Universal Health Services Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 13 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Q222 2024 Universal Health Services Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Good morning. Mark Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the Q2 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 ks for the year ended December 31, 2023, and our Form 10 Q for the quarter ended March 31, 2024.

Speaker 1

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 Q2 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 Q2 with adjusted admissions increasing 3.4% year over year and surgical growth flattening out. Overall, revenue growth was still a solid 6.6%.

Speaker 1

Meanwhile, expenses were well controlled. Specifically, the amount of premium pay in the 2nd quarter was $61,000,000 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 Q2 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 Q2, same facility revenues at our behavioral health hospitals increased by 11%, primarily driven by a 9.3% increase in revenue per adjusted patient day.

Speaker 1

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 Q2 as compared to the comparable prior year period. Our cash generated from operating activities increased by $422,000,000 to $1,100,000,000 during the 1st 6 months of 2024 as compared to $654,000,000 during the same period in 2023. In the first half of twenty twenty four, we spent $450,000,000 on capital expenditures and acquired 1,100,000 of our own shares at a total cost of approximately $195,000,000 Since 2019, we have repurchased approximately 30% of the company's outstanding shares. As of June 30, 2024, we had $1,000,000,000 of aggregate available borrowing capacity pursuant to our $1,200,000,000 revolving credit facility. In our Acute Care segment, we continue to develop additional inpatient and ambulatory care capacity.

Speaker 1

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 Allen 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 Bed Southridge Behavioral Hospital in West Michigan, a joint venture with Trinity Health Michigan, which is expected to open later this year.

Speaker 1

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

Speaker 2

comments. Thanks, Steve. We're pleased with our 2nd quarter results as both our business segments continue 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 the pandemic. The increase in operating income in comparison to last year's Q2 for acute care hospitals is a further step towards a more extended margin recovery we hope to sustain for the next several periods.

Speaker 2

In our Acute segment, physician expense, which was a significant headwind in 2023 has stabilized at approximately 7.5% 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 $1,000,000,000 increase to our stock repurchase program, thereby increasing the current aggregate purchase repurchase authorization to $1,228,000,000 We're happy to answer questions at this time.

Operator

Thank you. And now, we will now begin the question and answer session. One moment for our first question, which comes from Anne Hine of Mizuho Securities. Your line is open.

Speaker 3

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 DC that sounds like it might be a new program in acute care. And on the behavioral side going forward, that'd be great. Thanks.

Speaker 1

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 then both the Tennessee and Washington DC programs sort of fall into that category. As you suggest, Tennessee is a state in which we have exclusively behavioral business. Washington D.

Speaker 1

C. Is a geography where we have both acute and behavioral business, although the Medicaid supplemental program would be primarily beneficial for the acute business. Both programs, we have been told that the expectation from either the state or 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.

Speaker 1

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 2, 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.

Speaker 1

Great.

Speaker 3

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

Speaker 1

Yes. So we disclosed in our 10 Q that we think the potential benefit prior 10 Q, the potential benefit in Tennessee would be between $42,000,000 $56,000,000 annually. The potential benefit in Washington, D. C. Is probably in the $80,000,000 to $90,000,000 range annually.

Speaker 3

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.

Speaker 4

Hi. Yes, thanks. I was hoping

Speaker 5

you could elaborate a little bit on behavioral volume performance in the quarter. I think you had expectations maybe at the last earnings call if this could improve a little bit in the Q2. So I was 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.

Speaker 1

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 to equal and maybe better than slightly in Q2.

Speaker 1

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 non professionals, our 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 has 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 high co pays which make them meeting their financial requirements difficult in our behavioral hospitals.

Speaker 1

And finally, we have a handful of behavioral facilities that struggle 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 view that as a sustainable rate of growth going forward.

Operator

And our next question will be coming from Ben Hendricks, your line is open, of RBC Capital Markets.

Speaker 6

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.

Speaker 1

Yes. I mean, so one comment that I'd make about the 3.4 percent adjusted admission growth in acute care is that, that comparable number in the Q2 of last year was 7.7 percent and surgical growth in the Q2 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 and 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.

Speaker 1

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.

Speaker 6

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.

Speaker 7

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 Q1 and there was some outperformance then. You've had some outperformance in the 2nd quarter.

Speaker 7

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?

Speaker 1

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 Mark indicated in his comments, include anything for Tennessee or Washington D. C.

Speaker 1

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. Okay.

Speaker 7

There's been a lot of discussion this quarter about impact of 2 midnight rule, Medicaid redeterminations and so forth. Can you just maybe make some comment about what you're seeing there and how I know too many rule wouldn't affect the behavioral business, but the redeterminations maybe it has some impact on both sides. Any updated thoughts on what you're seeing in those two areas?

Speaker 1

Yes. I mean as far as 2 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 2 midnight rule change. We don't see any dramatic change in metrics like amount of denials or patient status changes, etcetera, 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 in the 2 midnight rule.

Speaker 1

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 PHE was about 4%. I think that number has climbed to about 5% currently. And on some of our peers that suggest that number has climbed to 6% or 7%.

Speaker 1

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, 2, 3 quarters. And it's I think it's been a slow process for those adolescents to either re enroll in Medicaid or to get onto a commercial exchange program.

Speaker 1

And if they get onto a commercial exchange program to exhaust the sometimes large co pays and deductibles that those plans have. So I think Medicaid redetermination could probably have bigger negative impact on the behavioral business. The shift to commercial exchanges on the acute side has probably been a slight net positive.

Speaker 7

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.

Speaker 8

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 $810,000,000 in the 10 ks that you expected to get this year. You updated it to $860,000,000 with the ones with the 10 Q. Just curious what that number is right now that you expect to get this year.

Speaker 8

So let's just do that my first question, then I got one for Mark. Thanks.

Speaker 1

Yes. So we're still working on that disclosure, which we'll have in our 10 ks 8 or 10 days. But I think there'll be a significant step up from the 8.60, obviously, including the Washington and Idaho numbers that we included in the press release, etcetera. But there'll be a more precise picture than we file our Q in a week or so.

Speaker 8

Okay. Do you have a route number you could share with us? Like does it go to do you think it goes much higher than $900,000,000 or if I add those two numbers in there?

Speaker 1

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

Speaker 8

Okay. So if we look at your guidance raise of $215,000,000 dollars you started the year at around $8,000,000 If it goes to low to mid-900s, dollars s, is it maybe fair to say that maybe half give or take of that guidance raise is coming from these supplemental payments? Is that a reasonable way to think about the rest comes from core?

Speaker 1

I think that's fair.

Speaker 8

Okay. And then Mark, you talked about the improvement in the hospital business in terms of the margins. Curious if the there's still a potential ways to go to get back to pre COVID levels. What do you think a reasonable target is when you sit down with your hospital book timeline 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 there?

Speaker 8

Thanks.

Speaker 2

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 not 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 the last 12 months in addressing not only the volume issues, but really getting a better handle on expenses.

Speaker 2

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.

Speaker 8

Great. Thanks.

Operator

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

Speaker 4

Great. Thanks. Good morning. Maybe just 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 return?

Speaker 4

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 acute kind of outside of these supplemental payment programs would be helpful.

Speaker 1

Yes. I think it's a variety of things, Jason. Again, I think we had a pretty difficult comparison. We're comparing to something close to 10% revenue growth last quarter, high surgical in last year's quarter rather, high surgical growth, etcetera. I think we're seeing some settling down, some exhaustion of some of those postponed and deferred procedures that have been postponed and deferred during the pandemic.

Speaker 1

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 our with the progress that we've made, as both Mark 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.

Speaker 4

Okay, great. Thanks. And then maybe just as a follow-up with the $1,000,000,000 increase to share repo program. I know you decelerated 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 $500,000,000 $600,000,000 on share repo for this year?

Speaker 4

Or how should we think about the share repurchase dynamics? Thanks.

Speaker 1

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 $500,000,000 or $600,000,000 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 that we believe we're still on track and obviously would needed the reauthorization to be able to accomplish that.

Speaker 4

Great. Thank you.

Operator

And one moment for our next question. Our next question will be coming from Sarah James of Cantor Fitzgerald. Your line is open.

Speaker 9

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?

Speaker 1

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 Q2. 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.

Speaker 9

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 your hiring practices are going? Thanks.

Speaker 1

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 they'll accelerate. We believe we'll continue to have more success in hiring, particularly in pockets that have been somewhat troublesome.

Speaker 1

I think that the impact of the Medicaid disenrollments, which I do think has weighed down our volumes in the last 3 or 4 quarters will get better as more of these people get either reenrolled in Medicaid or in commercial exchange products and they could also co pays 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 of 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 originally anticipated.

Speaker 3

Thank you.

Operator

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

Speaker 5

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?

Speaker 5

Thanks.

Speaker 1

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 costs. 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 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 on those community resources that tend to produce Medicaid patients.

Speaker 1

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 it at 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 your phrase leaning into that business and trying to work with referral sources to get more of it.

Speaker 5

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.

Speaker 5

Hey, good morning, guys. So on the acute labor side, can you talk about where turnover is today, where net hiring is and how to think about those in that half

Speaker 10

of the year as well as contract labor?

Speaker 5

And also as length of stay comes down due to better staffing, how does length

Speaker 10

of stay reductions help your EBITDA growth?

Speaker 1

Yes. So as far as acute care turnover, Tito, 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 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.

Speaker 1

But obviously, as I indicated in my prepared comments, our ability to reduce premium pay, which has been reduced almost probably by 2 thirds 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 reduction in the rate of acceleration in wage inflation in the acute business, the reduction in incentive payments, recruitment incentive payments, etcetera, 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 of 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 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.

Speaker 1

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.

Speaker 5

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

Speaker 1

Yes. Honestly, Peter, 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 believe is the lesson from this is that referral sources understand the business very well. They understand this is a very difficult patient population.

Speaker 1

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 recognize 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.

Speaker 5

Perfect. Great.

Speaker 11

Thanks so

Speaker 5

much guys.

Operator

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

Speaker 6

Thank you. So on behavioral, volume still yet to fully 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 fifty-fifty maybe more redetermination related? And would it be fair to say as redetermination impact tails off into the back half this year that it creates a positive backdrop and against easier second half volume comps that should help to bounce back naturally in behavioral volumes.

Speaker 6

And then if you could discuss the source of behavioral pricing strength, I think you said 7.2% ex the supplemental payment. So if you could discuss some of the dynamics there, what's happening in payer pricing, that

Speaker 4

would be helpful. Thank you.

Speaker 1

Yes. I mean, again, I would just make the point that the shortfall from where our behavioral volumes are, the 1.4 percent patient day growth in the quarter versus where we thought we would be, which would be a continuation of Q1 at around 2% or maybe a little bit higher than that. It's not an enormous shortfall and it's 60, 70, 80 basis points and therefore it's hard to parse with great precision between the 2 or 3 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.

Speaker 5

Thanks. Maybe just a follow-up 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?

Speaker 5

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 year end that should be getting you to kind of sustainably add that type of capacity?

Speaker 5

Thanks.

Speaker 1

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.

Speaker 1

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 our net high we continue to have net hires. I would say our we have had positive net hires for between the last 18 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 from Pito about acute care turnover.

Speaker 1

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.

Speaker 1

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 Maybell demand that we've really been unable to satisfy as much as we'd like to in recent periods.

Speaker 5

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?

Speaker 1

Yes. So I think it's sort of a catch-twenty 2. 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 case, but as we increase our ability to fill those vacancies etcetera, 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 that additions that we were running at before the pandemic.

Speaker 5

All right. 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.

Speaker 10

Hey, Steve. I have one more labor dynamic question. What's interesting is this is the 4th consecutive quarter where your SWB per patient day has moderated. 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.

Speaker 10

And I guess I would have thought intuitively the opposite would happen, but maybe there's something optical with the mix of versus acute or something. How do I make sense of this?

Speaker 1

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 substitute 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 a for sure gap and that acute care compensation rates were always higher than subacute care compensation rates, but that gap widened dramatically during the pandemic. I do think it has since narrowed.

Speaker 1

And so it really and that's I'm trying to answer your question in the sense of it really got to be an issue of it didn't matter when a nurse told us a behavioral nurse told us that she was leaving to make 3 times her salary in an acute care setting, raising her salary by $2 an hour, etcetera, 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 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, etcetera. And I think that's our focus. Look, certainly and particularly with the availability of some of these Medicaid supplemental payments etcetera in some markets, If we believe that paying higher compensation and could be an answer, we'll pursue that.

Speaker 1

But again, I'm going to suggest that I think in most cases, this is not a problem throwing money at it, just automatically solves it. But we'll invest more money where we think it makes sense.

Speaker 10

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.

Speaker 1

Yes. I mean, we've talked about the health plan from 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 where implants that are focused on Medicare Advantage patients.

Speaker 1

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.

Speaker 5

Thanks.

Operator

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

Speaker 11

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'd be curious across both segments.

Speaker 11

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?

Speaker 1

As far as the second question goes, 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 it would be because I would think that sort of midpoint between commercial and Medicare is probably about the midpoint of our reimbursement.

Speaker 11

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

Speaker 1

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

Speaker 5

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.

Speaker 12

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. You just remind us generally how long it takes those facilities to get to breakeven?

Speaker 12

And do the geographies or any other dynamics in those markets have any changes to that maybe faster or slower? Thanks.

Speaker 1

Yes. I would say generally the ramp of the facility to breakeven is probably in the 6 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 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.

Speaker 1

And we'll give more precise feedback on the impact of both West Henderson and the Washington D. C. Facility when we give our 20 25 guidance early next year.

Operator

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

Speaker 1

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

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Universal Health Services Q2 2024
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