Universal Health Services Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Operator: Good day, and thank you for standing by. Welcome to the Universal Health Services Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

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

[Steve Filton, Chief Financial Officer at Universal Health Services]

Thank you, and good morning. Marc Miller is also joining us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2023. During this conference call, we will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and Risk Factors in our Form 10-K for the year ended December 31, 2022, and our Form 10-Q for the quarter ended June 30, 2023. 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 $2.40 for the third quarter 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 $2.55 for the quarter ended September 30, 2023.

During the third quarter, same facility revenues at our behavioral health hospitals increased by 7.6%, primarily driven by a 6.5% increase in revenue per adjusted patient day. The patient day growth in the quarter was greater at our acute care behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day beyond the already robust levels we've been posting for several periods.

Additionally, as we have anticipated in our original 2023 guidance, we're beginning to see a negative impact of Medicaid redeterminations in certain states on behavioral health volumes. With 8.3% revenue growth, same-facility EBITDA for our behavioral health hospitals has increased approximately 10% during the first nine months of 2023 compared to the comparable prior year period. Our acute hospitals experienced strong demand for their services in the third quarter with adjusted admissions increasing 6.8% year-over-year. in part because the volume growth was skewed somewhat to lower acuity procedures, overall revenue growth prior year quarter, there was a continuing shift from inpatient to outpatient.

Additionally, we note that managed care behavior has become more aggressive in 2023 as it relates to denials and patient status classification changes. Meanwhile, the amount of premium paid in the third quarter was $69 million, reflecting a 15% decline from the amount in the previous several quarters. The continued robust increase in acute volumes is the major reason the premium pay has not declined further. It's worth noting that our average hourly rate, which includes premium pay was slightly lower than in the third quarter of 2022 -- in 2023 as compared to the comparable prior year quarter. Our cash generated from operating activities was $815 million during the first nine months of 2023 as compared to $699 million during the same period in 2022. In the first nine months of 2023, we spent $537 million on capital expenditures and acquired $2.7 million of our own shares at a total cost of approximately $367 million. Since 2019, we have repurchased approximately 26% of the company's outstanding shares. As of September 30, 2023, we had $721 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility.

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

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

Thanks, Steve. Despite what remains a difficult operating environment, our consolidated results continue to track our revised earnings guidance. As we anticipated, acute care volumes have continued their recovery trajectory and have gradually begun to resemble the patterns we experienced before the pandemic.

As Steve has previously commented, we recognize the need to counter the increasingly aggressive behavior on the part of our payers and seek appropriate price increases to offset the impact of inflation on our cost structure and to seek further contractual protection to ensure we are properly reimbursed for the level of care provided to our patients. We previously highlighted the upward pressure on physician expense, which tended to run at a rate of about 6% of revenues, pre-pandemic but is running closer to 7.6% in 2023.

In our behavioral segment, we have been pleased with our strong pricing and related earnings growth to date but acknowledge significant upside opportunity in our existing occupancy rates, particularly as we continue to improve our recruitment and retention metrics. As previously disclosed, we expect our operating results for the fourth quarter of 2023 to include revenues earned by our hospitals in connection with the Florida Medicaid managed care directed payment program.

In addition, it is worth noting that we continue to believe a new Nevada state directed program, which we have previously disclosed appears to still be on track for 2024 implementation with a potentially materially favorable impact on our Nevada hospitals.

We are pleased to answer questions at this time

Questions and Answers

[Operator]

Our first question comes from Justin Lake of Wolfe Research. Your line is now open.

[Justin Lake, Analyst at Wolfe Research]

Thanks. Good morning. Appreciate all the detail. A couple of questions on 2024. One, the -- just -- I know it's early to give guidance, but just wanted to hear your view Steve, on headwinds, tailwinds. And specifically, Marc, I appreciate the comments on Nevada that it does sound fairly material wanted to get some color, historically, when a speed goes to CMS and tries to put one of these programs in place, can you talk a little bit about timing and probability? Have you ever seen a state be unsuccessful. Have you ever seen CMS turn one of these down and say, I know you have the money, but we're not going to match type of thing. Can you give us some color there, historical background? Thanks.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Sure. Just in terms of sort of the first part of your question, in terms of 2024 guidance, Justin, as you know, we don't -- won't formally give our 2024 guidance until our fourth quarter earnings call at the end of February. I think it's fair to say that we continue to believe that the underlying metrics of the two businesses. As Marc kind of alluded to in his remarks, every sort of passing quarter, continue to resemble more of our pre-pandemic operating environment. And I think broadly, that's sort of the way we're thinking about 2024. I'm not going to go through a detailed list of puts and takes for 2024 at this point.

Obviously, the most significant one is the one that you mentioned. The supplemental program in Nevada, which we've been disclosing in our Qs and Ks for a number of quarters now. We believe the program has been submitted by the State of Nevada to QCMS. We believe that the state has been talking with CMS at that they believe that the program meets the CMS requirements, and I think they're anticipating CMS approval. Based on our experience with like programs, we don't believe there's anything in the program that CMS should fundamentally object to. But obviously, it's not over until there is CMS approval.

I think the state's expectation is that approval is likely forthcoming early in 2024. The program is supposed to be retroactive. It's created to be retroactive to January 1 of 2024. We are still waiting for the state to publish and impact file, which would show their estimate of the impact on individual hospitals. People have been using a number to, I think, estimate the impact on UHS in total in Nevada in the $100 million to $150 million range. And based on our understanding of the program mechanics, that doesn't seem like an unreasonable estimate. So again, the outstanding dynamic is CMS approval. We think it's probably forthcoming early in 2024. But obviously, we'll continue to keep people updated as we learn anything new.

[Justin Lake, Analyst at Wolfe Research]

Thanks.

[Operator]

Thank you. One moment for our next question. Our next question comes from Jason Cassorla of Citi. Your line is now open.

[Jason Cassorla, Analyst at Smith Barney Citigroup]

Great, thanks and good morning. Steve, I wanted to go back to your commentary on the Medicaid redeterminations impact on behavioral volumes. I guess are you able to work with those patients to help get them back on the coverage like you can with the acute care business. And as a result, see that volume headwind as more of a transitory issue? Or how should we think about the puts and takes on the redetermination impact on volumes for behavioral specifically?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. And to be perfectly candid, Jason, I think we're guesstimating to a degree, the impact. What we have noticed during the quarter is that in certain states and probably for us, most notably, Texas, certainly being the largest one, and it's been reported that I think there have been at least 1 million people redetermined off the rolls in Texas. But what we've noticed in a place like Texas is that the number of calls and inquiries that we're getting that qualify from both a clinical and financial perspective, meaning there's adequate coverage available have declined a little bit in the quarter. We don't know, I think, precisely that, that's related to Medicaid redeterminations, but we sort of draw that conclusion kind of based on historical trends and metrics.

As has been reported, it seems like a lot of these redeterminations are for administrative reasons. And a great number of these people will be able to get back reenrolled. And when they reach out to us, we certainly can help them do that. We can also try and help them to get other coverage. But a lot of those things take a little bit of time. So I think our perspective on this is it's probably, in large part, kind of a temporary dynamic. But I think we feel like there is a reasonable chance that our volume growth, particularly in our residential business amongst our trial adolescent population might have been greater in the third quarter, had it not been for the impact of Medicaid redetermination, again, especially in Texas, but at a handful of other states as well.

[Jason Cassorla, Analyst at Smith Barney Citigroup]

Great. Thanks. Helpful. And then maybe just a quick follow-up. Just on capital deployment. It looks like share repurchase activity picked up in the quarter. I guess just given the backdrop, how are you thinking about the uses of your free cash flow moving forward in areas where you perhaps see the best returns just at this juncture? Thanks.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes, I would just remind people that we have slowed our share repurchase a little bit in Q2. It seems like ages ago, but there was the threat of a government shutdown at the time, and we were concerned potentially about some short-term cash flow crunch issues. But obviously, that got resolved at least for the time being, and we resumed our sort of regular share repurchase activity in Q3. And I think we generally sort of think about using the bulk of our free cash flow for share repurchase going forward.

[Jason Cassorla, Analyst at Smith Barney Citigroup]

Great. Thank you.

[Operator]

One moment for our next question. Our next question comes from Stephen Baxter of Wells Fargo. Your line is now open.

[Stephen Baxter, Analyst at Wells Fargo & Company]

Yes, hi. Thanks. Can you expand a little bit on the managed care environment? Any way to quantify, I guess, how much of a drag on your realized commercial rates you're seeing from these tactics like if you thought you were getting a 5% rate increase. Is that effectively now 4% or some other number, given the drag there? And would you say this is getting back to pre-pandemic practices as the environments normalize? I think you've talked to me about that in the past? Or do you think this is something that's kind of gone well beyond that? Thank you.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. I think the way you frame the question, Stephen, is quite appropriate. I think that what we experienced or observed was particularly early on in the pandemic when health care utilization dropped dramatically. I think we felt like the managed care payers eased up quite a bit in what -- sort of what they're historically more aggressive utilization review, audits, denials, patient status changes, that sort of thing. I think as utilization picked up for the industry in 2023 and seem to be getting more back to normal and I think created some pressure on the MLRs for the managed care companies they got -- they returned to sort of what I would describe as their historical practices when it came to again, denial and claims reviews and that sort of thing.

And I think that's what we're seeing. And I think the way it's reflected is. And it's difficult to quantify in a precise way, but our acute care revenue per adjusted admission, which was up only modestly in the quarter, I think we would have been higher had it not been for this behavior. Now I think to a degree, we view it as again, relatively temporary in nature. You saw that our accounts receivable days outstanding ticked up in the quarter. A lot of this is I think, sort of an extended process, meaning we'll appeal a lot of these claims denials. We'll work to collect a lot of these moneys. And I think we will collect a substantial amount of them down the road. But again, in the current period, it did weigh I think, somewhat on our acute care revenue per adjusted administered.

[Operator]

Thank you. One moment for our next question. Our next question comes from A.J. Rice of UBS. Your line is now open.

[A.J. Rice, Analyst at Credit Suisse Group]

Hi, everybody. Maybe two things. Just to put a finer point on your revenue per adjusted admission trend in acute you're talking about MCO behavior. I think you also commented on volumes coming back tend to be a little lower acuity. Is there any way to parse that out? Do you think the underlying apples-to-apples pricing in acute care is still in that sort of 2% to 3% range. And how much are each of those being a drag. And then the flip side on the behavioral side, it looks like it's more of a volume question. And you mentioned Medicaid redeterminations, but there's been times when it's been constrained somewhat by staffing challenges. And just maybe comment on the underlying demand. This is still there to the same degree has been historically on the behavioral side.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Okay. Quite a bit in your question, A.J., I'll try and cover it all. again, I think on the acute side, as you suggest, in our prepared comments, and I think we've talked about this in previous quarters, I think the volumes are particularly high in 2023 because we are experiencing, not just us, but the industry in general, some level of recapture of procedures that were postponed or deferred during the pandemic.

And I think by their nature, those procedures tend to be the lower acuity, less intense procedures.. Obviously, the emerging sorts of procedures that occurred during the pandemic, the heart attacks, the strokes, the accents, trauma, those were attended to immediately but more elective, low-intensity stuff with the things that were deferred, including even as simply as visits to primary care physicians, etc. And so as those began to occur kind of in their more normal trajectory, they sort of create a cascade of demand as well. So somebody who hasn't seen their primary care doctor for a couple of years, now goes and now add a visit to the cardiologist or the routine colonoscopy or whatever it may be. And I think you're seeing that. So as our volumes, I think, are elevated, our revenue per admission is somewhat more muted.

I think over time, we would expect our volumes to moderate a little bit, but also our revenue per adjusted admission to come up. And again, I think we have a view that the long-term model in this business has not changed dramatically. I think we imagine that revenue growth in the acute business over time for a historically long time has been in that kind of mid-single-digit range, 5%, 6%, 7% and split pretty evenly between price and volume. And I think as time passes, we'll get closer and closer back to those historical norms.

I think on the behavioral side, as you suggest, the sort of dynamic has been kind of the flip side of that where pricing has been particularly strong. And again, that's a little bit of a mix issue. We've talked about some weakness in the residential business. In a couple -- a handful of facilities that are challenged with some very specific issues, but also with Medicaid redeterminations I mentioned earlier. But again, I think over time, those leases will see an increase in residential business. That will naturally bring down pricing, but we'll also increase volumes.

And the staffing issue just is a continuing issue we remain constrained in some markets, in some facilities by a lack of staff that could be nurses. It could be therapists. It could be mental health technicians who are nonprofessionals. Generally, I think we continue to improve our recruitment and our retention metrics. And I think those metrics as they continue to get better, will drive greater volumes.

[A.J. Rice, Analyst at Credit Suisse Group]

Okay. That's great. Thanks a lot.

[Operator]

Thank you. And one moment for our next question. Our next question comes from Jamie Perse of Goldman Sachs. Your line is now open.

[Jamie Perse, Analyst at The Goldman Sachs Group]

Hey, thanks. Good morning, guys. First on physician subsidies, can you just give us -- first, can you confirm whether that was in line with the expectations this quarter? And then secondly, just what are you seeing in terms of the market dynamics? Are you seeing the market start to settle? Or do you see more disruption out there? And any comments on your prior comments from 2Q about that kind of flattening out into next year?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. So Jamie, the comment that we made in Q2 was that we had originally anticipated and what we included in our 2023 original guidance was that physician expense would be $55 million to $60 million higher in 2023 than it was 2022. As it turned out, I think this has been a bigger issue than we anticipated, and I think virtually all of our peers anticipated around the country. And what we said is that we anticipated that the second half of the year would also reflect like another $55 million or $60 million increase over the second half of 2022. And we are tracking very closely to those numbers in the third quarter.

So in other words, I don't think we've had a material sequential increase in our pro fees in our physician expenses. Our expectation, what we said at the time was we thought -- not necessarily that the position expenses would absolutely flatten out in 2024. But certainly, that the rate of increase, which is running in the 35%, 40% range this year would moderate significantly. And while I think we were not prepared to suggest exactly what it would be right now, I think, something in the 10% to 15% range of increase would be sort of more of what we would expect. And it's really a function of the industry, I think, has largely sort of had to reset itself since the No Surprise Billing Act passed and the impact of that on the profitability of these physician billing businesses or physician services, the impact of the lower billings plays its way through the system. So what we're finding is we're replacing those contracts that are most expensive. We're putting them out to bid. We're in some cases, in-sourcing the service.

We believe that we'll be able to -- through those activities drive greater efficiencies, and that's why we have this general view that 2024 will not be as volatile and will not have as many material increases as we saw in 2023. But certainly, as we get closer to our 2024 guidance, we'll have a better sense of that, and we'll give more detail. But again, at the moment, we're tracking for the back half of the year, sort of exactly where we said we'd be last quarter.

[Jamie Perse, Analyst at The Goldman Sachs Group]

Okay. Perfect. That's helpful. And then secondly, just on 2024. Can you update us on progress with the three De Novo hospitals, in Nevada, Florida and D.C. Specifically, how should we think about the EBITDA drag as some of those pre-opening expenses ramp up next year? Thank you.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Sure. So the only hospital that will actually open in 2024 is our West Henderson facility in Las Vegas, which I think at the moment is scheduled to open either late in Q3 or early in Q4. So I think it will have a bit of a drag in our 2024 results. But given that it's relatively late in the year, given our historical success in opening hospitals in that market, I don't think it will be a tremendous drag. Again, as we get closer to our actual guidance, we'll put some more concrete numbers around that. But I don't think it should be terribly impactful to our 2024 guidance.

[Operator]

Thank you. And one moment for our next question. Our next question comes from Pito Chickering of Deutsche Bank. Your line is now open.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good morning, guys. Thanks for taking my questions. Can I go back to Medicaid reformation again for a second. Is this primarily inpatient or is it residential? And looking at the referral channels and as in Texas, are you hearing patients in the ER that can't get discharged and inpatient behavioral because they don't have coverage or any other color on which channels you're seeing the referrals due to Medicaid information in Texas.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. Pito, so I think as I mentioned, and again, I want to be clear that I'm not sure that the data that we get and the space that we have is sort of absolutely precise or that we can sort of correlate it to redeterminations in a very precise way. I think what we observed during Q3 was that the number of inquiries that we're getting, and that includes, as you suggest, referrals from third-party sources. It includes direct calls to our 800 numbers, it includes direct inquiries to our Internet sites, etc.

We're not necessarily down in volume, but what we were noticing is that it was a greater number of patients who did not have appropriate financial coverage. We always have some patients who don't, but it seems that number seemed to elevate in Q3. And it seemed to elevate in particular geographies in which Medicaid redeterminations were high. I mentioned Texas a bunch of times. I think Arkansas, Indiana, we're also states where we saw an elevated level.

But again, I'm not sure that I can parse it between inquiries from referral sources or direct increase to us. And like I said, I don't know that we can also tie it directly to what we generally are asking patients is what their current sort of financial coverage is. We're not necessarily getting their history of had Medicaid, loss Medicaid. We will talk a bit about whether we can help them get Medicaid coverage, etc, but we don't necessarily document the history there. So it's a little bit difficult to, I think, give the level of sort of precise data that you're looking for.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. So just make sure I understand that. So the number of inbound inquiries are basically the same, but the financial ability to pay was lower.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Correct.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Got it. And then a quick follow-up to Jamie's questions on the business pressures. Thanks for giving us this number is about 30% to 40% increase this year, moderating for 10 to 15 for next year. I guess, what percentage of contracts are locked in either typically multiyear contracts? So what percentage contracts are already locked in for next year? Or you've already gone and in-sourced this group yourselves?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. I think the truth is, Pito, these contracts are multiyear contracts, but they all have short-term outs. So in other words, I mean, I think the reason this physician expense is you became a crisis in 2023. And is that even though hospitals, I think, have long-term contracts with their position, their contract position providers, their ER physicians, their anesthesiologist those groups were coming to hospitals and saying, look, we're going to give you a 90-day or 120-day notice whatever our contract calls for unless you're able to increase our subsidy or change our contract in some way, etc. So I'm not sure that the underlying length of the contract is all that determined because I think in most cases, for us, and I'm guessing for others in the industry because otherwise, this wouldn't have become the issue that it did. All have short-term out.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Great. Thanks so much, guys.

[Operator]

Thank you. One moment for our next question. Our next question comes from Sarah James of Cantor Fitzgerald. Your line is now open.

[Sarah James, Analyst at Cantor Fitzgerald]

Thank you. I wanted to go back and clarify two comments that you made. First, on what sounds like the low acuity pent-up demand working its way through. You said you expect it to phase down over time. So just wondering if that means you expect it to still be a factor in 2024, if you're talking about phasing down through the end of this year? And the second clarification is just on the inpatient denials from insurers. Can you give us a little bit more context? Are these procedure classes that the payers are saying should have been outpatient? Or is it something about the number of hours spend or some other aspect that they're pushing back on?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. I mean, so I've said before that it is virtually impossible for us to precisely say whether a particular procedure is a catch-up of something that was postponed or deferred during the pandemic. So in other words, when we schedule an elective surgery or an elective diagnostic test. We have no idea when that patient sort of originally contemplated that procedure or discussed it with their physician, etc. What we do know is that the volume of elective procedures clearly declined certainly in the early stages of the pandemic. and they have been picking up since. And so we conclude and I think it's a reasonable conclusion that there is some element of catch-up. And to be fair, if you look at it, acute care adjusted admissions for us were up like 10% in the first quarter. Which was really kind of an extraordinary number.

It's moderated a little bit in Q2, down to like 8%, which is still a very high number, moderated to a little less than 7% in Q3. Which, again, still a very robust number from a historical perspective, but seems to be moderating a little bit. Your question about how quickly it continues, how much is left in the pipeline. The truth of the matter is I'm not sure that anybody can answer that question with precision. I just don't know that, that data is out there in a meaningful way that anybody can capture.

So look, when we, again, give our 2024 guidance, we will make some guesstimate based on trends and how it's going and what we think acute care volumes will look like in 2024. But I think broadly, our view is that those lower acuity volumes will continue to get caught up and moderate, and we'll get back to again, mid-single-digit acute care revenue growth that ultimately will be split between price and volume pretty evenly, whether that happens early in '24. Late in '24, I think that's yet to be determined. Your question about denials, particularly in the acute business, the issue that I think is probably, first and foremost, tends to be classification of patients between an inpatient admission and observation status. With obviously a patient who -- and this is frustrating for us because a lot of these patients are in the hospital for multiple days. But from the managed care perspective, don't meet inpatient admission criteria even though we're treating them. multiple days and maybe then getting paid for them as if they were simply an outpatient in our emergency room.

But that's the main issue. We do get sort of flat out denials where an insurance company would say that a patient shouldn't have been treated at all. But the vast majority of issues that we have with insurance companies on the acute side are over patient classification between inpatient and observation.

[Sarah James, Analyst at Cantor Fitzgerald]

Thank you.

[Operator]

Thank you. One moment for our next question. Our next question comes from Ann Hynes of Mizuho. Your line is now open.

[Ann Hynes, Analyst at Mizuho]

Hi, good morning. Can you just give an update on the behavioral hospitals that had some issues in Q2, how they are progressing -- I'm sorry, progressing back to normal emission trends. And also maybe to that same effect, I know in Q2, you hired a bunch of nurses that take a while to train and a while to ramp up. Can you talk about how that's going? And when you think that group of nurses will be able to take on a full patient load that we'll be able to see in the emission trends? Thanks.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Thanks, Ann. So you alluded to the two items that we probably discussed at the greatest length in Q2 that was affecting behavioral volumes in Q2. One was a handful of residential treatment facilities that were challenged with very kind of specific and nuanced issues with either regulators or referral sources, etc, that were working their way through. And then secondly, on a broader kind of more macro basis, so significant amount of new nursing graduates into the system, having to orient them, get them trained, etc. In both cases, we talked about the fact that the sort of recovery from those things would take the better part of the year. But by the end of the year and early into 2024, we thought both those issues would be largely behind us. I think that's true. The first issue is a much more sort of identifiable issue, those facilities will sort of return to their normal trajectory.

The staffing issue is obviously an ongoing one. We're constantly hiring new nurses and having to train them, etc. Again, I think it became an issue in Q2 in the spring when a lot of new nursing graduates were coming out of school where those numbers sort of crept up and we're having sort of a measurable impact in the business. I think the encouraging thing from our perspective is that overall, our hiring rates as well as our turnover -- hiring rates are going up and our turnover rates are coming down, albeit in both cases incrementally, which should allow us to, in our minds, get back to kind of what we think is a more normative and expected level of volume growth in behavioral, which is probably not terribly higher than the 1% we're running now, but maybe in the 3% or 4%. And in terms of our model and our ability to generate incremental earnings and incremental margin growth, that small increase in occupancy should make a big difference.

[Ann Hynes, Analyst at Mizuho]

All right. And I'm not sure if you said this, but can you just provide the contract on premium labor as a percentage of total labor for nursing and acute care?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. So it was $69 million in Q3, which is about a 10% to 15% increase over what we've been running the last few quarters.

[Ann Hynes, Analyst at Mizuho]

Very quick. Thank you.

[Operator]

Thank you. And one moment for our next question. Our next question comes from Kevin Fischbeck of Bank of America. Your line is now open.

[Kevin Fischbeck, Analyst at Bank of America]

Great. Thanks. You may have just -- I don't know maybe dismissed, but you made a comment earlier about how lack of labor is restricting volume growth. But then on the RTC side, it sounds like you got redetermination potentially restricting volume growth, which seems that odd. I guess you're saying that the occupancy difficult is on the acute side and that it's not really a lack of labor on the RTC side or else you'd just be able to refill that redetermination headwind, right?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. I just think there are discrete issues, Kevin. I think again, Medicaid redeterminations, I think, again, in just certain geographies are creating, we believe, relatively temporarily a bolus of patients who coverage, we didn't lack coverage, let's say, a quarter ago or two quarters ago. And so we seem to be turning more patients away in Q3 for lack of financial resources than we have had in the past. But again, we think that's sort of a temporary issue.

The staffing issue tends to be more of an issue in the acute behavioral business just because we rely more on RMs in that patient care model. And so yes, I mean, the staffing constraint and the deflection issue in behavioral tends to be more skewed to the acute behavioral business than the residential business.

[Kevin Fischbeck, Analyst at Bank of America]

Okay. That's helpful. And then I guess on the professional fees, I just want to tack I think you said the number went from 6% of revenue to 7.6% of revenue. Was that an acute care revenue number? Or is that a total revenue number? And then is there any reason to think that this cost pressure is fundamentally different than any other cost pressure? Like right now, you're going back and getting better rates to match the inflation spikes you've seen over the last few years. Is this cost pressure just one more cost pressure that you would have to price in over the next few years and maybe it takes three years to recapture the 1.6% headwind to margins, but you would expect to catch that eventually? Or is there anything structurally different about this cost versus others?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. So two things. Number one, in terms of the first question, yes, I should have been clear this is the infusion expenses really, as we've been discussing, it is really ER coverage esthesiology coverage and by definition, is an acute care issue, and those percentages were meant to be percentages of acute care revenue. Your second question about sort of isn't just like any other expense. I mean, again, as I was mentioning, I think in a previous response, I think what really drove this sort of immediate pressure and position expense and the timing of it was the passage of the No Surprise Billing Act.

And what I think we all learned was that these physician coverage businesses had relied on their profitability in large part for their billings to out-of-network patients. I'm not sure collectively, we have a full understanding of that. So when that ability was reduced dramatically by the No Surprise Billing Act, those businesses to the degree that they were run by third parties or even to the degree that hospitals were insourcing that became much less profitable, and we had to absorb those costs.

I mean in our case, in almost all cases, we were just having to pay third parties more. But I think once that gets reset, I'm not sure there be pressure continues. I mean, to me, that's a onetime reset. I think that's what you're seeing play through our numbers in 2023, etc. I do think there's also an element, I mean, there is, I think, a finite, there's a shortage of these kinds of doctors much like there was a shortage of nurses that we felt during the pandemic, and that exacerbated the dynamic a little bit. But again, I think that expense rose by 35% or 40% for us in 2023.

I can't think of another expense that rose by anywhere near that amount. And so again, I think we have a view that this is a largely kind of onetime notion. That's not to say that there won't be pressure on physician expense next year that, as I said earlier, it couldn't increase by 10% or 15%. And something above the rate of inflation. But I just don't think we think that this is something that we're going to have to face 35% or 40% increases multiple years in a row.

[Kevin Fischbeck, Analyst at Bank of America]

But I'm sorry, maybe I'm just -- it seems to me like you're not saying this 1.6% acute care margin pressure is going to reverse over time as you just price surgeries, everything higher to reflect you don't have an increased cost in here. You're saying this is a new baseline and we should kind of think differently about the long-term margin in acute because these pressures won't continue to get worse, but they're here to stay.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes, I don't think anybody is suggesting that physician expenses are likely to decline anytime soon. I don't think that's anything we have suggested. Like I said, we said earlier, when people talk about what's it likely to be in 2024, I said a 10% or 15% increase is not an unreasonable way to think about it.

[Kevin Fischbeck, Analyst at Bank of America]

All right. Thanks.

[Operator]

Thank you. One moment for our next question. Our next question comes from Whit Mayo of Leerink. Your line is now open

[Whit Mayo, Analyst at Leerink Partners]

Hi. Thanks. I know you guys are still going through the planning process for 2024, but I just wanted to sort of dial in to maybe some of the top strategic priorities you have for the behavioral health business that might be different than some of the initiatives in prior years? You've covered your labor agenda pretty well on this call and the progress -- the small progress, I think, that you're seeing there. But just anything else you'd call out, any organizational changes, anything that gets you excited or less excited about next year? Thanks.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. I mean, so Whit, I think as we've discussed, obviously, staffing, recruitment retention remains a top priority and focus. And honestly, I think we'll continue to be for the foreseeable future. Like I said, I think we feel like we've made a significant amount of progress, but it continues to be a major focus because, again, I think we have a belief that to the degree that we can hire appropriate clinical personnel, particularly in very specific geographies, very specific hospitals.

We absolutely have the ability to increase occupancy significantly. There are other initiatives, I think we have to increase occupancy. I think broadly, increasing occupancy is sort of the most significant opportunity we see in our behavioral business. In a business where pricing has been strong, where I think what Q3 reflects is that cost controls have been improving. We've been reducing contract labor. We've been reducing over time. I think that increased occupancy is the most significant opportunity we had in paper going forward. And I think we believe it's a significant opportunity.

Recruitment retention is a big way to get there, but we're looking at broadening our continuum, focusing on certain service lines like substance abuse and MAT and telehealth and outpatient and broadening sort of the continuum of care that we already, I think, offer a pretty broad continuum of care, but broadening that even more and broadening our payer mixes that we reach out to, we have a pretty strong presence in both the active and retired military but I think have a number of initiatives to increase our penetration there. So there's a handful of important initiatives in behavioral. But all I think would fall under this umbrella of being able to increase occupancy.

[Whit Mayo, Analyst at Leerink Partners]

Got it. Steve, just looking at the guidance, I know that you're reiterating it, but my math, if I just apply very simple normal seasonality looking at the DPP program in Florida you can easily get to the high end of the range. And I know that you're very respectful of the volatile operating environment, but just sort of anything that I'm missing or any refresh views as you kind of look within the range and kind of how you feel like you're tracking. Thanks.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yes. I mean I feel like -- and I will say that we don't pay a great deal of attention to consensus estimates, but the last time that I looked at consensus estimates, I think they were sort of in the midpoint of our revised guidance. It seems like a reasonable target at the moment. I think as we've discussed on the call, in my mind, clearly, the two upsides for us, number one, as we just discussed, is if we're able, over the fourth quarter to increase behavioral volumes and occupancy, I think that would be extremely helpful and create a significant amount of upside. And on the acute side, being able to push that pricing number up, recapture some of the sort of disputed amounts from our managed care payers, increased acuity, that sort of thing. So I think we've largely discussed what the upsides are and that if we were able to achieve those things, maybe we could get beyond where the consensus targets have us now.

[Whit Mayo, Analyst at Leerink Partners]

Okay. Thanks.

[Operator]

Thank you. One moment for our next question. Our final question comes from Joshua Raskin of Nephron Research. Your line is now open.

[Joshua Raskin, Analyst at Nephron Research]

Hi. Thanks for fitting me in here. Just on the physician staffing costs again. Can you just remind us how much of the staffing may be for ED anesthesiology, how much of that is outsourced or if any of it's in-sourced at this point? And then separately, how are your employee physicians performing? Is it really just an issue of specialists that we're billing for specific out-of-network issues? Or are you seeing some of that internally as well?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yeah. So first of all, for us, Josh, all of these contract services have historically been outsourced at least ER and anesthesiology. We have, in the last three or four months, brought some of those services in-house where we thought it made economic sense to do it, but historically, they've all been outsourced. I think it's a very different dynamic. And I think again, it's very specific to these house-based physicians, anesthesiology, ER being by far the highest ones.

But we're seeing it some in radiology, some in intensivist or labors or whatever. But clearly, ER and anesthesiology being the two largest our employee physicians who are just either regular primary care or specialists. I don't think they've been affected in a material way by the No Surprise Billing Act. Essentially, those physicians are in network with virtually all of the payers that we're in network with. So it's really not an issue with them. So this dynamic, I think, is very specific to the hospital-based physicians.

[Joshua Raskin, Analyst at Nephron Research]

That makes sense. And then just one last one on 2024. I know you're talking about this normalization. But when I look at some of the same-store revenue growth numbers, mid to -- mid-to-high single digits in the acute side, very high single digits to low double digits on the behavioral side. It just seems like pretty tough comps. And so do you think this is just more of a catch-up reset year and that next year we'll be back in that, pick a number, 5%, 6% range overall?

[Steve Filton, Chief Financial Officer at Universal Health Services]

Yeah. And again, I think I made those comments earlier. I mean, I think, yes, I think we think that in both cases, revenue growth, whether it's exactly in the beginning of 2024 later. But I think we think it moderates to sort of more historically normative levels. And I would also say a more historically normative split. So on the acute side, I do think volumes are likely to come down over time, but I think acuity will come up. And again, we'll get back to kind of mid-single-digit pricing.

I think in behavioral, we're likely to see pricing moderate a little bit, but also see volumes come up and again, get to kind of mid-to-upper single-digit pricing or upper single-digit revenue growth. And in both cases, I think with the moderation in costs with physician expense on the acute side coming into better control with contract labor coming down and overtime coming down, it should put us in a position where we're back on that trajectory of getting -- being on a path to get back to pre-pandemic margins in both segments.

[Joshua Raskin, Analyst at Nephron Research]

Perfect. Thanks.

[Operator]

I am showing no further questions at this time. I would now like to turn it back to Steve Filton for closing remarks.

[Steve Filton, Chief Financial Officer at Universal Health Services]

Thank you. We'd just like to thank everybody for their time and look forward to speaking with everybody next quarter.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Steve Filton, Chief Financial Officer
• Marc Miller, President and Chief Executive Officer

Analysts

• Justin Lake, Wolfe Research
• Jason Cassorla, Smith Barney Citigroup
• Stephen Baxter, Wells Fargo & Company
• A.J. Rice, Credit Suisse Group AG
• Jamie Perse, The Goldman Sachs Group, Inc.
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Sarah James, Cantor Fitzgerald
• Ann Hynes, Mizuho
• Kevin Fischbeck, Bank of America Co.
• Whit Mayo, Leerink Partners
• Joshua Raskin, Nephron Research