Universal Health Services, Inc. (UHS) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Solid Revenue Growth: The company reported a solid 6.6% revenue growth, with acute hospitals experiencing a moderation of demand but still achieving a 3.4% year-over-year increase in adjusted admissions.
• Effective Expense Management: Expenses were well controlled, with a significant reduction in premium pay, reflecting a 15% to 20% decline from the prior year quarter.
• Strong EBITDA Growth: On a same facility basis, EBITDA at acute care hospitals increased 37% during the second quarter of 2024 compared to the prior year, showcasing effective cost management and operational efficiency.
• Behavioral Health Segment Performance: The behavioral health hospitals saw an 11% increase in same facility revenues, driven by a 9.3% increase in revenue per adjusted patient day.
• Capital Expenditures and Share Repurchases: The company spent $450 million on capital expenditures and acquired 1.1 million of its own shares at a cost of approximately $195 million, highlighting its ongoing investment in growth and shareholder value.

Pessimistic Highlights

• Surgical Growth Flattening: The company noted that surgical growth has flattened out, indicating a potential slowdown in one of the more profitable areas of hospital operations.
• Moderation in Acute Care Volumes: Acute care volumes have moderated, which could impact future revenue growth if the trend continues.
• Behavioral Volume Performance: Behavioral patient days on a same-store adjusted basis were up by about 2% in Q1 and expected to be slightly better in Q2, indicating a slower recovery in this segment.

Company Outlook

• EPS Guidance Increase: Based on favorable operating trends in the first half of the year, the company is increasing the midpoint of its 2024 EPS guidance by 17% to $15.80 per diluted share.
• New Supplemental Programs: The company is optimistic about new supplemental programs being developed in Tennessee and Washington D.C., which are not yet fully approved but could significantly benefit the company if approved.
• Stock Repurchase Program: The Board of Directors has authorized a $1 billion increase to the stock repurchase program, indicating confidence in the company's financial health and future prospects.

Q & A Highlights

• Q: Can you provide details on the supplemental payments and what inning you are in for both the acute care and behavioral segments? (Ann Hynes, Mizuho Securities)

  A: The company is cautious about discussing new or expanded programs until formal submission to CMS. Tennessee and Washington D.C. programs are expected to be approved later this year or early next year, with significant annual benefits anticipated. (Steve Filton)

• Q: Could you elaborate on behavioral volume performance in the quarter and expectations for demand growth? (Stephen Baxter, Wells Fargo)

  A: Behavioral volumes have been impacted by staffing challenges and Medicaid disenrollments, particularly in the Southern states. The company aims to achieve a 3% patient day growth target by the end of 2024. (Steve Filton)

• Q: Can you discuss the moderation in acute demand and surgical volumes? (Ben Hendrix, RBC Capital Markets)

  A: The company had anticipated a return to pre-pandemic patterns for acute care volumes and surgical growth. Cost management has been a focus in preparation for this moderation. (Steve Filton)

• Q: On the updated guidance, how much is capturing year-to-date trends versus adjustments for supplemental payment information? (A.J. Rice, UBS)

  A: The guidance increase accounts for the first half beat, includes supplemental programs known to continue in the second half, and retains original guidance for revenue and volume perspectives. (Steve Filton)

• Q: What impact have the two-midnight rule and Medicaid redeterminations had? (A.J. Rice, UBS)

  A: The company has not seen a significant impact from the two-midnight rule change and notes that Medicaid redeterminations have had a bigger negative impact on the behavioral business. (Steve Filton)

• Q: Can you provide an update on the guidance for DPP and share repurchase dynamics? (Justin Lake, Wolfe Research)

  A: The DPP number is expected to go into the low to mid-900s, with about half of the guidance raise coming from these supplemental payments. The company intends to spend the bulk of its free cash flow on share repurchases. (Steve Filton)

• Q: What is the embedded adjusted admissions growth in your guidance for the second half? (Sarah James, Cantor Fitzgerald)

  A: The volume assumptions for the back half of the year are not significantly different from the original guidance, with adjusted admission growth in the acute side in the 3% to 4% range. (Steve Filton)

• Q: Can you give us a sense of where Medicaid supplemental payment programs stand relative to average commercial rates? (Andrew Mok, Barclays)

  A: Medicaid reimbursement remains well below commercial and Medicare rates, but supplemental payments help make up for inadequate reimbursement in the past. In some behavioral facilities, Medicaid payments approach Medicare reimbursement, influencing the company's approach to attracting Medicaid patients. (Steve Filton)

• Q: On the acute labor side, can you talk about turnover, hiring, and how length of stay reductions help EBITDA growth? (Pito Chickering, Deutsche Bank)

  A: Acute care turnover is in the low-and-mid-20s, with premium pay reduced significantly. Reducing length of stay lowers the cost per discharge, contributing to EBITDA growth. (Steve Filton)

• Q: Have recent negative press and Senate Finance Committee reports impacted referrals? (Pito Chickering, Deutsche Bank)

  A: The company has seen virtually no impact from the Senate hearing and report on volumes, referral sources, or regulatory oversight. (Steve Filton)

• Q: Can you break out roughly how much of the volume headwind is Medicaid redeterminations versus labor-related constraints? (Michael Ha, Baird)

  A: It's difficult to precisely parse the impact between Medicaid redeterminations and labor constraints, but both are expected to improve in the back half of the year. (Steve Filton)

• Q: Is there any sign that demand is being impacted outside of the Medicaid population? (Kevin Fischbeck, Bank of America)

  A: The underlying demand for behavioral treatment continues to increase, with the company focused on reducing turnover and filling vacancies to meet this demand. (Steve Filton)

• Q: How do you make sense of the moderation in SWB per patient day against the challenges in filling positions? (Whit Mayo, Leerink Partners)

  A: The gap between acute care compensation and sub-acute care compensation has narrowed, with the company focusing on making behavioral settings rewarding and reducing turnover rather than solely increasing compensation. (Steve Filton)

• Q: What percentage of revenue is coming from exchange-based insurance, and how do margins of these patients compare to other segments? (Joshua Raskin, Nephron Research)

  A: Approximately 5% of admissions come from exchange-based insurance, with revenue and margins likely similar due to reimbursement rates being between Medicare and commercial. (Steve Filton)

• Q: How long does it take new facilities to get to breakeven, and do geographies change this timeline? (Ryan Langston, TD Cowen)

  A: New facilities typically reach breakeven in 6 to 12 months, with the timeline potentially compressed in markets like Las Vegas. The impact on earnings will be more precise in the company's 2025 guidance. (Steve Filton)