Universal Health Services, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and thank you for standing by. Welcome to the Universal Health Services First Quarter 2024 Earnings Conference Call. [Operator Instructions]
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 first quarter ended March 31, 2024. 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, 2023. We'd like to highlight just a couple of developments and business trends before opening the call up to questions.
Thanks, Steve. In our year-end conference call, we said we envisioned 2024 as a year of continued strength in both of our business segments. And during the first quarter of 2024, both segments increased their operating margins when compared to the comparable quarter of 2023. We anticipated that acute care volumes would likely moderate to a degree, but remain robust compared to historical levels. We also believe the acuity trends will continue their recovery trajectory.
[Operator Instructions] Our first question comes from the line of Justin Lake of Wolfe Research.
First question on your acute care volumes in the quarter. Just to your point, Steve, I think it's pretty clear the calendar had some impacts, January, February stronger, March weaker. So I'm curious if you can maybe share with us what you were seeing monthly or maybe kind of Jan, Feb versus March. And then how does April kind of starting to look versus March? Are you seeing it kind of back to January, February levels or somewhere in between?
Okay, I'll try and tackle a bunch of different issues there. Yes, so definitely acute care volumes and behavioral volumes softened in March, I think, as a result of the Easter spring break timing. We're seeing some recovery in April, I would say April is probably volume-wise somewhere in between the January, February run rate and the March run rates. And I think that's what we would expect. I mean, the shortfall in admission and elective activity and surgical activity that we saw in March, I think we would largely expect to make up not necessarily completely in April, but mostly through the second quarter. And it seems like we're on track to do that.
Our next question comes from the line of Ann Hynes of Mizuho Securities.
So obviously, you beat consensus EPS and EBITDA meaningfully. Can you tell us what you beat versus your internal expectations? Is my first question.
Thanks, Ann. Yes, I mean, our internal budget for the quarter was not far off from consensus. I think maybe it was a little bit higher than consensus, so maybe 2 or 3 percentage points higher than consensus. But obviously, it was a successful quarter, both in terms of the third-party expectations as well as our own. As far as the 2-Midnight Rule and the impact on inpatient acute volumes, as best as we can tell, it did not have -- and I think the question is, is there a change in payer behavior that's resulting in a measurably increased amount of inpatient activity versus observation and our own data as well as we use a third party to help us adjudicate a lot of these [Indiscernible] call them claims that are on the bubble of being inpatient or observation. We use a third party to help us with that.
Our next question comes from the line of Stephen Baxter of Wells Fargo.
Two kind of quick ones, I guess. So first, the behavioral patient day, volume growth improvement that you're expecting throughout the year, I guess, just give us a little bit of color on leading indicators or potentially capacity opening up, I guess, like what is giving you the confidence to kind of point to that from here.
So in terms of your first question about behavioral patient days and behavioral patient day growth, I think as you alluded to in your question, it improved slightly from the pace of the last few quarters, our expectation is that it will continue to improve during the year. Incrementally, I think Marc mentioned that our underlying guidance for the year assumes we'll get to like a 3% patient day growth level. What gives us that confidence is simply that, as we've said, many times over the last several years as we believe the underlying demand is there.
Our next question comes from the line of Pito Chickering of Deutsche Bank.
Can you talk about the acute OpEx changes that you saw in this quarter? How much did [Indiscernible] increased year-over-year? And is this the right level going forward and any other pressure points [Indiscernible] should be thinking about?
Yes. So I think, Pito, especially on the acute side, the increase in other operating costs are primarily driven by physician expense which we said for the year would increase by about 5% or 6%, and we believe that will still be the case. But because physician expense continue to increase every quarter last year, and we believe will be relatively flat this year, meaning flat quarter-to-quarter, the increase over last year will diminish as we get to the end of the year.
Okay. And then on -- a follow-up to Justin's question on supplemental payments. I guess for $10 million to $15 million from prior two periods. But looking out into '24 or '25, what states do you think could be expanding or adding sort of new payments that could impact your behavioral throughout the year?
Yes. So what I would say is we've often pointed out, and I think there are a couple of analysts on this call who will routinely point out that over the last several years, especially our original forecast of supplemental payments have tended to only increase as the year has gone on as states either implement new programs or refine their existing programs and calculations and I think that's our expectation for this year as well.
Our next question comes from the line of A.J. Rice of UBS.
Obviously, with the strong revenue number, that gives you leverage down the income statement. But I wondered if you look at labor, both permanent and your premium labor. Can you give us a little sense of what the underlying trends are year-to-year wage increases, how it's working out with your premium labor outlay and then similarly, I'll ask on the first second question. Pricing was strong in the quarter. Obviously, that was helped on the acute side by the supplemental payments, any updated thoughts on where commercial rate increases are coming out and the extent to which you think exchange-related coverage as people maybe pick up exchange coverage versus Medicaid is impacting what you're seeing there?
Yes. So again, a few different issues here. I'll try and address them discretely. Yes, I mean I think clearly, what the income statement reflects as you alluded to, A.J., is more operating leverage and efficiency on the labor line. I think it's a result of a few different things, premium and pay.
Our next question comes from the line of Ben Hendrix of RBC Capital Markets.
Just a quick follow-up on the Illinois litigation. I appreciate that this is unprecedented and different, in fact, and jurisdiction from Acadia settlement, but that was also kind of equally unprecedented. I was just wondering if this is changing at all your approach to the RTC business, your strategy, capital allocation and how you expect to kind of grow in your approach to behavioral health over the long term?
No, I think it would be premature, then. Again, as I commented earlier, I think that there still is a great deal of uncertainty surrounding this particular case and verdict that we had. I'm certainly not an expert and wouldn't comment in any great detail on the case that Acadia had other than to comment that it was a different state, it was the case with multiple plaintiffs. There were multiple cases. Our case was in a different jurisdiction, a single [Indiscernible] of a single incident, et cetera.
Our next question comes from the line of Kevin Fischbeck of Bank of America.
I was wondering if you can talk a little bit about margins. I guess both segments saw some nice margin improvement in the quarter. You've talked about a significant margin opportunity in both segments of time. Just want to get a little more color update about how you think about build to an opportunity for margins, the pace of that margin improvement? And it does feel like -- and I don't know if this was in your original assumption, but it does feel like the supplemental payments are coming in maybe better than one might have thought a year or 2 ago. So I want to get your thoughts about how that might impact your view on where margins ultimately can be?
Yes. So Kevin, we have said for some time that we felt like the margin deterioration that we saw during the pandemic could and would largely be recovered in both business segments as we return to sort of more normal levels of growth, and I think you specifically have pointed out that acute care volumes broadly, not just ours, still haven't necessarily returned to prepandemic levels. So we still think there is a decent amount of runway there for continued acute care volume growth as well as behavioral volume growth, which I addressed in a previous question.
Our next question comes from the line of Jason Cassorla of Citi.
I wanted to follow up on the supplemental payments and the acceleration there. Clearly, you guys are benefiting. But I guess your local market competitors [Indiscernible] benefiting as well. So I guess I'm just curious if you're seeing any changes from a competitive standpoint either competitors accelerating build-out of the outpatient or anything along those lines?
Yes. So in terms of your first question, Jason, I don't know that in any of our markets, we've detected or recognized a significant change in our competitive behavior as a result of the increase in supplemental payments. I'll make the point that, obviously, the supplemental payments tend to benefit as they're intended to providers who are providing more service to Medicaid patients have higher Medicaid utilization. I think that's why we struggled a little bit more during the pandemic. I think we tend to have a slightly higher Medicaid utilization than some of our public peers. So I think we're benefiting from that now. But in terms of our local market now, I don't know that, again, the Medicaid supplemental payments are specifically affecting competitive behavior.
Our next question comes from the line of Whit Mayo of Leerink Partners.
Steve, maybe just comment on the Medicaid rule that was released this week on state-based programs. Maybe too early to have much insight, but it seems like some positives and some less positive things. Just curious how your team and legal advisers are looking at this.
Yes. So I mean we were encouraged with the fact that in this rule, Medicaid did not place a cap on these supplemental programs. Instead, they focused -- as they have in the past, I don't think this was a new focus there, but they focused on these hold harmless agreements, which they have historically objected to. I'm certainly not an expert -- a legal expert in this regard. But I do know that we've certainly used legal experts and consultants and are aware of consultants who will adamantly argue that CMS just is wrong on this particular issue and on the legality of these hold harmless arrangements.
That's helpful. And just one other quick one. Just thinking about the opening of West Henderson later this year. Is that still a good timetable and maybe the P&L consideration, start-up losses, and I'm kind of curious how you think about how the volume may get redistributed in the market once that hospital opens.
So West Henderson is scheduled to open late in the year, maybe in late November, December. So it shouldn't have much of an impact, there will be some level of preopening costs and then a month or 2 of probably operating losses as it opens. I think we didn't really highlight that in our call a couple of months ago, in part because I think we have a view that continued improvement of our hospital in the [renal market] will largely offset that. And as a consequence, neither was likely to have a material impact on this year's results.
Our next question comes from the line of Sarah James of Cantor Fitzgerald.
Can you clarify the $5 million sequential uptick in premium pay, was that related to the acute volume strength? Then does your $50 million a quarter of premium pay goal assume a version to normal acute volumes? And how do you think about strategy and time line to get to that $50 million?
Yes. So I actually think, Sarah, that the $68 million in premium pay in Q1 is pretty similar to what we've been running the last few quarters. You're right, we have talked kind of about a goal of getting into sort of the mid-50s. But I think what's prevented us from doing that is these really robust acute care volumes. And I'll make the point that the 4.5% adjusted admission increase in Q1 of this year is compared to, I think, in excess of a 10% increase in adjusted admissions last year's first quarter. So you're really talking about, I think, some pretty historically high acute care volume numbers.
Our next question comes from the line of Joshua Raskin of Nephron Research.
I was wondering if you could give a broader update on CapEx spending and maybe capacity increases in specific areas of focus and then just a quick follow-up on Las Vegas and West Henderson opening. I'm curious if Las Vegas on the acute care side, volumes or demand there running above company average? And maybe just a little bit more color on sort of shorter-term trends there.
Sure. So I think from a CapEx perspective, Josh, I think we continue to invest on the acute side in those areas where I think acute invasion hospitals really differentiate themselves, meaning emergency room services, emergency room capacity, surgical services, both in and outpatient, and again, for the higher acuity, higher-end services that we don't have as much competition in. But we also continue to invest in outpatient. We have a very successful freestanding emergency department initiative that has been underway for a number of years. I think we'll finish this year with probably 30 freestanding EDs around the country, whereas 5 years ago, I think we didn't have any, and we can also continue to invest in some freestanding surgical services facilities, freestanding imaging centers, et cetera.
[Operator Instructions] Our next question comes from the line of Andrew Mok of Barclays.
I think you commented that the quarter was above your internal expectations. You're expecting behavioral volumes to improve from here, and there's potential upside to initial forecast for supplemental payments. So just putting all those together, any updated thoughts on where you think you sit within the unchanged guidance for the year.
Sure, Andrew. I mean, clearly, just from a mathematical perspective, the amount that we exceeded our own internal budget and consensus numbers for the first quarter would already put us on the trajectory [indiscernible] towards the high end of our guidance. I think most people know, but I'll just repeat for everybody's sake. We had never revised guidance after the first quarter. It's just something that we don't generally think is a kind of a prudent thing to do. I think if the trends continue, however in Q2, that's certainly a possibility, guidance revision at the end of Q2 if these trends continue. Again, I think the trends that I would specifically highlight were better than we expected in Q1 of our acute care volumes, which I think we thought might moderate a little bit more than they actually did and behavioral pricing, which I think we thought might moderate a little bit more than they did. Obviously, we're pleased that neither did, we're focused on keeping both of those metrics as high as they can be.
Great. And then just a follow-up. I think you commented on intra-quarter in April volumes in the acute segment. Just hoping you could do the same thing in the behavioral segment and maybe comment on trends exiting the quarter to help support the higher growth outlook?
Yes. I think I forget if the comments that I made were specifically about the acute segment. But I think the trends more similar in both. I think I commented in some conferences earlier this quarter that the behavioral business got off to a bit of a slow start with some bad weather -- in bad winter weather in states that don't necessarily usually expect bad winter weather in the south central part of the country. But [April volumes] recovered in late January and certainly in February, but I think have the same calendar issues as the acute segment did in March, softer volumes, et cetera, particularly in that child and adolescent population, which tends to really soften when school is out.
I'm showing no further questions at this time. I would now like to turn it back to Steve Filton for closing remarks.
We'd just like to thank everybody for their time and look forward to speaking with everybody next quarter.
Thank you for your participation in today's conference. This concludes the program. You may now disconnect.