Universal Health Services Q1 2023 Earnings Report

Universal Health Services EPS Results

• Actual EPS: $2.34
• Consensus EPS: $2.15
• Beat/Miss: Beat by +$0.19
• One Year Ago EPS: $2.15

Universal Health Services Revenue Results

• Actual Revenue: $3.47 billion
• Expected Revenue: $3.45 billion
• Beat/Miss: Beat by +$19.34 million
• YoY Revenue Growth: +5.30%

Universal Health Services Announcement Details

• Quarter: Q1 2023
• Date: 4/25/2023
• Time: After Market Closes
• Conference Call Date: Wednesday, April 26, 2023
• Conference Call Time: 9:00AM ET

Universal Health Services (NYSE:UHS) (NYSE: UHS) is one of the largest diversified health care management companies in the United States, offering a broad spectrum of services through its acute care hospital and behavioral health segments. The company operates general acute care hospitals, surgical hospitals and ambulatory centers, as well as inpatient and outpatient behavioral health facilities. Its network provides emergency and specialized medicine, diagnostic imaging, laboratory services, advanced surgical care and rehabilitation, complemented by a comprehensive array of behavioral services including psychiatric treatment, addiction programs and developmental disabilities care.

In the acute care segment, UHS’s facilities deliver services ranging from emergency department treatment and intensive care to maternity care and outpatient surgery. Through its behavioral health operations, the company focuses on mental health stabilization, co-occurring disorder programs, and long-term rehabilitation for patients of all ages. Many of its locations also incorporate telehealth offerings and community-based programs designed to expand access to primary and behavioral health care.

Founded in 1979 by Alan B. Miller and headquartered in King of Prussia, Pennsylvania, Universal Health Services has expanded its footprint to include more than 350 facilities across the United States and Puerto Rico, with select operations in the United Kingdom. Under the leadership of its founder and executive chairman, the company has pursued both organic growth and strategic acquisitions to enhance its clinical capabilities and geographic reach. UHS employs tens of thousands of health care professionals and support staff committed to delivering patient-focused care and operational excellence.

Universal Health Services Q1 2023 Earnings Call Transcript

Key Takeaways

• Behavioral health segment delivered strong results with a 4.7% increase in adjusted patient days, a healthy 5% rise in net revenue per adjusted day, nearly 10% revenue growth, and same-store EBITDA margins improving from 20% to 23%.
• Acute care admissions rose 10.5% year over year, but revenue grew just 3.5% as COVID-19 patient volume fell, resulting in a $42 M headwind from lost incremental government reimbursements and a continued shift from inpatient to outpatient surgical procedures.
• UHS successfully leveraged its bed capacity constraints in the behavioral segment to renegotiate payer contracts, achieving above-historical rate increases amid high demand for treatment.
• Operating cash flow declined to $291 M from $445 M in Q1 2022 due mainly to working-capital timing; the company invested $169 M in capital expenditures, repurchased $79 M of shares, and retained $875 M of undrawn revolving credit capacity.
• The company maintained its full-year guidance, expecting acute volumes and pricing to normalize to pre-pandemic patterns with low-mid single-digit growth, further premium-pay reductions, and moderated behavioral rate growth as staffing shortages ease.

Presentation

[Operator]

Good morning. Thank you for standing by. Welcome to the Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw the question, simply press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Steve Filton, Executive Vice President and Chief Financial Officer. Please go ahead.

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

Thank you and good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the Q1 ended March 31, 2023. During the conference call, we'll be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast 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, 2022. We'd like to highlight just a couple of developments and business trends before opening the call up to questions.

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

As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $2.28 for their Q1 of 2023. After adjusting for the impact of the item reflected on the supplemental schedule as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.34 for the quarter ended March 31st, 2023. During the Q1, our behavioral health hospitals produced strong results. The decline in COVID activity allowed our behavioral hospitals to continue to reduce their labor vacancies, resulting in a reduction of the capped bed capacity and a 4.7% year-over-year increase in adjusted patient days. Combined with a healthy 5% increase in net revenue per adjusted patient day, overall revenues grew by almost 10% over the prior year quarter.

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

With that level of revenue growth, same-store behavioral EBITDA margins increased from 20% to almost 23%. Our acute hospitals experienced strong demand for their services, with adjusted admissions increasing 10.5% year-over-year. For a variety of reasons, revenue growth was more muted at 3.5%. As a percentage of total admissions, COVID-diagnosed patients made up 14% of our admissions in the Q1 of 2022, but only 4% of admissions in the Q1 of 2023. This decline in COVID patients resulted in reduced revenues due to the lower acuity and less of the incremental government reimbursement associated with COVID patients. The impact of the COVID support payments, including HRSA, Medicare sequestration, and the 20% Medicare add-on, was a $42 million headwind in the Q1 compared to the same prior year period.

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

There was also $15 million of out-of-period Texas TRP reimbursement recorded in Q1 of 2022 that did not recur in this year's quarter. While overall surgical volumes were robust, increasing a little over 10% from the prior year quarter, there was a continuing shift from inpatient to outpatient, resulting in further overall revenue pressures. Meanwhile, the amount of premium pay in the quarter, which declined from a peak of $153 million in the Q1 of 2022, was $85 million in the Q1, similar to what it was in the third and Q4s of 2022. The dramatic increase in volume is the major reason that premium pay has not declined further. It's worth noting that our average hourly rate, which includes premium pay, was 7% lower than it was in the Q1 of 2022.

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

In total, the robust volume growth offset by lower revenue per adjusted admission resulted in flat same-store acute care EBITDA compared to last year's quarter. We also note that the Q1 acute non-same-store results included approximately $10 million of a headwind for the impact of the Desert Springs Hospital closure and approximately $5 million of losses related to start-up facilities. Our cash generated from operating activities was $291 million during the Q1 of 2023, as compared to $445 million during the same quarter in 2022. The decline was largely due to an unfavorable change of $183 million in other working capital accounts, primarily due to the timing of disbursements for accrued compensation and accounts payable.

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

In the Q1 of 2023, we spent $169 million on capital expenditures and acquired 650,000 of our own shares at a total cost of approximately $79 million. Since the inception of the current share repurchase program in 2014, we have repurchased more than 20% of the company's outstanding shares. As of March 31, 2023, we had $875 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility. I'll now turn the call over to Marc Miller, President and CEO, for closing comments.

[Marc D. Miller, President, CEO at Universal Health Services]

Thanks, Steve, and good morning. In our year-end conference call, we said we envision 2023 as a year of continued transition into a post-pandemic world.

[Marc D. Miller, President, CEO at Universal Health Services]

We anticipated that volumes in both segments and acuity in our acute business would continue their recovery trajectory and gradually begin to resemble the patterns we experienced before the pandemic. The comparison to last year's Q1 for our acute hospitals, which were experiencing the significant surge in COVID patients with the Omicron variant, is particularly challenging. Many of those COVID-related headwinds will become much less of a factor as the year progresses. We expected to be able to reduce premium pay by about one-third in 2023 from 2022 levels as we continue to increase hiring rates and reduce turnover. While the decline in premium pay has leveled off for the time being, we continue to make progress on overall wage pressures.

[Marc D. Miller, President, CEO at Universal Health Services]

In our acute segment, we highlighted the upward pressure of, on physician expense, which tended to run at a rate of about 6% of revenues pre-pandemic, but is budgeted to run and actually is closer to 7.5% in 2023. Overall, we were pleased with our Q1 results, which were largely in line with our internal expectations, with our behavioral results somewhat ahead and our acute results slightly behind. We are pleased to answer questions at this time.

[Operator]

Thank you. As a reminder, if you have a question, simply press star one, one on your telephone. To withdraw the question, simply press star one, one again. One moment. We have a question from Jason Cassorla with Citi. Please proceed.

[Jason Cassorla, Equity Research Analyst at Citi]

Great. I guess, you know, first, you know, wanted to ask about your acute volume trajectory. You know, I guess obviously a solid start to the year, but, you know, curious if you believe this is broad-based underlying demand or anything else beyond an easier comp. I guess given performance in the quarter, how you're thinking about the sustainability of the momentum and volume growth for the remainder of 2023.

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

Hello Jason, look, I think we've made the point for some time that we felt that as COVID volumes continued to decline and sort of continue at a kind of a lower, we'll call it endemic level, that the non-COVID volumes would begin to recover. I think that recovery, quite frankly, has been a bit slower than we anticipated. But, you know, clearly, taking into account what our, you know, public hospital, acute care hospital peers have said as well in the Q1, you know, I think there seems to be a broad-based recovery across the space

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

You know, I think our expectations is that, you know, we're gonna begin to see acute care volumes track at their sort of, you know, pre-pandemic patterns, you know, with volume growth in the low to mid-single digits and, you know, sort of pricing growth at a, at a similar level. You know, ultimately and particularly, I think once we get beyond the Q1 with that difficult COVID comparison, you know, we'll begin to see an acute care business model that resembles something a lot closer to our pre-pandemic experience.

[Jason Cassorla, Equity Research Analyst at Citi]

Okay. Got it. Thanks. Just as a follow-up, you know, I wanted to ask about the favorable behavioral revenue per patient day trend of 5% in the quarter. I guess any color on how we should think about the growth in that stat for the remainder of 2023, just given the improvements you're seeing on labor scarcity, better volume for your product than anything else? Any help there would be great. Thanks.

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

Again, we've talked about this, you know, I think on a number of prior calls. I think prior to the pandemic, revenue per adjusted day in the behavioral division tended to increase about 2% to 3% annually. During the pandemic, I think, you know, we've seen that number jump to 5% or 6% in a number of quarters. We've attributed in many cases to a more aggressive stance on our part as we renegotiated contracts with some of our lowest payers, with the idea that in an environment of capacity constraint, an environment where we were turning patients away, because of a lack of adequate staffing, you know, it gave us more leverage to take, you know, a more aggressive stance with our payers.

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

Again, I think you saw that in the 5% revenue per adjusted day increase in the Q1. You know, obviously, I think the sort of the crux of your question is, as we continue to hire more people and those capacity constraints are eased some, you know, does it change the dynamic with the payers? I think, you know, the honest answer is to a degree, but I'll also say just broadly, I think across the space, the behavioral space, we have a view that demand across the space exceeds the supply of beds in many geographies and in many instances. You know, I think we're gonna still have leverage with the payers in many of our geographies.

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

If they want a place to have their patients treated, they're gonna have to pay, you know, at a, at a minimum, you know, market rates to providers and to us. We also did say, I think in, when we talked about our 2023 guidance in our last call, that we were projecting, you know, our guidance that revenue per day growth would moderate some. If we see some moderation, it is certainly something that's been anticipated in our guidance. Right now, it's a pretty strong environment in terms of our negotiations with payers.

[Jason Cassorla, Equity Research Analyst at Citi]

Great. Thank you.

[Operator]

Thank you. One moment for our next question, please. It comes from the line of Joshua Raskin with Nephron Research. Please proceed.

[Analyst at Nephron Research]

Hi. Good morning. This is actually Marco on for Josh. I appreciate you taking the question. Based on your commentary, it appears that capacity is opening back up in the behavioral segment as staffing levels improve. You also just spoke to demand outstripping supply in a number of geographies. With that, do you think we're at a point now where we should expect more development on the behavioral side or even acquisitions of assets there? Thanks.

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

Yeah. I think it's a reasonable question. Obviously, during the pandemic and during the significant capacity constraints we had and the issues we had in hiring sufficient clinicians, especially nurses, to treat our patients, we did put on hold some of our development activities, you know, building new capacity at existing facilities or building de novo facilities, although we certainly continued with some. You know, I think your question is right. I mean, we, you know, just had a meeting recently in which we reviewed a whole, you know, chunk of facilities that are running at in excess of 80% occupancy on the behavioral side to consider, I think, the exact point of your question, whether it merited, you know, study of, you know, building more capacity in those facilities.

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

I think you're right. This is a bit of a compounding kind of dynamic. As we're able to hire more people and fill more of our permanent vacancies, I think we'll be able to treat more patients. As we're able to treat more patients, we may need to increase capacity in some of our, you know, some of our facilities and some of our de novo projects. I think that's certainly a possibility over the next several years.

[Analyst at Nephron Research]

Great. Thanks. Then just on the acute care side, I know you gave some detail on the contract labor trends in the quarter. I was wondering, your thoughts on whether rates are now back to levels where it makes sense to just continue utilizing, temporary labor as a means of increasing capacity. Do you think there'll be enough sustained demand on the acute, side to support that? Thanks.

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

Yeah, I mean, the traditional, I think approach to temporary labor in the acute business for us, and I think, you know, largely for our peers, always was that, you know, when there were temporary surges in volumes, which there often are, you know, COVID activity aside, it always made sense to, you know, solve those sort of temporary demands on your staffing with the use of temporary and traveling nurses, et cetera. You know, what became, you know, really sort of a disrupting kind of factor during the COVID, you know, surges was that the price or the cost of that temporary labor, you know, rose to 2x and 3x, and I think sometimes 4x, you know, what traditional rates had been.

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

I think as we see those numbers come down, and we certainly have seen them come down quite a bit, although I, you know, don't think we're at pre-pandemic levels, you know, I think we're gonna get back to that, you know, sort of traditional approach that when we need temporary labor, we'll go to these, you know, outside agencies for it. But it'll be on a less frequent basis, et cetera. I will say that there were times during the pandemic where the cost of temporary labor got so expensive that, you know, we just refused to use it if it got above a certain level. Again, I think we're largely past that point.

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

Like many other things that I've, you know, referenced on the call, I think that as we progress in 2023 and we go beyond that, we're gonna see that temporary labor supply-demand dynamic and pricing and inflationary dynamic return to much more of a pre-pandemic sort of level than, you know, what we have seen in the last few years.

[Analyst at Nephron Research]

Great. Thanks very much.

[Operator]

Thank you. One moment for our next question, please. All right, it comes from the line of Andrew Mok with UBS. Please proceed.

[Andrew Mok, Equity Research Analyst at UBS]

Thanks. Can you help us understand the sequential improvement in the acute business in the context of lower acuity trends seen in the Q4? Did underlying acuity actually improve, or were volumes so strong such that it masked some of the, you know, continued acuity headwinds that you're seeing? Thanks.

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

Yeah. I think the sequential improvement reflects, you know, some of the normal seasonal patterns. I think, you know, in any normal year, our busiest year on the acute side. There's generally a pretty significant step up from the Q4 and, you know, some of the reduced activity during the holidays in the Q4, et cetera. I think you did absolutely see some of that. I also think you know, just continue to see a return of normal patterns, patients who, you know, had delayed and deferred procedures during the pandemic, beginning to schedule those and at least get into the pipeline for some of those more elective and scheduled procedures, et cetera.

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

I think you saw that dynamic. You know, I think the acute care performance clearly, in my mind, was more favorable when you look at it from a sequential basis. When you look at it from a year-over-year basis to the Q1 of last year when we had the Omicron surge, when we had the very high acuity, you know, it, you know, the comparisons I think were much more challenging. You had the COVID reimbursement in the Q1 of last year. To your point, you know, the Q4 improvement over for the acute division, you know, was encouraging to us and I think sort of reinforces our view that we've, you know, created an appropriate sort of guidance trajectory in 2023 with the acute care performance improving as the year goes on.

[Andrew Mok, Equity Research Analyst at UBS]

Got it. Related to that, hoping you can provide an update on the Las Vegas market with respect to the Desert Springs Hospital you closed down and the new Reno hospital. How is that tracking against expectations? Thanks.

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

And so those are two, you know, very different dynamics. As I think we discussed in our last call, the Desert Springs dynamic is really related to the new hospital we're building in West Henderson, which is sort of between our existing Henderson Hospital and our existing Desert Springs Hospital. As I think, you know, physicians and patients and employees all, you know, came to the realization that ultimately West Henderson would be replacing, you know, Desert's function in the market, you know, they began to make other decisions and move to other hospitals, very often our own hospitals elsewhere in the market. We made the decision to close Desert as an acute care hospital, but we still operate a freestanding emergency department on the site.

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

As I mentioned in our prepared remarks that, you know, those shutdown costs and severance costs, et cetera, created about a $10 million headwind in the Q1 compared to last year. You know, essentially, I think after that, as the year progresses, you know, Desert Springs will have much less of an impact. I think, you know, we're very much looking forward to the positive impact that West Henderson will have when it opens in either the spring or the middle of 2024. In Reno, our new hospital, you know, had a bit of a drag, you know, compared to last year, but certainly not at the level of, you know, 2022 when it was, you know, $7 million or $8 million drag per quarter on average.

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

You know, we think again, that will improve over the year. As I think we indicated in our guidance, we're expecting about a $30 million, you know, favorable tailwind in 2023 from the Reno hospital. Broadly, I would just say, and I think this is consistent with what our peers have said, you know, we've seen our Texas and Florida markets recover, and this is, I think, particularly from an acute care perspective, recover from the pandemic dynamics faster than our other markets around the country, including, in our case, you know, Nevada and California. There's been a shift in population to places like Florida and Texas. I think those economies tended to recover more quickly from the shutdown.

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

They didn't shut down as completely or as quickly as some other, you know, markets around the country. Again, I think our experience in those markets is consistent with what, you know, at least a couple of our peers have talked about as well.

[Andrew Mok, Equity Research Analyst at UBS]

Great. Thanks for the call.

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

Yeah.

[Operator]

Thank you. One moment for our next question, please. All right, it comes from the line of Stephen Baxter with Wells Fargo. Please proceed.

[Analyst at Wells Fargo Securities]

Hi. Thanks for taking the question. This is Nick on for Steve. I was hoping you could talk a little bit about how your Q1 results impact your thinking for full year guidance, particularly in light of some of the margin favorability you saw in behavioral in the quarter. Thank you.

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

Yeah. As is our practice, you know, we didn't address guidance in our press release, which means that we're maintaining our existing guidance. I will say that and because we don't give quarterly guidance, I will say that, you know, our internal forecasts for the quarter were somewhat ahead of the consensus estimates, although our actual results were ahead of both consensus and our internal forecasts. You know, I know that a couple of our peers raised their guidance in the Q1. As you all know, I've been at UHS for more than three decades. I don't recall that we've ever changed our guidance after the Q1 for better or for worse. Obviously, in this case, it would have been for better had there been any change.

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

You know, generally, we were pleased with the Q1 results, I think, as you know, Marc's comments, you know, on the call indicated. I will also make the point that, unlike other years, the earnings trajectory that we're expecting in 2023, is that earnings will continue to improve as the year progresses. You know, we feel very comfortable with our full year earnings. We're very pleased with the Q1 results. You know, certainly it didn't feel from, either a sort of historical practice perspective or any other that, you know, there was any need to change the guidance after the Q1 results.

[Operator]

Does that answer your question, sir?

[Analyst at Wells Fargo Securities]

Yes, thank you.

[Operator]

My pleasure. One moment for our next question, please. All right, it comes from the line of Ann Hynes with Mizuho Securities. Please proceed.

[Ann Hynes, Senior Healthcare Services Equity Analyst and Managing Director at Mizuho]

Hi. Good morning. Could you talk about nursing trends, maybe in each segment, which segment you think is recovering faster than the other? I know you said turnover improved, but can you give us some stats, maybe what turnover was at the height of the pandemic, what it was before the pandemic, and what it's trailing now? Thanks.

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

Sure, Ann. You know, I think turnover, particularly in nursing across the U.S. pre-pandemic, you know, tended to average in the low 30% range. I think most of our hospitals tended to do a little bit better than that, but obviously nursing turnover is and has been a significant, I think, challenge for the hospital industry for many years. During the pandemic, I think those percentages often doubled, and in some cases, maybe even tripled. Again, not just for UHS and not just for acute or behavioral, but, you know, I think for hospitals across the country.

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

I think it was particularly challenging for sub-acute providers, like behavioral hospitals or nursing homes or home health agencies or any, you know, long-term care businesses who were losing clinicians to these incredibly sort of high-priced opportunities to make, you know, these really premium amounts in acute care COVID settings, you know, during the pandemic. I think what we said all along was that as COVID volumes, you know, diminished and reduced to sort of the levels that we saw in Q1 of this year, that many nurses would sort of return to, you know, their original or if you will, their sort of home-based occupations or work sites. I think we've, you know, seen that.

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

I think we've seen a sort of a faster and quicker benefit to that on the acute, on the, excuse me, on the behavioral side, where we've been able to fill more of our permanent vacancies. As a consequence, we've been able to admit more patients. Again, the, you know, the, that 10% same-store revenue growth that we saw in the Q1, I think is a, you know, very concrete reflection of our, you know, progress that we're making. On the acute side, we're making progress. We've obviously reduced our premium pay, you know, by almost half from where it was a year ago.

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

You know, I think a number of our peers have quoted, you know, we have tended to talk about the wage issues in acute care by quoting our premium pay numbers, and that includes both things like overtime and shift differential that we pay to our own employees as well as contract labor. When you just, you know, isolate the contract labor numbers as a percentage of overall salaries and wages, you know, I think we're in that 5% to 6% range, which I think is, you know, right where our peers are, maybe even a little bit lower than that. We've clearly made progress on the acute care side as well.

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

I think that, you know, while the acute care recovery has been a little bit slower, I think it positions the acute care business well for the rest of the year as acuity returns, as surgical volumes improve. The fact that we've been able to reduce premium pay so much from a year ago bodes well for, you know, what we'll be able to accomplish in the upcoming quarters as well.

[Ann Hynes, Senior Healthcare Services Equity Analyst and Managing Director at Mizuho]

Great. Just on the inpatient side, inpatient trends, admissions improved sequentially. Can you just describe what delta, like, what do you think is coming back versus what was not in 2022?

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

I think it tends to be across the board. You know, we have seen emergency room volume increase and that always has sort of a cascading impact on our admissions. We've seen our scheduled and elective and surgical procedures increase. You know, and I think the one in, the dampening sort of impact of that is that as, you know, which again, I mentioned in my prepared remarks, is that even though overall surgical volumes are clearly increasing and even inpatient volumes are increasing on an absolute basis, there's definitely a shift to, you know, to more procedures being done on an outpatient basis.

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

I would highlight, I think particularly again, I don't think this is unique to UHS, but particularly in the orthopedic service line, we've seen a pretty dramatic shift in the last couple of years from inpatient to outpatient procedures. You know, just broadly, I think we're seeing, you know, the volumes in almost all of our service lines improve.

[Ann Hynes, Senior Healthcare Services Equity Analyst and Managing Director at Mizuho]

Great. Thanks.

[Operator]

Thank you. One moment for our next question, please. He comes from the line of Justin Lake with Wolfe Research. Please proceed.

[Analyst at Wolfe Research]

Hey, guys. This is Austin on for Justin. Appreciate the question. Steve, sticking on that, like, scheduled elective mix that you just described, you know, I know that was a little bit of a focal point in Q2, Q3, and through back half of last year. You know, you noted some improvement there, but wondering if you can kinda quantify where that's maybe tracking versus the pre-pandemic level. Is that shift to outpatient, you know, maybe shifting that run rate going forward? Thanks.

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

Again, I mean, I, and I think in my prepared remarks, I talked about, year-over-year surgical growth, total surgical growth, as around 10%, higher on the outpatient side, you know, maybe 14%, lower on the inpatient side, maybe, you know, 4%, something like that. You know, I think that level of growth is reflective of, you know, some amount of catch up of deferred procedures, et cetera. I mean, that would be, a pretty difficult pace to continue, sort of indefinitely. Again, I mean, I think we've argued for some time now that as COVID volumes decline, there would be some, you know, kind of pent-up demand and surgical volumes at a minimum would return to their pre-pandemic levels.

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

I think we're at a point right now where we're recapturing some of the volume that we lost during the height of the pandemic. It feels like, you know, absent another COVID surge, which nobody seems to be anticipating at the moment, you know, there ought to be a relatively, you know, steady and sustainable growth in surgical volumes. Although I suspect that they'll continue to be more skewed to outpatient rather than inpatient.

[Analyst at Wolfe Research]

Great. Thanks. Maybe just as a quick follow-up, you know, commercial contracting cycle kind of in focus. I'm just wondering if there's any update there and if you're still seeing some favorability on that front. Thanks.

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

Yeah, I mean, I think, you know, as we indicated and have indicated, I think since we're probably in the back half of 2022 when, you know, inflation began to, you know, have a clear impact on, you know, obviously our business, but on the rest of the world, you know, we've been negotiating managed care increases that I think, you know, in general are, you know, somewhere in 150 to 175 basis point range higher than what they were pre-pandemic. You know, that will continue, quite frankly for, you know, a number of periods, as, you know, contracts, you know, come up for renewal. Yeah, I mean, I think as we are renegotiating commercial contracts in particular, you know, we're getting some relief.

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

I think we would still argue it's not necessarily full relief for the inflationary pressures we've been under. It's certainly been helpful to our results. You know, more clearly on the behavioral side, you can see that number in our revenue per day. It's not as easy to see it on the acute side in our revenue per admission because you've got the sort of acuity factor working the other way. Again, I think, you know, those comparisons are gonna become a lot clearer as we get past the Q1 when the COVID comparisons to the prior year are gonna be much more equal and not nearly as out of whack.

[Analyst at Wolfe Research]

Great. Thanks for the call, guys.

[Operator]

Thank you. One moment for our next question, please. It comes from Kevin Fischbeck with Bank of America. Please go ahead.

[Joanna Gajuk, Director in US Equity Research at BofA Securities]

Good morning. Thank you. This is Joanna Gajuk filling in for Kevin today. Thanks for taking the question. I guess, first just a follow-up on the behavioral business. The volume's pretty strong there. We just talk about acute, but any color there in terms of, you know, the regions or business lines, or is it kind of across the board? Just kinda any additional color on this, like, volume strength.

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

not really, Joanna. I mean, again, you know, this is a subject that we've discussed, you know, at great length in calls during the pandemic. you know, we have argued throughout that the biggest constraint on our volume growth in behavioral was our staffing and the inability to hire a sufficient number of clinicians, which was mainly nurses, but also things like other professionals like therapists and psychologists and psychiatrists even. but also even some non-professional folks, the mental health technicians who are a critical part of our, you know, patient care planning in our behavioral hospitals. you know, what we continue to say is that as the COVID volumes decline, we'd be able to hire more people and fill more of those permanent vacancies.

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

Our net hires have been increasing, you know, for well over a year now pretty consistently. You know, I think you saw our behavioral volumes improve in the back half of 2022. Obviously, they continued to improve in the Q1 very robustly. You know, the early signs is those trends are continuing into Q2. You know, I think we hit our highest behavioral census number within the last week that we've seen in a couple years. You know, we're very bullish about our ability to again, you know, continue to fill those vacancies and increase our ability to treat more patients. It's, you know, very much across the board from a geography perspective, from a service line perspective.

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

It's, you know, to be perfectly honest, you know, that 10%, you know, same-store revenue growth really couldn't be anything but pretty comprehensive because, you know, there's not, there's not a single geography or a single service line that could drive that level of improvement.

[Joanna Gajuk, Director in US Equity Research at BofA Securities]

Would you say that with the strength of, because you made it sound like things were tracking better, but in a segment, but it sounds like maybe margins. Any change to kind of your view for the year for this segment, or it's kind of, in the ballpark?

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

Yeah, I mean, again, I'll just echo the, you know, the comments made by Marc in his remarks. You know, I think when we created our 2023 guidance, we envisioned that 2023 would be a year of transition out of sort of the pandemic environment and into a post-pandemic world in which we'd have, you know, much greater success in, you know, filling our labor vacancies. There wouldn't be as much labor supply demand disruption. Certainly, that's the way the Q1 played out, particularly very strongly on the, on the behavioral side. You know, that's the way our guidance plays out for the year. You know, we're, you know, we're feeling very good about how the year has started out, and anticipate that most of these trends will continue as the year goes on.

[Joanna Gajuk, Director in US Equity Research at BofA Securities]

Great. Thank you. Last question on behavioral segment. When it comes to, you know, redeterminations of states are starting this process now, many of them, you know, delaying it, I guess, you know, we've been talking about this quite a bit. Can you talk about how you think this will play out for your behavioral business specifically? You know, do you assume anything in your guidance, or is it more 2024, if at all? Also, I guess, any comments on how this could impact, you know, the acute care business? Thank you.

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

Look, I think the truth, Joanna, is that nobody really has a very, you know, sort of clear and precise view of how redeterminations are gonna affect, and by the way, either the behavioral or the acute business. As your question indicates, you know, it depends a lot on the pace at which the states go through the redetermination process, and that's not clear. It certainly depends on the pace at which folks who lose their Medicaid coverage can qualify for commercial exchange products. Number one, how quickly they can do so. Number two, what percentage of them can do so. You know, there've been all sorts of, you know, guesstimates by all sorts of people about how this will play out. Some of them are, quite frankly, substantively very positive for the hospital industry. Some are somewhat negative.

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

I think broadly what we did in our 2023 guidances, think about redeterminations as being sort of modestly negative for both segments. To be fair, that was largely a guesstimate, but I think that has been included in our pricing assumptions for 2023. We'll see how it plays out. We're certainly ready from an operational perspective at our hospitals to do everything that we can do to make sure that patients who lose their Medicaid coverage, you know, do everything possible to re-qualify for commercial exchanges or any other coverage that might be available in a particular market. We're, we're prepared at that, you know, sort of, you know, ground level to deal with redeterminations.

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

I think that's something that, you know, we as an industry are gonna have to wait and see how that develops and plays out over the next couple of quarters.

[Joanna Gajuk, Director in US Equity Research at BofA Securities]

Thank you for this call. I appreciate it.

[Operator]

Thank you. One moment for our next question, please. All right, it comes from the line of Steven Valiquette with Barclays. Please proceed.

[Steven Valiquette, Managing Director at Barclays]

Great. Thanks. Good morning. Not to get too granular on labor, but, you know, our monthly labor tracker showed the company had better momentum, later in the quarter, you know, in February and March, especially on filling, nurse job vacancies in both segments. I would think that would also bode well for volumes in the Q2. I'm not asking to comment on monthly trends, obviously, but just curious if you're able just to comment on the momentum for the company, exiting the quarter on the labor front, and whether that also, you know, should give a, you know, positive bias for volume trends in the Q2 as well. Thanks.

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

Yeah, look, I, you know, just broadly, Steve, I would say, you know, we concur with the idea that things improved broadly, both from a labor perspective, volume perspective, as the quarter went on. Again, as I think I've noted, you know, a number of times in my comments on the call already, that's the way our 2023 guidance is built. You know, I think traditional seasonality would not suggest necessarily that things would continue to get better historically from the Q1 forward, but we thought 2023 trajectory would be different, and it seems to be playing out that way. It played out that way in Q1, and certainly early in Q2, that seems to be the trend.

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

You know, so, you know, we're encouraged by that, you know, the assumptions that we made in our 2023 guidance seem to be at least early in the year, playing out in the way that we expected.

[Steven Valiquette, Managing Director at Barclays]

Okay. Got it. Okay. Thanks.

[Operator]

One moment for our next question, please. All right, it comes from the line of Pito Chickering with Deutsche Bank. Please proceed.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Hey, good morning, guys. Thanks for taking my questions. A follow-up to both Ann Hynes and Joanna Gajuk's question here. Can you combine both the new hires and the turnover to quantify what the net hires was, specifically in behavioral, compared in the Q1 versus the Q4? How many behavioral beds are you still unable to staff at this point, if any, and kinda how does that track throughout the year?

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

Yeah. Pito, I don't have, you know, the net hire detail in front of me. What I do know and what again, I've said, I think on a number of occasions is, our net hires on the behavioral side in particular, have been positive, you know, definitely since the end of the Q1 of last year. You know, and I think that's been pretty consistent and probably accelerating, as, you know, time has progressed. And again, I think that's pretty consistent with our expectations and, you know, I think we expect it will continue to be the case. You know, how many beds we have capped, et cetera, you know, it's kind of an interesting thing.

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

You know, we don't really give that number in a precise way because, you know, it really sort of varies the way each facility thinks about it. I think they generally sort of describe a bed or a unit as kinda capped or closed if it has traditionally been open, but, you know, has to be temporarily closed because of a lack of, you know, sufficient staffing. I will say this, I mean, you know, we continue to, again, we've made this comment before, this is not anything terribly new. You know, we continue to turn away significant numbers of patients because there's either not an available bed or not an available staff member or staff members to treat that patient.

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

We continue to believe that as we make progress and continue to hire people in the behavioral space, that the demand will be there. It's not like we're hiring people to chase demand. We believe that we're hiring people to meet the demand that's already out there and has been demonstrated to us through the incoming, you know, inbound, you know, inquiry process, whether that's, you know, people, you know, calling our 800 numbers or people, you know, inquiring about treatment online. As we measure that incoming call volume, there's still a significant amount of unmet demand that, you know, we believe as we addressed earlier in the call, we can meet through potentially expanding bed capacity, but also through continuing to expand our net hires.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, great. Then a follow-up question here. you know, as you think about sort of margin expansion and behavioral, sort of over the next, you know, sort of between 12 to 24 months, how much is this coming from sort of getting those beds filled up and sort of getting the fixed costs leveraged there? How much of it is coming from the spread of pricing running in the mid-single digits versus the wage inflation running in the 3% range?

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

Yeah, I'm sorry. You know, I'm not sure I fully understand the question. I mean, obviously, if you look at our, you know, 10% revenue growth in the Q1 was split pretty evenly between price and volume. You know, honestly, I think there's more upside on the volume side as, you know, I kind of, I think, responded to an earlier question. You know, I think we may see that price, or revenue per adjusted day moderate a little bit as the year goes on, and some of the capacity constraints are eased. I think, you know, the volume growth, for the foreseeable future, you know, I think you pegged the timeframe as 12 or 24 months, should continue. And quite frankly, not really, inconsistent with what our volume growth patterns were in behavioral pre-pandemic.

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

You know, obviously those, you know, volume patterns were significantly muted during the pandemic because of the labor supply and demand disruption that we saw. As, you know, we continue over the next couple of years, I think that, you know, we're very confident that, you know, volume growth in the mid-single digits is a very sustainable sort of number.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, great. Thank you so much, guys. Nice quarter.

[Operator]

Thank you. One moment for our next question. As a reminder, if you do have a question, simply press star one one to get in the queue. Our question comes from Jamie Perse with Goldman Sachs. Please proceed.

[Jamie Perse, Equity Research Analyst at Goldman Sachs]

Hey, thank you. Good morning. Steve, you previously guided to about 1% to 2% revenue per adjusted admission in 2023. You also said that was, you know, kind of one of the more aggressive assumptions in your thinking for 2023. Getting through the tough 1Q comp, I'm just curious how revenue per adjusted admission played out versus your expectations and how to think about that metric for the rest of the year, this for the acute segment.

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

Yeah. Again, I mean, I think our comments, you know, were straightforward in saying that, you know, our, you know, acute performance in the Q1 was slightly below our own expectations. I think it was mostly on the pricing side because obviously it was hard not to be pleased with the volumes in the quarter. I think our, you know, expense control was pretty strong. Now again, I think as we said, that Q1 comparison we know was always gonna be difficult for on a pricing basis for the acute business because of that acuity drop.

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

I think we'll get a better view of this as the year progresses because, you know, the, again, the COVID comparison is not gonna be nearly as important, and we'll get to see, you know, what the, I'll call it sort of true pricing dynamic looks like, what the inpatient to outpatient shift means, et cetera. You know, again, you know, I think we were sort of slightly behind expectations in Q1, but certainly don't in any way feel like that doesn't mean we can't get to our full year expectations on the acute side.

[Jamie Perse, Equity Research Analyst at Goldman Sachs]

Okay, thanks for that. Just on contracting tactics with commercial payers, you previously mentioned there were some contracts where you're potentially willing to walk away if payers didn't kind of, you know, meet you halfway. I'm curious how some of those types of negotiations have played out since. Are payers becoming more receptive to meeting providers at better rates? Have you actually walked away from contracts? Just any update there on the behavioral side in particular.

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

Again, I mean, to I think a large degree, the proof is in the pudding. We had, you know, 5% revenue per adjusted day growth in our, you know, behavioral revenue in the quarter. That certainly is, you know, well above historical averages, you know, which I think tended to be in the maybe 2% to 2.5% range. More, you know, more like what we have been seeing during the pandemic.

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

Because I think that with capacity constraints and with our large market share in many of our geographies, you know, if payers are unwilling to, you know, kind of in your terms, meet us halfway, pay us a reasonable rate and, you know, essentially go out-of-network with us, I think, you know, their choices and their options to have their patients treated in other settings, in at least in some geographies, is severely limited. I think we've been pretty successful. You know, at the end of the day, that revenue per adjusted day, I think is the evidence of that. It plays out. You know, you sort of, you know, are asking me how it plays out.

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

We, you know, a lot of times we will give notice of termination, and the contract never terminates, and we will, you know, reach a negotiated, you know, settlement on rates. Other times, we will actually walk away, and the contract will terminate. Sometimes that's a permanent thing, and sometimes the payer comes back and, you know, even after the termination will settle. It, you know, it doesn't play out the same way every time. Again, you know, my sense is broadly in the behavioral space, there's not a lot of excess capacity around the country.

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

Payers, while they certainly are always gonna be aggressive, are gonna, I think, you know, find themselves having to be reasonable if they really wanna make sure that there is a place for their subscribers to be adequately treated. I think in on the behavioral side, that, strong leverage position is gonna continue with us for some time.

[Marc D. Miller, President, CEO at Universal Health Services]

I just wanna piggyback on this point because, you know, we have just decided a little bit more forcefully now that we're just going to push this issue. We need to be paid fairly for the work that we're doing. Our expenses are up and some of the payers, you know, don't meet us halfway all the time, and we've been clearly explaining to them that that's not gonna be adequate going forward. In addition to that, we're having a lot of different discussions with payers, I'd say in the last six to 12 months that we've not had before. It goes to a lot of what Steve is saying. Their needs are growing on the behavioral side. We are the largest provider in the United States in behavioral.

[Marc D. Miller, President, CEO at Universal Health Services]

The leverage is shifting a little bit, and we're trying to work with them to show them how it is, you know, more conducive for them to pay us a little bit more, but have their patients serviced in a much better way than to try and continue to nickel and dime. Ultimately, you know, that's not gonna satisfy their needs. Those discussions are, I would say, escalating, and they're different discussions. I think that we're gonna have more positive results from the types of conversations that we're having now.

[Jamie Perse, Equity Research Analyst at Goldman Sachs]

Thanks for all the color.

[Operator]

Thank you. At this time, I would like to turn the conference back to Steve Filton for closing remarks.

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

Okay, thank you. We'd like to thank everybody for their time this morning and look forward to speaking again next quarter.

[Operator]

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Participants

Executives

• Marc D. Miller, President, CEO

Analysts

• Andrew Mok, Equity Research Analyst at UBS
• Ann Hynes, Senior Healthcare Services Equity Analyst and Managing Director at Mizuho
• Jamie Perse, Equity Research Analyst at Goldman Sachs
• Jason Cassorla, Equity Research Analyst at Citi
• Joanna Gajuk, Director in US Equity Research at BofA Securities
• Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank
• Steve Filton, Executive Vice President and Chief Financial Officer at Universal Health Services
• Steven Valiquette, Managing Director at Barclays
• Analyst at Nephron Research
• Analyst at Wells Fargo Securities
• Analyst at Wolfe Research