Q3 2023 Universal Health Services Inc Earnings Call

Good day and thank you for standing by welcome to the Universal Health services third quarter 2023 conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone. He will then hear an automated message advising your hand is raised.

To withdraw your question. Please press star one one again.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your first speaker today, Steve Filton CFO. Please go ahead.

Thank you and good morning, Mark Miller is also joining us. This morning welcome to this review of Universal Health services results for the third quarter ended September 32023.

During this conference call will be using words, such as believes expects anticipates estimates and similar words that represent forecasts projections and forward looking statements.

For anyone not familiar with the risks and uncertainties inherent in these forward looking statements I recommend a careful reading of the section on risk factors and forward looking statements and risk factors in our Form 10-K for the year ended December 31 2022.

Form 10-Q for the quarter ended June 32023.

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 uhm per diluted share of $2 40 for the third quarter of 2023.

After adjusting for the impact of the items reflected on the supplemental schedule is included with the press release, our adjusted net income attributable to uhm per diluted share was $2 55 for the quarter ended September 32023.

During the third quarter same facility revenues in our behavioral health hospitals increased by seven 6%, primarily driven by a six 5% increase in revenue per adjusted patient day.

The patient day growth in the quarter was greater at our acute care behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day beyond the already robust levels, we've been posting for several periods. Additionally.

Additionally, as we have anticipated in our original 2023 guidance, we're beginning to see a negative impact of Medicaid redetermination in certain states on behavioral health volumes.

With eight 3% revenue growth same facility EBITDA for our behavioral health hospitals as increased approximately 10% during the first nine months of 2023 compared to the comparable prior year period.

Our acute hospitals experienced strong demand for their services in the third quarter with adjusted admissions, increasing six 8% year over year.

In part because of the volume growth was skewed somewhat to lower acuity procedures overall revenue growth was seven 5%.

While overall surgical volumes increased about 3% from the prior year quarter, there was a continuing shift from inpatient to outpatient.

Additionally, we note that managed care behavior has become more aggressive in 2023 as it relates to denials and patient status classification changes.

Meanwhile, the amount of premium pay in the third quarter was $69 million, reflecting a 15% decline from the amounts in the previous several quarters.

Continued robust increase in acute volumes is the major reason that premium pay has not declined farther.

It's worth noting that our average hourly rate, which includes premium pay was slightly lower than in the third quarter of 2022.

In 2023 as compared to the comparable prior year quarter.

Our cash generated from operating activities was $815 million during the first nine months of 2023 as compared to $699 million during the same period in 2022.

In the first nine months of 2023, we spent $537 million on capital expenditures and acquired $2 $7 million of our own shares at a total cost of approximately $367 million. Since 2019, we have repurchased approximately 26% of the company.

Outstanding shares.

As of September 32023, we had $729 million of aggregate available borrowing capacity pursuant to our one $2 billion revolving credit facility.

I will now turn the call over to Mark Miller, President and CEO for closing comments.

Thanks, Steve.

Despite what remains a difficult operating environment, our consolidated results continue to track our revised earning guidance.

As we anticipated our acute care volumes have continued their recovery trajectory and have gradually begun to resemble the patterns, we experienced before the pandemic.

As Steve has previously commented we recognize the need to counter the increasingly aggressive behavior on the part of our payers and seek appropriate price increases to offset the impact of inflation on our cost structure and to seek further contractual protection.

To ensure we are properly reimbursed for the level of care provided to our patients.

We previously highlighted the upward pressure on physician expense, which tended to run at a rate of about 6% of revenues pre pandemic, but it was running closer to seven 6% in 2023.

And our behavioral segment, we have been pleased with our strong pricing and related earnings growth to date, but acknowledge significant upside opportunity in our existing occupancy rates, particularly as we continue to improve our recruitment and retention metrics.

As previously disclosed we expect our operating results for the fourth quarter of 2023 to include revenues earned by our hospitals in connection with.

With the Florida, Medicaid managed care directed payment program.

In addition, it is worth noting that we continue to believe a new Nevada State directed program, which we have previously disclosed appears to still be on track for 2024 implementation with a potentially materially favorable impact on our Nevada hospitals.

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We are pleased to answer questions at this time.

Thank you at this time, we will conduct a question and answer session.

To ask a question you will need to press star one on your telephone.

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 comes from Justin Lake of Wolfe Research. Your line is now open.

Thanks, Good morning, appreciate all the detail.

Couple of questions on 2024 one.

Just I know, it's early to give guidance, but just wanted to hear your view Steve on headwinds tailwind.

And specifically Mark.

Yes, I appreciate the comments on Nevada.

That does sound fairly material wanted to get some color historically when it speak goes to CMS and tries to put one of these programs in place.

Can you talk a little bit about timing and probability of you've ever seen it.

Unsuccessful have you ever seen CMS turn one of these down.

I know you have the money, but we're not going to match type of thing could you give us some color there historical background. Thanks.

Sure just in terms of sort of the first part of your question in terms of 2020 for guidance.

Justin as you know, we don't formally give our 2024 guidance until our fourth quarter earnings call at the end of February I think it is fair to say that we.

We continue to believe that the underlying metrics of the two businesses.

I kind of alluded to in his remarks.

Every sort of passing quarter continue to resemble more of our pre pandemic.

The operating environment, and I think broadly that's sort of the way we're thinking about 2024 I'm not going to go through a detailed list of puts and takes for 2024 at this point obviously the most significant one is the one that you mentioned this supplemental program in Nevada, which we've been disclosing in our Qs and Ks for a number of quarters now.

We believe.

The program has been submitted by the state of Nevada to CMS.

We believe that the state has been partnering with CMS through out so that they believe that the program needs. The CMS requirements and I think they are anticipating CMS approval based on our experience with like programs. We don't believe theres anything in the program that CMS should fundamentally.

Italy object to but obviously.

It's not over until there is CMS approval I think the state to expectation does that approval is likely forthcoming early in 2024.

The program is supposed to be retroactive, it's created to be retroactive to January one of 2024.

We are still waiting for the state to publish an impact file which would show their estimate of the impact on individual hospitals.

People have been using a number two I think estimate the impact on UHF and total in Nevada in the $100 million to $150 million range and based on our understanding of the program mechanics that doesn't seem like an unreasonable estimate so.

Again, the outstanding dynamic is CMS approval, we think it's probably forthcoming early in 2024, but obviously, we'll continue to keep people updated as we learn anything new.

Thanks.

Thank you one moment our next question.

Our next question comes from Jason Cazorla of Citi. Your line is now open.

Great Thanks, and good morning.

Steve I wanted to go back to your commentary on the Medicaid Redetermination impact on behavioral volumes I guess are you able to work with those patients to help get them.

Back on the coverage like you can with the acute care business.

As a result see that volume Hasnt, one is more of a transitory issue or how should we think about the puts and takes on the redetermination impact barley.

Mr Behavioral specifically.

Yes and to be perfectly candid, Jason I think we're estimating to a degree the impact what we have noticed during the quarter is that in certain states and probably for us most notably, Texas, certainly being the largest one and it's been reported that I think theyre going to at least 1 million people re determined off the rolls in.

Texas, but what we've noticed in a place like Texas is that the number of.

Calls and inquiries that we're getting that qualify from both a clinical and financial perspective, meaning there is adequate coverage available.

Have declined a little bit in the quarter, we don't know.

Precisely that that's related to Medicaid redetermination, but we've sort of drawing that conclusion kind of based on historical trends and metrics.

As has been reported it seems like a lot of these re determinations are for administrative reasons and.

A great number of these people will be able to get back re enrolled and when they reach out to us. We certainly can help them do that we can also try and help them to get other coverage.

But a lot of those things take a little bit of time. So I think all of our perspective on the SaaS, it's probably a large part of kind of a temporary dynamic, but I think we feel like there is a reasonable chance that our volume growth, particularly in our residential business amongst our child and adolescent population might've been greater.

In the third quarter had it not been for the.

The impact of Medicaid Redetermination is again, especially in Texas.

Handful of other states as well.

Okay.

Great. Thanks helpful. And then maybe just a quick follow up just on capital deployment. It looks like share repurchase activity picked up in the quarter I guess just given the backdrop. How are you thinking about the uses of your free cash flow moving forward in areas, where you perhaps see the best returns just at this juncture.

Yes, I would just remind people that we have slowed our share repurchase a little bit in Q2, it seems like ages ago, but there was.

The threat of a government shutdown at the time.

We were concerned that we potentially about some short term cash flow.

Lunch issues, but obviously that got resolved at least for the time being and we resumed our sort of regular share repurchase activity in Q3.

And I think we generally sort of.

Think about using the bulk of our free cash flow for share repurchase going forward.

Great. Thank you.

One moment for our next question.

Our next question comes from Stephen Baxter of Wells Fargo. Your line is now open.

Yes, hi, Thanks can you expand a little bit on the managed care environment any way to quantify I guess, how much of a drag on your realized commercial rates youre seeing from these tactics like if you thought you were getting a 5% rate increases that effectively now 4% or some other number given the drag there and would you say this is getting back to prepay debt.

Nick practices as the environment Normalizes, I think you've talked about that in the past or do you think this is something that has kind of gone well beyond that thank you.

Okay.

I think the way you framed the question Steven is quite appropriate I think that what we experienced our observed wise, particularly early on in the pandemic.

Unknown Executive: The day, and thank you for standing by.

When health care utilization dropped dramatically.

Unknown Executive: Welcome to the Universal Health Services 3rd quarter, 2023 conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

I think we felt like the managed care payers.

Eased up quite a bit and what sort of where they are.

Historically more aggressive.

Utilization review.

Audits denials patient status changes that sort of thing I think as <unk>.

Utilization picked up for the industry.

In 2023 and seem to be getting more back to normal and had been created some pressure on the MLR is for the managed care companies. They got.

Steve Filton: I would now like to hand the conference over to your first speaker today, Steve Filton, CFO. Please go ahead. Thank you and good morning.

They returned to sort of what I would describe as their historical practices when it came to again.

Marc Miller: Marc Miller is also joining us this morning.

Steve Filton: Welcome to this review of Universal Health Services Results for the 3rd quarter and its September 30, 2023. During this conference call, we will be using words such as beliefs, expects, anticipates, estimates, and similar words that refer to the efforts and forecasts, projections, and forward-looking statements.

Alan claims reviews, and that sort of thing and I think thats, what we are saying and I think the way it's reflected is and it's difficult to quantify in a precise way.

But our acute care revenue per adjusted admission, which was up only modestly in the quarter I think we will.

Steve Filton: For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of this section on risk factors and forward-looking statements and risk factors in our form 10K for the year end of December 31, 2022, and our form 10Q for the quarter ended June 30, 2023. We would like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported net income attributable to UHS for diluted share of $2.40 for the 3rd quarter of 2023.

Would have been higher had it not been for this behavior now I think to a degree we view it as.

Relatively temporary in nature, you saw that our accounts receivable days outstanding ticked up in the quarter.

Lot of this is I think sort of an extended process, meaning we will.

Im appeal a lot of these claims denials, we will work to collect a lot of these monies and I think we will collect a substantial amount of them down the road, but again in the current period. It did weigh I think somewhat on our.

Acute care revenue per adjusted admission.

Steve Filton: After adjusting for the impact of the item reflected on the supplemental schedule as included with the press release, our adjusted net income attributable to UHS for diluted share was $2.50. During the 5 cents for the quarter ended September 30, 2023. During the 3rd quarter, same facility revenues at our behavioral health hospitals increased by 7.6%. Primarily driven by a 6.5% increase in revenue per adjusted patient day. The patient day growth in the quarter was greater at our acute care of behavioral hospitals versus our lower acuity residential treatment centers which tended to drive up the revenue per day beyond the already robust levels we've been posting for several periods.

Thank you.

One moment for our next question.

Our next question comes from a J rice of UBS. Your line is now open.

Hi, Ravi.

Maybe two things just to put a finer point on your revenue per adjusted admission trend in acute.

Talking about <unk>.

<unk> behavior.

You also commented on volumes.

Coming back tend to be a little lower acuity.

Is there any way to parse that out do you think the underlying apples to apples pricing in Q acute care is still in that sort of 2% to 3% range.

Steve Filton: Additionally, as we have anticipated in our original 2023 guidance, we're beginning to see a negative impact of Medicaid redeterminations in certain states on behavioral health volumes. With 8.3% revenue growth, same facility EBITDA for our behavioral health hospitals has increased approximately 10% during the first 9 months of 2023 compared to the comparable prior year period. Our acute hospitals experience strong demand for their services in the 3rd quarter with adjusted admissions increasing 6.8% year over year.

And how much are each of those being a drag and then the flip side on the behavioral side. It looks like it's more of a volume question and you mentioned Medicaid redetermination, but there's been times when it's been constrained somewhat by staffing challenges.

Just maybe comment on the underlying demand is still there to the same degree.

Historically on the behavioral side.

Okay.

Quite a bit in your question, a J I'll sure I'll try and cover it all.

Steve Filton: In part because the volume growth was skewed somewhat to lower acuity procedures, overall revenue growth was 7.5%. While overall surgical volumes increased about 3% from the prior year quarter, there was a continuing shift from inpatient to outpatient. Additionally, we note that managed peer behavior has become more aggressive in 2023 as it relates to denials and patient status classification changes. Meanwhile, the amount of premium pay in the third quarter was $69 million, reflecting a 15% decline from the amounts in the previous several quarters.

Again, I think on the acute side as you suggest in our prepared comments and I think we've talked about this in previous quarters. I think the volumes are particularly high in 2023, because we are experiencing not just us but the industry in general some level of.

Recapture our procedures that were postponed or deferred.

During the pandemic.

And I think by their nature of those procedures tended to be the lower acuity lastly procedure areas, obviously, the emerging sorts of procedures that occurred during the pandemic alright attacks strokes. The accidents trauma. Those were attended to immediately by the more elective lower intensity stuff what are the things that we're doing.

Steve Filton: The continued robust increase in acute volumes is the major reason the premium pay is not declined farther. It's worth noting that our average hourly rate, which includes premium pay, was slightly lower than in the third quarter of 2022 as in 2023 as compared to the comparable prior year quarter. Our cash generated from operating activities was 815 million during the first nine months of 2023 as compared to 699 million during the same period in 2022.

<unk>, including <unk>.

Even though assembly as visits to primary care physicians et cetera, and so as those began to occur kind of in their more normal trajectory.

So to create a cascade of demand as well, so somebody who hasn't seen their primary care doctor for a couple of years now goes I know at a visit to the cardiologist or has their routine colonoscopy or whatever it may be and I think youre seeing that so as our volumes I think are elevated.

Steve Filton: In the first nine months of 2023, we spent $537 million on capital expenditures and acquired 2.7 million of our own shares at a total cost of approximately $367 million. Since 2019, we have repurchased approximately 26% of the company's outstanding shares. As of September 30, 2023, we had $721 million of aggregate available borrowing capacity pursuant to our $1.2 billion involving credit facility.

Our revenue per admission is somewhat more muted and I think over time, we would expect our volumes to moderate a little bit but also our revenue per adjusted admission to come up.

And again I think we have a view that the long term model and this business has not changed dramatically I think we imagine that revenue growth in the acute business over time historically long time has been in that kind of mid single digit range.

Marc Miller: I will now turn them all over to Mark Miller, President and CEO for closing comments. Thanks, Steve. Despite what remains a difficult operating environment, our consolidated results continue to track our revised earning guidance. As we anticipated, acute care volumes have continued their recovery trajectory and have gradually begun to resemble the patterns we experienced before the pandemic. As Steve has previously commented, we recognize the need to counter the increasingly aggressive behavior on the part of our payers and seek appropriate price increases to offset the impact of inflation on our cost structure and to seek further contractual protection to ensure we are properly reimbursed for the level of care provided to our patients.

267%.

And split pretty evenly between price and volume and I think as time passes we'll get closer and closer back to those historical norms.

I think on the behavioral side as you suggest that sort of dynamic has been kind of the flip side of that where pricing.

Has been particularly strong and again thats, a little bit of a mix issue.

We've talked about some weakness in the residential business.

In a couple of handful of facilities that are challenged with some very specific issues, but also with Medicaid redetermination as I mentioned earlier.

But again I think over time that those believes we will see an increase in residential business that will naturally bring down pricing, but will also increase volumes and the staffing issue just as a continuing issue we remain constrained in some markets and some facilities by a lack of staff that could be nurses it could be therapists it could be.

Marc Miller: We previously highlighted the upward pressure on physician expense, which tended to run at a rate of about 6% of revenues pre-pandemic, but is running close to the 7.6% in 2023. In our behavioral segment, we have been pleased with our strong pricing and related earnings growth to date, but acknowledge significant upside opportunity in our existing occupancy rates, particularly as we continue to improve our recruitment and retention metrics. As previously disclosed, we expect our operating results for the fourth quarter of 2023 to include revenues earned by our hospitals in connection with the Florida Medicaid Managed Care Directed Payment Program.

Mental health technicians, who are non-professionals generally I think we continue to improve our recruitment and our retention metrics.

Those metrics as they continue to get better we'll drive.

Greater volumes.

Okay, that's great. Thanks, a lot.

Thank you and one moment for our next question.

Okay.

Our next question comes from Jamie Paris of Goldman Sachs. Your line is now open.

Hey, good morning, guys.

First on physician subsidies can you just give us.

First can you confirm whether that was in line with the expectations. This quarter and then secondly.

Marc Miller: In addition, it is worth noting that we continue to believe a new Nevada State Directed Program, which we have previously disclosed, appears to still be on track for 2024 implementation with a potentially materially favorable impact on our Nevada House.

Just what are you seeing in terms of the market dynamics in the market start to settle or do you see more disruption out there in and any comments on.

Your prior comments from <unk> about that.

Kind of flattening out into next year.

Yeah, So Jamie the comment that we made.

In Q2.

Unknown Executive: We are pleased to answer questions at this time. Thank you.

Was that we had originally anticipated and what we included in our 2023 original guidance was that physician expense would be $55 million to $60 million higher in 2023 than it was in 2022.

Unknown Executive: At this time we will conduct the question and answer session. As a reminder, to ask the question you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

As it turned out I think this has been a bigger issue than we anticipated and I think virtually all of our peer is anticipated around the country and what we said is that we anticipated that the second half of the year would also reflect another 55 or $60 million increase over the.

Justin Lake: Our first question comes from Justin Lake of Wolf Research. Your line is now open. Thanks. Good morning. Appreciate all the detail. A couple questions on 2024 one. The just you know, it's early to get guidance, but just wanted to hear your view Steve on headwinds tailwinds. And specifically, Mark, you know, appreciate the comments on Nevada, you know, that, you know, it does sound fairly material. Wanted to get some color, you know, historically when a state goes to CMS and tries to put one of these programs in place, you know, can you talk a little bit about timing and probability?

The second half of 2022, and we are tracking very closely to those numbers in the third quarter. So in other words I don't think we've had.

A material sequential increase in.

In our pro fees.

Physician expenses.

Our expectation what we said at the time wise, we thought.

Not necessarily that the physician expenses would absolutely flatten out in 2024, but certainly that the rate of increase which as you know running in.

30%, 40% range this year would moderate significantly in <unk>.

I think we were not.

Prepared to suggest exactly what it would be right now.

Justin Lake: Have you ever seen a state be unsuccessful? Have you ever seen CMS turn one of these down and say, you know, I know you have the money. But we're not going to match the thing. Can you give us some color there historical background. Thanks.

Something in that 10% to 15% range of increase would be sort of more of what we would expect and it's really a function of.

The industry I think has largely sort of had to reset itself since the notice surprise billing act passed in the impact of that on the profitability of these physician billing business is our physician services the impact of that.

Steve Filton: Sure, just, you know, in terms of sort of the first part of your question in terms of 2024 guidance, you know, just as you know, we don't formally give our 2024 guidance until our fourth quarter earnings call at the end of February. I think it's rare to say that. You know, we continue to believe that the underlying metrics of the two businesses as more kind of alluded to in his remarks, you know, every sort of passing quarter continue to resemble, you know, more of our pre pandemic operating environment.

The lower billings plays its way through the system.

So what we're finding is.

Where.

Replacing those contracts that are most expensive, we're putting them out to bid or in some cases or in sourcing the service.

We believe that we'll be able to through those activities drive greater efficiencies and Thats why we have this general view that 2024 will not be as volatile and will not have as many.

Steve Filton: And I think broadly that's sort of the way we're thinking about 2024. Yeah, I'm not going to go through a detail list that puts in takes for 2024 at this point. Obviously, the most significant one is the one that you mentioned, this supplemental program in Nevada, which we've been disclosing, you know, in our case in case for a number of quarters now. We believe the program has been submitted by the state in Nevada to CMS.

Material increases as we saw in 2023, but certainly as we get closer to our 2024 guidance, we'll have a better sense of that and we will give more detail.

Got it.

Again at the moment, we're tracking for the back half of the year sort of exactly where we said we'd be last quarter.

Steve Filton: We believe that the state has been talking with CMS left so that they believe that the program, you know, meets the CMS requirements. And I think they're anticipating CMS approval based on our experience with, you know, like programs that we don't believe there's anything in the program that, you know, CMS should. Fundamentally objective, but obviously, you know, it's not over until there is CMS approval. I think the state expectation is that approval is likely forthcoming early in 2024.

Okay perfect. That's helpful. And then secondly, just on 2024 can you update us on progress with the three de Novo hospitals, Nevada, Florida, DC, specifically, how should we think about the EBITDA drag and some of those pre opening expenses ramp up next year. Thank you.

Sure. So the only hospital that will actually opened in 2024 is our west Henderson facility in Las Vegas, which I think at the moment is scheduled to open either late in Q3 or early in Q4. So.

I think it will have.

Bit of a drag.

Our 2024 are resolved, but given that it's relatively late in the year and given our historical success in opening hospitals in that market I don't think it will be.

Steve Filton: The program is supposed to be retroactive. It's created to be retroactive to January one of 2024. We are still waiting for the state to publish an impact file, which would show their estimate of the impact on individual hospitals. People have been using a number to, I think, estimate the impact on UHS in total in Nevada in the 100 to 150 million dollar range. And based on our understanding of the program mechanics, that doesn't seem like an unreasonable estimate. And so, again, the outstanding dynamic is CMS approval. We think it's probably forthcoming early in 2024, but obviously will continue to keep people updated as we learn anything new. Thank you.

Unknown Executive: One moment for our next question.

Tremendous drag again, as we get closer to our actual guidance.

Put.

Some more concrete numbers around that but I.

I don't think it should be terribly impactful to our 2020 for guidance.

Thank you and one moment our next question.

Okay.

Our next question comes from Peter Chickering of Deutsche Bank. Your line is now open.

Hey, good morning, guys. Thanks for taking my question can I go back to Medicaid Redetermination again for a second and just primarily inpatient or is it residential and looking at the referral channels and they see in Texas are you hearing of patients in the ER or they can't get discharged inpatient behavioral because they don't have coverage or any other color on what.

Jason Cassorla: Our next question comes from Jason Cassorla of City. Your line is now open. Great.

Channels, you're seeing the lower referrals due to Medicaid redetermination in Texas.

Yeah. So I think as I mentioned and again I want to be clear that I am not sure that.

Steve Filton: Thanks and good morning. Steve, I want to go back to your commentary on Medicaid re-determination impact on behavioral values. I guess, are you able to work with those patients to help get them back on the coverage like you can with the acute care business as a result, see that volume as one of a transitory issue or how should we think about the puts and takes on a re-determination impact on volumes or behavioral specifically?

The data that we get and we stated that we have is sort of absolutely.

Precise or that we can correlate it to two redetermination is in a very precise way I think what we observed during <unk>.

Q3 was that the number of.

Steve Filton: Yeah, and to be perfectly candid, Jason, I think you know, we're guestimating to a degree the impact where we have noticed during the quarter is that in certain states and probably for us most notably, Texas, you know, certainly being the largest one and it's been reported that I think they've been at least a million people re-determined off the rolls in Texas. But what we've noticed in a place like Texas is that the number of calls and inquiries that we're getting that qualify from both a clinical and financial perspective, meaning there's adequate coverage available, you know, have declined a little bit in the quarter.

Inquiries that we're getting and that includes as you suggest referrals from third party sources that includes direct.

Calls to our 800 number as it includes direct inquiries to our internet sites etcetera.

We're not necessarily down in volume, but what we're noticing is that there was a greater number of patients who did not have appropriate financial coverage. We always have some patients who developed but it seemed that number seemed to elevate in Q3 and it seem to elevate and particular geographies in which Medicaid Redetermination, where high I've mentioned, Texas.

A bunch of times I think Arkansas, Indiana were also states, where we saw an elevated level.

Steve Filton: We don't know, you know, I think precisely that that's related to Medicaid re-determinations, but, you know, we've sort of drawn that conclusion kind of based on historical trends and metrics. As has been reported, you know, it seems like a lot of these re-determinations are for administrative reasons and a great number of these people will be able to get back re-enrolled and when they reach out to us we certainly can help them do that.

But again I'm not sure that I can parse it between inquiries from referral sources or direct inquiries to us.

And like I said I don't know that we can also tie it directly to <unk>.

Generally are asking patients is what their current sort of financial coverage is we're not necessarily getting their history.

Medicaid lost Medicaid, we will talk to them about whether we can help them get Medicaid coverage et cetera, but we don't necessarily document the history there.

Steve Filton: We can also try and help them to get other coverage, but, you know, a lot of those things take a little bit of time. So, I think our perspective on this is it's probably in large part kind of a temporary dynamic, but, you know, I think we feel like there's a reasonable chance that our volume growth, particularly in our residential lives, among such around that lesson population, might have been greater in the third quarter, had it not been for the impact of Medicaid re-determination. Again, especially in Texas, but I can't go a lot of your stage as well.

Little bit difficult to I think give the level of sort of precise data that youre looking for okay.

Okay.

Just make sure I understand that so the number of inbound inquiries at basically the same.

<unk> ability to pay us with slower.

Correct.

Okay got it.

And then a quick follow up to jamie's questions on the Ism pressures.

Forgive me I think the number is about 34% increase for this year moderating or 10 to 15 for next year I guess what percent of these contracts are locked and these are typically multiyear contracts. So what percentage of contracts already locked in for next year or you have already gone and in sourced the script yourselves.

Steve Filton: Great, thanks. Helpful. And then maybe just a quick follow-up. Just on capital deployment, it looks like share repurchase activity picked up in the quarter. I guess just given the backdrop, how are you thinking about the uses of your free cash flow moving forward in areas where you perhaps see the best returns just at the juncture? Thanks. Yeah, I would just remind people that, you know, we have slowed our share repurchase a little bit in Q2.

Yes, I think the truth is.

These contracts are multiyear contracts, but they all have short term outs. So in other words I mean I think the reason this.

Physician expense issue became a crisis in 2023 and is that even though hospitals I think had long term contracts with their physician and your contract position providers their ER physicians their anesthesiologists those groups were coming to hospitals, and saying look we're going to give you a 90 day or 120 day notice.

Steve Filton: It seems like, you know, ages ago, but there was, you know, the threat of the government shutdown at the time. And, you know, we were concerned potentially about some short-term cash flow, you know, crunch issues, but obviously, you know, that got resolved at least for the time being. And we resumed our sort of regular share repurchase activity in Q3. And I think, you know, we generally sort of think about using the bulk of our free cash flow for share repurchase going forward.

Unknown Executive: Great, thanks. Thank you. One moment for our next question.

Overall contract calls for and last you're able to increase our subsidiary or change our contract in some way et cetera. So I'm not sure that the underlying length of the contract is all that determined that because I think in most cases for us and I am guessing for others in the industry, because otherwise wouldnt have become the issue that it did.

All have short term ads.

Stephen Baxter: Our next question comes from Stephen Baxter of Wells Fargo. Your line is now open. Yeah, hi, thanks.

Okay, great alright, thanks, so much guys.

Thank you one moment our next question.

Steve Filton: Can you spend a little bit on the managed care environment, any way to quantify, I guess, how much of a drag on your realized, you know, commercial rates you're seeing from these tactics, like if you thought you were getting a 5% rate increase, is that effectively now, you know, 4% or some other number given the drag there. And would you say this is getting back to pre pandemic practices as the environment's normalized?

Our next question comes from Sarah James of Cantor Fitzgerald. Your line is now open.

Thank you.

I wanted to go back and clarify comments that you made.

First on what sounds like the low acuity pent up demand working its way through you said you expect it to phase down over time. So just wondering if that mean do you expect it to.

Steve Filton: I think you've talked only about that in the past, or do you think this is something that's kind of gone well beyond that? Thank you. Yeah, I think the way you frame the questions, Stephen, is quite appropriate. I think that what we experienced or observed was, particularly early on in the pandemic, when healthcare utilization dropped dramatically, I think we felt like the managed care, payers, eased up quite a bit in what, you know, sort of what they're, you know, historically more aggressive.

There will be a factor in 2024, if youre talking about phasing down through the end of this year.

And the second clarification is just on the the MP sand denials from the insurers can you give us a little bit more context are these procedure classes that the payers are saying.

Have been outpatient or is it something about the number of hours.

Stan or some other aspect that they're pushing back on.

Steve Filton: Utilization review, you know, audits, denials, patient status changes, that sort of thing. I think as utilization picked up for the industry, you know, in 2023 and seemed to be getting, you know, more back to normal, and I've been created some pressure on the MLRs for the managed care companies. They got, you know, they returned to sort of what I would describe as their historical practices when it came to, again, you know, denial and claims reviews and that sort of thing.

Yeah. So.

I've said before that it is virtually impossible for us to precisely say, whether a particular procedure is a catch up of something that was postponed or deferred.

During the pandemic so in other words when.

We schedule and elective surgeries and elective diagnostic test we have no idea when that patient instead of originally contemplated that procedure or discussed it with their physician et cetera. What we do know is that the volume of elective procedures clearly decline certainly in the early stages of the pandemic.

Steve Filton: And I think that's what we're saying. And I think the way it's reflected is, and it's difficult to quantify in a precise way. But our acute care revenue projected admission, which was up only modestly in the quarter, I think we would have would have been higher and not been for this behavior. Now I think to a degree, we view it as, again, relatively temporary in nature. You saw that our accounts receivable days outstanding picked up in the quarter.

And they had been picking up since.

So we conclude and I think it's a reasonable conclusion that there is some element of catch up and to be fair. If you look at it.

No.

Steve Filton: There are a lot of this is I think sort of an extended process, meaning we'll, you know, appeal a lot of these claims denials. We'll work to collect a lot of these monies. And I think we will collect a substantial amount of them down the road. But again, in the current period, it did, you know, way, I think somewhat on our acute care revenue per adjusted admission. Thank you. One moment for our next question.

Acute care adjusted admissions for us were up like 10% in the first quarter, which was really a kind of an extraordinary number it's moderated a little bit in Q2 down to like 8%, which is still a very high number moderated to a little less than 7% in Q3.

Which again, it's still a very robust number from historical perspective, what seems to be moderating a little bit. Your question about how quickly. It continues how much is left in the pipeline. The truth of the matter is I'm not sure that anybody can answer that question with precision.

Just don't know that that data is out there in a meaningful way.

Then anybody can capture so look when we again give our 2024 guidance, we will make some guesstimate based on trends and perhaps going into what we think acute care volumes will look like in 2024, but I think broadly our view is that those lower acuity volumes will continue to get caught up and moderate and we will get.

AJ Rice: Our next question comes from AJ Rice of UBS. Your line is now open. Hi, everybody.

Steve Filton: Maybe two things just to put a finer point on your revenue for adjusted admission trend and acute. You're talking about MCO behavior. I think you also commented on volumes coming back tend to be a little lower acuity. Is there any way to parse that out? Do you think the underlying apples to apples pricing and acute acute care is still in that sort of two to three percent range? And how much are each of those being a drag?

Back to again mid single digit acute care revenue growth that ultimately will be split between.

Price and volume pretty easily whether that happens early in 'twenty four late in 'twenty, four I think thats yet to be determined.

Your question about denials, particularly in the acute business. The issue that I think is probably first and foremost tends to be classification of patients between inpatient admissions and observation status with obviously a patient who.

Steve Filton: And then the flip side on the behavioral side, it looks like it's more of a volume question. And you mentioned Medicaid redeterminations, but there's been times when it's been constrained somewhat by staffing challenges. And just maybe comment on the underlying demand. This is still there to the same degree it has been historically on the behavioral side. Okay. Part of it in your question, AJ, I'll try and cover it all. You know, again, I think on the on the acute side, as you suggest, in, you know, our prepared comments, and I think we've talked about this in previous quarters.

This is frustrating for us because a lot of these patients are in the hospital for multiple days.

But from the managed care perspective don't meet inpatient admission criteria, even though we're treating them for multiple days and maybe then getting paid for them as if they were simply in an outpatient in an emergency room.

But that's the main issue.

We get we do get sort of flat out denials, where.

And insurance company will say that the patient should have been treated at all but the vast majority of issues that we have with insurance companies on the acute side are over patient classification between inpatient and observation.

Steve Filton: I think the volumes are particularly high in 2023 because we are experiencing, not just us but the industry in general, some level of retapture of procedures that were postponed or deferred during the pandemic. And I think by their nature, those procedures tended to be the lower acuity, less intense procedures. Obviously, the immersion sorts of procedures that occurred during the pandemic, heart attacks, the strokes, the accidents, trauma. You know, those were attended to immediately, but the more elected, lower intensity stuff, when the things that were deferred, including the same, you know, you know, even as simply as visits to primary care positions, et cetera.

Thank you.

Thank you one moment for our next question.

Our next question comes from Ann Hynes of Mizuho. Your line is now open.

Hi, good morning.

Can you just give an update on the behavioral hospitals that had some issues in Q2, how they are progressing I'm, sorry regression back to normal admission trends.

And also maybe to that same effect I know in Q2, you hired a bunch of nurses that take a while to train in a while to ramp up can you talk about how that's going and when you think that group of nurses will be able to take on a full patient load that we will be able to say that the admission trends. Thanks.

Steve Filton: And so as those began to occur kind of in their more normal trajectory, they, you know, sort of create a cascade of demand as well. So somebody who hasn't seen their primary care doctor for a couple of years now goes and now has a visit to the cardiologist or has the routine colon asked to be a whatever it may be. And I think you're seeing that. So as our volumes, I think are elevated.

Thanks Ann so.

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Alluded to the two items that we probably discussed.

The greatest length in Q2.

That was affecting.

Steve Filton: You know, our revenue per admission is somewhat more muted, and I think over time, we would expect our volumes to moderate a little bit, but also are, you know, revenue per adjusted admission to come up. And, you know, again, I think we have a view that, you know, the long term model in this business has not changed dramatically. I think, you know, we imagine that revenue growth in the acute business over time for, you know, historically long time has been in that kind of mid single digit range.

Haverhill.

<unk> in Q2, one was a handful of residential treatment facilities that were challenged with very specific and nuanced issues.

With either regulators or referral sources et cetera, they were working their way through and then secondly on a broader kind of more macro basis.

Absorb a significant amount of new nursing graduates into the system, having to orient them and get them trained et cetera. In both cases, we talked about the fact that the sort of recovery from those things would take the better part of the year.

Steve Filton: You know, five to seven percent and split pretty evenly between price and volume. And I think, you know, as time passes, we'll get closer and closer back to those historical norms. I think on the behavioral side, as he suggests, the sort of dynamic has been kind of the flip side of that where pricing has been particularly strong. And again, that's a little bit of a mix issue. We've talked about some weakness in the residential business in a couple of handful of facilities that are challenged with some very specific issues, but also would medicate re determinations.

By the end of the year and early into 2024, we thought both of those issues will be largely behind us and I think thats true. The first issue is a much more.

Sort of identifiable issue those facilities will sort of returned to their normal trajectory. The staffing issue is obviously ongoing one we're constantly hiring new nurses and having to train them etcetera.

I think it became an issue in Q2 in the spring when a lot of new nursing graduates, who are coming out of school, where those numbers sort of crept up and we're having sort of a.

Steve Filton: I mentioned earlier, but again, I think over time, those release will see an increase in residential business. That will naturally bring down pricing, but we'll also increase volumes. And the staffing issue just, you know, is a continuing issue. We remain constrained in some markets and some facilities by a lack of staff that could be nurses, it could be therapists, it could be mental health technicians who are non professionals. Generally, I think, you know, we continue to improve our recruitment and our retention metrics. And I think those metrics as they continue to get better will drive greater volumes.

Unknown Executive: Okay, that's great. Thanks a lot. Thank you, and one moment for our next question.

A measurable impact on the business I think the encouraging thing from our perspective has been overall our hiring rates.

As well as our turnover hiring rates are going up and our turnover rates are coming down, albeit in both cases incrementally which should allow us to.

And our minds get back to kind of what we think going to a more normative.

And expected level of volume growth in behavioral which is probably not terribly higher than the 1%. We're running now, but maybe in the three or 4% and in terms of our model and our ability to generate incremental earnings and incremental margin growth.

That will and small increase in occupancy should make a big difference.

Jamie Perse: Our next question comes from Jamie Perse of Goldman Sachs. Your line is now open. Hey, thanks. Good morning, guys. First on the physician subsidies, can you just give us, you know, first can you confirm whether that was in line with the expectations this quarter? And then secondly, just what are you seeing in terms of the market dynamics where you've seen the market start to settle or do you see more disruption out there and any comments on you or prior comments from QQ about that kind of flattening out into next year?

Alright, and I'm not sure. If you said this but can you just provide the contract.

Labor as a percentage of total labor for nursing in acute care.

Yes, so it was $69 million in Q3.

Which is about a 10% 15% increase over what we've been running the last few quarters.

Okay, great. Thank you.

Thank you and one moment for our next question.

Our next question comes from Kevin Fischbeck of Bank of America. Your line is now open.

Jamie Perse: Yeah, so Jamie, the comment that we made in Q2 was that we had originally anticipated and what we included in our 2023 original guidance was that position expense would be $55 to $60 million higher in 2023 than it was in 2022. As it turned out, I think this has been a bigger issue than we anticipated and I think virtually all of our peers anticipated around the country and what we said is that we anticipated that the second half of the year would also reflect like another $55 or $60 million increase over the second half of 2022.

Great. Thanks.

You may have just.

And then maybe just Smith.

You made a comment earlier about how.

Lack.

Lack of labor is restricting volume growth, but then on the <unk>.

RTC side it sounds like.

No.

You've got redetermination potentially affecting volume growth, which seems at odds I guess youre, saying that the occupancy.

Difficulties on the acute side and that it's not really a lack of labor on the RTC side or else you just need to refill that redetermination headwind.

Yes, I just think they are discrete issues Kevin.

Jamie Perse: And we are tracking, you know, very closely to those numbers in the third quarter. So in other words, you know, I don't think we've had a material sequential increase in our profuse or in our position expenses. Our expectation, what we said at the time was we thought not necessarily that the position expenses would absolutely flatten out in 2024, but certainly that the rate of increase, which is, you know, running in the 35, 40% range this year, would moderate significantly.

I think what again.

Medicaid Redetermination I think again and just certain geographies are creating we believe relatively temporarily.

All of the patients who lack coverage who didn't lack coverage.

<unk> ago or two quarters ago.

And so we seem to be turning more patients away in Q3 for lack of financial resources than we have had in the past.

But again, we think that sort of a temporary issue.

Jamie Perse: And, you know, while I think we were not prepared to suggest exactly what it would be right now, I think something in the 10 to 15% range of increase would be sort of more what we would expect. And it's really a function of, you know, the industry I think has largely sort of had to reset itself since the No Surprise Billing Act passed and the impact of that on the profitability of these position billing businesses or physician services.

The staffing issue.

Tends to be more of an issue in the acute behavioral business, just because we rely more on rins in that patient care model.

And so yes, I mean the staffing.

Constrain in the deflection issue.

In behavioral tends to be more skewed to the acute behavioral business in the residential business. Okay. That's helpful. And then I guess on the professional fees.

Jamie Perse: The impact of the, you know, the lower billings, you know, plays its way through the system. So, you know, what we're finding is, you know, we're replacing those contracts that are most expensive. We're putting them out to bid. We're in some cases in sourcing the service. You know, we believe that we'll be able to through those activities, you know, drive greater efficiencies. And that's why, you know, we have this general view that 2024 will not be as volatile and will not have as many material increases as we saw in 2023.

Just wanted to check.

You said the number went from 6% of revenue to seven 6% of revenue was that was that in the acute care revenue number or was that a total revenue number and then is there any reason to think that this.

Cost pressure is fundamentally different than any other cost pressures like right now you're going back and getting better rates to match the inflation spikes you've seen over the last few years is this cost pressure just one more cost pressure that you would have to price them over the next few years and maybe it takes three years to recapture the one.

6% headwind to margins, but you said you would expect to catch that.

Jamie Perse: But certainly, you know, as we get closer to our 2024 guidance, you know, we'll have a better sense of that, and we'll give more detail. But again, at the moment, you know, we're tracking for the back after the year, sort of exactly where we said we'd be last quarter.

Eventually or is there anything structurally different about this cost versus others.

Yes, so two things number one in terms of the first question I should have been clear this is.

Unknown Executive: Okay, perfect. That's possible.

<unk> expenses really as we've been discussing in Israel EUR coverage anesthesiology coverage by definition is an acute care issue and those percentages were meant to be percentages that acute care revenue.

Steve Filton: And then secondly, just on 2024, can you update us on progress with the 3 to Nova hospitals in Nevada, Florida, and DC? Specifically, how should we think about the EBITDA drag and some of those pre-opening expenses wrap up next year? Thank you.

Your second.

<unk> about isn't just like any other expense I mean again as I was mentioning I think in a previous response.

Unknown Executive: Sure, so the only hospital that will actually open in 2024 is our West Henders and Facility in Las Vegas, which I think at the moment is scheduled to open either late in Q3 or early in Q4. So I think it will have a bit of a drag in our 2024 results, but, you know, given that it's relatively late in the year and given our success in opening hospitals in that market, I don't think it will be a tremendous drag.

What really drove.

This sort of immediate pressure and physician expense on the timing of it was the passage of the no surprise billing.

And what I think we all collectively learned was that these physician coverage businesses.

<unk> had relied on their profitability.

Large part for their billings to out of network patients I'm not sure.

Unknown Executive: Again, as we get closer to our actual guidance, you know, we'll put, you know, some more concrete numbers around that, but I don't think it should be, you know, terribly impactful to our 2024 guys. Thank you, and one moment for our next question.

Collectively we have a full understanding of that so when that ability was reduced dramatically by the no surprise billing at those businesses.

To the degree that they were run by third parties or even to the degree that hospitals were influencing that became much less profitable and we had to absorb those costs in our case in almost all cases, we were just having to pay third parties more but I think once that gets reset I'm not sure that that pressure continue.

Pido Chickering: Our next question comes from Pido Chickering of Deutsche Bank. Your line is now open. Hey, good morning guys, it's a big speaking my question.

Steve Filton: Can I go back to the med case? I read a translation again for a second. Is this primarily inpatient or is it residential? I'm looking at the referral channels they see in Texas. Are you hearing of patients in the ER, they can't get discharged and inpatient behavioral because they don't have coverage right now the color on which the channels are seeing the lower referrals due to medicated recruitment in Texas?

Because I mean to me that's a onetime reset I think thats, what youre seeing play through our numbers in 2023 et cetera, I do think there is also an element.

There is I think a finite.

A shortage of these kinds of doctors.

Much like there was a shortage of nurses that we felt during the pandemic and that exacerbated the dynamic a little bit.

Steve Filton: Yeah, Pido, so I think as I mentioned, and again, I want to be clear that I'm not sure that the data that we get and sprays that we have is sort of absolutely precise or that we can correlate it to re-determinations in a very precise way. I think what we observed during Q3 was that the number of increase that we're getting and that includes, as you suggest, referrals from third party sources, it includes direct calls to where we're not necessarily down in volume, but what we were noticing is that it was a greater number of patients who did not have appropriate financial coverage.

But again.

I think that expense rose by 35% or 40% for us in 2023, I can't think of another expense that rose by anywhere near that amount and so again I think we have a view that this is a largely kind of onetime notion that's not to say that there wont be pressure on physician expense next year.

That as I said earlier, it couldnt increased by 10 or 15% above so something above the rate of inflation, but I. Just don't think we think that this is something that we're going to have to face 35% to 40% increases multiple years in a row.

I'm, sorry, maybe I'm just it seems to me like you're not saying this one 6% acute care margin pressure is going to reverse over time as you just price surgeries everything higher to reflect.

Steve Filton: We always have some patients who don't, but that number seemed to elevate in Q3 and it seemed to elevate in particular geographies in which Medicaid re-determinations were high. I mentioned Texas a bunch of times that they go out and saw in Indiana and we're also states where we saw an elevated level. But again, I'm not sure that I can parse it between inquiries from referral sources or direct inquiries to us, and like I said, I don't know that we can also tie it directly to, what we generally are asking patients is what their current financial coverage is. We're not necessarily getting their history of had Medicaid, loss Medicaid. We will talk to them about whether we can help them get Medicaid, coverage, et cetera, but we don't necessarily document the history there.

Increased costs and here you are saying is that the new baseline that we should kind of think differently about the long term margin in acute.

Unknown Executive: So it's a little bit difficult to, I think, give the level of sort of precise data that you're looking for.

These pressures.

If you could get worse, but they are here to stay.

I don't think I don't think antibody is suggesting that physician expenses are likely to decline anytime soon I don't think thats anything we have suggested like I said, we said earlier when people talk about whats it like likely to be in 2024.

I sat at 10% to 15% increase is not an unreasonable way to think.

Hi, Thanks.

Okay.

Thank you one moment our next question.

Our next question comes from Whit Mayo of Leerink. Your line is now open.

Unknown Executive: Okay, so just to make sure I understand that. So the number of inbound inquiries are basically the same, but the accessibility to pay is lower. Okay, got it.

Okay.

Hey, Thanks, I know you guys are still going through the planning process for 2024, but I just wanted to sort of dial into maybe some of the top strategic priorities you have for the behavioral health business that might be different than some of the initiatives in prior years since you've covered your labor, it's a pretty well on this call.

Steve Filton: And then a quick call to James' questions on the physical pressures. Thanks for giving us the numbers about 3.4% increase in this year, moderating for 10 to 15 for next year. What percent of these contracts are locked in, these are typically multi-year contracts. So what percent of these contracts are already locked in for next year, or you've already gone and outsourced this group yourself. Yeah, I think the truth is, Peter, these contracts are multi-year contracts, but they all have short term outs.

Progress to small progress I think that youre seeing there, but just anything else you'd call out any organizational changes anything that gets you excited or less excited about.

Next year. Thanks.

Yes, I think so.

I think as we've discussed obviously staffing recruitment and retention remains a top priority and focus and honestly I think we will continue to be for the foreseeable future.

Steve Filton: So in other words, I mean, I think the reason this position expense issue became a crisis in 2023 is that even though hospitals, I think, had long-term contracts with their position, their contract position providers, their ER position for anesthesiology, those groups were coming to hospitals and saying, look, we're going to give you 90-day or 120-day notice whatever our contract calls for, unless you're able to increase our subsidy or change our contract in some way, et cetera. So I'm not sure that the underlying length of the contract is all that determinant because I think in most cases, for us, and I'm guessing for others in the industry, because otherwise this wouldn't have become the issue that it did, at all have short term outs.

Like I said I think we feel like we've made a significant amount of progress but it.

Continues to be a major focus because again I think we have a belief that to the degree that we can hire.

Appropriate.

Clinical personnel, particularly in a very specific geographies very specific hospitals, we absolutely have the ability to increase occupancy.

Significantly.

<unk>.

There are other initiatives I think we have to increase occupancy I think broadly increasing occupancy.

Unknown Executive: Okay, great. Thanks so much guys.

The most significant opportunity we see in our behavioral business.

Business, where pricing has been strong where I think Q3 reflects is that cost controls have been improving we've been reducing contract labor we have been reducing over time I think that increased occupancy as the most significant.

Unknown Executive: Thank you, one moment for our next question.

The opportunity we have in behavior going forward and I think we believe it's a significant opportunity recruitment retention is a big way to get there, but we're looking at broadening our continuum.

Sarah James: Our next question comes from Sarah James of Cantor Fitzgerald. Your line is now open. Thank you.

Steve Filton: I want to go back and clarify two comments that you made. First on, you know, what sounds like the low cutie pent up demand working its way through. You said you expected to phase down over time. So just wondering if that means you expected to still be a factor in 2024 if you're talking about facing down through the end of this year.

<unk> online.

Certain service lines like substance abuse.

<unk>.

Telehealth and allocation.

And broadening sort of a continuum of care that we already I think off of a pretty broad continuum of care, but broadening that even more.

And broadening our payer mixes that we reach out to we had a pretty strong presence in.

Steve Filton: And the second clarification is just on the inpatient denials from the insurers. Can you give us a little bit more context? Are these procedure classes that the payers are saying should have been outpatient or something about the number of hours spent or some other aspect that they're pushing back on? Yeah, I mean, so I've said before that it is virtually impossible for us to precisely say whether a particular procedure is a catch-up of something that was postponed or deferred during the pandemic.

The active and retired military but I think you'll have a number of initiatives to increase our penetration there. So.

A handful of important initiatives.

In behavioral, but all I think would fall under this umbrella.

Being able to increase occupancy.

Got it.

Steve just looking at the guidance I know that you're reiterating it but by.

My math, if I just apply very simple normal seasonality looking at the DTP program in Florida, you can easily get to the high end of the range and I know that you are very respectful of the volatile operating environment, but just sort of anything that I'm missing or any refresh that you use as you kind of look within the range and kind of how you feel like youre.

Steve Filton: So in other words, when we schedule an elective surgery or an elective diagnostic test, we have no idea when that patient sort of originally contemplated that procedure or discussed it with their physician, et cetera. What we do know is that the volume of elective procedures clearly declined certainly in the early stages of the pandemic and they have been picking up since. And so we conclude, and I think it's a reasonable conclusion that there is some element of catch-up.

Tracking VIX.

Yes, I mean I feel like.

And I will say that we don't carry a great deal of attention to consensus estimates, but last time that I look at consensus estimates I think they were sort of in the midpoint of our revised guidance it seems like a reasonable.

The target at the moment I think as we've discussed on the call in my mind clearly the two upsides for US number one as we just discussed is if we're able over the fourth quarter to increase behavioral volumes and occupancy I think that would be extremely helpful and create significant upside and on the acute side.

Steve Filton: And to be fair, if you look at it, acute care adjusted admissions for us were up like 10% in the first quarter, which was really kind of an extraordinary number. It's moderated a little bit in Q2 down to like 8%, which is still a very high number, moderated to a little less than 7% in Q3, which again, so a very robust number from historical perspective seems to be moderating a little bit.

Being able to push that pricing number off recapture side.

Sort of disputed amounts from our managed care payers increased acuity that sort of thing. So I think we've largely discussed what the upsides are in that if we were able to achieve those things.

Steve Filton: You know, your question about how quickly it continues, how much is left in the pipeline. The truth of the matter is I'm not sure that anybody can answer that question with precision, and just don't know that that data is out there in a meaningful way that anybody can capture. So, you know, look, when we, again, give our 2024 guidance, we will make some guesstimate based on trends and how it's going, you know, what we think acute care volumes will look like in 2024.

We could get beyond where the consensus pilot countless now.

Okay. Thanks.

Thank you one moment our next question.

Okay.

Our final question comes from Joshua Raskin of Nephron Research. Your line is now open.

Hi, Thanks for fitting me in here just on the physician staffing costs again can you just remind us how much of the staffing maybe for EDI anesthesiology, how much of that is outsourced or any of its in sourced at this point and then separately. How are your employed physicians performing is is it really just an ADC low spec.

Steve Filton: But I think broadly, our view is that those lower acuity volumes will continue to get caught up and moderate. And we'll get back to, again, mid-signal digit, acute care revenue growth, that ultimately will be split between, you know, price and volume pretty evenly, you know, whether that happens early in 24, late in 24, I think that you have to be determined. Your question about, you know, denials, particularly in the acute business, the issue that I think is probably first and foremost tends to be classification of patients between an inpatient admission and observation status with obviously a patient who, you know, you know, and this is frustrating for us because a lot of these patients are in the hospital for multiple days, but from the managed care perspective, don't meet inpatient admission criteria even though we're treating them from multiple days and maybe then getting paid for them as if they were simply in an outpatient in our emergency room.

Lists that were billing for specific out of network issues or are you seeing some of that internally as well.

Steve Filton: But that's the main issue, you know, we get, you know, we do get sort of flat out caniles where, you know, an insurance company will say that the patient shouldn't have been treated at all, but the vast majority of issues that we have with insurance companies on the acute side are overpatient classification between inpatient and observation.

Yeah. So.

First of all for Us Josh.

All of these contract services have historically been outsourced at least EUR in anesthesiology.

We have in the last three or four months.

Broad some of those services in house.

Where we thought it made economic sense to do it but historically they've all been outsourced.

It's a very different dynamic.

And I think again its very specific to these house based physicians anesthesiology EUR being by far the highest lines, but we're seeing it Simon radiology some in.

Unknown Executive: Thank you. Thank you, one moment for our next question.

Intensivist or labor or whatever but clearly our anesthesiology being the two largest are employed physicians who are just the regular primary care specialists I don't think they have been affected.

In a material way by the no surprise billing act essentially those physicians are in network with virtually all of the payers that were in network with so it's really not an issue with them. So so this dynamic I think is very specific to the hospital based physicians.

Ann Hynes: Our next question comes from Ann Hynes and Mizzoulo, your line is now open. Hi, good morning. Can you just give an update on the behavioral hospitals that have some issues in Q2, how they are progressing back to normal admission trends? And also maybe to that same effect. I know in Q2, you hired a bunch of nurses that take a while to train in a while to ramp up. Can you talk about how that's going? And when you think that group of nurses will be able to take on a full patient load that we'll be able to see in the admission trends? Thanks. Thanks, Ann.

Okay that makes sense and then just one last one on 24 I know youre talking about this normalization, but when I look at some of the same store revenue growth numbers.

Mid to Berry mid to high single digits in the acute side very high single digits to low double digits on behavioral side, just seems like pretty tough comps and so do you think this is just more of a catch up reset year in that next year, we'll be back in that pick a number 5% 6% range overall.

Yes, and again I think I made those comments earlier I mean, I think yes, I think we think that in both cases revenue growth whether it's exactly in the beginning of 'twenty 'twenty. Four later, but I think we think it moderates to sort of more historical historically normative levels.

Steve Filton: So, you alluded to the two items that we probably discussed at the greatest length in Q2 that was affecting behavioral volumes in Q2. One was a handful of residential treatment facilities that were challenged with very specific and nuanced issues with either regulators or referral sources etc. They were working their way through. And then secondly, on a broader kind of more macro basis, you know, a significant amount of nursing graduates into the system having to orient them, get them trained, etc.

And I would also say more historically normative split so on the acute side I do think volumes are likely to come down over time, but I think acuity will come up and again, we will get back to kind of mid single digit pricing in behavioral we're likely to see pricing moderate a little bit, but also see volumes come up and again get too.

Kind of mid to upper single digit pricing or upper single digit revenue growth and in both cases, I think with the moderation in cost with physician expense on the acute side coming into.

Steve Filton: In both cases, you know, we talked about the fact that the sort of recovery from those things would take, you know, the better part of the year. But by the end of the year and early into 2024, we thought both of those issues would be largely behind this. And I think that's true. You know, the first issue is a much more, you know, sort of identifiable issue. You know, those facilities will sort of return to their normal trajectory.

Better control with contract labor coming down and over time coming down it should put us in a position where we're back on that trajectory of getting.

On a path to get back to pre pandemic margins in both segments.

Perfect. Thanks.

I am showing no further questions at this time I would now like to turn it back to Steve Filton for closing remarks.

Steve Filton: The staffing issue is obviously not ongoing one. You know, we're constantly hiring new nurses and having to train them, etc. You know, again, I think it became an issue in Q2 in the spring when a lot of new nursing graduates were coming out of school where those numbers sort of crept up and were having sort of a, you know, a measurable impact in the business. I think the encouraging thing from our perspective is that overall our hiring rates, as well as our turn over, our hiring rates are going up and our turnover rates are coming down, albeit in both cases incrementally, which should allow us to, you know, in our minds get back to kind of what we think is a more normative and expected level of volume growth in behavioral, which, you know, is probably not terribly higher than the 1% we're running now, but maybe, you know, in a 3% or 4%. And, you know, in terms of our model and our ability to generate incremental earnings and incremental margin growth, you know, that small increase in occupancy should make a big difference.

Thank you Ed we just like to thank everybody for their time and look forward to speaking with everybody next quarter.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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Steve Filton: All right. And I'm not sure if you said this, but can you just provide the contract with premium labor as a procedural labor for nursing and the QCARE? Yeah. So it was $69 million in Q3, which is about a 10% to 15% increase over what we've been running last few quarters. All right. Great. Thank you.

Unknown Executive: And one moment for our next question.

Kevin Fischbeck: Thank you. Our next question comes from Kevin Fischbeck of Bank of America. Your line is now open. Great, thanks. You may have just, I don't know, maybe I just missed, but you made a comment earlier about how, you know, lack of labor is restricting volume growth, but then on the RTC side, it sounds like, you know, you've got to be determinations, potentially restricting volume growth, which seems it odd. I guess you're saying that the occupancy difficult is on the acute side, and that it's not really a lack of labor on the RTC side, or else you just need to refill that re-determination headwacker, right?

Kevin Fischbeck: Yeah, I just think they're discrete issues, Kevin. You know, again, you know, Medicaid re-determinations, I think, again, in just certain geographies are creating, we believe relatively temporarily, a bolus of patients who lack coverage, who didn't lack coverage, you know, like fake quarter go or two quarters ago, and so, you know, we're, we seem to be turning more patients away in Q3 for lack of financial resources than we have had in the past, but again, we think that sort of a temporary issue.

Kevin Fischbeck: The staffing issue tends to be more of an issue in the acute behavioral business just because we rely more on RNs in that patient care model, and so, yeah, I mean, the staffing constraint and the deflection issue in behavioral tends to be more skewed to the acute behavioral business than the residential business. Okay, cell phone, and then I guess on the professional fees, just want to check, I think you said the number went from 6% of revenue to 7.6% of revenue, was that was that an acute care revenue number or was that a total revenue number, and then is there any reason to think that this cost pressure is fundamentally different than any other cost pressure, like right now, you're going back and getting better rates to match the inflation spikes you've seen over the last few years, isn't this cost pressure just one more cost pressure that you would have to price in?

Kevin Fischbeck: Over the next few years and maybe it takes three years to capture the 1.6% had went to margins, but you should you should expect to catch that eventually, or is there anything structurally different about this cost versus others? Yeah, so two things, number one in terms of the first question. Yeah, I should have been clear, this is the efficient expense is really, as we've been discussing it, is really, you know, EOR coverage as the theology coverage of my definition is an acute care issue, and those percentages were meant to be percentages of acute care revenue.

Kevin Fischbeck: [inaudible] I am sorry, I'm maybe I'm just but like it seems to me like you're you're not saying this 1.6% acute care margin pressure is going to reverse over time as you just price surgery, everything higher to reflect you have an increased cost in here. You're saying this is a new baseline and we should kind of think differently about the long term margin and acute because these pressures will get worse, but they're here to stay.

Kevin Fischbeck: I don't think I don't think anybody is suggesting that that physician expenses are likely to decline anytime soon. I don't think that's anything we have suggested. Like I said, we said earlier when people talk about, you know, what's it like likely to be in 2024. We, you know, I said at 10 to 15% increase is not unreasonable way to think about it. All right.

Unknown Executive: Thanks.

Unknown Executive: Thank you.

Unknown Executive: One moment for our next question.

Unknown Executive: Our next question comes from with mail of leering. Your line is now open. Hey, thanks. I know you guys are still going through the planning process for 2024, but I just wanted to sort of dial into maybe some of the top strategic priorities you have for the behavioral health business that might be different than some of the initiatives and priorities. You've covered your laborage into pretty well on this call and the progress, the small progress.

Marc Miller: I think that you're seeing there, but just anything else you call out any organizational changes, anything that gives you, you know, excited or less excited about next year. Thanks. Yeah, I mean, so with I think as we've discussed, obviously staffing recruitment retention remains a top priority in focus. And honestly, I think we'll continue to be for the foreseeable future. Like I said, I think we feel like we've made a significant amount of progress, but you know, it continues to be a major focus because, again, I think we have a belief that to the degree that we can hire appropriate, you know, clinical personnel, particularly in, you know, very specific geographies, very specific hospitals.

Marc Miller: We absolutely have the ability to increase occupancy significantly. There are other initiatives. I think we have to increase occupancy. I think broadly, increasing occupancy is sort of the most significant opportunity we've seen our behavioral business. You know, in a business where pricing has been strong, where I think, you know, what Q3 reflexes that cause controls have been improving. We've been reducing contract labor. We've been reducing overtime. I think that increased occupancy is the most significant opportunity we had in behavioral going forward.

Marc Miller: And I think we believe it's a significant opportunity. The treatment retention is a big way to get there. But, you know, we're looking at, you know, broadening our continuum, you know, focusing on, you know, certain service lines like substance abuse and MAT and, you know, telehealth and outpatient, you know, and broadening sort of the continuum of care that we already, I think, offer a pretty broad continuum care. But, but broadening that, you know, even more, you know, and broadening our, you know, pair mixes that we reach out to.

Marc Miller: We had a pretty strong presence in, you know, both the active and retired military, but I think you know, had a number of initiatives to increase our penetration there. So, you know, there's a handful of important initiatives in behavioral, but all I think would fall under this umbrella of being able to increase our.

Steve Filton: Steve, just looking at the guidance and note that you're reiterating it, but my math if I just apply very simple normal seasonality looking at the DPP program in Florida, you can easily get to the high end of the range. And I know that you're very respectful of the volatile operating environment, but just sort of anything that I'm missing or any refresh views as you kind of look within the range and kind of how you feel like you're tracking things.

Steve Filton: Yeah, I mean, I feel like, and I will say that we don't take great deal of attention to content assessments, but the last time that I looked at content assessments, I think they were sort of in the midpoint of our revised guidance that seems like a reasonable, you know, target at the moment. I think if we discussed on the call, you know, in my mind, clearly the two websites for us, number one is we just discussed, you know, we're able, over the fourth quarter to increase, behavioral volumes and instruments, I think that would be, you know, extremely helpful and create, you know, significant amount of upside.

Steve Filton: And on the acute side, you know, being able to push that pricing number up, recapture some of the sort of disputed amounts from our managed care payers, you know, increased security, that sort of thing. So I think we've largely discussed what the upsides are and that, you know, if we were able to achieve those things, you know, maybe we could get, you know, beyond where the consensus target has us now.

Unknown Executive: Okay, thanks. Thank you.

Joshua Raskin: One moment for our next question. Our final question comes from Joshua Raskin of Neffron Research. Your line is now open. Hi, thanks for fitting me in here to find the physician staffing costs. Again, can you just remind us how much of the staffing may be for ED anesthesiology, how much of that is outsourced or if any of it's in source at this point. And then separately, how are your employee positions performing is it really just an issue of, you know, specialist that we're billing for specific out of network issues or using some of that internally as well.

Joshua Raskin: Yeah, so, first of all, for us, Josh, all of these contract services have historically been outsourced, at least, you know, ER and anesthesiology. We have in the last, you know, three or four months brought some of those services in the house, where we thought it made economic sense to do it, but historically they've all been outsourced. I think it's a very different dynamic, you know, and I think again, it's very specific to these house-based physicians, anesthesiology, ER being by far the highest ones, but we're seeing it's some in radiology, some in intensivist or laborist or whatever, but clearly ER and anesthesiology being the two largest.

Joshua Raskin: Our employee positions who are just, you know, either regular primary care or specialist, I don't think they've been affected in a material way by the no-surprise billing act, you know, essentially those positions are in network with virtually all of the payers that we're in network with, so it's really not an issue with them. And so, so this dynamic, I think, is, you know, very specific to the hospital-based physician.

Steve Filton: That makes sense. And then just one last one, I'm 24. I know you're talking about this normalization, but when I look at some of the same store revenue growth numbers, you know, mid to very, you know, mid to high single digits and the acute side, very high single digits, the low double digits and the behavioral side just seems like pretty tough comps. And so, you know, do you think this is just more of a catch up reset year in that next year, we'll be back in that, you know, pick a number of five, six percent range overall.

Steve Filton: Yeah. And again, I think I made those comments earlier. I mean, I think you'll, yes, I think we think that, you know, in both cases, revenue growth, you know, whether, you know, it's exactly in the beginning of 2024 later, but I think we think it moderates to sort of more historically normative levels. And I would also say a more historically normative split. So on the acute side, I do think volumes are likely to come down over time, but I think acuity will come up.

Steve Filton: And again, we'll get back to kind of mid single digits. I think in behavioral, we're likely to see pricing moderate a little bit, but also see volumes come up. And again, get to, you know, kind of mid to upper single digit pricing or upper single digit revenue growth. And in both cases, I think, you know, with the moderation and cost with position expense on the acute side coming into better control with contract labor coming down and over time coming down, it should put us in a position where, you know, we're back on that trajectory. Of getting, you know, being on a path to get back to pre pandemic margins in both segments.

Unknown Executive: Perfect. Thanks.

Unknown Executive: I am showing no further questions at this time.

Steve Filton: I would now like to turn it back to Steve Filton for closing remarks. Thank you. We just like to thank everybody for their time and look forward to speaking with everybody next quarter.

Unknown Executive: Thank you for your participation in today's conference.

Unknown Executive: This does conclude the program.

Unknown Executive: You may now disconnect.