procedures. Elective procedures have been somewhat lagging, and I think it's because there's a lack of both primary care and specialty physicians in the market because there really hasn't been a high-quality hospital provider in that part of the city. Physicians have, for the most part, have not located there. They don't have their offices there. We're changing that.
I think we're changing it relatively quickly. We're recruiting new physicians. Physicians are being drawn there by the busy emergency room, et c. But that will take a little bit of time to ramp up. I think it's worth noting that because the district has really been the one that built the facility, and our CapEx investments in the facility are much less than they've been in a normal, I'll call it, de novo facility.
We don't have to get to the same sorts of margins that we would need to get to at, I'll call an average hospital, to get to our sort of normal hurdle rates of return. We've talked about that hospital breaking even by the fourth quarter this year, and we would think that would continue to grow after that. The Alan B. Miller Hospital is our new hospital in Palm Beach Gardens, Florida.
That hospital opened in July of this year. As we are expecting, and again, with most new hospitals outside of Las Vegas, will be a bit of a drag as it works through. Most of our brand-new de novo hospitals usually get to average divisional margins within about 18-36 months. That would be, as I said, our West Henderson Hospital facility got there much, much faster. Cedar Hill is probably taking a little more time. The ABM or Alan B. Miller Medical Center facility, we would hope would be more in the norm of that 18-36 month ramp-up.
That is helpful. Just last one on acute business, if I think about access points and freestanding ERs have been an important part of that strategy, where things stand today and what that means for some of the growth and margin structure of the business.
Yeah. We have talked already about how on the behavioral side, there has been a continued, and I think an accelerated shift into more outpatient settings. That shift has been taking place on the acute side, quite frankly, for I think a decade or longer. We participated in that on the acute side, I think, more aggressively than we have on the behavioral side. You mentioned freestanding emergency departments.
We have 35 of those around the country. We have them in virtually all of our markets. They are a very convenient access point for patients. We find that patients who are not generally that acutely ill prefer to be treated in that setting. They can generally be treated more quickly, more conveniently, more safely, et c, without the long wait times, et c. So, they have been very successful.
We have also got about a little more than a dozen ambulatory surgery centers around the country with the hopes of adding another one in every one of our markets over the next several years. Finally, we have probably got a couple of hundred physician practices around the country that also obviously help to build our outpatient business. So, yeah, we have this, I think, very comprehensive approach to outpatient that includes the FEDs that I think were the crux of your question, but other elements of it as well.
Great. Maybe we can switch gears just to technology in terms of how you are deploying tech and AI. If I look at it through the lens of there are applications like revenue cycle management, there are things on the clinical side that are maybe a little bit more longer dated, but just where are you seeing it have the biggest impact on your business today?
Yeah, you mentioned revenue cycle, and we have talked a lot about that probably being the area that we most aggressively started adopting AI technology from the perspective of denial appeals and the completeness of our billing packages that go out. Some of our medical records coding, our emergency room coding has been using an AI application. We just generally think that revenue cycle broadly is well-suited for artificial intelligence applications because there are thousands, frankly, hundreds of thousands of transactions. They are recurring. They generally fit a particular pattern, etc . I think that is well-suited for AI applications. We have also been, I will call it dabbling, if you will, with clinical applications. I think originally I will call them sort of peripheral applications.
For instance, using AI technology that has been developed by Hippocratic AI, which is a company that we have been a shareholder in and investor in, to instead of a human being, a nurse, making a post-discharge call to a patient, finding out how they are feeling, finding out if they filled their prescriptions, finding out if they have made their follow-up physician appointments, following up on whether they are in pain, those calls are now being made in many cases by an AI agent.
I think the latest data suggests that 50% of the people who pick up the phone and have an AI agent identified on the other end will continue the conversation. I have listened in on a bunch of those conversations. They are really quite fascinating, and people are very comfortable sharing, and the information that is being gathered and being imparted is really valuable, I think.
It helps to reduce readmissions, helps to make sure the patient is doing well. That is another example. Also using AI technology, I will say, kind of pseudo-clinically to help us project diagnoses and project length of stay so that we can better manage length of stay, which is a significant way for us to control expenses. What I think in some ways is the biggest challenge from an artificial intelligence perspective today is managing and prioritizing the opportunities, really focusing your resources, choosing the projects you are going to do based on what is likely to have the most significant, fastest return, et cetera. We have got kind of a whole structure in place, oversight committee, etc , to try and do that very effectively.
Got it. When you think about the financial impact, is this something that just kind of gradually over time accrues to the business, or is there a tipping point? How do you see it as we go forward here?
No, I think it accrues, maybe that's a good word, and I think it compounds. I think when we're asked sometimes about how we think about some of the headwinds that particularly we'll face over the next years as a result of Medicaid challenges in OB3 and in other ways, I think we think about the efficiencies that AI can help us generate and help us realize as being a significant way that we're going to be able to offset some of those headwinds over the next several years.
Got it. Well, as we wrap up here on time, just quickly on the headwinds, you mentioned OB3, the exchange marketplace. Any change in terms of your expected headwind that you're seeing in the business or how things are playing out?
I think the exchange dynamics have largely played out the way that we expected. We originally projected the impact from the exchange, the loss of exchange patients would be about $75 million this year. We upped that estimate a little bit to about $85 million to $85 million in the second quarter revision. But other than that, I think it has largely played out the way that we expected. I think we envisioned that 2026 would be the big cliff for the dramatic decline in exchange patients. We'll see what happens next year, but not expecting that number to increase other than perhaps incrementally.
Got it. Okay. We are right at time. Steve and Darren, thank you so much for your time.
Thanks to everybody.