All right. Great. Welcome, everyone. My name is Michael Ha, the managed care and healthcare facilities analyst at Baird. Our next session is with Universal Health Services, an operator of acute and behavioral healthcare facilities. I'm very pleased to have with us today Chief Financial Officer Steve Filton and Head of Investor Relations Darren Lehrich. Thank you for being here. Steve, Darren, would you like to make any introductory comments?
Yeah, I'll make just a couple of quick things, maybe a recap a bit of Q2, which I know seems like a long time ago. We were pleased in Q2 with the rebounded volumes in both of our business segments. The continued, we think, effective cost control in both segments. We had the benefit of the Florida Directed Payment Program monies that related to calendar year 2025. Offsetting those favorable items were some unfavorable exogenous items, which I'm guessing we'll get into in a little bit more detail. As a result of all those items, we did revise our guidance in Q2, our full-year guidance for 2026. From the midpoint of an EBITDA less NCI perspective down about 3% at that midpoint, leading us to a projection for the year of EBITDA growth of about 3% and EPS growth of about 6%.
Subsequent to the second quarter, probably the two most significant items are we closed the Talkspace transaction, which I'm sure we'll talk a little bit more about, and we completed a bond issuance of $1.1 billion, setting us up for the next several years. Very excited about the Talkspace acquisition. Really an opportunity for us to accelerate our outpatient growth and behavioral access to the 6,000 therapists that Talkspace has on their panel. Again, I'm sure we'll get into all that. Yeah, I'm happy to answer your questions, Michael.
Perfect. Thank you. I think we'll start with acute, then go sort of coverage policy, then end off with behavioral. On acute, same-facility acute adjusted admissions rose up 1.4% in the first half, including pretty strong second quarter 2.9% growth, while you did revise your full-year target to 2.5%. My question is, how are volumes tracking in third quarter, and what will determine whether this year finishes toward the upper or the lower end of that range? Should we interpret this as sort of a new long-term target or more of a target applicable for next year and more medium term?
Yeah. The slight downward revision in our projected acute adjusted admissions for the year was really, I think, just an acknowledgment of the real soft first quarter admissions. I think our original guidance, where the midpoint was about 2.5%, would be difficult to achieve given the softer first quarter volumes. The 2% midpoint for the year seems just more reasonable and achievable. And I put that in the context of, if you look at our last 10 years of experience, I think acute care adjusted admissions have basically traded in a sort of 2%-2.5% range. So the 2% that we've got for this year is well within that range. It's, I think, reflective of the fact that we think that overall volumes are relatively solid.
As far as your question about what would drive it to be on the upside or the downside, I think it's to some degree the continued ramp of the de novo facilities, particularly Cedar Hill. It's how quickly the 177 beds that we added in the second quarter to our existing facilities ramp up, and we think that'll happen relatively quickly. But generally view the demand environment in acute to be relatively stable and fairly consistent with historical norms.
Great. So on that topic of Cedar Hill, emergency department activity has been encouraging, but elective volumes have ramped more slowly because, as you've talked about, limited primary care specialist base in that surrounding market. What concrete physician recruitment and referral milestones are really required at Cedar Hill to move from expected fourth quarter breakeven toward more, call it mature profitability, and how should your new ownership of that affiliated physician group accelerate that process?
Yeah. I think it's worth just providing just a tad bit of perspective. The impetus to build that Cedar Hill facility really came from the District of Columbia government itself. They viewed that part of the district, which is Ward 7 and 8, as a historically underserved part of the district from a healthcare perspective, and they were extremely anxious to build a state-of-the-art facility operated by an experienced mature operator. We have a long history with the district at GW Hospital. And so the district undertook the capital commitment. They put up the funds to build the hospital, several hundred million dollars worth of investment. We have a long-term operating and management agreement with them.
When we opened the facility back about a year and a half ago in April of 2025, what we found was almost immediately, and you alluded to this in your question, Michael, emergency room volumes were quite strong, which I think was reflective of the fact that, in fact, the residents of that part of the district really were hungering for this opportunity to have their own facility, one that they could go to for quality care, et cetera. Honestly, I would say we were almost overwhelmed by the emergency room volumes at the outset. What we were lacking, and again, I know your question addressed this, was a balance of more elective procedures.
I think the reason for that is that because historically, most people in Ward 7 and 8 were leaving that part of the city to get their healthcare elsewhere, there really was a lack of what I would describe as physician infrastructure. Primary care physicians, specialists, they just didn't have their offices in Ward 7 and 8, and that's what really needs to happen. We need to have more physicians based in and around the hospital. We're recruiting physicians. We are doing our best, not just necessarily recruiting new physicians, but getting physicians who have a presence elsewhere in the district to open offices in Ward 7 and 8, et cetera. That's what I think will happen. It's taking some time, maybe a little bit longer than we expected.
I think we normally view the ramp-up of a de novo hospital to take about 18 or 36 months before it reaches divisional averages. In the case of Cedar Hill, it's taking somewhat longer than that. We do project and have said that we expect to get to breakeven in Q4. The one nuance that I'd highlight, however, is that because we didn't provide the capital to build the hospital, to get to our target rate of returns for this particular project, we'll be able to do so without getting to necessarily average margins or average absolute levels of profitability. Your last question, or the last part of your question was, how does the migration of the medical faculty group that was owned and run by The George Washington University Hospital for many years, and that we took over for that early in the third quarter.
How does that affect the Cedar Hill ramp-up? I think we'll have some of those physicians helping us in Cedar Hill. But the reality is most of those physicians will practice at GW. They have practiced at GW historically and will continue to. So I don't think that's going to have a big impact. I think it'll be mostly non-GW or non-medical faculty, or we call it Capital Medical Group physicians, that'll staff the Cedar Hill facility.
Got it. Nevada remains one of your most important markets with West Henderson adding capacity as you anticipate recovery in Vegas tourist demand. How would you disaggregate West Henderson's growth between improving market demand, share gains from competitors, and volume shifting from your legacy facilities?
Yeah. If you go back to just the previous question and the comment that I made about it usually takes 18-36 months for a facility to ramp up and get to divisional averages. West Henderson, and we've commented on this before, became profitable in its first full quarter of operation. It opened in December 2024, and it was profitable by the first quarter of 2025. Not necessarily divisional averages, but even that accelerated ramp-up is really extraordinary, and honestly, we've only experienced that in hospitals in Las Vegas. To your point, there was demand. Henderson and now West Henderson are located in the southeast part of the market. That's a market that was really owned by a competitor for the longest time. Nobody else competed there.
Henderson opened and was very busy, and then the population continued to move west, and we saw the need to open yet another hospital. We opened West Henderson. West Henderson, to some degree, capitalized a little bit of our own hospital business. We estimated that in its first few quarters of operation to be a 40, 50 basis point impact on our adjusted admission growth, same store. Just to show how strong the market itself is, the 177 beds that we talked about adding to our acute facilities in Q2, some of those beds, 35 or 40 of those beds, were added at Henderson Hospital, which is our closest hospital to West Henderson. It's just a demonstrated, I think, or it's reflective of the demonstrated need for healthcare in that space. Broadly, our Vegas hospitals, I think, are doing well.
2025 was a bit of a softer year. There was a softer flu season. Your question kind of alluded to, I think, tourism and conferences and meetings were down a little bit, but seem to have rebounded, and I think the Vegas market is kind of back to fairly robust growth that is helping to propel the overall divisional performance.
The only thing I would add to that, Michael, is when you think about the Las Vegas economy, it really has broadened beyond gaming. West Henderson and that Henderson area that we are talking about, I think, is a great example of how the economy in Clark County has really changed. A lot more sports teams are there. Our hospital is actually very close to the Raiders facility. A lot more technology businesses coming into Nevada, especially in the northern part where we have hospitals in Reno. I think a little bit more balance to the broader economy is starting to really unfold in Las Vegas.
Great. Switching over to exchanges now. Your estimated 2026 exchange headwind is now up from $75 million to $85 million. Approximately $35 million of that is in the first half, $50 million in the back half. Our checks in recent weeks, and we publish on it, they do not appear to be great when it comes to uninsured volumes, and it seems like the pressure continues to mount into July and August. That said, is the $50 million second half assumption still intact? What visibility do you have given the lag between members stopping premium payments and what appears in your hospital data?
Yeah. Again, I think it is worth kind of just reminding people that original $75 million impact estimate that we had made with our original 2026 guidance was based on a couple of critical assumptions. One, that there would be about a 25%-30% decline in people who had exchange coverage. Two was that a small percentage of those people, maybe 10%-20%, would lose their exchange coverage, but would be able to replace it with other commercial coverage, potentially through their employers or others. Three was that there would be a shift in those people who kept their exchange coverage, of metal tiers, mostly from silver to bronze. I think for the most part, those assumptions have played out in the first half as we expected they would.
Probably the single biggest divergence from what we originally projected, and I think you kind of alluded to this in your question, Michael, was that we have all seen an almost one-for-one swap or trade, if you will, from the number of people who have lost their exchange coverage to an increase in uncompensated care, meaning that virtually everyone who lost their exchange coverage turned into an uncompensated patient. That was something that we really did not anticipate fully, and that is really what drove the $10 million increase in our estimate. I think what we have said is, as you point out, we had a $35 million impact in the first half of the year, with $15 million in the first quarter, $20 million in the second quarter, and now projecting $50 million in the back half.
I think that's reflective again of how this has played out in actuality, meaning not everybody stopped paying their premiums on January 1. Some people may have paid their premiums for a month or two months or three months before stopping, et cetera. Some of that impact is back-end loaded, but some of it is also reflective of exactly when we become aware of somebody not making their premium payments. We really only become aware of that through the managed care companies. When a patient comes in with exchange coverage and exchange card, we'll verify the insurance. If the managed care company verifies the insurance, we assume that it's good, premiums are paid, et cetera.
We may then go to bill that bill a month later, two months later, and we'll then get feedback from the insurance company that premiums haven't been paid and then they're not going to cover the care, et cetera. So, there is a delay in our awareness. There is a delay, I think, in some cases with people actually paying their premiums. I think that's what's reflected in the build up as the year goes on. We're not really commenting on our inter-quarter commentary about exchange volumes or payer mix or volumes in general, but I would say that we're still comfortable that revised estimate should be fairly accurate for the balance of the year.
Got it. When we think about, I believe your preliminary 2027 outlook appears to assume the second half exchange headwind carries forward at approximately the same exit rate, which would annualize $50 million into $100 million for 2027. Given another year of material premium increases in the marketplace, more potential metal tier migration, if exchange enrollment does decline incrementally, call it 5%, 10%, or more in 2027, why wouldn't the total headwind rise meaningfully above?
It could, Michael. To be fair, I think our point of view, at least at the moment, is we just don't have any real insight into that. There's also been speculation that there could be some level of re-enrollment as people realize that going uninsured has been problematic. Maybe they can get. Some of these people are working people who maybe will be able to get insurance through their employers, et cetera. We just don't know. So, you're right. I think the way you framed it is our presumption at the moment is that the run rate for the exchange impact in the second half of the year will be the run rate for next year.
As we get closer to giving our actual 2027 guidance in several months, if there is more visibility, if there is more clarity, we will update those estimates, but we just do not have nearly enough information or precision to do that at the moment.
Right. On Medicaid, managed Medicaid volumes have declined modestly during the first half, and several Medicaid plans have recently reported greater than expected eligibility related attrition, especially with work requirements creating more uncertainty into 2027. How should we think about and size the incremental risk to UHS's payer mix and uncompensated care after considering medical frailty exemptions, which I believe you have mentioned in the past may affect most of your behavioral lives, and basically in your ability to help those eligible patients document those exceptions?
So, just to level set, in terms of our payer mix experience to date in 2026 through the first half of the year, we have not really seen significant changes in our mix. Putting the exchange dynamics aside, which we have already talked about, we have seen slight increases in Medicare and managed Medicare. We have seen slight decreases, which your question I think alludes to in Medicaid and managed Medicaid. Our commercial volumes, again, outside of the exchanges, have remained fairly stable. As we think about going into next year and potential headwinds into next year, the biggest one is the one you highlighted, Michael, which is the Medicaid work requirements, which were part of OB3, will take effect in 2027. We have not tried to precisely size that impact. I am not aware of any provider who has chosen to do that.
I think in large part because collectively, I think as hospital providers, we are waiting for greater clarity on how the Medicaid work requirements are going to be implemented by the states. How quickly, how aggressively the states have an option as part of OB3 to ask for a six-month waiver and implementation. We do not know how many states will do so. We do know that there are states that are actually suing in the courts to challenge some of the requirements of the Medicaid work requirements. There is, again, you alluded to this in your question, there is an exception in the Medicaid work requirements, in OB3 for patients who are described as suffering from medical frailty. There is not a lot of definition in the bill for that. We have always understood it to cover potentially a significant amount of our behavioral diagnoses.
But again, that's going to be up to the states to promulgate the regulations and define them in each of the states. We'll see how that plays out. Again, maybe in several months when we're ready to give our 2027 guides, there'll be greater clarity. CMS, really probably one of the few organizations that's really tried to size this issue. They've projected that Medicaid work requirements could result in a disenrollment of up to 4% of the Medicaid population. But even CMS has not tried to tackle which of the Medicaid participants likely to lose coverage, be disenrolled. Is it the higher utilizers? I think the speculation has tended to be it will be the lower utilizers. But again, we have to see that. In terms of that, we're prepared for that, Michael, which again was part of your question.
Anytime a patient comes into one of our facilities, I'm going to say generally through the emergency room, they will interact with a registrar, with an intake person. If they don't have insurance coverage, if they don't have Medicare, they don't have Medicaid, they don't have commercial, our intake folks are trained to work with people to determine, look, are you eligible for some coverage that you don't currently have? Could you qualify for Medicaid? We have in most of our hospitals work with third party companies that we'll turn those folks over to, who work quite frankly on a contingent basis and go through the exercise of helping those people fill out Medicaid applications. Literally, they'll accompany them to the Medicaid office, et cetera. We're prepared to do that. We'll search for other options as well.
Sometimes there are county programs, sometimes a patient can qualify for COBRA if they've been employed, et cetera. So, our folks are trained to do that. They've always been trained to do that. It's part of what they do. They'll do that with the work requirements. Again, they'll need to have better understanding of exactly how the requirements are going to play out. But those of you who've kind of studied or read the bill, people can qualify for work requirements if they're in school, if they have volunteer jobs, et cetera. So, we'll go through all those processes to understand whether people qualify for the Medicaid work requirements.
Got it. Couple quick ones on policy and then we'll move on. The statutory SDP limits begin with state fiscal year 2028, which starts during calendar 2027 for several of your important states, while some payment pools even they fluctuate with Medicaid utilization. So how should we phase in the potential SDP headwind across calendar years 2027 and 2028, including any earlier pressure caused by Medicaid disenrollment? Maybe on the follow-up is, some of our policy checks seem to think if Congress flips, there could be a chance that SDP gets delayed or rolled back post midterms. Would love to hear your thoughts on that.
Yeah. I think you have a number of questions embedded in there. Number one, I think is we believe that the impact from those DPP reductions in calendar year 2027 will be relatively minimal. Our projections really presume that the bulk of the cuts start to impact us in 2028. We provide a lot of detail on that in our public filings. Of the $1.5 billion worth of Medicaid supplementals that we project today, or in our second quarter 10-Q that we will receive this year, we believe that the cuts beginning in 2028 and playing out over the next five years would amount to about $500 million of that $1.5 billion, and incurred fairly ratably about $100 million a year.
Your kind of second or maybe follow-up question about how might the outcome of the elections affect some level of modification or retraction of some of the requirements of those cuts? Hard to know. We are not counting on that. I think that it is entirely possible that, particularly if there is some sort of blue wave and the Democrats take control of the House or maybe the House and the Senate, that there could be some movement towards delaying or elongating those cuts or the impact of those cuts. I think the other, quite frankly, sort of political impetus may be just simply the passage of time. The OB3 cuts were sort of controversial when they were first passed, and there were even Republicans who objected mostly on the grounds that they would unfavorably impact rural facilities.
That objection came from senators sort of from different backgrounds, including Senator Susan Collins from Maine and Senator Josh Hawley from Missouri, very different sort of political, different parts of the political spectrum. But, as a consequence, they did include in the bill the rural fund, to help that. But the reality is, as these cuts, both the Medicaid work requirement cuts and then the DPP cuts, as they start to take effect in 2027 and 2028, the truth is they are going to affect hospitals well beyond just the rural hospitals. They are going to affect urban hospitals, they are going to affect safety net hospitals, they are going to affect children's hospitals. As those cuts become a lot closer to reality and perhaps start to be implemented, I do think there is a good chance that political pressure might grow to sort of relieve some of that.
But as I said, to be fair in terms of both the way we have projected, both the way we are approaching this, we are not assuming there are changes. If there are, we will welcome them. But if not, we are going to be prepared for the cuts that are on the books at the moment.
Got it. In a similar vein, on the proposed 2027 OPPS rule would reduce reimbursement for 340B acquired drugs, which has been a hot topic today, and redirect savings into higher non-drug components, which UHS has limited direct exposure to 340B. If finalized, how could this rule affect your net reimbursement and also your competitive position, given a lot of these not-for-profit systems have been benefiting a ton from 340B?
We disclose, again, in our public filings that if the proposed rule stands in its current form, that we, as many of our for-profit peers, would benefit because we have never benefited from the 340B favorable implications. Our outpatient Medicare reimbursement would increase by about 8%. Outpatient Medicare for us is not a huge part of our revenue stream. It is single digits of our total revenue, 5%, 6% or so. But honestly, this is one of those things where we are definitely sort of waiting on the sideline to see. We imagine that there will be significant or has been significant pressure from the not-for-profit industry about the rule and its implications for them. So we will see how it plays out. But it would have an incremental effect, an incremental positive effect on us if it were to stand.
Got it. Now we have a few minutes left and we even touch on behavioral, but all right. With Talkspace, T housand Branches, UHS is now uniquely positioned as the only scaled provider, with end-to-end continuum of behavioral healthcare. So I am trying to think, how does that breadth of service create tangible value, commercial value through stronger rate negotiations, preferred network status, greater directed volume relative to this fragmented local provider landscape over time? Could it help enable UHS to assume greater accountability for outcomes, total cost, episode-based shared savings? Could there be capitated arrangements? How should we think about the evolution of this model, given how uniquely positioned you are?
Yeah, I almost feel like I should be asking the questions than you. This is like Jeopardy!. I think you have answered the questions. No, look, and I think it is worth noting, we have talked a lot about a shift in focus over the last several years in our behavioral segment to more of an emphasis on outpatient revenue growth. We have been, for our 40+ years of behavioral history, really an inpatient-centric provider. Quite frankly, we think that the inpatient business is a solid business that will continue to grow incrementally. But the real growth, and the real accelerated growth we believe in behavioral demand will take place on the outpatient side for a variety of reasons. That is where patients would prefer to be treated if that is the clinically appropriate space. Payers and employers would prefer that, I think, their subscribers and their employees be treated on an outpatient basis.
It tends to be cheaper, et cetera. We have been focused on playing a bigger part in delivering that outpatient continuum of care. Your question alluded to the various ways that we have done it. Today, most of our outpatient revenues are generated by patients who we describe as step-down patients. These are patients who are discharged from our inpatient facilities, but who require some level of continuing care. It is a level of generally relatively high acuity continuing care, meaning not just an hour's worth of therapy a week or a couple of hours of therapy a week, but things that we call partial hospitalization or intensive outpatient, where they are receiving outpatient therapy three, four, five days a week, three, four, five hours a day, depending on their clinical needs.
Today, we only capture a very small percentage of those patients, in the mid-single digits tops, 3%, 4%, 5% of those patients. We think that the ultimate ability to capture that could be in the double digits, et cetera, and that which would be a significant opportunity for us. We have developed our own sort of focuses to get there, paying more attention to the discharge planning for patients, building out our thousand branches, freestanding facilities. But the Talkspace acquisition is really the one that really exponentially increases our ability to provide an alternative to patients. Because by being able to provide a virtual alternative to patients, we are not limited by proximate geography. They do not need to live near our hospitals to get that care. We are not limited by the therapists that we can offer and the schedules that we can offer.
Let us say we do our intensive outpatient three days a week in the mornings, and a patient wants to have their therapy in the afternoons or in the evenings or on the weekends, much more likely that we will be able to accommodate that need with Talkspace. Again, the ability to really be, as your question suggests, the only viable end-to-end continuum provider from the lowest acuity, hour-long therapy that has sort of been the bread and butter of what Talkspace has done to the intensive inpatient care that we have provided on both an acute and residential basis for our whole history, really positions us, I think, uniquely and what makes us so excited about the opportunities with Talkspace.
Beautiful. That is all the time we have. Thank you, Steve. Thank you, Darren, and everyone enjoy the rest of your day.
Thanks.
Thank you.
Oh, sorry.