Q4 2022 Universal Health Services Inc Earnings Call
I'm, Steve Felton.
Mark Miller is joining us this morning.
Come to this review of Universal Health services results for the fourth quarter ended December 31 2022.
During the conference call will be using words, such as believes expects anticipates estimates and similar words that represent forecast projections and forward looking statements.
For anyone not familiar with the risks and uncertainties inherent in these forward looking statements I recommend a careful reading of the section on risk factors and forward looking statements and risk factors in our Form 10-K for the year ended December 31 2022.
We'd like to highlight just a couple of developments in business trends before opening the call up to questions.
As discussed in our press release last night. The company reported net income attributable to uhm per diluted share of $2.43 for the fourth quarter of 2022 <unk>.
After adjusting for the impact of the items reflected on the supplemental schedule is included with the press release, primarily an asset impairment charge associated with an acute care hospital in Las Vegas are adjusted net income attributable to uhm per diluted share was $3.02 for the quarter ended December 31 2022.
<unk>.
During the fourth quarter, our acute care hospitals experienced a decrease in the number of patients with a COVID-19 diagnosis treated in our hospitals as compared to the prior year quarter.
As a percentage of total admissions COVID-19 diagnose patients made up 7% of our admissions in the fourth quarter of 2021, but.
But only about half of that percentage of admissions in the fourth quarter of 2022.
This decline in Covid patients resulted in reduced revenues due to the lower acuity and less of the incremental government reimbursement associated with patients.
While overall surgical volumes.
Tended to recover to pre pandemic levels, there was a measurable shift from impatient to outpatient resulting in further overall revenue softness.
Meanwhile, the amount of premium pay in the quarter, which declined from a peak of $153 million in the first quarter was $85 million in the fourth quarter similar to what it was in the third quarter.
In total there was insufficient revenue growth to offset the accelerated rate of wage increases and other inflationary pressures leading to an acute EBITDA results in the quarter below our internal forecasts.
At the same time this decline in COVID-19 activity allowed or behavioral hospitals to continue to reduce their labor vacancies, resulting in a reduction of the capping of bed capacity.
The effect of the increased revenue largely offset higher labor costs, leading to a behavioral EBIT result in the quarter more in line with our internal forecasts.
You'll also note that the fourth quarter included approximately $10 million of losses related to startup facilities are.
Our cash generated from operating activities was $297 million during the fourth quarter of 2022 as compared to $322 million.
During the same quarter of 2021, the decline was largely due to the opening of new facilities and the timing of receipt of certain supplemental reimbursements.
We spent $734 million on capital expenditures during 2022.
The reaction to the earnings softness experienced during the year, we reduce the pace of our capital expenditures spend by about one quarter from our original plans for the year.
Similarly, we moderated the trajectory of our share repurchases for the full year of 2022, we acquired $811 million of our own shares pursuant to our share repurchase program.
Since the inception of the current share repurchase program in 2014, we have repurchased more than 20% of the company's outstanding shares.
As of December 31, 2022, we had $886 million of aggregate avow available borrowing capacity pursuant to our $1.2 billion revolving credit facility.
R 2023 operating results forecast, which was provided in last night's release envisions 2023 is a year of continued transition into a post pandemic world.
We anticipate that volumes in both segments and acuity in our acute business will continue their recovery trajectory and gradually begin to resemble the patterns, we experienced before the pandemic similar.
Similarly, we expect to be able to reduce premium pay by about one third in 2023 from 2022 levels.
As we continue to increase hiring rates and reduce turnover.
As a result of multiple recruitment and retention programs that have been implemented over the last few years.
Again, we've assumed these improvements will occur incrementally during the year, but will be partially offset by wage pressures created by continued shortage of nurses and other clinical personnel and by broader inflationary pressures affecting our other expenses.
We note that in our acute segment physician subsidy expense is specifically anticipated to increase by a substantial amount.
Other headwinds that are reflected in our 2023 forecasts are approximately $100 million in COVID-19 related reimbursement received in 2022, but phased out in 2023.
As well as a reduction of about $30 million in supplemental reimbursement payments as disclosed in our 10-K.
Finally, we will incur a significant increase in interest expense in 2023 about three quarters of which in due to rising interest rates and the remainder to increase borrowings.
Despite these challenges we note that some of the operating indicators in early 2023 had been encouraging, especially in our behavioral health business.
During the pandemic, we have found the pace of recovery from several of the aforementioned challenges.
Has often been slower than we originally anticipated and have reflected that gradual cadence of recovery in our forecasts.
However, we remain confident in the fundamental strength of both our business segments, given are well positioned hospital franchises around the country.
We are pleased to answer questions at this time.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you would need to press star one one on your telephone keypad and wait for your name to be announced to withdraw. Your question. Please press star one one again, please stand by while we compiled Q&A roster.
At first call comes from the line of <unk> look you SP. Your line is now open.
Hi, Good morning, you mentioned software revenue in the acute segment due to lower acuity can you elaborate on the trends in surgical volumes and underlying acuity.
That you saw in the fourth quarter and what do you have embedded in the Guy for 2023 or when do you expect that to normalize. Thanks.
Yes, Andrew So I think it's mark remarked in his commentary.
And you can see in our press release metrics.
Revenue per adjusted admission was actually down for the quarter I think attributable to a few factors. One is the decline in COVID-19 patients those COVID-19 patients, particularly last year, particularly beyond the crime patients tended to be higher acuity patients.
And the loss of those patients and the loss of their good reimbursement reduces our acuity in our revenue.
In addition to that.
I've talked about the shift accelerated shift from inpatient to outpatient.
Or surgical volumes in Q4.
Actually we're probably three or 4% above what they were in Q4 2019, the last pre pandemic quarter.
Full pre pandemic quarter, but clearly there's been an accelerated shift I think that outpatient procedures are probably seven or 8% an inpatient procedures are sort of flattish.
So I think those are the main driver of the acuity softness in queue for as far as what we have built into the guidance for next year. I think again is marks sort of comments reflected I think we're projecting a gradual sort of return to normalcy. So for the year I think are.
General notion is that.
Acute care revenue per adjusted admission should increase probably and that 2% to 4% range, which would be much better.
Historical norms.
Uhm next call comes from the line of Stephen Baxter.
Wells Fargo.
Or at least Directionally by segment.
Appreciate in a color scheme for the one time items need acute care business. It sounds like that's like with a source of you know maybe some of the year on your pressure there, but it'd be great. If you could elaborate a little bit on what you were expecting for year over year margin trends in both accused of behavioral business. Thanks.
Yes, Steve I think we missed the beginning part of your question somehow so if you wouldn't mind repeating it I apologize.
Yeah, sorry about that so yeah. The additional color on EBITDA growth and top line growth by segment will be will be great. Just trying understandable, but when we look at the year over year margin pressure, where that's coming from it sounds like with some of the items you flagged on the acute side. It looks like that's probably it but just a better sense of on the direction of March and trends in both business.
<unk>. Thanks.
Yeah. So I think on the acute side there are specific headwinds.
Again, most of which I think mark elaborated on you to one.
The biggest one is $100 million of Covid related reimbursement.
That includes the Medicare, 20% AD on the Hershey reimbursement Medicare sequestration waiver, all of which get phased out at one point or another already phased out in 2023, I'll throw into that although not COVID-19 related another $10 million or so of 340 B reimbursement, that's that's going to get recouped in 2023.
Three.
In addition to that there is.
Mark note about $30 million.
Supplemental Medicaid reimbursement that declines next year.
That's about 20 in mid April business and 10 in the acute business I think the other main issue is that even though again is mark commented we're expecting.
Premium pay to decline another one third maybe another 150 $160 million in 2023.
What our experience has been is that the savings from that and there certainly are some savings, but the savings from that are offset to a large degree by increased base wages recruitment incentives sign on bonuses that sort of thing I think what our guidance, particularly in the queue.
Business implies or assumes is that all of those trends incrementally improve as the year goes on.
But those are the headwind I think specifically on the side of the business.
That mainly sort of tend to suppress the margins.
And him behave decided it's really more on the labor side, I mean, I think where we're at in both businesses is that at the moment, even though revenues are recovering, particularly on the behavioral side.
Salary expense or wage expenses still outpacing the growth in revenues I think we believe that by the second half of 2023 that begin to sort of stabilized and we start to sort of get two or more normalised historical pattern of revenue growth exceeding salary growth but.
And the first half of the year, that's not the case and again I think that's that's probably the main driver of the margin pressure next year.
Thank you. Our next question comes from the mind of Jason <unk> What city Jason.
Great. Thanks for taking my question I, just wanted to ask about the move to wind down inpatient operations at your Desert Springs Hospital, maybe you just can you unpack that a bit more in the decision there what the EBIT lift could be on the Gulf Ford and then anything else to note from a competitive perspective, as we think about your loss Vega.
Market broadly thanks.
Yeah sure I can answer that for you so.
We obviously, that's a very important market for us we've been looking at.
The whole market the market as a whole for many years.
We continue to try to build where we can at current properties as well as some of our dinovo projects, we have a new project.
That's going in that is really we're looking at it as a replacement hospital for Desert Springs. Originally we had hoped to keep desert springs operating longer into the future and closer to our opening date, if not all the way up to our opening date for our new West Henderson Hospital, but the market dynamics.
Mix caused us to have to accelerate the plan manner.
So what we've done basically is we're moving that hospital to a glorified emergency services.
Facility.
Will continue to run those services, even after we have our new hospital in West Henderson, Bill and we're really transferring just about all of those employees to other valley system.
Facility, so where it's been misreported that were laying off a lot of employees. In fact, we're really not and like I said just about every one of those employees is finding a home in another one of our hospitals, which is help alleviate some of the staffing pressures that we've had so.
That's really the situation I don't know.
Timing on the numbers West Henderson won't be open for that another year and a half I Wanna say middle to late 2004.
Yeah.
Our next question comes from the line of a Jane Wright with Credit Suisse <unk>.
Hey.
Hi, everybody. Thanks.
Maybe just two items and when you think about your outlook.
You mentioned that you're assuming an uptick in physicians subsidy expense I.
Wonder what's happening there I know in the back half a year your other operating expense.
22 seemed to step up or are you just assuming that continues or is there something else going on there.
To mitigate and then any update on your capital deployment thoughts.
You'd probably get some share repurchase into twenty-three outlook can you just comment on that and anything else that you're thinking about from a capital standpoint.
Sure AJ.
So physician subsidy expanse I think has been.
Kind of an emerging challenge for most of the acute hospital industry I would say for at least the back half of 2022 and I think most acknowledged it will continue into next year. So that's when we talk about that we're really talking about the generally the contract service expanse we pay.
Two.
Physicians, who are providing services in our emergency rooms anesthesiologist radiologists.
Those are probably the major groups and you're right. We have seen some increase in those expenses. This year I think we continue to assume.
That 2023 will probably result in another <unk>.
15% to 20% increase in those expenses and the magnitude of that is probably 4500 $50 million increase in.
And costs now I think long term.
We have a number of strategies to deal with.
That cost pressure, including in so we're seeing some of that activity to the degree that we can and competitively bidding contracts et cetera, I think we're at the moment we're caught in a.
A tough situations.
Difficult to change those arrangements in the short term, but in the long term.
I think a lot of those pressures are a result of some of the internal struggles that some of those larger staffing, finishing staffing companies are having and I think as those work their way out in the market adjusts we will see.
Some easing of that in future years, but yes, we've assumed.
More acts at a substantial increase in 2003 as far as capital deployment goes we've got embedded in the budget about $600 million of share repurchase assumed and.
We've also.
Got about $800 million of capital expense capital expenditures assumed in the budget as as we've disclosed in the press release.
Thank you next question comes from the line of Stephen <unk>.
Please.
<unk>.
Okay. Good morning.
Just.
Obviously I'm <unk>.
One of those changes obviously.
Storage.
Patting September the volume.
Jimmy otherwise.
Just pick.
Can I interrupt you're breaking up so we can get a better connection I can't hear your question I apologize.
Would you please repeat your question.
Steven.
And ensure better right now or not.
Yes, that's better. Thank you go ahead okay.
Sure I'm Gonna apologize.
Okay.
Obviously type of labor shortages.
Two.
And the volume kitchen, right now otherwise character.
20th back please.
Steve I apologize, you're breaking up again, maybe you can try to call back with it on a different line, yes. Steven you can begin to the queue call back annual re into the queue by dialing star one one on your keypad.
We'll go to our next questioner who is Justin link with.
Research.
Can you hear me okay.
Justin.
Yes, we can.
Yeah. Thanks.
So.
I was hoping it sounds like there's a very different trajectory between the acute business given the headwinds there in the bay real busy, but what seems to be I T better so within the within the full your guide can you give us a little color on the growth, we should expect year over year broken down between Q business.
Real business, maybe even like corporate segment will be helpful as well.
And then Martin maybe you could give us a little more color on what you're seeing on this shift Rob.
The outdated and what's driving that how big it back is it happening and how are you thinking about it the 2023.
Yeah. So.
Looking at the two segments discreetly.
As we suggested.
A number of times in the past, we thought that is COVID-19 volumes declined the recovery and the behavioral business would be <unk>.
More accelerated than in the acute in large part because.
There was never any benefit to increased cost with volume on the behavioral business, we didn't get paid any more for patients and quite.
Quite frankly, it created more stabbing challenges created more sort of patient matching challenges that sort of thing. So what I think you saw in the fourth quarter and I think a continuation quite frankly, what we saw in the third quarter Why's. This COVID-19 volumes declined.
I think Mark commented on this at the outset of the call we've been able to more successfully fill our nursing and other clinical vacancies and as a consequence had been able to incrementally improve our volumes, particularly as measured by patient days and that continues into next year with the <unk>.
Alonge as I indicated I think an earlier call is.
The the price we have had to pay to fill those vacancies is higher base wages, and some incentive payments and that sort of thing.
Which I think surprises margins certainly at the beginning of the year, although hopefully they improve as the year progresses, but probably at the end of the day.
The 2023 forecast assumes.
Slightly increased.
Margins in the behavioral business, the acute business a little bit different as we talked about they have to replace the benefit of the COVID-19 volumes that they add they.
They've got to deal with the headwinds that we.
Where specific about et cetera. So at the end of the day I think that acute care.
EBITDA and is relatively flat in 2023, which means margins are down slightly.
We have some increase in corporate cause things like.
Our equity confidence echostar to equity compensation or.
Incentive compensation, because we're assuming that.
We'll meet targets Morris is fully in 2023 that we did in 2002, so that sort of thing so.
I think.
Slightly increasing noises in the behavioral side slightly declining on the acute side and some.
Kind of disparate sorts of cost increases on the corporate side to get to the full budget guidance that we provide.
And with regards to your question on inpatient versus outpatient I mean, I think we're seeing what what many are seeing which is a continued shifts to outpatient.
That has been accelerated through the pandemic.
We're trying to continue to do a lot of the things that we've been doing the last few years, which is to ensure that we have the proper caseload in our impatient surgical areas, especially with the increases in costs for staffing those areas, we want to make sure that we have the proper acuity.
We're not doing low level cases, really outpatient cases in an inpatient setting.
Where we can't cover the cost properly. So our shift I think is pretty similar to a lot of others.
We're also trying to accelerate our development of surgical centers, so that we have more opportunities.
And more platforms.
For all of our surgery cases in as many markets as possible. So we continue to develop those.
As we find opportunities to do so.
Thank you and next call comes from the line of <unk> <unk> <unk> <unk> Bank.
Behavioral.
That.
So can you hear me, yes, yes, we can hear you now okay. There we go.
On behavioral how many birds are left.
Can't staff and how do you think that ramps hurt during 2023, and as staffing and behavioral becomes easier post COVID-19.
I'm wondering what areas of healthcare, where the biggest source of those hires and then finally as you can start staffing again do you increase your capex for behavioral beds to keep driving growth there over the next few years.
Yep. So it's it's.
[laughter].
Give you a number I mean, I think we're down to a few hundred beds.
And behavioral that we would consider capped and on most days now.
Now to be fair that number can change literally day to day et cetera.
So we do still feel like their patients are turned away.
Certain situations, because we don't have appropriate staffing a lot of times that may be specific to let's say a weekend or overnight staffing or.
Really does differ by facility.
But you're right I mean, that's probably been the.
Single biggest headwind for the behavioral business during the pandemic.
In large part because we were losing employees, mostly nurses, but other clinical personnel therapist psychologist et cetera.
Two other settings, where either they had the opportunity to work remotely or they had the opportunity to work in an acute care setting, making sort of premium dollars as those opportunities have declined.
And I think telemedicine procedures have.
Tended to decline as the pandemic is ease and certainly the demand from acute care hospitals for.
Covid treating nurses I think has declined as well.
More of those nurses returned to what I would describe as the behavioral fold.
So the last question, Yeah, I mean, obviously.
We have been more tempered if you will about behavioral capacity addition, during the pandemic because the thought was what's the point of adding additional capacity, if we're not going to be able to staff and but as those staffing pressures continued to ease I think we've made the point throughout the pandemic.
We think that the underlying demand for behavioral services across the full continuum is quite strong and robust and we still believe that and so yes. We are certainly looking and trying to gauge in individual markets, where additional capacity may be called for because the demand is.
There and because we feel like we can adequately staff any additional capacity that we build.
Great. Thanks, so much.
Thank you.
Next call will come from the line of Kevin Fischbeck with Bank of America, Kevin. Please wait until you hear your name announced.
Hey, Griffin.
Hey, So I guess on the call last quarter, you mentioned that I think that there's a tailwind this year from start up losses year over year can you just.
Remind us kind of how.
We should be thinking about that and then you've got in your opening remarks mentioned that this year is kind of a still a normalization off of Covid. I mean do you feel like 2023 is now going to be a solid based off of which we should be expecting normal growth and acute psych or do you feel like because of the way you're you're assuming progression through the year.
Here on these dynamics that that even 2024 could see some year over year.
Steve comparisons thanks.
Yeah, so as far as your first question on startup losses Kevin.
We mentioned in where I mentioned in today's call. The we had $10 million in the quarter I think we insert at the.
And our third quarter call that we had $45 million a year to Dave startup losses, So $55 million. This year. The biggest chunk of that is our acute care hospital that we open.
22, and Reno, that's probably a 30 $35 million swing from 22 23, a positive swing. The other 15 $20 million of losses are a handful maybe three or four behavioral openings in the year, maybe four or five.
And we probably have a similar number of openings next year.
I think we believe will do a little bit better.
Emerging from the pandemic and getting these things ramping up faster but.
I wouldn't necessarily describe that as a material tailwind. So I think we've got about a 30 35 million dollar tailwind in the budget for our turnaround in our Reno Hospital as far as you know.
Just sort of how we think about 2023.
It sort of.
Kind of a clean post pandemic year.
Mark made comments.
In his opening remarks about the idea that number one I think we view 23 is a transition year.
And we do so because I think one of the lessons that we've learned during the pandemic is that even as COVID-19 volumes declined.
There is there is this sort of transition period as.
Nurses returned to their regular jobs.
Physicians returned to their regular practices and patients returned to their regular utilization practices et cetera. So I think we think about that occurring gradually over.
The course of 2023, I would say probably the back half of 2023 looks a lot more like maybe the back half of 2019 the last.
Last sort of Covid free half a year that we've experienced and then 2024 I would imagine unless there is some unforeseen development begins to look like a really true postponed dynamic year.
Great. Thanks.
As a reminder to the question and answer Q. Please ask Dar one one on your keypad.
Next call comes from the line of Jamie pairs with Goldman Sachs.
Amy please standby.
Jamie.
Hey, Good morning can you can you guys hear me Okay, Yes, we can.
Okay. Great first just a quick numbers question can you provide the revenue base the insurance subsidiary than what the margin looks like on that and then.
Longer term question is just for in this structurally higher wage inflation environment for nurses given us the tightness in that market. What can you do over the medium term to just get more efficient.
Does that mean for care team design, our investment and labor saving technologies, just any anything you're doing to become more efficient on the labor front.
Yeah. So in answer to your question about our insurance subsidiary in the acute segment. It has roughly or will have an twenty-three about $400 million premium revenue.
We'll run as we sort of discussed in the past.
Kind of a modest margin in the low single digits.
The real <unk>.
Motivation in operating that insurance subsidiary is.
To create sort of a full continuum of care.
In our acute care markets.
Later integration with our physicians et cetera, it's not really.
Designed to be terribly profitable on its own.
As far as your second question about recruitment retention.
Look there's a lot of things and we could have a whole separate.
Hour long call, Mark I think alluded to multiple recruitment.
And retention initiatives that we've implemented during the pandemic.
But I think he specifically asked about.
Sort of patient care.
Sort of treatment structures and whatnot and we've tried to in both of our businesses create.
Staffing infrastructures that are not so reliant on registered nurses because those have been the most difficult positions to recruit two during the pandemic. So we're becoming more reliant on things like LPN and lvn.
Mental health tax and.
The behavioral business and.
Emts and that sort of thing and our emergency rooms.
All of those those kinds of things so we certainly have been.
Working too.
Really improve the recruitment and retention of the nursing population itself, but also trying to reduce our reliance, particularly on registered nurses, who have been the most difficult to recruit but I'll just add.
Or a number of technological solutions that are being bandied about.
On both sides, both sex segments, and we continue to evaluate a lot of those as some of our peers do as well I do think in the coming years, there will be some that we go forward with I'm not sure that any of them are going to be a real panacea, but I do think that they can be helpful. Depending on cause.
Us too.
Alleviate some of the staffing issues that we've had over the past few years.
Going forward. So we are excited about the possibility of some of those adding to the mix in the coming years.
Thank you.
Our next call will come from the line of being Hendrix RBC capital markets. Please stand by.
Then.
Yes. Thank you just a quick regulatory question. There was a proposal from CMS concerning the 11 15 waiver payment and implications there for calculation of a disproportional sure pay.
Payments for queue, just wanted to see if you guys had any initial thoughts on that I think you may have probably less exposure to that and some of your peers, but just wanted to get any initial takes on that proposal. Thanks.
Yes. So we've commented a number of times and would reference or direct people to our 10-K filing.
Where we.
Detail and pretty specific detail or supplemental Medicaid payments in the current year in 2022, and then what we expect for 2003.
Mentioned before.
We're expecting about a 30 million dollar decline next year across a number of states.
To your point, then I don't think we are.
Expecting a big change in Texas on the 11 15 change.
But but in total.
About a 30 million dollar reduction supplemental payments next year, including disproportionate share over over maybe two or three states.
Thank you. Thank you.
Thank you there are no additional questions in the queue.
This time I would like to turn the call back over to Steve for any closing remarks.
We just like to thank everybody for their time. This morning, and we look forward to speaking with you again at the end of the first quarter. Thank you.
Thank you for your participation today.
This does conclude the program you may now disconnect.
The conference will begin shortly to raise and lower your hand during Q&A you can dine style one one.
[music] [music].
Mmm.
[music].
Mmm.
[music].
[music].
Okay.
Okay.
[music].
Okay.
Okay.
[music].
So.
Okay.
[music].
Okay.
Mhm.
Okay.
[music].
Okay.
Okay.
[music].
Mhm.
Okay.
Hum.
[music].
Hum.
Okay.
[music].
Okay.
[music].
Hum.
Uh-huh.
Uh-huh.
Okay.
Okay.
Uh-huh.
[music].
Okay.
Okay.
[music].
Mhm.
[music].
Okay.
[music].
Okay.
[music].
Mmm.
[music].
Okay.
[music].
Okay.
[music].