Q2 2023 Universal Health Services Inc Earnings Call
Okay.
Okay, and thank you for standing by and welcome to the second quarter 2000, and twenty-three Universal Health Services' 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 to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message.
Advising you your hand is raised to withdraw your question Press Star one one again.
Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Steve Filton CFO . Please go ahead.
Thank you and good morning, 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 32023.
The conference call 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, 2022, and our Form 10-Q for the quarter ended March 31 2023.
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 <unk> per diluted share of $2 42 for the second quarter of 2023.
After adjusting for the impact of that item reflected on the supplemental schedule is included with the press release, our adjusted net income attributable to uhm per diluted share was $2 53 for the quarter ended June 32023.
Our acute hospitals experienced strong demand for their services in the second quarter with adjusted admissions increasing seven 7%.
The prior year, even though the volume growth was skewed somewhat to lower acuity procedures overall revenue growth was still a very robust nine 7%.
While overall surgical volumes were solid increasing about 5% from the prior year quarter. There was a continuing shift from inpatient to outpatient.
Meanwhile, the amount of premium pay in the second quarter was $75 million, reflecting approximately 10% to 12% decline from the amount in the previous several quarters. The continued robust increase in acute volumes is the major reason that premium pay is not decline further.
Worth, noting that our average hourly rate, which includes premium pay was 4% lower than the second quarter of 2022.
On a same facility basis EBITDA at our acute care hospitals increased 16% during the second quarter of 2023 as compared to the comparable prior year quarter.
During the second quarter same facility revenues in our behavioral health hospitals increased by seven 8%.
Primarily driven by a six 2% increase in revenue per adjusted patient day.
The patient day growth in the quarter was greater at our acute care or acute behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day beyond the already relatively robust levels, we've been posting for several periods.
With a similar level of revenue growth in the first quarter same facility EBITDA for our behavioral hospitals has increased 12% in the first half of the year compared to the comparable prior year period.
Our cash generated from operating activities was $654 million during the first six months of 2023 as compared to $478 million during the same period in 2022.
In the first half of 2023, we spent $337 million on capital expenditures and acquired one $4 million of our own shares at a total cost of approximately $192 million.
Since 2019, we have repurchased approximately 20% of the company's outstanding shares.
As of June 32023, we had $946 million of aggregate available borrowing capacity pursuant to our $1 2 billion revolving credit facility.
In our acute care segment, we continue to develop additional inpatient and ambulatory care capacity. We currently have 24 operational freestanding emergency departments as well as three additional which are expected to be completed and opened over the next six months and nine more which had been approved and are in very.
<unk> stages of development.
Also construction continues on our de Novo acute care hospitals, consisting of the 150 bed West Henderson Hospital in Las Vegas, Nevada, which is expected to open next fall the 150 bed Alan Miller Medical Center in Palm Beach Gardens, Florida.
136 bed Cedar Hill Regional Medical Center in Washington D. C. Both of which are expected to open in 2025 in our behavioral Health segment. We recently completed and opened 120 bed River Vista Behavioral Health Hospital in Madera, California, and we broke ground on the 96 bed.
South Ridge behavioral hospital in West, Michigan, a joint venture with Trinity Health, Michigan, which is expected to open later next year.
I will now turn the call over to Mark Miller, President and CEO for some closing comments.
Okay.
We were generally pleased with our second quarter results as both of our business segments continued their transition into a post pandemic world.
As we anticipated acute care volumes have continued their recovery trajectory and are gradually begun to resemble the patterns we experienced.
Before the pandemic.
The comparison to last year's second quarter for our acute hospitals is the first apples to apples comparison of two low COVID-19 volume quarters, we've had since the since the pandemic began.
And a 60 basis point year over year margin improvement in Q2 is a step towards a more extended margin recovery, we hope to sustain for the next several periods.
In our acute segment, we highlighted the upward pressure on physician expense, which tended to run at a rate of about 6% of revenues pre pandemic, but it's running closer to seven 6% in 2023.
Based on the generally favorable operating trends in the first half of the year, we are increasing the lower end of our 2023 EPS guidance from 950, a share to $9 85 per share.
As we have previously disclosed our 2023 guidance had originally assumed recognition in the fourth quarter of 2023 of $25 million of supplemental revenues from our Nevada Medicaid program.
The state has dramatically reduced the funding for this program and we now believe our fourth quarter revenue recognition will be only approximately $3 million. This reduction has informed our decision not to change the upper end of our guidance range at this time.
It is worth noting that we believe a new Nevada state directed program, which we also have previously disclose appears to still be on track for 2024 implementation with a potentially materially favorable impact on our Nevada hospitals.
We are pleased to answer questions at this time.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Our first question.
<unk> comes from Jason Kessler rollout from Citi. Your line is open.
Hi, great. Thanks, Good morning, I, just wanted to ask about acute care volumes I guess, obviously, a strong result for the first half, but wondering how you are feeling about the trajectory of those volumes in the back half of the year and I know, it's early but do you think this creates a new base from which to grow off of for next year or do you think so create kind of a.
Instead of difficult comps that you have to kind of overcome and worked through the first half of 'twenty four and just any color or commentary around that would be helpful.
Sure I mean, I think part of what we're experiencing.
And certainly in the first half of this year is what both I think providers and payers have anticipated for some time and that is during the pandemic there was some.
Amount of deferral and postponement of procedures.
And I think what both providers and payers have been reporting in the last quarter or two is that we've seen an uptick in volumes, particularly lower acuity volumes elective surgical procedures.
I think particularly skewed towards the Medicare population that probably was most prone to different postponed during the pandemic, it's very difficult for providers like us and I think quite frankly for almost everybody except for individual physicians to really try.
And precisely determine how much of current volume is in exhaustion.
Demand that will sort of postponed or deferred during the pandemic.
The comment that we have made simply is that we had 10% adjusted admission growth in acute care in Q1 close to 8% in Q2 those are really historically unprecedented numbers. So our expectation and again I think Mark's comments were in Q2 for the first time, we have kind of an apples to apples.
Comparison with last year in terms of low Covid volumes, we're expecting I think volumes to moderate in the future, but also for acuity to rise and to return to sort of that mid single digit level.
Top line growth in acute care that has sort of long been the model.
Whether that occurs in the <unk>.
Couple of quarter is whether we have a run of somewhat extended and enhanced volumes. I think is is difficult for anyone to project. Obviously, it's been pretty strong for the last six months.
Early indications in July of that remains that way, but.
We will say so so again I think some of that.
Our caution about guidance in the back half of the year is also informed by this idea that we're not exactly sure at what pace acute care volumes moderate but there is some sense that they will but generally feeling pretty pretty good about overall acute care volumes.
Which did suffer at least non COVID-19 volumes, which you know that did suffer definitively during the pandemic.
Got it okay. Thanks, and maybe just as a follow up on the acute care office and subsidy expense. It sounds like that's coming in at an even greater pressure point than originally anticipated in guidance I guess, one is that fair and curious if that level of spending is at a tipping point now where maybe you need to perhaps consider greater levels of in sourcing.
Other strategies to help offset and create kind of a good guy and sort of set up for 24 and beyond any just thoughts on that would be helpful. Thanks.
Yes, so we have certainly been talking about and anticipating that 2023 would be a challenging year. When it came to this issue authorization subsidy expense we talked about.
Back in February when we gave our 2023 guidance, providing like a 55% to $60 million increase in our guidance and physician expense.
The reality is the rate of increase is probably running at about twice that.
I do think that this is.
To some degree sort of a transitory pressure.
These contract service providers, who provide much of our especially emergency room in anesthesiology coverage.
Many of them are facing pretty significant financial stress there've been a number of high priced high profile bankruptcies.
In that area by these contract providers and in this interim period, where we're having to replace.
Or kind of substitute in either pay greater subsidies to our existing providers or to new providers or is your question Aleem.
I alluded to in source and hire these these physicians ourselves there's sort of.
It kind of one time hopefully expenditure.
Money.
To make this transition but at the end of the day I think we have a point of view that.
There's X number of EUR providers in the country. There is X number of anesthesiology providers in the country and when they're sort of current disruptions settles out.
Those dollar increases.
Like in 2024 will at a minimum level off and hopefully will actually decline, but we're not going to see this rate of increase over an extended period of time.
Great. Thanks for all the color.
Thank you one moment our next question.
Okay.
Our next question comes from Ben Hendrix from RBC capital markets. Your line is open.
Hi, Thanks, I was wondering if you could answer pretty much. The same question on the softness in the behavioral that we saw this quarter versus first quarter. I think you had called out maybe some headwinds at some specific facility. So just wanted to see kind of how that.
Looks like in the back half is that an easy fix and what we can expect going forward. Thanks.
Yeah.
I'll go back to the point that Mark made earlier, the first quarter comparison.
Was it a bit.
Melissa because we were comparing kind of a low COVID-19 volume in Q1 of 2023 with a very high volume COVID-19 quarter in 2022, so, particularly on the behavioral side that comparison was very favorable and volumes revenue EBITDA growth all look very favorable in Q1.
Q2 volume growth.
It was a little more normalized frankly, a little softer than we anticipated.
I think that our acute behavioral volumes and I made this comment in the prepared remarks, we're actually.
In line with our expectations, but the volumes in our residential treatment centers were somewhat lower than expectations as we kind of dive delved into those numbers.
It really seems like they were focused on a handful of facilities.
We're having specific issues with referral sources of regulatory issues that we believe will be corrected in largely resolved in the back half of the year, but didnt seem to be.
Pervasive in any sort of company wide or industry wide sort of dynamic so.
I think our view as we think about the behavioral business trajectory. The point that we've made for some time during the pandemic is that as COVID-19 volumes eased, we would be able to hire more people as we would be able to hire more people would be able to generate more patient days more volume greater efficiencies great greater EBITDA.
Growth I think if you look at the first six months of the year.
Again I made the point in my prepared remarks, EBITDA is up 12% I think if you look at the last four quarters EBITDA is up substantially and I think that's how we're looking at we're looking at.
Earnings power of our behavioral business.
A bit of.
The slowdown in Q2, but I think we think the long term trajectory. It's much more reflective of the experience we've had over the last two to four quarters.
Thank you.
Thank you one moment our next question.
We have a question from Andrew Mok from UBS. Your line is open.
Hi, Good morning, same store inpatient admissions were up about 7% in the quarter, but I think inpatient surgeries were only up about 1% or so you mentioned lower acuity procedures, but I think the stats would apply some very strong medical growth or non surgical growth can you elaborate on the nature of the procedures. They are seeing on the inpatient side.
Yes, so what I said in my prepared remarks was that overall surgical growth was up about 5% Q2 over Q2, which.
Which we view as a pretty solid outcome.
Skewed more towards outpatient growth outpatient procedures outpatient surgical procedures were up 8% in patients were only up 1%, but that obviously affects acuity and again I think.
In my mind. This is sort of an intuitive resolved if what we're seeing in terms of the volume growth in acute care is to some degree a recapture of postponed and deferred procedures. It makes sense that those deferred and postponed procedures whereof the lower acuity nature almost by definition if people had.
Emergency.
Health care needs during the pandemic those were attended to but the things that were deferred were more elective more discretionary procedures, both surgical and medical and again I think that's the dynamic youre seeing in terms of very high volumes, but somewhat more muted acuity.
Got it and just a quick follow up how is the renal hospital tracking against the expectations can you help quantify the contribution that that hospital had on same store admissions growth in the quarter.
Yes, I don't have those exact admission numbers for the renal hospital in front of me, but I will say that.
What we have said was included in our 2023 guidance was about a 25% to $30 million turnaround at the renal hospital.
I think we're tracking.
I think we anticipated that that would be a little backend loaded and I think thats right. I think we probably had about a $4 million to $5 million improvement in Q2.
But I think we're generally tracking for that level of improvement for the full year.
And that's our expectation my sense is.
The renal hospital is not large enough to have had a significant impact on admissions one way or the other in the quarter.
Okay.
Thank you.
Thank you.
Our next question.
Comes from Joshua Raskin from.
Nephron Research your line is open.
Alright. Thanks. Good morning, just the first question getting back to the behavioral health margins I think in the past you have suggested and I think you just alluded to that Steve that there just weren't enough clinicians to hire in that sort of slowed your volumes are you now able to find these clinicians if so where are they coming from and our different categories, maybe nurses versus MD is performing.
Parent rolls I'm, just curious how youre feeling that capacity.
Yes, I mean so.
What I think we've said pretty consistently throughout the pandemic is that the pandemic itself.
I should start by making the point that prior to the ban dynamic in late 2019 early 2020.
Think we would have described and I think most of our provider colleagues would have described the labor market is pretty tight.
The overall unemployment rate in the country was I think pretty close to full employment clinic.
Clinical employment, particularly nursing employment was very tight.
And then really exacerbates that that tightness, particularly for sub acute providers like behavioral providers, because we started to lose a great many nurses, especially nurses to.
These high level premium pay opportunities they were having working in.
Acute care hospitals, and COVID-19 units or ICU et cetera, and the argument. We made all along was that as COVID-19 volumes declined.
Those opportunities for these extraordinary.
Pay increases would decline and nurses would return to their will sort of call. It homebase unemployment and I think that's what we've been saying I'm going to say for the last 12 to 15 months I'm going to say at least back to the spring.
The early spring of 2022.
And.
We're seeing that now.
What we're seeing is an.
An increase in base wage rates in order for us to get those folks back so I think wage inflation and behavioral or average hourly rate increased in.
In Q2 over the prior year is more like four 5%, which is certainly higher than it was running in the pandemic and again you see some of that in.
Sure.
Salary overall salary increases, but at the end of the day and this is the point that I was trying to make before I think what we've demonstrated especially over the last three quarters.
And to a lesser degree in Q2 of this year is as we are able to hire more people were able to generate more volumes and as a consequence EBITDA growth margin improvement, etc. It is not a directly.
It's not a ratable increase every single quarter, but and again there is some element of timing here as we hire new people they have to be trained and oriented.
It causes some level of inefficiency that over time I think we have the view that we're going to continue to be able to hire more people and behavioral and admit more patients and that's going to lead to a long term growth trajectory in that business.
Gotcha Gotcha, and then just one more quick one the United spoke about a large increase in the incidence of mental health utilization just more people seeking services do you think that translates to more inpatient care or is that a level of acuity that's been more steady on the inpatient side and maybe thats more lower acuity.
Yes, my recollection from from reading, the United transcript was that they specifically talked about that increase being skewed to outpatient procedures.
And obviously I think outpatient.
More highly competitive set of market for.
For behavioral Theres a lot more competitors I think our view is over the long term the more people, who are getting care and getting appropriate assessment et cetera is good for our business, which tends to have a much broader continuum of care that includes more intensive outpatient.
Partial hospitalization and all sorts of inpatient care.
Across many diagnosis. So I think we have a view that while we didn't necessarily experience that same growth in outpatient that United referred to specifically I think in their first second quarter.
Call that ultimately down the road, we're likely to benefit from more and more people getting the appropriate level of behavioral care and assessment.
Great. Thanks.
Thank you.
Our next question comes from Whit Mayo from Leerink Partners. Your line is open.
Hey, Thanks, Steve I appreciate the comments on Nevada in the supplemental Medicaid program changes any way to potentially size. How you guys are thinking about the potential contribution of that in in 2024, I know theres still some moving pieces and approvals that need to happen.
Yes, so we're waiting with for the state to see a more specific guidance about how there.
Specific methodology is going to work et cetera, but based on our broad understanding of how this program is going to work.
I think anymore.
<unk> did in his prepared remarks, our expectation is that this could have a materially favourable benefit.
Our Nevada hospitals.
But we're anxiously waiting for the state to issue more specific.
Or more specifics surrounding the calculations and the methodology and the size of the pool et cetera, which we think could be forthcoming.
So to say in the near intermediate term.
But certainly we think there'll be.
A lot more clarity by the end of the year.
Okay now that's helpful. We've gotten.
Some questions around the Cerner Oracle EMR investment you guys are making none of this is new but just maybe remind us.
Income statement Capex impact, how many hospitals youre thinking about converting I can't imagine Thats all of your facilities. This timeline in any review of that initiatives.
Sure so yes.
As you said this is not necessarily really new news.
We originally.
Committed to a behavioral EMR implementation with Cerner and going back a couple of years.
And after <unk> acquisition by Oracle Oracle wanted to do this press release, which is fine.
But to be clear I mean, this is not new we've already implemented a handful of facilities in 2022, we will implement another round of facilities in 2023.
If you read the press release it does it refer to the number of facilities I think.
When at least one of the news media outlets picked up the story. Thank you sort of combine the fact that we were making this announcement with the fact that we've got 200 behavioral facilities here in the U S and said that we were committed to implement 200 facilities. As your question alludes to we are certainly not yet committed to that we are smaller residential facilities that may not be.
For an investment of this scale et cetera.
So I think the point I mean, I think that we will spend significantly less.
Behavior in our behavioral EMR than we did on the acute care MLR. We spent I think around 202000 $230 million a number of years ago on the implementation of an acute care EMR I think we'll spend substantially less on behavioral and it will be spread out over I think a five or six year period. So I don't think that the.
The individual impact of invest.
The investment is going to have a significant impact the other pieces.
And expectation that.
There are operating efficiencies that we'll gain and garner from the implementation so.
<unk> chunk of that investment should be offset with operating efficiencies.
Okay. Thank you.
Thank you.
We have a question from a J rice from credit Suisse. Your line is open.
Thanks, Hi, everybody I know you've gotten some good rate increases on the behavioral side.
The last year or so is I know a lot of states reset their rates.
Mid year I also know you got ongoing discussions on the commercial side.
Medicare we can track that easier, but any update on thinking about where rates settle out back half of the year into next year for commercial and Medicaid and the behavioral side.
Yes.
Jay I think our comments on rate increases and behavioral had been pretty consistent.
They definitely historically.
Revenue per day in the behavioral division has generally increased sort of two or 3% a year pretty consistently pre pandemic. During the pandemic. We saw those numbers rise to something much closer to 5% to 6%.
And I think we generally discuss that and we think the main reason for that is we've been able to leverage. The fact that there is capacity constraints in the industry as we've already talked about on this call because of labor capacity, especially.
And we've been going to our lowest titers.
Either demand increases from them.
Or canceling those contracts that we view to be inadequate and simply admitting patients who.
Insurance will pay us more.
Again in an environment, where we can only treat a limited number of patients we can be more selective about.
Who we treat and the fairness of what we think we are being paid.
What we have said is we think of that as we're able to admit more patients our ability to leverage that diminishes, a little bit and maybe that revenue per day increase that had been running five to six.
Moderates more to four to five we were again a little over six in the quarter.
Although that I think is a function not only of the rate increases we're getting but also the mix of acute versus residential patients as I mentioned before but I think generally our price the pricing environment in behavioral remains strong we remain aggressive we have terminated our issued notice of termination.
<unk>.
<unk> a great many markets to a great many payors.
We're pursuing this strategy a strategy pretty aggressively and feel like there is runway to do so for the foreseeable future.
Okay.
<unk>.
I know you talked about the new facility in Vegas.
The trajectory there, but maybe stepping back.
No you've got concentrated portfolios and the acute side in Vegas, and southern California, DC in southwest taxes any.
It's dispersion obviously you had good overall volume growth was there much of a difference in the performance in those major geographic markets this quarter.
So I think like most of our or several of our public peers HVA and tenant I think most notably have commented in the last year or so that their facilities in Texas, and Florida had been recovering at a more rapid rate.
And in other geographies.
I think as those states have emerged from the pandemic more Randy economies in those states are emergent and the pandemic more rapidly.
Honestly that has been.
Sort of a bit of a negative comparison for us.
Over the last year or so because we've got less of a relative footprint in Texas, and Florida, and more in Nevada, and California than our peers, but I think what we're seeing now is.
The recovery in those geographies is starting to pick up pace et cetera, I think our performance in Nevada was particularly.
Improved in the quarter and obviously, that's always a significant piece of good news for US I will say that to have the sort of acute care performance, we had in particularly for topline and EBITDA growth of 16%.
That would be pretty broad based it really can't be specific to one single market and I don't think it was but again the encouraging.
I think element for us specifically was the improvement in our Nevada results in the quarter.
Okay. Thanks, a lot.
Our next question one moment.
Yeah.
We have a question from Jamie <unk> from Goldman Sachs. Your line is open.
Hey, Thanks, good morning.
I just wanted to go back to the other operating expenses within acute for a second.
You spoke about some of the bankruptcies for vendors in this space are there specific sort of one time disruption costs and $590 million.
You realize this quarter I'm just trying to understand if we're.
Where we're going from here if thats the right new baseline or if you can take costs out at some point just any more color on on the near term and how to model that line item.
Yes look I made the point earlier, Jamie that we anticipated a significant increase in those physician subsidy expenses in our 2023 guidance, but in the first six months, they're tracking at twice the rate that we anticipated.
But I also tried to make the point that I think we believe that.
That.
These really dramatic increases are a function of this current disruption we've got providers, who are telling us one or two things one that they just can't continue they've declared bankruptcy.
And they can't continue to provide the contract services that where we are.
Contracted floor, and we're having to replace them generally at a higher cost whether we're contracting out to somebody else or hiring these folks in.
And again, there as we sort of transition costs that I think are largely onetime in nature.
But I think we're going to continue to experience. These for the next quarter or so.
I think we have a general view that by the time, we get to 2024.
However, this is settled out either.
And I'm not sure there's a single answer, but I think either a lot of these providers. These edr in anesthesiology physicians will be employed by hospitals and by us or there'll be employed by more local and regional providers.
More healthy financially et cetera, but we're going to see a leveling off of this expense.
I don't know that we're at.
We're able to predict exactly how.
And model that in the future and again I think.
Mind.
Yes.
Even a positive view of this in the quarter is acute care EBITDA, 16%.
Higher than it was last year's Q2, despite the fact that we've got.
Significantly east increased burden a physician expands we.
We feel like when that levels off next year, that's going to provide a boost to our earnings power.
Okay.
And you and other hospitals have always talked about our strong margin profile on surgery, just given that the tailwind that seem to be.
In the surgical space at this point can you give us any color on how to think about profit margins in our surgical business or profit contribution on average from surgeries.
Yeah, I mean, I think if you think about.
If however, you want to define our.
Okay.
Long term acute care margins.
In the upper teens, I'm going to call it 17% something like that that I think.
Surgical margins tend to be probably.
Five to 10 basis points above that and medical margins tend to be five to 10 basis points below that obviously theres a lot of difference depending on the specific procedure.
<unk>.
The length of stay the demographics of the patient base et cetera, but historically surgical margins.
It had been measurably higher than medical margins.
Okay. Thanks for the color.
Thank you.
Our next question will come from.
Scott Fidel from Stephens Your line is open.
Hi, Thanks, good morning.
Recent developments or proposals on the policy side would be interested to get your initial thoughts on.
The first was the.
The CMS proposal that came out around the intensive outpatient benefit for behavioral and Medicare and then just yesterday.
Just came out so don't expect too detailed.
<unk> bought the bite administration did also just come out with with an updated proposal really sort of focused on health plans around mental health parity and sort of enforcing that around in network.
In network for our behavioral so just interested on both those proposals if you have any initial thoughts on potential.
Potential risks and opportunities there.
Yes.
Tackle the parity, one which I know is the more recent one Scott first.
As you pointed out I mean, I think the administration announced yesterday that they were going to issue new rules on mental health parity, which they did this morning and I. Appreciate your acknowledgment that we have not had a chance to review those I think.
The broad context here as mental health parity legislation originally passed almost 15 years ago, but I think the industry has always been frustrated that the amount.
The amount of adherence and enforcement on the part of the government has never at least then as fulsome as the industry would have liked.
And without leading the specific regulations or having a chance to read the specific regulations I think the one.
Positive that we take away is that the current administration seems focused on the fact that there needs to be better enforcement there the mental health parity legislation originally.
Was I think viewed very positively for the industry and I do they get a positive impact, but I think it should be more positive than I think we would argue that there have been plans and payers that have sort of tried to dodge the.
<unk>.
The intent of the legislation and we believe that any effort on the part of this administration to more aggressively enforce those parity laws.
Welcome.
In terms of the outpatient.
Regulations also to make repeat the same comments I was making just about.
United commercial comments or commercial utilization comments before.
I think that any.
New developments that allow people or encourage people to get more access to intensive outpatient or behavioral care in general are generally going to be positive for us we have a lot of intensive outpatient offerings.
But I think more than that.
We had this complete continuum of care.
From very low acute outpatient is very high.
Hi, acute indication that the more people, who are given access to care and behavioral diagnosis and assessment I think thats generally good news for us. So I would say we view both of these developments is a positive I think we view them consistent with I think general.
Legislative.
And administrator sort of favorability to the behavioral business at both the federal and state level difficult to quantify the benefit for either of those in any sort of precise way.
Got it and then just one quick follow up just on the Medicare.
Volume sort of normalization that we've been seeing any way can you sort of tease out just in the second quarter.
I guess that sort of skewed between outpatient and inpatient obviously, we know that.
To be sort of heavily driven by outpatient, but im interested whether you saw a pick up in the inpatient side <unk> on.
On the Medicare volumes as well thanks.
Yeah.
Yeah. So we saw as we said adjusted admissions increased by almost 8% in the quarter. Some of that is certainly driven by the outpatient activity, but obviously pure admission growth was also pretty strong.
Again, I just feel like what Youre seeing is it is a bit skewed towards the lower acuity procedures and again not by a tremendous amount I mean, we saw.
Overall revenue per adjusted admission on the acute side increased by 2% or so in the quarter I think normally we would expect that number to be more of a 2% to 4% range that was kind of on the low end.
There is a little bit more of that SKU.
I think it's not so much I mean, there's clearly an inpatient and outpatient issue, but I think it's more of an issue. It's skewing more towards those elective and deferred procedures that were postponed whether they ran or outpatient during the pandemic and are now being realized in greater numbers.
Okay, great. Thank you.
Thank you our next question comes from.
Justin Lake with Wolfe Research your line is open.
Thanks, Good morning.
First question wanted to ask about what Youre seeing from the players I know you already got asked about pricing, but given Medicaid payers are heading into a redetermination Medicare advantage payers are talking about higher utilization. Steve are you seeing any early signs.
Increased medical management.
Claims denial et cetera.
Typical stuff that matters Carol do.
When they are costs are or might be a little bit higher.
Yes, so two things or two comments that you made you're asking I mean, one is we're not seeing I think at least.
A measurable impact that we can identify from Medicaid redetermination so far.
I do think it all again.
Mark commented on.
The rationale for not raising the upper end of our guidance. He commented on the Nevada supplemental payment and I do think that's a big piece of it but I think we also have a view that there may yet be an impact from Medicaid redetermination in the back half of the year in both of the businesses that we have not yet seen.
<unk>.
We're paying very close attention to that.
<unk>.
Focus, but I think your other comment is also well taken and that is with a lot of the payers reporting an increase in their own medical loss utilization.
We have an expectation that we're going to see more aggressive behavior on their part too.
Whatever it may be limit length of stay on the behavioral side or.
Challenge more in patient versus observation.
Classification on the acute side.
I can't say that we can say definitively that we've seen that change in a measurable way just yet I think it sometimes takes a quarter or two for that information to sort of play out but I will tell you that we're very prepared for it very focused on it.
I think in all sorts of ways I think we're trying to change our contracts. So that these issues are more.
<unk> defined data in upfront in the contracts, but will also in the way that we provide billing information and we go through the appeal process. So all of those things are a significant focus of ours, but I think you are.
Suggestion that managed care payers are likely to become more aggressive in their utilization review procedures is something we're very sensitive to and prepared for.
I appreciate that maybe you could expand on your commentary around Redetermination I know a lot of us are uncertain. How this plays out but one kind of line of thinking is that a bunch of people are going to be kicked off Medicaid and a lot of them could end up on the exchanges are on private.
Employer health plans, which pay a lot better right, especially on the acute side, but even on the behavioral side. So how do you think about that vis vis do you. Just think that you are concerned that a lot of folks are going to be unfortunately removed from our roles and not pick up all the coverage is it market specific to you given your geographic exposure do you think that is broad based.
What drives that.
Yeah. So I think that we generally can occur as your question sort of alludes to with.
But sort of broad way that a number of analysts both I'm going to say.
Dispassionate analysts like CMS, and the urban Institute et cetera, when they looked at the potential impact of Redetermination and then a number of sell side folks have done pretty exhaustive studies and I think they all can conclude largely.
The way you framed your question that ultimately there'll be a sufficient number of people who are re determined off the Medicaid roles, but who can requalify on better paying commercial products commercial exchange products that the net impact to providers will be a positive one I think our.
The skepticism or concern or caution is more short term or timing related in nature and that is as we go through the process and people get re determined off.
How quickly can they requalify.
For promotional products et cetera, and again I just don't think we've had enough time to really.
Measured whether there could be a sort of a short term bump or.
And drain on this but.
But I think in the long run we think we probably come out.
At least whole if not somewhat ahead. The good news from my perspective is based on the Redetermination data that I've seen.
While there have been a lot of people we determined off.
A lot of those Redetermination is a good chunk of them are sort of more for administrative reasons.
Their paperwork is not up to date the address is that at today whatever it may be and so it feels like those people will be able to get back on the Medicaid roles quickly.
So.
It feels like maybe the impact in the long run it's not going to be as significant as we might have thought but again our point of view is may be some short term uncertainty over the long term I don't think we think this is really going to be a net negative for providers.
Got it thanks for all the color.
Sure.
Thank you.
Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.
Great. Thanks.
I wanted to go back to I guess Mark's comments about both segments starting to transition to that post pandemic World do you guys. How are you thinking about what the company has two businesses look like in that oral does it is it right to assume that.
From a margin perspective things look like 2018 2019 is there reason to believe.
That margins might be higher or lower.
Over time, and how do you think about.
Pat in the timing of getting two whenever that normalization is.
Yes, I think the answer Kevin is a little bit different for each of the segments I think and I think we've touched on this to some degree on the call today, but certainly in previous calls as well I think on the behavioral side.
Our view is that.
Margins during the pandemic, particularly or.
<unk>.
Diminished were negatively impacted by the labor scarcity.
And again the argument goes that as we are able to hire more people.
We'll be able to.
Create and really not create by the exhaust more of the unmet demand that's been out there and I think our view on behavioral is not only should we be able to return to 2019 margins ultimately, but to return to sort of peak behavioral margins would probably go back to 2004.
<unk> 2015, now just to be clear when I say that I mean, I don't think thats, an immediate I don't think that happens obviously in the next quarter or two but I think it is this sort of gradual trajectory.
Relatively robust topline growth.
And relatively fixed and semi fixed expenses that allow us to do that I think on the acute side.
It's a bit and a little bit more of a mixed story. There was certainly some benefit to the acute care business from the pandemic itself from the acuity of the Covid patients from the special reimbursement that we received related to COVID-19 patients et cetera.
And so I think it's a little bit more challenging for the acute business to get back to those pre pandemic margins because they've got to replace a lot of that I'm going to say COVID-19 patient related benefit clearly they've been doing that over the last few quarters and again. This gets back to I think the question of.
Sure.
How sustainable this higher level of acute care volume is going to be.
But again pretty much pretty similar I think we certainly feel like we're four or 500 basis points on the acute side below where our pre pandemic margins.
Mark Mark's comments in his prepared remarks, where we got 60 basis points of that back in Q2, we view that as a first step, which we hope to sustain for many more quarters to get to get back or get close to pre pandemic margins.
Yes, so it sounds to me like to some degree in both cases, it's if the volume number Thats <unk>.
<unk> to get you back to.
To where you were I.
I guess the behavioral one makes sense labor the constraint you fixed that the Q1, though it's still a little bit unclear to me I understand the concept of pent up demand, but when you. Just finally got above 2019 levels. When historically, you've been growing volumes a couple percent per year kind of well below that long term trend line. What is it that that makes you cautious to say that.
You wouldn't get back to that long term trend line or at the population growth demographics and fundamental demand drivers in your markets really unchanged.
Why do you get concerned to this is it a bolus.
Rather than the.
The new normal.
Yes.
Yes.
I don't think we've.
Any way given up hope.
I hope that we can get back to acute care margins.
Pre pandemic acute care margins.
Suggesting that I think the recovery or the path to recovery is a little more complicated on the acute side.
Because there were some benefits from the pandemic that Theyre just clearly we're not on the behavioral side of the pandemic really had only negative consequences for our behavioral business and therefore, I think the recovery from the pandemic is sort of a steeper and more robust and quicker quite frankly on the behavioral side than it is on the acute side.
Look I think what Youre seeing is some pretty rapid recovery on the acute side, but again, it's being driven by what I think we would argue are probably some level of extraordinary.
Volumes that will moderate some.
I think if you look at the acute care.
<unk> business model and earnings trajectory over an extended period of time with.
No.
Mid single digit revenue growth in that five or 6% range.
We have generally been able to produce EBITDA growth margin improvement et cetera, and.
I don't think Theres any reason, we can't sustain that level of topline growth for the foreseeable future.
It may take us a little bit longer to get there than it will on the behavioral side.
Okay, Alright, so I think I got it but just to make sure to tie. It all up you are not saying that this year's volumes become a headwind to next year, because there's some sort of unsustainable bolus. It's this is probably a good base, but we just didn't assume.
7% volume growth, we should assume from here more normalized volume growth or are you, saying that there could be a headwind next year from a comp perspective.
Yes, again hard to know, Kevin, but we had 10% revenue growth obviously in this quarter.
Again, that's at a historically high level.
I don't.
Again, I'm not giving 2020 for guidance at this point.
I don't know that we'll be able to sustain that level of revenue growth two things I think the level of revenue growth, probably moderates a little bit I think the the makeup of that revenue growth changes too.
What less volume somewhat more acuity and pricing.
But I think again.
At 10% revenue growth moderates to six or 7% I still think thats a model in which we're likely to see increased EBITDA.
And margin expansion.
Alright, perfect. Thank you.
Thank you one moment for our next question.
Yeah.
We have a question from Stephen Baxter with Wells Fargo. Your line is open.
Yeah, Hi, Thanks, a follow up on an earlier question I wanted to ask if you could expand a little bit more on the behavioral margins in the quarter.
Pre COVID-19 margins to increase sequentially in the second quarter. Obviously, you had a different experience this quarter with <unk> and other opex as a percent of revenue up sequentially I'm wondering what drove those increases and how did margins internally compared to your expectations and do you think we should see something closer.
Now the in the balance of the year. Thank you.
And operator, I'm, just going to make the point, that's going to have to be our last question.
<unk>.
So yes.
Had a few nonrecurring items in the quarter, we had a loss on disposal of assets there were about $3 million and we had an unfavorable exchange rate, which was affecting us in the U K by a couple of million dollars.
But just generally I think we saw salary increase a little bit more than we expected in the quarter.
And this is the point I was making in responding to an earlier question I mean, I think generally our ability to hire people and fill the vacant positions. It as a positive development in the short run it can be somewhat inefficient. We have a lot of people in orientation and training a lot of these people that we're hiring are somewhat less.
Experienced in less.
Trained and particularly in behavioral care than we're used to historically and that creates a little bit of inefficiency again in the short run I think in the long run and Thats why im suggesting to people not to focus so much on just the second quarter, but on the first six months of the year at the last four months of the last four.
Quarters, where we've really been emerging from the pandemic not being impacted by COVID-19 being able to hire people and I think the.
Broadly the results there show that we're going to continue to grow the top line, but also generate the efficiencies that we think generally come with that top line growth and I think thats still fundamentally arent belief so.
I think that's the way we're looking at the business.
Thanks for your question and operator, I think we're going to have to stop at this point in time.
Okay.
I'd like to turn it back to Steven Filton for any closing remarks.
Yes, just to thank everybody for their time this morning, and we look forward to speaking with everybody again after our third quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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