Q3 2022 Universal Health Services Inc Earnings Call
Okay.
Good morning, and thank you for standing by and welcome to the Universal Health Services incorporated second quarter 2022 earnings Conference call.
I'd now like to hand, the conference over to a speaker today, Steve Filton Chief Financial Officer. Please go ahead Mr. Filton.
Okay.
Thank you and good morning, everyone. Mark Miller is also joining us. This morning, we welcome you to this review of Universal Health services results for the second quarter ended June 32022.
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 for anyone not familiar with the risks and uncertainties inherent in those forward looking statements I recommend a careful reading of the section on risk factors and forward looking.
Statements and risk factors in our form.
Form 10-K for the year ended December 31, 2021, and our Form 10-Q for the quarter ended March 31 2022.
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 an adjusted net income attributable to Uhf's per diluted share of $2 20 for the second quarter of 2022.
As previously disclosed in our pre announcement on June 32022, our acute hospitals experienced a significant decline in COVID-19 related patients during the second quarter of 2022.
As a percentage of total admissions Cobra diagnosed patients made up 13% of total admissions in the first quarter of 2022, but only 3% in the second quarter of 2022.
The decrease in Covid related patient volumes during the second quarter was not offset by an equivalent increase in non COVID-19 related patients, resulting in significant shortfalls in revenues and earnings compared to our original forecast for the quarter.
And even though we did make progress in reducing premium pay and the acute segment, which went from $153 million in the first quarter to $117 million in the second quarter overall cost did not decline sufficiently to offset the weaker revenues.
Specifically a surge in patients with the Amazon version of the IRS, which began in December 'twenty one.
Tended to peak in most of our geographies in January of 'twenty two.
Our acute segment, we would note that in general the omicron patients were less acute reopen the COVID-19 related patients treated in previous surges in us displayed somewhat lower acuity.
While the amount of contract nursing hours used even more importantly, the rate we had to pay for those hours increased significantly in the first quarter, both on a sequential basis as well as on a year over year comparison.
Our behavioral segment, we also made progress in scaling our vacant positions, but patient day volumes still has not recovered as quickly as we originally expected.
We do note that our reported second quarter results were benefited from approximately $10 million of revenues from supplemental, Texas, Medicaid reimbursements, which were not reflected in our estimates for the quarter and the pre announcement. These revenues were originally contemplated to be recorded in the second half of the year. So the $10 million represents a shift.
And timing only.
Second quarter also included approximately $20 million of startup losses incurred by recently opened de novo acute and behavioral health facilities as well as a $16 million pre tax charge.
Incurred to increase our reserves for self insured professional and general liability claims.
Our second quarter 2022 operating results were significantly behind our original forecast.
The primary driver of the shortfall was that non COVID-19 volume does not recover as quickly.
Great.
Based on our previous experience during the pandemic when coke volumes declined rapidly.
We believe there are multiple contributing factors to the slower demand rebound, most notably labor scarcity issues, which continue to constrain our ability to meet demand in certain circumstances.
However, we believe the majority named shortfall has been simply delayed or postponed and then ultimately it will be realized.
We're encouraged by the progress made in reducing premium pay.
Vacancies and we continued to invest heavily in recruitment and retention initiatives, where appropriate. We are also developing alternative patient care models that allow us to use a wider variety of available caregivers to render the most efficient and high quality of care we care.
And the reaction to the earnings softness in fact that we are completing our refinancing during the quarter we were.
Reduced the pace of our capital expenditure spend by about 20% or $100 million for the first six months of the year.
Similarly, we moderated the trajectory of our share repurchases, although we still expect to acquire approximately the same number of shares.
In our original guidance.
We are pleased to answer your questions at this time.
As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from.
Marco from Nephron.
Research Your line is now open.
Hi, good morning, Thanks for taking the question. So you spoke to some of the developments.
On contract labor during the quarter.
But I was wondering if you could provide a little more detail on what youre seeing in terms of the hourly rates and utilization and how that's tracking into July .
And also is there any detail you can provide on a base hourly nursing rates and how those compare today to last year or even two years ago.
Yeah, so what.
What we've said in the first quarter was that we had $115 million under $53 million.
Premium pay and the acute segment.
And we said that our guidance presume that that number would be cut.
Approximately in half by the fourth quarter, so that we'd have something like 75 or $80 million.
Premium pay in the fourth quarter.
We're pretty much on track for that trajectory as I said, we had $117 million of premium pay.
In Q2, which is about 20%, maybe a little bit more reduction I think that reduction came from a combination.
Both rate declines and hours utilized I think.
Split pretty evenly in terms of their impact.
So I think Thats, where we are as far as.
Underlying base wage rates.
I think as we've noted before.
They have gone from sort of pre pandemic increases I'll say on the acute side, specifically from let's say three to three 5% to something more like four 5% to 5%.
On the behavioral side, they probably started at somewhat lower but again something in the neighborhood of 120 550 basis point increase in base rates.
Pre pandemic post pandemic comparison.
Great. Thanks, and then if I could ask one quick follow up on the behavioral side is there any way to quantify the last patient volumes from the lack of your ability to find the staffing.
In other words is there any detail you can provide on how many admissions or patient days, you think you've lost from that.
Yeah.
And we do track that internally.
Don't disclose those numbers in part because.
I think different hospitals track them, a little bit differently et cetera.
Then there's the most precise statistics, but we do know that we have turned away during the pandemic are significant number of patients.
Either because we didn't have the staff to treat them or because.
We had certain beds blocked because patients couldnt be.
Those the other patients with Covid et cetera.
What I would say is we continue to believe that.
The historic levels of growth that we've experienced in our behavioral business.
Mid single digit volume growth of 34, 5% same store patient day growth year over year.
We believe there is certainly still achievable once we can.
Beyond the current labor scarcity.
I think the second quarter represents an incremental improvement towards that goal still a ways to go but I think the trend is.
A positive one.
Okay. Thank you very much.
Thank you one moment for our next question.
Our next question comes from Andrew Mok with UBS. Your line is now open.
Thanks, Good morning, Steve.
Steve acute results missed their internal plan by a pretty wide margin can you help parse out the impact from the health plan business within the acute segment how much of an earnings drag was that and is that expected to get better for the balance of the year.
Yes.
The insurance subsidiary with somewhat of a drag on earnings certainly was not the.
The significant most significant or even close to the most significant I think obviously as we discussed both on the pre announcement in our remarks again today.
It was.
The difficulty we had in replacing Covid patients with non COVID-19 patients.
The insurance subsidiary winds up being a drag because as we add new subscribers or establish new accountable care organizations in our markets. There are generally startup costs and losses associated with that but that drag in the quarter was in my mind, no more than $10 million.
Got it Okay, and then on the behavioral side behavioral revenue per patient day had been trending 5% quarter over the last seven quarters that moderated to less than 2%. This quarter is there anything to call out that's driving the slowing increases on the behavioral pricing. Thanks.
Yes, I mean, probably a chunk of that probably the most significant Shanghai.
People recall and we did disclose we recorded that special reimbursement special Kentucky reimbursement.
In June of last year.
In the comparison between year is at least some of that is included so as we've noted the recording of that Kentucky revenue is much more ratable in 2022 so.
We're comparing a more ratable.
<unk> in 2022 with that Big chunk received in 2021, so probably that drives down the revenue growth rate more than anything else.
Great. Thanks for the color.
Thank you.
One moment for our next question.
Our next question comes from Stephen Baxter with Wells Fargo. Your line is now open.
Yeah, Hey, Thank you it looks like there's about a when you look at the acute care reported EBITDA in the same store EBITDA. It looks like there's about a 20 million dollar drag from non same store items. It sounds like if I remember correctly. The insurance company results are not reported and same store just wondering if you can confirm that or not and then should we.
Think about the balance of that.
Being driven by startup losses or any other items impacting that that would be helpful color. Thank you.
So the insurance subsidiary results are certainly included in our same store results I would always have been obviously, except for when they first started.
What I said in my prepared remarks was we had $20 million of startup losses at new acute care and behavioral facilities. The biggest chunk of that is our new hospital in Reno, which opened I believe very late March or early April .
And one of the things that we're experiencing just yet another difficulty of the pandemic is.
Slower process in getting new hospitals certified and getting their Medicare numbers.
And therefore being able to bill patients.
And in a more timely way historically.
That used to be a little literally just a few day process between opening and getting your Medicare number certified I think in the case of <unk>.
Our hospital in Reno, It took us almost a couple of months.
And as a consequence.
I think we suffered more significant losses than we really anticipated and thats, a big chunk of that $20 million that I mentioned in my prepared remarks.
The significant improvements we are expecting in the back half of the year is that that hospital will ramp up fairly significantly in our forecast of leases that it will be.
Profitable by the back half of the year.
Got it okay. Thank you and then just as a quick follow up it does seem like there.
A little hard to tell but might be some pressure on the other opex line beyond the insurance company results.
Can you talk about anything else youre seeing impacting that line item, whether it's physician staffing costs or anything else like thank you.
Okay.
Yes, I mean, the acute care other operating expenses appear to be going up fairly significantly, but as you pointed out I think the biggest chunk of that is the impact of the insurance subsidiary.
The insurance subsidiary records, it's medical losses, or we record as medical losses in that other operating expense line because they are medical losses tend to run 85%, 88% of revenue as opposed to other operating expense at the hospitals, which tend to run at 20% of revenue something like that.
When when we have an.
The increase in subscribers and increase revenue on the in the insurance subsidiary it tends to distort that other operating expense line. So as an example in Q2, if you exclude the insurance subsidiary firm on our acute care reporting our same store revenue growth, which we reported 3% would be adjusted to 2% but.
Other operating expense growth, which we report as 14% would be at 6%, which I think is probably a much more.
In line or what would be an in line expected number for that other operating expense. There is nothing else extraordinary that other opex line that I can think of.
Thank you.
One moment for our next question.
And our next question comes from Benjamin Rossi with BMO. Your line is now open.
Hi, Good morning, Thanks for taking my question just filling in for Matt Borsch here.
Regarding inflationary pressures for 2023.
It's early but how do you think we should be thinking about key inflationary pressures through 2023 versus historical trends.
And with managed care negotiations and ability to pass some of these inflationary pressures inflationary pressures through pricing.
You just give us some timing on how we should think about that.
Yes.
Yeah look I think that by far the biggest challenges that our hospitals have faced have been on the labor side of the business.
And I don't think thats purely just sort of normal inflationary pressures.
I think we have had a point of view for some time that as Covid volumes declined.
And settle into.
Something more of an endemic level.
The pressure, particularly on premium pay would ease we certainly saw that sequentially from the first quarter to the second quarter in <unk>.
Commented in an earlier response, that's our expectation as the year goes on that will.
If that plays out the way that we expect it will certainly significantly diminished the pace of our cost increases now as you point out we certainly are experiencing other inflationary pressures throughout the business.
At the same way that all consumers and all businesses are.
And we're certainly doing our best to recoup them from our managed care payers.
I've mentioned in previous calls that.
We've been aggressively giving notice of termination.
On <unk>.
Contracts in both the acute and the behavioral business at a pace faster than quite frankly, I can really remember ever historically, because as we identify contracts that simply in our minds are not even remotely keeping up with inflationary pressures in labor pressures.
And especially in places, whether it's behavioral or even in some of our acute facilities, where we're already capacity constrained.
We are willing to part with what we believe are inadequately reimburse contracts and focus on patients and contracts that are that are in fact adequately reimbursed I also would note that.
Struck me at least that there was a different tone from some of the payers I think United in their quarterly earnings call acknowledged that they would be.
Giving some level of price increases in 2023 to ignite to providers to acknowledge the increased inflationary pressures, which at least for me. It was the first time that a payer head.
Acknowledge that so our expectation is that payers will be more receptive to it in 2023, but we will also continue to be aggressive and try and grab the bull by the horns, where we're able to.
<unk>.
Wrangle rate increases from reluctant payers, where we can and where we can I think we are willing to.
Reconfigure, our business and rid ourselves of some of those lowest players.
Got you great and then quickly on recruiting and continuing to hear about tight labor conditions for clinical staff, particularly rpms just looking for a quick update on how your internal initiatives for recruiting retention airplane out.
Yes.
Yes.
Yes, I mean, so the comments that I made at the outset indicated roughly 20% decline in premium pay on the acute side.
Sequentially from Q1 to Q2 on the behavioral side, we continue to have.
A number of months five or six months certainly at least.
Continuous net new hires meaning.
The number of people, we're hiring is exceeding the number of people that are exiting the company. Our focus quite frankly is really now on that back and then reducing the <unk>.
Are folks who are leaving.
And again I'll repeat sort of what I said earlier I think we have a view that as COVID-19 volumes decline and we settle into sort of more of an endemic kind of an environment, where there are not these extraordinary opportunities for nurses to chase premium dollars that are four or five times their base.
Salary.
That we'll see a bit more of a return to historic norms.
Nurses.
Returning to full time jobs et cetera, I'm, not suggesting that there have been no changes during the pandemic I think we are probably.
You're going to get used to a higher level of higher normative level of temporary and traveling nurses maybe than we've had in the past et cetera, but I do think those numbers will continue to come down from where they are today to something approaching what we were used to in a pre pandemic environment.
Great. Thanks for your commentary.
Right.
Thank you.
Okay.
Yeah.
And our next question comes from Jason Cazorla with Citi. Your line is now open.
Great. Thanks, maybe just for the acute business can you discuss utilization by payer across commercial Medicare Medicaid and if there's any particular payer buckets, where you're seeing outsized pressure on volumes and then just a follow up on mix acuity.
We remain elevated but are you seeing any relative pressure on the medical versus surgical side of the business worth, noting and then maybe how we should think about those trends for the balance of the year.
Yes, I think.
We have said throughout the pandemic that we have not seen dramatic changes in our payor mix.
I think for the most part our acute hospitals have tended to experience higher levels of COVID-19. During the surge is than at least our public peers.
I assume that's just a geographic sort of luck of the draw.
You get the Covid patients in your market, nobody nobody sort of advertisers or.
Does anything to try to track those patients you get what you get.
And so we've tended to have I think a slightly higher Medicare to commercial mix in some of our peers, particularly during surges, but other than that I don't see that the managed care companies I think otherwise from a mix of business perspective continue to talk about a shift from inpatient to outpatient.
I think in our minds that's a.
That's really just the continuing dynamic that has been present in the industry now for at least a decade, probably quite a bit more.
Within our own hospitals, I don't know that we've really seen that shift accelerated.
But again I will get back to you I think the fundamental challenge that.
We faced in our acute care business in Q2 was that as Covid volumes declined and they declined rapidly.
We were unable to replace them at the same pace as we did lets say in 2021 with elective and scheduled procedures.
And the more acute in more profitable all sorts of procedures that.
Go missing during during the Covid surges so.
I'll just remind everybody that in 2021 Q2 really proved to be the most profitable most robust quarter of the year.
For both of our business segments.
After again.
Significant surge of Covid in January of 'twenty, one and we were really kind of built our original 2020 to forecast off of that experience and I think what we found is that particularly again on the acute side that recovery of non COVID-19 volumes, which occurred earlier in 2020.
One it occurred in April and May and June in 2021 has been just sort of extended out into the back half of the year and I think that was the crux of Mark's opening comments that we believe that demand has really been postponed or deferred and not for the most part.
Lost in any significant way and so we understand that we have a pretty significant.
Forecast in the back half of the year for increasing volume and continued decreases in labor, but that was our experience during the quarter.
The quarter got better sequentially with each month July seems to be getting sequentially better than June and so we're encouraged though we know we have a steep hill to climb, but we're encouraged that those should still be achievable.
Forecast.
Got it. Thanks appreciate that color and maybe just a follow up just on the Capex side, if I heard this correctly it sounds like you've reduced capex spending expectations by about 20%.
I think last quarter, you discussed that you're taking capex spending in the account on an episodic basis, given the labor and volume backdrop, and perhaps if you can give any more detail around the capex reduction of developments there that would be helpful.
So a significant amount of our capex is on large projects.
Obviously, there was a significant amount of money spent in the early part of the year to open the hospital in Reno.
Capital spending on new hospitals as back end loaded in the sense that.
Lot of it takes place in a month or two.
Before the hospital opens when most of the equipment is delivered and installed.
And that's a significant expense, but we also opened several new behavioral hospitals, we've talked about our projects to build new hospitals in California, We're opening a new patient tower in Edinburg, Texas.
Very shortly et cetera, so those projects and all of our large projects.
Our difficult to really slow down or certainly stop in any efficient way.
We've learned this over the years, so most of that reduction that.
I referred to.
It's really in sort of discrete equipment spending and smaller capital projects that can be postponed or delayed and I think we just felt it was kind of a prudent course.
Two to slow those projects at a time to Baldwin and earnings were pressured number one but also win labor constraints, where such an overarching issue why build new capacity or open new capacity, if we were going to have difficulty.
Staffing and so.
All of that is I think sort of being done in real time, and we will continue to monitor it monitor it.
I think volumes begin to improve as we believe they have already begun to and believe they will continue to do so we will make our judgments.
Restoring the pace of capital, but I would say for the foreseeable future the pace of our capital spending will be moderated below what our original forecast for this year.
Yeah.
Got it thanks I appreciate all the color.
Thank you.
One moment for our next question. Our next question comes from Whit Mayo with FCB Securities. Your line is now open.
Hey, Thanks, Steve on the malpractice charge is this a one time prior year negative development or did you raise your estimate some reserves on a on a go forward basis I know, we had a higher malpractice development last year. So just trying to understand.
What you have in your plan now.
Yes.
And I think we said this last year, our malpractice experience is that.
Not seeing an increased number of cases and I think broadly what our actuaries tell us is that this is lee.
The general experience across the country, but the value of cases that are being brought in just is increasing at a fairly significant rate. So you are right. We did have an increase to our reserves last year. We did have an increase to our reserves in the second quarter of this year, we view it as a one time thing.
In the sense of that.
I think otherwise our malpractice expense and provision from our practice in the back half of the year will be as we originally forecasted.
So it's the size of the claim is not the frequency of the claims.
Correct.
Okay.
And maybe just two other quick questions I'm curious how the U K operations are performing now and if there was any sizable impact from currency in the quarter and then if you could just talk a little bit about the surgical trends in the quarter any service lines stronger weaker than your expectations.
Yes, so sort of do it backwards and hopefully I remember everything surgical trends as I said I mean I think.
We're seeing what seems to be kind of a common theme, which is that our outpatient procedures tend to be growing faster than inpatient honestly I'm not sure. That's a new development, nor as I said earlier didn't do I think we see that sort of trend or that gap accelerating but it is certainly continuing.
As far as within our surgical services are they are particularly strong or weak service lines, we're in cardiology orthopedics et cetera.
I don't think so I think.
They are tending to all grow at around the same levels.
As far as the UK goes I think interestingly.
We're through most of the pandemic I think the behavior of our behavioral business in the UK has been a little bit more stable than the acute business, while they experienced many of the same issues, particularly with labor staffing.
Because they tend to have a longer length of stay and smaller facilities I. Just don't think that they were quite as pressured as we are in the U S.
On that issue so they've actually performed much closer to our forecast in the U S business now keep in mind.
Bill a pretty small part.
Part of the overall business, it's about 5% of our consolidated revenues.
As you pointed out recently the U K economy has come under some significant pressure the exchange rate is.
Become unfavorable to us again, because it's such a small part of the business. It certainly has had an unfavorable impact, but I think it's only a few million dollars in the quarter.
And I think other than the sort of broad pressures on the U K economy, and some of the taxes, they're implementing in raising their corporate taxes. There is a macro I think unfavorable sorts of issues, but I think the underlying business in the U K continues to do very well.
Okay. Thanks.
Thank you.
One moment for our next question.
And our next question comes from the line of a J Rice with credit Suisse. Your line is open.
Thanks, everybody.
Maybe first you mentioned, David you're seeing progression throughout the quarter and July trends looked.
Or at least as strong as June if not a little better.
Normal seasonal pattern would have you stepped down in third quarter, probably in both businesses and then.
A strong finish to the year in the fourth quarter.
When youre thinking about the way guidance lays out for the back half of the year I know you don't guide on a quarterly basis, but can.
Can you give us any flavor for how youre thinking about the trajectory will it be a normal seasonal year would be somewhat different than that.
Yes, I mean, I think almost by definition, if you sort of go through the math of our back half expectations for revenues and EBITDA.
To see that we pretty much assume that kind of a normal seasonal.
Progression that you alluded to.
We're assuming is going to be overcome by this kind of deferred and postpone demand. So we assume that the third quarter will be sequentially better than the fourth in the fourth will be sequentially better than third and by a significant amount. So.
And again, it's this idea that I'm going to go back to what I was saying before if you look at the recovery in 2021, the second quarter was the strongest of the year, which is again historically not the the traditional seasonal pattern, but it was the emergence from the Covid surge.
Sort of a pickup in volumes the easing of labor pressures.
All of those things are occurring in 2022 as well, we just think they are occurring at a sort of more elongated and slower pace. So that a good chunk of that recovery a good chunk of that labor improvement will take place in quarters, three and four this year rather than the way they did in quarter two of last year.
Okay, and then maybe I'll ask on the.
Behavioral business you had a sequential improvement in margin of about 200 basis points, which is encouraging.
And that really didn't come with a big.
Rebound in volume or step up in volume.
Is that how.
How do you think then where do we go from here do you need.
Volume step up somewhat.
Get further margin improvement are there other things that are.
So the labor situation whatever that.
Suggest that you can see more margin improvement.
Any sense of where you think that would ultimately settle out coming out of a pandemic.
Yes, So look I think you highlight AJ kind of an important.
Point in the way that COVID-19 surge as sort of manifest themselves and impact the two business segments, and I think theyre impacted quite differently. So on the acute care side, we have the COVID-19 surge in January.
And while Covid patients present, a lot of sort of operating.
<unk> for an acute care hospital from an earnings and financial perspective, there is a significant benefit to them they're high acuity patients.
There is very little bad debt or there had been very little bad debt because of the government programs to cover the uncompensated COVID-19 patients.
Et cetera, you are running very efficiently all of that all that sort of stuff.
So as those patients decline as the COVID-19 patients decline on the acute side.
Now there is sort of air bubble, if you will created and you've got to fill that barber with non COVID-19 business and as I said for a number of reasons that's been a more challenging and I think a slower recovery in 2022 than it was in 2021 as a result, the weakest month that we've had this year on the acute side of the business as April and.
It has gotten better since then as I've said sequentially each month, whereas on the behavioral side.
Covid surge as sort of immediately.
Devastating theres really no benefit to it.
It makes our staffing challenges wildly exacerbated we have a lot of challenges when we have to isolate COVID-19 patients in closed beds et cetera. So the weakest month of the year for our behavioral business. This year has been January when we had the biggest COVID-19 surge and then we've just generally seen a sequential improvements since then.
But your overall point I think is well taken in order for us to meet our forecast that are out there, we clearly need an improvement in volumes, which again I am going to say, we believe the underlying demand in both businesses as there is the labor situation eases as the Covid surges.
<unk>.
It should be easier too.
To execute on those volume increases we thought we would do it earlier in the year, but.
Our revised forecast has it slower and some of it quite frankly, not even taking place in 2022, but that's the crux of our revised forecast.
Okay, maybe I'll just slip in one last one because it hasn't been addressed it seems like some of the specialty hospital peers, whether it's rehab behavioral.
They're talking about seeing an up tick in acute care companies or entities being interested in doing joint ventures, as the repositioning and trying to deal with their own labor challenges are you seeing that.
Update on discussions around potential jv's with.
Okay got other big health systems.
Yeah look we've talked about this for some time that yes. We think there are a significant number of acute care hospitals, who have existing behavioral services, either a dedicated floor or a discrete building in which they are offering behavioral services, but feel like they are not.
Terribly efficient and we're focused on delivering those services and are looking for a partner who is more expert in more experienced in doing that.
We mentioned earlier that we had a number of de novo's open this year.
And Wisconsin, our first <unk>.
<unk> Hospital in Wisconsin.
In Iowa in Missouri, we've had.
The Iowa, Missouri hospitals are joint ventures with acute care hospitals, we have a number more in the pipeline. So I think.
It's an accurate.
The comment.
Comment that Youre hearing from others I think we're trying to measure that again against sort of.
A real uptick in capital investment at a time when there are challenges in opening new capacity with.
With labor etcetera. So I think we're trying to create a pipeline of these.
These joint ventures that can be absorbed in a proper way without creating a drag on earnings but yes. I think we have said for some time, we think that the opportunity to joint venture with some acute.
Acute care hospitals, and probably even more importantly, some acute care hospital systems to offer behavioral services is a significant opportunity over the next five years to seven years.
Okay. Thanks, a lot.
Thank you.
One moment for our next question.
Our next question comes from Ben Hendrix, with RBC capital markets. Your line is now open.
Alright. Thank you very much just to follow up on.
On the behavioral side, certainly the you'd mentioned that the volumes. It's got the question a little bit better sense.
Our low point in January but they seem to trend a little bit better than we had expected and seem to be a little bit better than some commentary from your peers.
On behavioral I was just wondering if you could there any particular areas.
That you saw.
Ed.
Or.
Different from your from your expectations and just how is that how that's trending in general.
Sure.
Any particular mix issues with payer mix or if there was any any kind of patient mix that deviated from your expectations. Thanks.
No Ben I think.
I think we tried to allude to before.
Main challenge for our behavioral hospitals during the pandemic has been a lack of staff and as a consequence, we feel like we've had to turn away significant numbers of patients because we didn't have adequate staff to treat those patients mostly rins, but in some cases.
Therapist physicians psychologists family counselors in other cases, nonprofessionals mental health technicians et cetera.
Progress in that area has been slow, but since the COVID-19 decline in January, especially we've made a lot of progress and I think more than anything else that has allowed us to make incremental improvements in our volumes.
I think those have continued into July and our expectation is there.
They will continue into the balance of the year, but I don't know that its in any particular service line.
Or payer.
I think again it is more than anything a reflection of the fact that we're slowly getting our arms around the labor scarcity issue, increasing our net hires.
Experimenting maybe not even experimenting anymore about implementing.
New patient care models that rely somewhat less on our end and on other caregivers.
The ultimate total care, that's given to patients and attention that's given to patients is the same.
At the same quality, but just not as reliant on registered nurses.
Thanks, and just a quick follow up on the Capex side I know you talked about a reduction in capex and part of that going to discrete equipment spending but is there any.
Or color you can give us on priorities for those cuts kind of been the equipment side. Thanks.
No I mean, it's really I think we're making discrete decisions for.
For each hospital and every market based on.
Where are they sort of struggling.
We invest in new equipment will they be able to have the staff to.
Realize the benefits of that investment or should we wait until.
The staffing issues resolve themselves, but no I wouldnt say that its functionally we're not buying <unk>, but we are buying MRI is just not that sort of thing.
I think we're making these individual judgments about where it makes sense to postpone or weighed on an investment until.
We are not as sort of capacity constrained from a labor perspective.
Thank you.
And our next question comes from Kevin Fischbeck with Bank of America. Your line is now open.
Yes.
Great. Thanks.
Apologize for some of these questions because sometimes it gets confusing to me about where they were talking about acute or behavioral volumes. So maybe just to clarify when you talked about labor being the biggest.
Okay.
Headwinds to volume because you talked about the behavioral side more than the acute side because it sounded like in Q2 is more COVID-19 dropped and then Gordon can come back rather than a staffing issue on.
On the acute it or do I have that right. When you say labor is also a real gating factor to volume growth in acute.
Yes, so thanks, Kevin it's a good question and I, probably should have been a little more precise in my commentary I think absolutely from the beginning of the pandemic, we have talked about the major headwind or gating factor on the behavioral side as being the labor capacity constrained and shortage, but I do believe that in Q2.
And I think on the acute side through most of the pandemic. The issue has been we've been able to fill most of our vacancies, but we've had to do so at an extremely high cost and therefore on the acute side. Most of the focus has been on that premium pay rather than sort of an absolute <unk>.
Fair city or.
Vacancies sort of an issue I will say that in Q2.
We did see that issue a rise in the acute care segment I don't know that we saw at pervasive Lee I don't know that it was the single biggest issue by any stretch.
But for instance, I think our surgical volumes overall were impacted and some of our markets by a lack of your anesthesia coverage anaesthesia anesthesiologists and their assistance et cetera tend to be independent contractors not our employees. So it's not necessarily something were in direct control of.
But we were hearing feedback during the quarter.
That we were having to limit surgery schedules et cetera in some markets because they simply werent enough.
Anesthesia wasn't another anesthesia coverage same thing in some markets. We have to go on emergency room in <unk>, because we didn't have simply enough staff in the emergency rooms et cetera, again, I don't know that it was a pervasive issue in the acute care space in Q2, but I do think it contributed to the Q2 weakness in a way.
That we hadn't necessarily seen before.
Okay, because I guess when we hear some of the other companies talk about how they think about managing their business. During this labor shortage.
As you said, we've just the emphasized certain business lines because doesn't makes sense. Some labor is $103 an hour and therefore are growing more slowly I haven't heard you guys talk about that I mean, when you think about cutting back on capex because it might just be hard to staff to that growth. I mean are you at all changing your model.
Your thought about managing through this or just trying to understand.
Thought process has changed and what if any implications are for volume growth or margin improvement from here.
Over the next few quarters.
Yes look I.
Kevin I think that the notion.
That where there is a labor scarcity, you're going to want to emphasize your high margin service lines and deemphasize low margin service lines.
Is it sort of theoretically.
Tractive idea and something that I think we do and we do all the time to the degree that we're able to.
I do also believe that in a business in which at least half of our <unk>.
Patients are more than half of our patients, but about maybe half of our admissions come through the emergency room.
I'm sure you can understand that that's not an easy business to control and you basically take what comes in and you treat those patients.
The same thing.
As an example tends to be one of the lower margin service lines in most hospitals.
But when a woman comes into the hospital in labor.
Theres really no option too.
To do anything but to treat that women and that's of course, what we do so.
Again.
Heard what the other companies say and I think we certainly try and do it to the degree that we can but I also believe that in a hospital. There is there's really a limit to how much of that you can do I think what we can do in terms of being selective in our business is what I alluded to before in terms of managed care contracting.
We don't have to be in network with managed care payers, who are not offering us adequate rates et cetera. So I think in that regard, that's an easier sort of function to manage.
Because you're going to do that in advance and if somebody is out of network, they're either going to pay a higher price or theyre going to go to another hospital.
But that's something that I think you can deal with in a more in my mind more sort of measured and rational way and we certainly have talked about that now for several quarters.
Okay, Great and then maybe just last question I guess on the Psych side demand has been strong for a number of years and you guys have been growing slower than how we think about overall demand in fact, even before the last couple of years during the pandemic. So I'm just trying to think about what it means when labor gets better from here, but maybe it's a little bit elevated.
<unk> than it was.
In 2019.
So what exactly does that mean from growth can you then grow from.
The way that we think about how this business should be growing in that type of labor environment or does that still create a situation where labor is still tight and so theres still going to be struggling to kind of get to where that business should be.
Yes.
Kevin I go back to.
Late 2019, right before the pandemic I'm going to say November December 19 January February of 'twenty.
And Youre right, we were coming off some challenging year as we had seen labor shortages back in 2015, and 16 that I think we have largely overcome we saw length of stay pressures in 17 and 18 from our managed Medicaid payers I think we have largely overcome in I would say that for a five month period late 2019.
Early 2020.
I think we were generally feeling like we were firing on all cylinders for the first time in a long time and it certainly was still a tight labor market.
But there's a difference between sort of a tight labor market and one in which there are extreme scarcity, which I'd characterize the way. It was during the pandemic. So we had I think a four or five month period of kind of a just a brief window to see what it would be like to be able to operate without any significant sort of overarching.
Headwinds still in the tight labor market and we were doing pretty well during that short period, and then of course the pandemic occurs in the middle of March of 'twenty.
I think thats really kind of what we're shooting for and I don't know that we're going to get back to that.
That environment in the next month or the next quarter, but I think we feel like it's not.
It's something that's so far away that we can't see getting there and I think we feel like there is a lot of incremental improvement as we return to an environment, where we ought to be able to grow the behavioral business revenues in sort of mid to upper single digits, which we had done for a very long time.
For a decade and a half or so before all this started.
And I think that the overall plan and we're very focused on it.
I think mark alluded to all the money that we've invested in recruitment and retention initiatives. We think that there is a real payoff to all of those things over the next couple of years.
And again fundamentally every measure that we have is that there's still significant demand out there for behavioral and that quite frankly demand for behavioral services is probably in the general population increase during the pandemic rather than decrease.
Great. Thanks.
Thank you.
One moment for our next question.
Our next question comes from Tito Chickering with Deutsche Bank. Your line is now open.
Good morning, guys. Thanks for fitting me in here a couple of quick questions. A follow up question for Ajs guidance questions. We set our models appropriately the.
Historically about 46% of your EBITDA in the back half of the year comes in <unk> and the rest in <unk>, which means it's tricky EBITDA about $4 20 ballpark is that just the right range, we should be focusing on.
<unk>.
Yes, so Peter as you know, we don't give quarterly guidance and I think as I've mentioned, a number of times, we're not going to start doing it during the pandemic when I think theres greater uncertainties, but I think you are right I mean, I think in the sense that.
Those percentages are probably reasonable I think what we've what I've said earlier is clearly we back loaded more of our earnings into the back half of <unk>.
2022, then we then we are in a normal year and I think what you are suggesting is there is still has to be some level of seasonality.
Third quarter is when our patients and our physicians take their vacations et cetera. During the summer time, so I'm not going to say that those are the right numbers, but I think the thought process is certainly reasonable.
Great and then a multi part question for you just back on the labor topic I guess the first one is Youll go you are in or are the rates in January versus June or July I have those changed at all in 2022.
Already stable and then the same question for tax and Lpns are you hiring a lot more Lps in Texas than it used to and are we seeing sequential labor pressures from those rates.
And then finally can you refresh us on what percent of S&P.
Is our interest in our non rins. Thanks, so much.
<unk>.
Yes so.
The answer I think.
I think every business in America is facing as we are having a harder time hiring just about everybody.
And again.
Now like I follow other industries as closely as some of the folks on this phone, but certainly everything I read everything I talked to peers et cetera.
Kate's that hiring quite frankly hiring people even here in our corporate office is more challenging than it was pre pandemic.
So, yes, I think thats all a challenge I think what we said a number of times. However is that while there is certainly some upward pressure on nursing rates.
<unk> rates.
In some ways the pressure has been so great and the opportunities have been so great for nurses to work in these temporary and traveling jobs that raising their rates is really not even been.
Sort of inappropriate reaction so our nurses.
Leaving to take a traveling job in which she has earned four or five times our base salary. There's really nothing we can offer him or her to compete with that and so what we do is we try and look at the competitive rates in the market base rates for our ends et cetera, but we're not trying to match those sort of crazy.
Opportunities that nurses are finding in the temporary and traveling area and what we also found is that as COVID-19 surge as decline the number of those crazy opportunities decline pretty precipitously as well so.
Again.
I believe back to this thing I mean, I think that the labor situation will continue to be a type one for some time.
There'll be upward pressure on nursing rates for some time, but just not nearly the sort of <unk>.
So you kind of opportunities and crazy pressures, we felt when we were paying.
$225 an hour for a temporary nurse et cetera, those rates I think have come down almost by half since since they're high.
Okay, and then the hiring of tax and Lps does that sort of changed today versus pre Covid do you think that that sort of this level of LTM <unk>. This is the right level going forward.
Yes.
Yes look what I think is ultimately going to happen.
Certainly we're doing our best to encourage it is.
Going to see more people enter the workforce.
As.
What we do is we encourage our mental health technicians to go to school and become LTM or some sort of.
Certified clinical person, we encourage our lpns to get their RN degrees etcetera, and obviously, we're providing help and support for them to do that so hopefully over the course of the next few years not just uhm.
The industry will build a better pipeline.
And what we've found is that occurs sort of naturally when there is a nursing shortage, obviously I think what the pandemic did.
Was it exacerbated that shortage and sort of made it occur almost overnight in a way that that's not something we've experienced before but I think the overall reactions.
Our focus on building a bigger pipeline of sort of unit nurse education progression et cetera, we'll start to have a real impact over the course of the next.
A couple of years.
Great. Thanks, so much guys.
Thank you.
And at this time I would now like to turn the call back over to Mr. Steve.
Hilton for any closing remarks.
None other than we thank everybody for their time and wish.
I wish everybody a good rest of the summer. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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Okay.
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