Universal Health Services, Inc. (UHS) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Universal Health Services Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Steve Filton, CFO. Please go ahead, sir.

Thank you, and good morning. Marc Miller is also joining us this morning, and we both welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2021. During the conference call, we will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, projections and 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, 2020, and our Form 10-Q for the quarter ended March 31, 2021. 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 $3.79 for the second quarter of 2021. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $3.76 for the quarter ended June 30, 2021. In last night's press release, we identified three specific items, including supplemental Kentucky Medicaid reimbursements, an increase to our self-insured professional and general liability reserves, and the receipt of insurance proceeds. On a combined basis, these items had a net favorable impact on after-tax earnings of approximately $30 million during the second quarter of 2021. Even if one chooses to ignore the favorable impact entirely, our earnings during the quarter still exceeded our internal forecast by a wide margin. For most of the second quarter, we experienced a continued decline in the number of COVID-19 patients being treated in our hospitals and a corresponding recovery in the number of non-COVID patients. As a result, most of our key volume metrics, including acute and behavioral patient days, emergency room visits and surgical cases grew to levels approaching those that we were tracking before the pandemic began. This robust recovery in volumes exceeded the pace of our original forecast and drove the favorable operating results even in the face of continuing labor pressures in both of our business segments. Our cash generated from operating activities was $119 million during the second quarter of 2021 as compared to $1.45 billion during the same period in 2020. The decline in cash provided by operating activities was driven by the previously announced early repayment of $695 million of Medicare accelerated payments, which were received by us during 2020 and repaid to the government during the first quarter of 2021. We spent $482 million on capital expenditures during the first six months of 2021. At June 30, 2021, our ratio of debt to total capitalization declined to 35.7% as compared to 38.3% at June 30, 2020. As previously announced, we resumed our share repurchase program in the second quarter of 2021 after suspending it in April 2020 as the COVID volume surged for the first time. During the second quarter of 2021, we repurchased approximately 2.21 million shares at an aggregate cost of $350 million. And yesterday, our Board of Directors authorized a $1.0 billion increase to our stock repurchase program, leaving $1.2 billion remaining authorization. We were extremely pleased with our second quarter 2021 operating results, which we noted were well ahead of our internal forecast. As a consequence, we also raised our full year earnings guidance, including an approximately 6% to 8% increase in our full year forecasted adjusted EBITDA. I would note that during the past four to six weeks, many of our hospitals have experienced significant surges in the number of COVID patients, and it is not evident that this surge has yet reached its peak. Given the uncertain impact of this most recent surge on non-COVID volumes and on labor shortages, we based our guidance for the second half of the year, primarily on our original internal forecast. Marc and I would be pleased to answer your questions at this time.

[Operator Instructions] Our first question will come from the line of Kevin Fischbeck with Bank of America.

Just wanted to follow up on the labor issue. It seems like a lot of companies are talking about difficulty in getting staffed. And I guess really interested mostly on the psych side that's been kind of a gating factor to growth for you guys. What are you seeing now? And how do you expect that to play out over the next year or so?

Sure. Well, Kevin, we've certainly discussed it for some time. I think we felt like before the pandemic began that the labor situation in our behavioral hospitals have largely stabilized from some of the challenges we've been having in the years before that. Obviously, the onset of the pandemic that have exacerbated and kind of created new challenges in terms of -- are finding sufficient numbers of therapists and nurses and mental health technicians who are nonprofessionals. For a variety of reasons, competition from telehealth providers, for therapists, nurses who were either burn out or contracting the virus or quarantining because they've been exposed to the virus or mental health technicians who we were competing with employers like Amazon or FedEx with. So a whole bunch of challenges, I think, during the pandemic. Again, I think as the pandemic eased in from its peaks early this year, I think the labor situation has been improving. And I think you saw that in Q2 with sequential improvement in our volumes and just a sort of a general stabilization of the behavioral business. Obviously, as I mentioned in my remarks, we've seen an uptick in COVID patients in the last four to six weeks. I think it's a little too early to tell what sort of impact that's going to have on our ability to fill all of our open labor positions. And it's why, as I, again, made -- commented in my prepared remarks, we've been a little bit cautious about our guidance in the back half of the year.

Okay. That makes sense. And I guess maybe just a little more color on the psych volume improvement. I guess you've got a different number, different service lines in psych. Are they all returning uniformly or some doing better than others?

It's very geographic specific. Number one, Kevin, I mean, I think it really depends about the competitive environment in the market. So, we have some markets where it is frankly not an issue and others where it's a significant issue. I will say that again, in May, June, July, we were setting internal records for how many people we were hiring at all levels as a result of some very focused equities on our part to increase our recruitment activities, et cetera. We were also focusing a great deal on increasing retention rates for those people we do hire, but again, express some level of caution and concern with the rise in COVID volumes in the last month or so only because every other time we've seen an increase in COVID patients, it does create an exacerbated pressure on those labor issues.

And maybe just another question. It looks like your cyclones are still down, I guess, maybe versus 2019. Is that the right way to think about it? And when do you think you can get back to those levels?

Yes. I mean I think as we've commented many times over the course of the pandemic, the underlying demand by sort of every way that we measure it for behavioral care is as strong as it was pre-pandemic and quite frankly, probably stronger, whether we measure that on inbound increase calls, internet inquiries, et cetera, or the amount of patients that were required to deflect because we don't have beds or we don't have sufficient staff, et cetera. Every indicator that we have both on a sort of macro industry-wide basis and a micro UHS basis indicates that the demand is still growing. As I indicated, I think we felt that as the pandemic eased, a lot of those pressures were easing, not necessarily disappearing by any stretch, but easing. We didn't have -- nurses weren't as burned out, nurses weren't chasing those premium dollars. It just became easier to hire and to retain people. So I think that the COVID resurgence makes it a bit more challenging. But ultimately, we have a view that these shortages are temporary and transient in nature and when they get resolved, which I think will happen as the pandemic eases over time, we'll be able to get back to pre-pandemic volumes and ultimately see pre-pandemic volumes.

Your next question will come from the line of Joshua Raskin with Nephron Research.

This is Marco on for Josh. Thanks for taking the question. I was wondering if you could just provide a bit more detail on the cadence of volumes through the quarter relative to the pre-COVID baseline? And would also appreciate some color on the trends you're seeing through July and thoughts around what is baked into guidance for the second half of the year? Thanks.

Sure. So I think we commented in Q1, we reached our -- the peak of our COVID levels, the third wave of COVID patients was sort of in late December 2020 and into January of 2021. Those were our highest COVID levels at almost all of our hospitals that we experienced during the pandemic. I would say beginning in the second half of January and then pretty steadily from there, COVID volumes declined and non-COVID volumes have recovered and rebounded. And as I indicated again in my prepared remarks to the point that by the time we exited Q2, for most of our volume metrics, we were back to sort of pre-pandemic and were sort of using 2019 as our measure of pre-pandemic levels of volumes. As I also indicated, we've seen COVID patients surged again beginning very late June and certainly well into July, and they don't appear to have peaked. Now what I will say is that our operators seem to be managing through this fourth wave of COVID very effectively. We certainly have seen a financial result since the COVID surge has resumed. But just from a volume metric perspective, we don't see that level of decline in things like elective surgeries or other activity that we've seen with other COVID surges. I think our operators are just much more accustomed to dealing with this, all of the sort of gating factors that have proved problematic in earlier surges, lack of PPE, lack of beds, lack of ventilators, those things, at least at the moment, don't exist. So we're coping much better. I do think probably the single biggest issue we will have with the resumption of COVID is just exacerbated pressure on labor. Every time that COVID frequency has increased, there's been more and more pressure on labor, and that's tough to measure. I mean, I think we know that we're using more temporary labor in July, but what the ultimate impact of that will be will have to play out. But at least so far through July, we seem to be coping reasonably well. However, as I indicated again in my prepared remarks, because we're sort of uncertain as to how this plays out and what the cadence will be, we've been cautious and haven't assumed that our financial results will sort of exceed our internal forecast in the back half of the year the way they did in Q2. And we've just sort of presumed that we'll meet our original guidance for the back half of the year for the most part.

Your next question will come from the line of Ralph Giacobbe with Citi.

Steve, can you talk a little bit more about utilization by payer just across commercial, Medicare and Medicaid, and also if you're seeing differences in acuity between them as well beyond sort of utilization?

I mean I think what the second quarter results are emblematic of -- and I think this is -- seems to have been true for at least our two acute care public peer who also have already reported this quarter is that there is a very favorable mix of patients as COVID has declined, and the non-COVID patients have recovered, the payer mix of those patients is skewed to commercial and to Medicare. We're seeing in a lot of our markets, fewer Medicaid and uninsured patients. We're seeing higher acuity of the patients we are treating. We've said, I think, from the beginning that the patients who sort of reluctant to come to the hospitals, driving softer emergency room activity, et cetera, tend to be lower acuity, Medicaid on insured patients. And so that mix obviously is reflected, albeit at lower volumes and higher revenue per unit, per adjusted admission, per adjusted patient day on both the acute and the behavioral side and increased earnings. So I think that's been generally a positive development and so positive that quite frankly, it has outweighed and even, I think, arguably overwhelmed the increased labor pressure that we've experienced. Now again, I'll caution that we may see a different dynamic in Q3 with higher levels of COVID patients, the mix may not be quite as favorable, but I think it was very favorable in Q2.

Okay. All right. That's helpful. And then I was hoping you could help frame what you are seeing specific to COVID. Maybe just baseline it for us, what percentage of admissions were COVID in the second quarter? And then obviously, obviously, you talked about the increase in just the last kind of few weeks. I was hoping to get sort of a quantification of what percentage of admissions you've seen of late that are COVID of the baseline? Thanks.

Yes. So I think in the second quarter, the percentage of COVID admissions to overall admissions had dropped into the sort of mid-single digits. I think throughout the pandemic, our average has been more like the low double digit, 12%, 13%. And I think at its peak in, let's say, January of 2021 or the first half of January 2021, we were at that maybe 20% of our admissions were COVID. Our COVID volumes today are similar to what they were a year ago in the sort of June, July time frame from a year ago, which, again, I would suggest we're in sort of the low double-digit percentage, 10%, 11%, 12% of our overall admissions. So not near the peak of where we were in January, but either close to or exceeding where we were in the second wave last summer.

Your next question will come from the line of Pito Chickering with Deutsche Bank.

They're getting closer to the 2019 levels, but not there yet. As you think about the back half of the year, should we be thinking about admissions accelerating sequentially from here and exiting the year at or above 2019 levels for fourth quarter?

So Peter, I think our point of view was, when we gave our original 2021 guidance, we had a point of view about declining cadence of COVID patients and frequency of COVID patients and a corresponding recovery in non-COVID volumes. I think the fact of the matter is, and I think our second quarter results reflect this that the decline in COVID patients was more rapid than we originally anticipated and the recovery of non-COVID business was also correspondingly more rapid. And obviously, it led to second quarter results that were well ahead of our expectations. I think as we think about now the second half of the year, again, the most recent COVID surge sort of complicates that, and I don't know that where any of us are really insightful enough to know exactly how that will affect the ultimate trajectory for the rest of the year. But I think we have a point of view that some of the catch-up and recovery of those deferred procedures, et cetera, were realized in the second quarter that maybe we had anticipated would occur later in the year. And so, I think we were thinking about a little bit more seasonality in the back half of the year. So I think, for instance, as I look at The Street estimates, I think The Street was projecting just steady improvement in volumes sort of throughout the year, which was sort of defied the traditional seasonality. And at the beginning of the year, that seemed to make some sense. But I think now that we've had such a strong second quarter, presuming that the COVID volumes decline relatively soon. I think we think the second half of the year will look a little more seasonal -- traditional seasonally than maybe we expected originally.

Okay. Fair enough. And then on behavioral margins, they increased 100 basis points sequentially after we pull out the $55 million from Kentucky. I guess how should we think about behavioral margins progression throughout the year? And can you walk us through the sort of the hires in June and July? And how do you think about hiring versus top line growth versus margins? Thanks so much.

Yes. I think that a lot of the strength in behavior and the increase in margins that you alluded to is being driven by strong pricing or revenue per adjusted day. And we talked about that quite a bit in the last few quarters. I think it's driven by lower level of denials, less uninsured patients, a number of other things, including some negotiated price increases with some of our managed care payers, particularly our managed Medicaid payers. It's been a little bit difficult to sort of predict how sustainable those levels are. I think some of that improvement is based on a little bit less rigorous utilization management behavior on the part of payers. And I think there was a view that at some point, as we emerge from the pandemic, the payers would become sort of more aggressive than they have been during the pandemic. We'll see how that occurs. But I think we have a point of view that as pricing moderates some, our volumes will continue to recover. And that's really based on the labor sort of dynamics that you talked about. And again, I mentioned that we've been seeing from our own internal perspective, very impressive hiring numbers for the last few months. What is difficult to measure in real time is exactly how our turnover rates are doing for a while. I think they had stabilized, the concern is with the resurgence in COVID that turnover rates could increase because we've seen turnover rates increase every time that COVID volumes increase. So that's the piece that's a little bit difficult to peg with precision.

Your next question will come from the line of Jamie Perse with Goldman Sachs.

I wanted to start with EBITDA and just thinking about 2022 and given where your guidance is for the rest of this year. How are you thinking about the longer-term growth of EBITDA, again, just given where you're going to exit this year relative to where Street is for 2022?

So I think our point of view is that the underlying fundamentals of both of these businesses have not really changed in any significant way. And the way that we've always thought about the long-term model for both of these businesses is that, they could and should grow from a top line perspective in the mid-single-digit range, 5%, 6%, 7%. And all other things being equal, if you were able to achieve that, that EBITDA growth would meet or exceed that and margins would expand, et cetera., because this is still a largely fixed and semi-fixed cost business. Obviously, during the pandemic, that sort of traditional model was significantly disrupted because of an overemphasis on COVID patients who tend to be sicker, less profitable and a decline in non-COVID business, whose patients tend to be more profitable. But I think our point of view and again, we're not smart enough to know exactly what the cadence and frequency of the COVID patients is going to be. But I think our longer-term point of view was as the COVID volumes declined. And again, I think Q2 was a perfect example of this. We sort of returned to a more normalized model where volume growth was in the low single digits. Pricing growth was in the low single digits, on a combined basis, revenue growth was in the mid-single digits. EBITDA growing, margins were expanding, et cetera. And I think at this point, that's how we think about 2022 with the sort of caveat that we presume that 2022 will be a relatively quiet year from a COVID perspective, but that's probably more helpful than anything else at this point.

Okay. That's really helpful. And then share repo and dividend, obviously both back now. Just how are you thinking about other legs of capital deployment, specifically M&A, just your interest level there and what you're seeing out there in the market? Thank you.

Sure, and Marc can certainly weigh in on this subject as well. But I think we have -- we saw about interest level. I don't think our interest level in M&A has declined. I think somebody asked Marc the question specifically in the first quarter call, and he talked about the fact that we continue to look at and explore and perform diligence on a whole host of opportunities in both business segments at the end of the day other than some relatively small opportunities, which we pursue things like micro hospitals and freestanding emergency departments, et cetera, that we've acquired. These are transactions in the $40 million, $50 million, $60 million range individual transactions, there really hasn't been real significant opportunities of size although we continue to explore them and would pursue them if they made economic sense and more compelling from a financial return perspective. In the absence of those opportunities, and again, I think the second quarter was a good example of this. We just became a more aggressive acquirer of our own shares. We're buying back our shares even with sort of the strong recovery in our share price in Q2. We're buying back our shares, arguably somewhere in the 8.5x to 9.5x EBITDA range. And honestly, we're hard pressed to find an opportunity to buy external EBITDA at those same multiples. So we view the opportunity to buy back our own shares as still pretty compelling. And I think we'll continue to do so. And our original guidance for 2021 was that we would buy back $750 million worth of stock over the three quarters. We bought back $350 million in Q2. So, we're obviously ahead of that pace.

Your next question will come from the line of Frank Morgan with RBC Capital Markets.

Steve, I wanted to go back to the hiring on the behavioral side of the business. It sounds like you've had some success there. But where are you now versus what you actually need? And what would that translate into in terms of incremental capacity to bring on more volumes?

So Frank, it's a great question. I mean I think we have a point of view that if we could wave a magic wand and hire all the staff that we need, again, at the therapist nurse, tech levels, our volumes would exceed I'll call it pre-pandemic baseline or 2019 volumes by mid-single digits at least. I think the demand is sufficiently there that, that would be the case. Now I don't want to leave the impression that obviously, we don't have a magic wand and there's just -- instead a lot of hard work that remains to be done and focus. But I think we have a point of view that these things are -- these issues and these obstacles are overcomeable, if that's a word. And we will meet these targets, especially, again, as the virus received, obviously, the frequency of the virus and sort of multifactorial kinds of pressures that puts on our labor is the one thing that, as you might imagine, so they're completely out of our control. There's nothing we can do about that. But don't believe the virus is going to last forever. And we believe that as it proceeds, it will become much easier for us to meet our hiring and retention targets. And I think fundamentally, we believe that demand will return to not only pre-pandemic levels, but will be growing in the way that I described the model earlier to somebody by mid-single digits every year above pre-pandemic levels.

Got you. And maybe going back to your guidance, and you called out you're thinking more of a seasonal pattern, but could you help us maybe if you had to give a weighting and attribution for the second half of the year. Is it -- are you thinking maybe 40% of the balance of the year will occur in the third quarter and 60% in the fourth? Any kind of color in terms of weighting over the second half of the year? And then, are there any incremental buybacks included in that guidance?

Yes. I mean, we made this point in Q1, which is, I think UHS has very intentionally not ever given quarterly guidance. And I said if there was ever a year when I think we would never have changed that practice and be more precise, I think this was the year. I still believe that obviously, some of the cadence and some of the trajectories this year are much harder to predict than ever before. What I will say, and I think I referenced this in an earlier comment is as I looked at The Street estimates for the year, it just seemed like they were a little heavy in the fourth quarter compared to what our expectations were. And I think that's because I'm really not being critical, The Street in creating their expectations for the year sort of ignored the normal seasonal patterns, said volumes would continue to recover because you had all this pent-up demand, et cetera. I think we have a point of view that because volumes have recovered earlier than our expectations a lot of it sort of became front-end loaded. You see that in the Q2 results, not only for us but our peers that the fourth quarter will be -- have some of the more seasonal softness that we've seen historically because of the holidays, et cetera. So that's the only observation I'd make about the cadence and particularly The Street trajectory for the balance of the year.

Got you. One last one and I'll hop. Just in terms of the COVID surge you have experienced, any particular geographies you called out, certainly, we've read about Vegas, but is Vegas the biggest source? Or any color around any other geography? And I'll hop.

Yes. I mean, so on the acute side, I think we've all read that states that have seen a significant increase in Texas and Florida and Nevada. And unfortunately, from an acute perspective, that probably covers of our acute care revenues. So, we're seeing that increase in all of our markets, but I think probably Vegas is the most acute at the moment. And then on the behavioral side, it's pretty spread out. I mean, we do have again, a pretty big presence in Florida and Texas. From a behavioral perspective, we have some hospitals in Missouri, which has been kind of a focal point of the COVID resurgence, et cetera. So, we're feeling that tension in a number of different markets on the behavioral side as well.

Your next question will come from the line of Matt Borsch with BMO Capital Markets.

You have Ben filling in for Matt Borsch. Thanks for taking my question. So I would like to touch upon price transparency. With the announcement of the proposed rule to increase fines to hospitals, I was just wondering how your team plans to handle compliance with these possible changes going forward?

So we have a point of view that our hospitals have been compliant with the price transparency regulations since January 1 of this year when they originally went into effect. Occasionally, we will sort of be critiqued by users or other groups who sort of kind of tested and will say that they have difficulty navigating uncertainties, et cetera, and we make tweaks to it. But we very much feel that we currently comply and will continue to comply.

[Operator Instructions] Your next question comes from the line of A.J. Rice with Crédit Suisse.

First off, with respect to the change in reserve that you recorded in the second quarter, can you flesh out a little bit? Is that part of a normal review process? Was that an unusual update? And does that have any impact on forward accruals?

Sure, A.J. So, the nature of the malpractice reserves are such that we conduct -- or we have a third-party actuary conduct in-depth actuarial analysis twice a year. So this was part of our kind of midyear review of that reserve. And the nature, unfortunately, on the malpractice reserves because they have such a long tail and cases are often being settled five, six, seven or even more years from their actual occurrence. It's probably the single most difficult kind of an accounting estimate that we make and is probably subject to the most change. I think what our actuary reported to us in the current period, and we, I think, affirmed with a number of other outside observers in this area is that the general trend in the country is for not necessarily more free malpractice cases, but more severe and more sort of dollar intensive cases. And that's been our experience as well. So given that those results, they determined that we needed an increase in our reserves, we concurred. We recorded that. We'll record, I think, a relatively small increase in our provision form malpractice going forward. I don't think that will have more than kind of $20 million impact annually going forward. And obviously, we'll continue to do these biannual detailed reviews by the actuary, but that's the color behind that.

Okay. And then the other question I was going to ask, you talked a little bit about different aspects of what you're seeing on the commercial side. But is just there an update on where you're at and re-contracting. Is that happening at a normal pace for this year, next year and beyond any change what you're seeing in terms of rate increases or in terms of terms, all the value-based talk and so forth, anything there that's new or different that you're seeing?

No, I think the reality is that commercial managed care contracts continue to be administered contracts and negotiated throughout the pandemic. Obviously, I don't know that all -- those sorts of negotiations were held in person or face-to-face historically. So I don't think that changed a great deal during the pandemic. I did note earlier and have noted, I think, in previous calls that we really made a concerted effort, particularly on the managed Medicaid side of the behavioral business to negotiate price increases and in some cases, we haven't had for years. And I think that's helped to drive that really strong behavioral pricing that we've experienced throughout the pandemic. So, that's the one change that I would highlight and suggest is certainly sustainable. Other than that and other than, again, I think a comment that I've made before that our managed care payers, particularly on the behavioral side, seem to have been a little bit more lenient on utilization management and denial like the stay during the pandemic. I think broadly, we haven't seen huge changes in our relationships with managed care payers on either the acute or behavioral side.

And just maybe a final thing. On the public exchange volume, we're hearing some -- obviously, there's growth again of note this year with the changes in subsidies and the changes in the extended period of enrollment. Has that moved the needle? I'm assuming you book that in commercial, if I'm right.

Yes. So sometimes it's difficult to identify what patients have an actual exchange product, et cetera. But what I do think and I said this again in an earlier comment is, despite all the economic disruption and particularly in the beginning of the pandemic, people losing their job, setting reduced hours, et cetera. We didn't see the accompanying increase in rates of uninsured the way that we have in previous sort of economic downturns. And I attribute some of that to the fact that obviously, the ACA was in place, and so for instance, in a state like Nevada, where we've seen a significant amount of weakness in the gaming industry, again, particularly early in the pandemic. We've seen an uptick in Medicaid utilization and I think that's generally been a good thing because I think these people would have been uninsured other than being able to fall back on expanded Medicaid benefit. So that sort of thing, I think, has been helpful. I think the presence of the ACA, Medicaid expansion in some of our important states like California, Nevada. The greater ease in terms of being able to acquire commercial exchange products, I think all that's been helpful to keep that better payer mix that we seem to be experiencing, our peers seem to be experiencing during the pandemic.

We have no further questions at this time. I'll turn the conference back over to management.

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

Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.