Universal Health Services Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Q2 2024 Universal Health Services Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Steve Filton, Executive Vice President and CFO. Please go ahead.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2024. During the conference call, we'll be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on Risk Factors and forward-looking statements and Risk Factors in our Form 10-K for the year ended December 31, 2023, and our Form 10-Q for the quarter ended March 31, 2024. We'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $4.26 for the second quarter of 2024. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $4.31 for the quarter ended June 30, 2024. Our acute hospitals experienced a moderation of the demand for their services in the second quarter with adjusted admissions increasing 3.4% year-over-year and surgical growth flattening out. Overall, revenue growth was still a solid 6.6%. Meanwhile, expenses were well controlled. Specifically, the amount of premium pay in the second quarter was $61 million, reflecting a 15% to 20% decline from the prior year quarter.

On a same facility basis, EBITDA at our acute care hospitals increased 37% during the second quarter of 2024 as compared to the comparable prior year quarter. And the increase was 20% if you exclude the impact of the incremental Medicaid supplemental payments in Nevada. During the second quarter, same facility revenues in our behavioral health hospitals increased by 11%, primarily driven by a 9.3% increase in revenue per adjusted patient day. Even after adjusting for Medicaid supplemental payments not included in our original 2024 guidance, same facility revenues increased by 7.2% and same facility EBITDA for our behavioral health hospitals increased 13% in the second quarter as compared to the comparable prior year period. Our cash generated from operating activities increased by $422 million to $1.1 billion during the first six months of 2024 and as compared to $654 million during the same period in 2023. In the first half of 2024, we spent $450 million on capital expenditures and acquired 1.1 million of our own shares at a total cost of approximately $195 million. Since 2019, we have repurchased approximately 30% of the company's outstanding shares. As of June 30, 2024, we had $1 billion of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. In our acute care segment, we continue to develop additional inpatient and ambulatory care capacity.

We currently have 27 operational freestanding emergency departments as well as 12 more, which have been approved and are in various stages of development. Also, construction continues on our de novo acute care hospitals consisting of the 150-bed West Henderson Hospital in Las Vegas, Nevada, which is expected to open late this year. The 136 bed Cedar Hill Regional Medical Center in Washington, D.C. which is expected to open in the spring of 2025, and the 150-bed Alan B. Miller Medical Center in Palm Beach Gardens, Florida, which is expected to open in the spring of 2026. In our behavioral health segment, we recently opened the 128-bed River Vista Behavioral Hospital in Madera, California, and we are developing the 96 beds Southridge Behavioral Hospital in West Michigan, a joint venture with Trinity Health Michigan, which is expected to open later this year.

I'll now turn the call over to Marc Miller, President and CEO, for closing comments.

[Marc D. Miller, President and Chief Executive Officer at Universal Health Services]

Thanks, Steve. We're pleased with our second quarter results as both our business segments continued to make operational improvements. As we anticipated, acute care volumes have moderated somewhat and are gradually be going to resemble the patterns we experienced prior to pandemic. The increase in operating income in comparison to last year's second quarter for acute care hospitals is a further step towards a more extended margin recovery, we hope to sustain for the next several periods. In our acute segment, physician expense which is a significant headwind in 2023, has stabilized at approximately 7.5% of revenues. Based on the generally favorable operating trends in the first half of the year, we are increasing the midpoint of our 2024 EPS guidance by 17% to $15.80 per diluted share from $13.50 per diluted share previously. New supplemental programs being developed in Tennessee and Washington, D.C., which are not yet fully approved are not included in our revised guidance. Lastly, as announced in yesterday's earnings release, our Board of Directors has authorized a $1 billion increase to our stock repurchase program, thereby increasing the current aggregate purchase -- repurchase authorization to $1.228 billion.

We're happy to answer questions at this time.

Questions and Answers

[Operator]

[Operator Instructions] One moment for our first question, which comes from Ann Hynes of Mizuho Securities. Your line is open.

[Ann Hynes, Analyst at Mizuho Securities]

Great. Thanks. I just want to focus my question on the supplemental payments. I'm just trying to figure out what inning you are in both the acute care and behavioral for maybe new programs. Like so you mentioned D.C., that sounds like it might be a new program in acute care. And on the behavioral side going forward, that would be great. Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. And so I think we had mentioned before that I think from our perspective, while we may understand that individual states are contemplating either new programs or expansion of existing programs, we tend to really not discuss them until there is some formal submission of a program to CMS and sort of pending approvals from CMS within the state. And both the Tennessee and Washington D.C. programs sort of fall into that category. As you suggest, Tennessee is a state in which we have exclusively behavioral business. Washington, D.C. is a geography where we have both acute and behavioral business, although the Medicaid supplemental program would be primarily beneficial to the acute business. Both programs, we have been told that the expectation from state of the district is that the programs are likely to be approved either later this year or early next year. Both programs would be retroactive. We believe Tennessee would be retroactive most likely to July of 2024 and that D.C. would be retroactive to October of 2024, this year. And again, none of these things are guaranteed and they all depend on CMS approval. Those are the two, I'll call them, incremental or additional programs we would disclose. But we certainly are aware of other states and where expansion of programs or new programs are at least being considered.

[Ann Hynes, Analyst at Mizuho Securities]

Great. And just one follow-up. I know that you provided the potential benefit for Tennessee, but have you -- can you provide what you think D.C. would be? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So we've disclosed in our 10-Q that we think the potential benefit of our prior 10-Q, the potential benefit in Tennessee would be between $42 million and $56 million annually. The potential benefit in Washington, D.C. is probably in the $80 million to $90 million range annually.

[Ann Hynes, Analyst at Mizuho Securities]

Great. Thank you.

[Operator]

And one moment for our next question. And our next question will be coming from Stephen Baxter of Wells Fargo. Your line is open, Stephen.

[Stephen Baxter, Analyst at Wells Fargo & Company]

Hi. Thanks. I was hoping you could elaborate a little bit on behavioral volume performance in the quarter. I think you had expectations maybe the last earnings call, just going to improve a little bit in the second quarter. So just wondering if you could talk about some of the drivers of performance in the quarter. And then also how you're thinking about behavioral demand growth in the back end of the year. Thank you.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I think that the dynamics surrounding behavioral volumes have remained pretty much the same. You are correct in your description. We -- behavioral patient days on a same-store adjusted basis were up, I think, about 2% in Q1. We expect it be to equal and maybe better than slightly in Q2. We did not. I think the issues are very familiar to what we've been talking about for some time, while we've made, I think, a lot of progress on filling our labor vacancies around the country. We still find in very specific markets and geographies that certain labor positions, sometimes nurses, sometimes therapists and counselors, sometimes nonprofessionals and mental health technicians are difficult to place and can sometimes limit capacity or our ability to admit patients. I think we've discussed in the last few quarters, the fact that Medicaid disenrollments, particularly in the Southern states, Texas and Mississippi, Louisiana, Arkansas, have had more of an impact on our business as people have gotten disenrolled from Medicaid and it's taken them some time to get either reenrolled in Medicaid or into a commercial exchange program, if they get into a commercial exchange program, they often have the high co-pays and deductibles, which make them meeting their financial requirements, difficult behavioral hospitals. And finally, we have a handful of behavioral facilities that struggled with very specific issues in 2023. I believe they've all improved, but are doing so at a somewhat slower pace than we originally imagined they would. I think ultimately, we still believe that, that 3% patient day growth target that we embedded in our original 2024 guidance is an achievable target, probably not in terms of full year growth. But I think we believe that by the end of 2024, we should be growing at that rate and we view that as a sustainable rate of growth going forward.

[Operator]

And one moment for our next question. And our next question will be coming from Ben Hendrix of RBC Capital Markets. Your line is open.

[Ben Hendrix, Analyst at RBC Capital Markets]

Thank you very much. Just wanted to see if you could elaborate a little bit on the moderation in acute demand and your surgeries flattening out with trending towards pre-COVID levels. Any trends you can call specifically in specific categories and any payer mix implications there and how you're seeing that develop? Thank you.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I mean so one comment that I'd make about the 3.4% adjusted admission growth in acute care is that, that comparable number in the second quarter of last year, was 7.7%, and surgical growth in the second quarter of last year was in the 5% to 6% range. So those were both very difficult comparisons. I think we had a view that 3.4% adjusted admission growth, a relatively flat. Surgical growth was relatively close to our expectations, given the very difficult comparison. We've been talking, I think, for some time about the expectation that acute care volumes, both overall admissions and surgical growth would return to sort of pre-pandemic patterns. I don't know that, that's absolutely where we are right today. But certainly, I think we've been preparing for that. And I think a lot of the cost management that you saw during the quarter was an expectation and preparing for that so that as we return to some of those pre-pandemic levels of revenue and volume growth, we could generate the sort of increased EBITDA and margin expansion and remain on that trajectory for at least several more periods.

[Ben Hendrix, Analyst at RBC Capital Markets]

Thank you.

[Operator]

One moment for our next question. And our next question will be coming from A.J. Rice of UBS. Your line is open.

[A.J. Rice, Analyst at UBS Group]

Hi, everybody. Maybe just first question, and then I have a follow-up. First question on the updated guidance. I know you didn't raise the full year guidance after the first quarter, and there was some outperformance -- and then you've had some outperformance in the second quarter. And then there's also the supplemental payments maybe that weren't in the original guidance. Can you just sort of parse out how much is just capturing year-to-date trends? How much is an adjustment for supplemental payment information? And then have you made any adjustment to your second half expectations in this updated guidance?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So A.J., from a high-level perspective, the approach that we took to the revised guidance was obviously to increase the guidance by the amount of the first half beat, which was substantial to include in the revised guidance for the back half of the year. Any supplemental programs and payments that we knew would continue and be present in the second half. We did not, as Marc indicated in his comments, include anything for Tennessee or Washington, D.C. And then we included some of the cost management improvements that we've made, which we believe are certainly sustainable. But for the most part, particularly from, I think, a revenue and a volume perspective, just generally retained our original guidance for the second half of the year.

[A.J. Rice, Analyst at UBS Group]

Okay. There's been a lot of discussion this quarter about impact of Two Midnight Rule Medicaid redeterminations and so forth. Can you just maybe make some comments about what you're seeing there and how -- I know Two Midnight Rule wouldn't affect the behavioral business, but the redeterminations, maybe it had some impact on both sides. Any updated thoughts on what you're seeing in those two areas?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I mean as far as two-midnight goes, and we've commented on this before, and I acknowledge that our comments may be a little bit different than what some of our peers have said. But it's -- we've been unable to validate or I think, precisely identify any real benefit that we're getting from the Two Midnight Rule change. We don't see any dramatic change in metrics like amount of denials or patient status changes, etc. Nor anecdotally, do we hear from our personnel who deal with this issue on a daily basis that they've seen real behavior changes on the part of payers. Again, I know some of our peers have suggested otherwise, but we're just unable to really parse out any significant impact from the change of the Two Midnight Rule. Medicaid redeterminations, I think on the acute side, have resulted in an increase in commercial exchange patients. Again, I think compared to some of our peers, probably not as big an increase. We've gone -- we had commercial exchange patients as a percentage of our overall adjusted admissions. Pre the end of the PAT was about 4%. I think that number has climbed to about 5% currently. I know some of our peers have suggested that number has climbed to 6% or 7%. We haven't gotten that high. On the behavioral side, I alluded to this in an earlier response. I do think we're being affected by the Medicaid redeterminations, particularly in the adolescent population. We definitely have seen some weakness in that population in the last, I'm going to say, two, three quarters. And it's -- I think it's been a slow process for those adolescents to either reenroll in Medicaid or to get on to a commercial exchange program. And if they get on to a commercial exchange program, to exhaust sometimes large copays and deductibles that those plans have. So I think Medicaid redeterminations to probably had a bigger negative impact on the behavioral business, the shift to commercial exchanges on the acute side has probably been a slight net positive.

[A.J. Rice, Analyst at UBS Group]

Okay. Thanks a lot.

[Operator]

One moment for our next question. And our next question will be coming from Justin Lake of Wolfe Research. Your line is open.

[Justin Lake, Analyst at Wolfe Research]

Thanks. Good morning. Steve, first, on the guidance in terms of just kind of isolating that DPP bucket, I think you started the year at about $810 million in the 10-K that you expected to get this year. You updated it to $860 million with the ones with the 10-Q. Just curious what that number is right now that you expect to get this year. So let's just do that in my first question. Then I've got one for Marc. Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So we're still working on that disclosure, which we'll have in our 10-K, in eight or 10 days. But I think there'll be a significant step up from the $860 million, obviously, including the Washington although no numbers that we included in the press release, etc. But there'll be a more precise picture that we file our Q in a week or so.

[Justin Lake, Analyst at Wolfe Research]

Okay. Do you have a round number you could share with us? Like does it go to -- do you think it goes much higher than $900 million? Or if I add those two numbers in there?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes, I think it will go into the low to mid-$900s million.

[Justin Lake, Analyst at Wolfe Research]

Okay. So if we look at your guidance raise of $215 million, you started the year at around $810 million. If it goes to low to mid-$900s million is it maybe fair to say that maybe half give or take, of that guidance raise is coming from these supplemental payments? That a reasonable way to think about the rest [Indecipherable]?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

I think that's fair.

[Justin Lake, Analyst at Wolfe Research]

Okay. And then, Marc, you talked about the improvement in the hospital business in terms of the margins. Curious if the -- there's still a potential way to go to get back to pre-COVID levels. What do you think a reasonable target is when you sit down with your hospital operators? And do you have a trajectory or a plan at which you kind of time line is probably the best way to put it. In terms of when you expect to get there? Maybe you could share a couple of the steps you expect to take to get that. Thanks.

[Marc D. Miller, President and Chief Executive Officer at Universal Health Services]

Yes. I mean we have a lot of plans, and there's a lot of discussions on how we're going to continue to incrementally improve. I'm going to give you a number or a time period right now. But every market is a little bit different, obviously. We've been very pleased with the work that the operators have done, especially in the last 12 months. In addressing not only the volume issues, but really getting a better handle on expenses. And I think if we just continue with that trajectory, we'll get to where we need to be fairly soon, but we still have a little ways to go.

[Justin Lake, Analyst at Wolfe Research]

Great. Thanks.

[Operator]

And one moment for our next question. And our next question will be coming from Jason Cassorla of Citi. Your line is open, Jason.

[Jason Cassorla, Analyst at Smith Barney Citigroup]

Great. Thanks. Good morning. Maybe just to ask on the acute pricing and mix in the quarter, up 3.5% or so, but kind of normalizing for the supplemental payment dollars this year, maybe only up kind of slightly year-over-year. Is that just simply a function of that lower acuity volume continue to return? I know you made comments around surgical volume dynamic in the quarter? Or just maybe anything you can give on acuity and payer mix trends within a Q kind of outside of the supplemental payment programs would be helpful.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I think it's a variety of things, Jason. Again, I think we had a pretty difficult comparison. We were comparing to something close to 10% revenue growth last quarter, high surgical and less years quarter rather, high surgical growth, etc. I think we're seeing some settling down some exhaustion of some of those postponed and deferred procedures that have been postponing deferred during the pandemic. I think that even exclusive of the supplemental payments, our expectation in the acute business is we'll get to as we have historically, a same-store revenue growth sort of trajectory of 5%, 6%, split pretty evenly between price and volume. And again, I think with the progress that we've made, as both Marc and I have alluded to on the cost management side, that should allow us continued EBITDA growth and margin expansion until we get either completely back to or something close to pre-pandemic margin levels in that segment.

[Jason Cassorla, Analyst at Smith Barney Citigroup]

Okay. Great. Thanks. And then maybe just a follow-up. With the $1 billion increase to the share repo program, I know you accelerated a little bit in terms of share repo activity in the quarter, maybe with the Illinois lawsuit kind of dynamics going on. But with the increase there in the repo program is the expectation that you're still aiming to spend around $500 million, $600 million on share repo for this year? Or how should we think about the share repurchase dynamics? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So I think your suggestion is largely on point. Our original guidance suggested that we would spend the bulk of our free cash flow, which would be $500 million or $600 million on share repurchase. And I think that is still our intent. And I think frankly, the main point of including that announcement in this quarter's release was to just reinforce that idea. We believe we're still on track and obviously, we needed the reauthorization to be able to accomplish that.

[Jason Cassorla, Analyst at Smith Barney Citigroup]

Great. Thank you.

[Operator]

Our next question will be coming from Sarah James of Cantor Fitzgerald. Your line is open.

[Sarah James, Analyst at Cantor Fitzgerald]

Thank you. I was hoping you could talk a little bit about the embedded adjusted admissions growth baked into your guidance for the second half. Are you assuming that first half levels stay flat or decelerate? And could you talk a little bit about what the drivers are for that assumption?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So our volume assumptions, I think, in the back half of the year are not terribly different than our original guidance. On the acute side, I think it's adjusted admission growth in the 3% to 4% range, just sort of continuing kind of how we're exiting the in the second quarter. I think on the behavioral side, practically, it will be a tall order to get to 3% patient day growth for the full year. But I do think that we still believe that we'll get to that 3% by the end of the year and that, that will be a sustainable level or a level of growth that we can sustain for the foreseeable future after that.

[Sarah James, Analyst at Cantor Fitzgerald]

Got it. And on the behavioral side, do you think about getting to that 3% as mostly capacity driven? And do you have any updates on how you're hiring practices are going? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I mean I think it's a combination of things. I ticked off, I think the things that have been progressing a little more slowly than we expected. I think we believe that will accelerate. We believe we'll continue to have more success in hiring particularly in pockets that have been somewhat troublesome. I think that the impact of the Medicaid disenrollment, which I do think is weighed down our volume in the last three or four quarters, will get better as more of these people get either reenrolled in Medicaid or in commercial exchange products and the copays and deductibles. And I believe the progress on the handful of residential facilities that have been a drag, which have been progressing but at a somewhat slower rate than we expect will continue and all that will help and allow us to get back to the 3%, which I think, again, was our original plan, it's just happening a little bit more slowly than we had originally anticipated.

[Sarah James, Analyst at Cantor Fitzgerald]

Thank you.

[Operator]

And our next question will be coming from Andrew Mok of Barclays. Andrew, your line is open.

[Andrew Mok, Analyst at Barclays]

Hi, good morning. Just wanted to follow up on the Medicaid supplemental payment programs. First, can you give us a sense where these programs stand relative to average commercial rates? And second, how does the higher Medicaid reimbursement change the relative attractiveness of patients in that payer class? Is this a category that you would lean into from a referral and service line perspective? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So -- and I think at least one of my acute care company peers made this point that even though there have been these substantial increases in Medicaid supplemental payments around the country that for the most part. And I think this is particularly true on the acute side, our Medicaid reimbursement remains well below commercial rates, mostly well below Medicare rates. And quite frankly, in most cases, still below our cost. So we've made the point before, and I'll reinforce it again because it's an important one that these Medicaid increases are really intended to, I think, make up for the inadequate reimbursement of the last several years, particularly the cost pressures that accelerated during the pandemic, just broadly, inflation pressures, but also the particular wage pressures that were exacerbated during the pandemic. I think on the behavioral side, at least in some of the states, the Medicaid supplemental payments do, in some cases, approach Medicare reimbursement in some cases, sort of probably between Medicare and commercial. I think in those states and in those facilities, it does sort of change our approach and it, I think, encourages us to focus on those referral sources and those community resources that tend to produce Medicaid patients. And I think we -- it does inform our approach in those markets. And we are, I think the phrase you used was leaning into that. I think on the acute side, the vast majority of our Medicaid business comes to our emergency room. So there's not a whole lot of proactive actions that we take to seek that business out, we get the business we get, and we're just being reimbursed for that a more adequate rate. But yes, on the behavioral side, I do think that we're in those states where these programs increase the Medicaid reimbursement to a level that makes it more attractive. We are using upraise leaning into that business and trying to work with referral sources to get more of it.

[Andrew Mok, Analyst at Barclays]

Great. Thank you.

[Operator]

And one moment for our next question. And our next question will be coming from Pito Chickering of Deutsche Bank. Your line is open, Pito.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey. Good morning guys. So on the acute labor side, can you talk about where turnover is today where hiring is and how to think about those in the back half of the year as well as contract labor. And also, as length of stay comes down due to better staffing, how does length of stay reductions help your EBITDA growth?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So as far as acute care turnover, Pito, I think that we're down into the low and mid-20s, which is kind of where we were in sort of the pre-pandemic period. Obviously, we still view that turnover rate as high. But to be fair, that's -- the hospital and acute care industry has had turnover rates in the high 20s and low 30s and nationally for a long time. And while we view those as still very inefficient and not necessarily ideal, and we continue to work to lower them. Part of that is it's just the nature of the business. But obviously, as I indicated in my prepared comments, our ability to reduce premium pay, which has been reduced almost probably by 2/3 from its height at the very height of the pandemic indicates more success in hiring and filling these permanent positions. I think you also see it in our -- in just our deceleration or a reduction in the rate of acceleration in wage inflation in the acute business, the reduction in incentive payments, recruitment incentive payments, etc., all indicate, I think a settling out of the labor supply demand dynamic and just greater success on our part in filling our open vacancies. As far as the length of stay dynamic, because the vast majority of our payments are made on a per discharge basis, the lower our length to stay, the more efficient we are in being able to treat patients and fully treat them and discharge them to the appropriate setting, whether that's home or to some sort of subacute facility to the degree that we reduce length of stay. We're really reducing our cost per discharge or cost per admission. And then again, I think that we've lowered our length of stay dramatically from the height of the pandemic but even continue to do so incrementally. And again, I think that's partly reflected in our very successful cost management and cost reduction initiatives that you can see on our income statement.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. There's been some negative press recently, including the Senate Finance Committee on ResCare. Are you seeing that impact to your referrals at all?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. Honestly, Pito, we really have seen virtually no impact from the Senate hearing and report. I think the greatest impact we would expect perhaps to have seen would be from referral sources. But I think what we kind of believe is the lesson from this is that referral sources understand the business very well. They understand this is a very difficult patient population. They understand that our hospitals, I think, do overall a very admirable job. And I think the outcomes and the patient satisfaction results suggest that patients are generally satisfied and highly satisfied with their care in these facilities. And I think referral sources recognized that. So no, we've really seen no impact on our volumes, no impact from referral sources, not necessarily any additional incremental regulatory oversight. So we're pleased with that.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Perfect. Great. Thanks so much, guys.

[Operator]

And one moment for our next question. And our next question comes from Michael Ha of Baird. Your line is open.

[Michael Ha, Analyst at Robert W. Baird]

Thank you. So on behavioral, volumes still yet to slowly rebound, pricing remains powerful. I was wondering if you could help us break out roughly how much of the volume headwind is Medicaid redeterminations versus labor-related constraints? Is it 50-50, maybe more of redetermination related? And would it be fair to say that redetermination impact tails off into the back half of this year that it creates a positive backdrop? And against easier second half volume comps that should help the bounce back naturally in behavioral volumes. And then if you could discuss the source of behavioral pricing strength, I think you said 7.2% ex the supplemental payments. So if you could just test some of the dynamics there, is it what's happening in parse pricing, that would be helpful. Thank you.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I mean, again, I would just make the point that the shortfall from where our behavioral volumes are, the 1.4% patient day growth in the quarter versus where we thought we would be, which would be continuation of Q1 at around 2% or maybe a little bit higher than that. It's not an enormous shortfall. And its 60, 70, 80 basis points. And therefore, it's like to parse with great precision between the issues that I elaborated on the staffing, the Medicaid redeterminations, the handful of residential facilities. So that's difficult to do. I think broadly, as your question suggests, we do believe redeterminations get -- or the impact from redeterminations get better in the back half of the year as we do believe these other issues, the staffing and the residential facilities will get better in the back half of the year and allow us to reach that 3% target.

[Operator]

And one moment for our next question. Our next question will be coming from Kevin Fischbeck of Bank of America. Your line is open.

[Kevin Fischbeck, Analyst at Bank of America]

Okay. Just a follow on that comment there about the site volume improvement. I guess two questions. First one is, is there any sign, I guess, maybe outside of the Medicaid population that demand in any way, shape or form is being impacted? Or is this really just about kind of capacity and then redeterminations? And then second, when you think about that labor dynamic to get back to 3% by the end of the year, and to consistently be growing 3%. I mean you're going to have to be adding staff at that pace. Are you currently adding staff at that pace generally that would support that? It sounds like you're not quite there yet. So just trying to understand what you're doing between now and year-end that should be getting you to kind of sustainably add that type of capacity? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes, Kevin. So I think -- and part of the reason that I think we have been confident that behavioral volumes should and could increase to sort of more historically normative levels, is that we believe the underlying demand is strong, and we measure that in a couple of different ways. We measure it sort of from a macro basis, there's a lot of sources of incidence of behavioral illness and the need for treatment in a whole variety of diagnoses, including opioid illness and many others. And again, we believe that virtually across the board, demand for behavioral treatment continues to increase. And so this really becomes an issue of can we -- what do we have to do to satisfy that demand and that sort of plays into the labor dynamic? Yes, we are. We continue to have net hires. I would say our -- we have had positive net hires for between the last 18 and 24 months. Again, it's been incremental and a little slower than we thought, but we continue to add that. I think one of the major areas of focus more recently is we had a question earlier, I think, for Pito, about acute care turnover. Behavioral turnover tends to be probably twice what acute care is. And that creates a lot of inefficiency. So even though we're hiring a lot of people, they're leaving. And again, I think this is not just a UHS issue. I think it's an industry-wide issue. But we are very focused on the things that we can do and want to do to reduce that turnover rate, which includes mentorship programs and educational opportunities and career development opportunities so that when we hire people, they really have an incentive to want to stay with the organization to stay with the facility. And I do believe that we can reduce our turnover rate, which I think is a practical objective. That will be one way in which we'll be able to satisfy some of that outstanding behavioral demand that we've really been unable to satisfy as much as we'd like to in recent periods.

[Kevin Fischbeck, Analyst at Bank of America]

All right. Great. Is there an actual physical capacity dynamic too, that you need to be adding beds? Or is there enough bed capacity, it's really just the labor that's the constraint?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. So I think it's sort of a catch '22. I think we dramatically reduced the pace at which we were adding beds during the pandemic because we had a view that, well, what's the point of adding new beds if we can't staff the beds that we already have. I think as we make more and more progress and again, this is an individual facility, individual market kind of calculation in each phase, but as we increase our ability to fill those vacancies, etc., and sort of see a path and a ramp to being able to fill those vacancies I think we're going to be more willing to resume the pace of bed additions that we were running at before the pandemic.

[Kevin Fischbeck, Analyst at Bank of America]

Thanks.

[Operator]

And one moment for our next question. And our next question will be coming from Whit Mayo of Leerink Partners. Whit, your line is open.

[Whit Mayo, Analyst at Leerink Partners]

Hey, Steve, I have one more labor dynamic question. What's interesting is this is fourth consecutive quarter where your SWB per patient day has moderated. And I'm just really trying to square this against the comments on the challenges in filling positions. You said you're hiring maybe a little bit slower than you thought but it's not pressuring the salary line at all. And I guess I would have thought intuitively, the opposite would happen, but maybe there's something optical with the mix of RTC versus acute or something. How do I make sense of this?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I mean, I think what you saw during the pandemic was people leaving subacute industries, and that obviously included behavioral, but it included, I think, lots of other subacute industries like nursing homes and skilled nursing facilities and home health. And they were leaving those industries to work in acute care settings where they were able to make a significant premium to their existing salaries. And I think there's always been, for sure, a gap and that acute care compensation rates were always higher than sub-acute care compensation rate, but that gap widened dramatically during the pandemic. I do think it has since narrowed. And so really -- and that's -- I'm trying to answer your question in the sense of. So it really got to be an issue. It didn't matter when a nurse told us -- a behavioral nurse told us that she was leaving to make three times for salary in an acute care setting. Raising her salary by $2 an hour, etc., was not going to have any impact, which is why I don't think you saw dramatic pressure on our behavioral rates during the pandemic and which is why, as you're suggesting, I think you're seeing moderation actually in our salaries and wages per patient day. Because the way we're solving this problem is not necessarily through higher premium payments and incentive payments, although we certainly did that during the pandemic, and we do it in markets where we still think it's necessary. But I think our real focus is on how do we make people feel that working in a behavioral setting is rewarding is creating career opportunities for them is a place that they're going to be valued, etc. And I think that's our focus. Look, certainly, and particularly with the availability of some of these Medicaid supplemental payments, etc., in some markets, if we believe that paying higher compensation and -- could be an answer, we'll pursue that. But again, I'm going to suggest that I think in most cases, this is not a problem of throwing money at it just automatically solves it. But we'll invest more money where we think it makes sense.

[Whit Mayo, Analyst at Leerink Partners]

Okay. And my follow-up, I haven't heard you talk about the health plan business in some time. Wondering how that's performing versus expectations and how you guys think of that as a core business for UHS? Or do you think differently at all about it? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

I mean we've talked about the health plans and time to time. I think like any provider-sponsored health plan and this is really an acute care dynamic we only operate the health plan in markets in which we have acute care hospitals. And it is a way for us to create narrow networks in which our hospitals participate. It's a way for us to create further alignment with Medicare physicians, particularly in plants that are focused on Medicare Advantage patients. And we think, ultimately, even though the plan operates largely at a breakeven level currently, that it's still less expensive and greater sort of return investment than some other options like physician employment or other similar options, although we certainly do those things as well. And so yes, the health plan continues to do that. It continues to provide us, again, I think, a narrower network and a funnel of patients in certain markets, and we'll continue to operate it with that aim.

[Whit Mayo, Analyst at Leerink Partners]

Thanks.

[Operator]

Our last question will be coming from Joshua Raskin of Nephron Research. Joshua, your line is open.

[Joshua Raskin, Analyst at Nephron Research]

Hi. Thanks, Just one more Steve. I guess, I heard the 5% of patients are coming with exchange-based insurance. But what percentage of revenue is coming from those individual exchange patients? I'll be curious across both segments. And if you could comment on the margins of those patients relative to your other segments. And then why do you think that 5% is lower than peers? Is that network strategy and contracting? Or do you think that's geographic based?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

As far as the second question, I don't really know the answer to that, Josh. As far as the first one goes, because I think commercial exchange reimbursement tends to be somewhere between Medicare and commercial, probably a little closer to Medicare, I would say, I don't have this data right in front of me, but my guesstimate would be the 5% of admissions would be something pretty close to what percentage of revenue would be because I would think that sort of midpoint between commercial and Medicare is probably about the midpoint of our reimbursement.

[Joshua Raskin, Analyst at Nephron Research]

Okay. And margins, you think, similar to somewhere between Medicare and commercial then?

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. Yes. I'm sorry, but yes.

[Joshua Raskin, Analyst at Nephron Research]

Okay. Thanks.

[Operator]

We did get an additional question from Ryan Langston, and that's Ryan Langston of TD Cowen. Your line is open, Ryan.

[Ryan Langston, Analyst at TD Cowen]

Thanks. Good morning. Thanks for squeezing me in. Just real quick on the new facilities that are coming online, both, I guess, in the acute and behavioral, can you just remind us generally how long it takes those facilities to get to breakeven? And do the geographies or any other dynamics in those markets have any changes to that, maybe faster or slower? Thanks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

Yes. I would say, generally, the ramp of the facility to breakeven is probably in the six- to 12-month range and then to what I would consider to be divisional averages, probably the 18- to 24-month range. In markets like Las Vegas, that time frame tends to be compressed. Again, I think there's little impact this year in 2024 because the facility that we're opening in Las Vegas will be very late in the year. So I don't think it's going to have much of an impact on earnings this year. And we'll get more precise feedback on the impact of both West Henderson and the Washington, D.C. facility when we give our '25 guidance early next year.

[Ryan Langston, Analyst at TD Cowen]

Thanks.

[Operator]

And I'm showing no further questions. I would now like to turn the conference back to Steve Filton for closing remarks.

[Steve G. Filton, Executive Vice President and Chief Financial Officer at Universal Health Services]

We would just like to thank everybody for their time this morning and look forward to speaking with everybody again next quarter. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Steve G. Filton, Executive Vice President and Chief Financial Officer
• Marc D. Miller, President and Chief Executive Officer

Analysts

• Ann Hynes, Mizuho Securities
• Stephen Baxter, Wells Fargo & Company
• Ben Hendrix, RBC Capital Markets
• A.J. Rice, UBS Group AG
• Justin Lake, Wolfe Research
• Jason Cassorla, Smith Barney Citigroup
• Sarah James, Cantor Fitzgerald
• Andrew Mok, Barclays PLC
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Michael Ha, Robert W. Baird
• Kevin Fischbeck, Bank of America Co.
• Whit Mayo, Leerink Partners
• Joshua Raskin, Nephron Research
• Ryan Langston, TD Cowen