Operator: Good day and thank you for standing by. Welcome to the Fourth Quarter 2023 Universal Health Services Earnings 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. [Operator Instructions] 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, Executive Vice President and Chief Financial Officer. Please go ahead.

Steve Filton: Thank you and good morning. Marc Miller is also joining us this morning and we welcome you to this review of Universal Health Services results for the fourth quarter and to December 31, 2023. During the conference call, we’ll be using words such as believes, expects, anticipates, estimates and similar words that represent forecast projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on Risk Factors and Forward-Looking Statements and Risk Factors in our form 10-K for the year ended December 31, 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 per diluted share of $3.16 for the fourth quarter of 2023. 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 per diluted share was $3.13 for the quarter ended December 31, 2023.

Marc Miller: Our acute hospitals continue to experience strong demand for their services in the fourth quarter. With adjusted admissions increasing 5.6% year-over-year. Overall surgical volumes were solid as well, increasing 4% year-over-year. Net revenue per adjusted admission, which has lagged for much of the year, increased by 3.7% as compared to the fourth quarter of 2022, as acuity trends and pressure from payers have started to stabilize. Meanwhile, the amount of premium pay in the quarter, which declined from a peak of $153 million in the first quarter of 2022, was $67 million in the fourth quarter of 2023, similar to what it was in the third quarter. For the full year 2023, our strong acute care revenues were largely offset by elevated expenses, especially physician subsidies, which resulted in flattish margins for the full year.

During the fourth quarter, same facility revenues at our behavioral health hospitals increased by 7.2%, driven primarily by a 6.1% increase in revenue per adjusted patient day. The patient day growth in the quarter was greater at our acute behavioral hospitals versus our lower acuity residential treatment centers, which tended to drive up the revenue per day to relatively robust levels consistent with our year-to-date experience. Additionally, as we discussed last quarter, we continue to see a negative impact of Medicaid redeterminations in certain states on behavioral health volumes, although it appears that impact has also begun to stabilize. With 8% revenue growth, same-facility EBITDA for our behavioral hospitals has increased approximately 9% for the full year of 2023 compared to 2022.

A doctor speaking with a patient in a hospital bed in an exam room.

Steve Filton: We also note that in the fourth quarter, we recorded approximately $18 million in connection with the recently approved Mississippi Hospital Access Program covering the six-month period of July through December of 2023. Our cash generated from operating activities was $452 million during the fourth quarter of 2023, as compared to $297 million during the same quarter in 2022 and $1.268 billion during the full year of 2023, as compared to $996 million during 2022. We spent $743 million on capital expenditures during 2023, which was consistent with our original forecast for the year. For the full year of 2023, we acquired $525 million of our own shares pursuant to our repurchase program. Since January 1, 2019, we have repurchased more than 26 million shares representing almost 30% of our shares outstanding as of that date.

As of December 31, 2023, we had $701 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility.

Marc Miller: The core operating assumptions underlying our 2024 operating results forecast, which was provided in last night’s release, largely reflect the historical pre-COVID trends in the respective businesses. We anticipate that volumes in our acute segment will moderate from the elevated 2023 levels, but conversely, acuity and pricing in our acute business will increase, and for the full year, both metrics will resemble the patterns we experienced before the pandemic. Despite the continuing shift of services from inpatient to outpatient settings and pressure from payers to restrain reimbursement increases in a variety of ways. We expect continued improvement in premium pay labor trends and general cost trends that will remain largely stable in 2024.

Specifically, physician expenses, which were a major headwind in 2023, are expected to grow by the overall inflation rate in 2024. As noted in our press release, our 2024 operating results forecast includes an additional $149 million of Nevada supplemental revenues, which were approved by CMS in late December and disclosed by us in an 8-K filed in early January. We believe demand for our behavioral services remains robust and our same-store adjusted patient day growth in 2024 is forecasted to exceed the 2.1% growth we experienced in 2023. A significant driver of behavioral volume upside is due to our success in filling vacant positions. But we acknowledge that specialty workforce shortages in certain markets continue to be an obstacle to even more volume growth.

In both our business segments, we were pleased that measures of patient satisfaction and quality of care increased in 2023 and we are focusing on continued improvement of these metrics in 2024. We are pleased to answer questions at this time.

Operator: Thank you. [Operator Instructions] Our first question comes from Ann Hynes with Mizuho. Please go ahead.

Ann Hynes: Hi. Good morning. I just want to ask you about the Two Midnight rule. I know that throughout the year, you had a lot of denials for these short-stay inpatient stays. Did that get better in Q4 and do you actually think one of the large national managed care plans is saying they actually think hospitals might have billed early and start benefiting Q4? Do you actually think that happens? Did you receive actually a benefit in Q4 from kind of early billing for this regulatory change that’s starting in January 1, 2024? And also, can you tell me what your guidance includes for any potential benefit for this change, for this and also for Medicaid redetermination considering there’s like a big growth in the health exchange market? And are you assuming any kind of positive pay and makeshift benefit in guidance? Thanks.

Steve Filton: Yeah. So, as Marc commented in his prepared remarks, I think, what we saw in Q4 was improved revenue per admission — per adjusted admission in the acute business, which I think we attribute to a combination of increasing acuity, but also at least stabilizing pressure from payers. Again, I think we saw for much of 2024, excuse me, for 2023 and payers being more aggressive as their medical loss ratios were rising, et cetera, in a variety of ways, including denials and patient status changes, which would include recasting patients from inpatient to observation, et cetera. I don’t think we changed our billing practices during the quarter, but I think all you’re seeing is, effectively, I think, we’re starting to anniversary some of that more aggressive behavior of the payers in the fourth quarter.

As far as sort of how we’ve guided, again, I think, as Marc said in his remarks, I think, we’re assuming that in the acute segment, that volumes moderate a little bit in 2024 and that acuity pricing improves. So we returned to kind of what I would consider to be a more historically normative model of mid-single-digit growth in acute care, maybe 5%, 6% growth, split pretty evenly between price and volume. And I think what that really means is, we’re being a little conservative about volumes, which have sort of been running hotter than that, but we’re being a little bit more aggressive about pricing, which has been running less than that. But it’s not like we have included in our guidance a specific impact from sort of how payers will use the Two Midnight rule differently going forward, et cetera.

We believe there may be an incremental opportunity there, but I don’t think we necessarily feel it’s material until we really see the behavior on the part of the payers change.

Ann Hynes: Okay. Great. And just one follow-up. You talked about in your prepared remarks that the labor shortages are still impacting volume. Is this in both segments or is it mainly behavioral and maybe how much do you think your volume is being held back because of labor?

Steve Filton: Yeah. I mean, so as we’ve said, I think, throughout the last several years, it’s been a very tight labor market and I think it’s affected the two businesses differently. On the acute side, we’ve generally been able to fill all of our necessary positions, but obviously often at a higher cost using a temporary label and traveling nurses, et cetera. Although, as we indicated in our prepared remarks, those numbers have declined significantly. On the acute side, excuse me, on the behavioral side, in contrast, in a number of cases, we’re simply unable to fill our positions over the last several years and it has curtailed our volume growth. Again, I think our basic guidance for next year is mid-single-digit growth, probably, in the behavioral segment, that means, 6%, 7%, 8%, again, split pretty evenly between price and volume.

In the behavioral segment, I think that means we’re being a little bit more conservative about price, which has been running hot the last couple of years and a little bit more aggressive about volume, which has been relatively soft this year. I think, Marc said, our patient day growth in 2023 was 2.1%, so our guidance assumes something greater than that. But we acknowledge that in some markets, in some hospitals, there are positions that we still have difficulty filling. I don’t know that we can say precisely, but we do think that we could run higher volumes if, in fact, we could fill all of our positions, but we know that’s not a realistic outlook at the moment at least.

Ann Hynes: Great. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from Justin Lake with Wolfe Research. Please go ahead.

Justin Lake: Thanks. Good morning. I wanted to ask you first about the 2024 guide. The — specifically, Nevada ends up at the high end of the range you gave before, obviously, a great tailwind, ex that, it looks like EBITDA growths at the midpoints in the 4% range, too. Just trying to understand, I think, we’re probably only splitting hairs a little bit, maybe expected 1%, 2% better than ex-Nevada. Just curious if there were any kind of one-timers in 2023 where it’s not really apples-to-apples that you want to point out or anything within the guidance. For instance, Marc mentioned in a tough comp on inpatient, how — like maybe you can tell us what you think the EBITDA by business is going to grow and any thoughts on why that’s maybe 1% or 2% shorter than kind of typical?

Steve Filton: Yeah. So, first of all, Justin, I mean, I think, that there’s a series of arguments being made that excluding the $150 million increase from Nevada or quite frankly excluding any of our Medicaid supplemental payments is really an appropriate way to look at the business, because I think what we would argue quite strenuously is that, one of the reasons — one of the significant reasons that our margins and earnings have lagged over the last several years is that Medicaid reimbursement in particular has not kept up with elevated costs, whether that’s the labor costs across both businesses or the physician subsidy expense that Marc referenced and the acute business in his remarks. So, in our minds, the Nevada increase specifically but these Medicaid supplemental programs in general are simply bringing us back to adequate rates that at least partially compensate us for some of these increased expenses.

So, in my mind, ignoring them as we think about our growth year-to-year is not necessarily the correct way of doing it. But I’ll try to answer your question the way you asked it. What I would say is, I do believe that, after a couple of difficult years and difficult operating environments and elevated costs, again, in labor, physician costs, just general inflation sort of across the Board, we’ve been a little bit cautious about our ability to expand margins. I would say that if we’re able to achieve the revenue targets that we’ve set in our guidance, we’d be hopeful that we could do better than the margins that are embedded in guidance. But as we’ve faced over the last several years, some of these expense increases have been a bit unpredictable, physician subsidies in 2023 are a perfect example.

So I think we’ve been prudently cautious about how we look at the profitability growth in both businesses.

Justin Lake: That’s helpful. And then, Steve, as you mentioned on DPP, and I don’t disagree that it’s lumpy, but it should be part of the business. That said, it’s gone to a place I never imagined it going, these supplemental payments. And I’m just curious, like, you guys actually put out a great table in the 10-K where you actually showed us the estimated number for 2024. And I’m just sitting here looking over time, Steve, I think in 2019, it was $225 million of net benefit or 13% of EBITDA. Now it’s an $809 million benefit or 41% of your EBITDA guidance in 2024. And I’m just curious, like, do you think this continues, like, do you see any states that, could be the next Nevada or do you see the potential that, this starts to moderate at some point or kind of stabilize, because it’s obviously been a big part of growth over the last couple of years. Just curious how you think about it going forward. Thanks.

Steve Filton: Yeah. So, look, I think, you make a good point. I mean, I think, if you look, and I appreciate your commenting on our disclosures, because I think we’ve provided probably more expansive disclosures in this area of Medicaid supplemental payments than any of our public peers. But if you go back, however many years you want to track it, it has, as you’ve suggested, an upward trajectory and that’s not by accident. I mean, I think it’s an acknowledgment by the states and by CMS that Medicaid reimbursement, again, in specific states, has really been inadequate and — has really been inadequate over the last several years in an elevated inflationary environment with significant expense pressures, particularly in labor.

And the states are providing these monies, not as bonuses for hospital providers, but quite frankly, as necessary supplemental reimbursement to keep them in a position, to keep the providers in a position to be able to provide absolutely necessary services to a population that otherwise will not receive them. So, quite honestly, there are other states that do not have these programs that are talking about adopting them. We don’t really disclose them until they get further down the road and sort of are submitted for approval and that sort of thing. But we know that conversations are happening in a number of other states. CMS, to your point, has certainly talked about the impact of the growth in these programs and has talked about, I think, limiting the growth.

I don’t think they’re really talking about cutting back these programs, but they’re talking about capping the growth, maybe capping the growth so that Medicaid reimbursement can’t exceed commercial reimbursement. I don’t think we’re at risk of that in any of our states or just sort of capping the overall growth rate, et cetera. So I could see that happening where the rate of growth slows, but it strikes me that once these programs are implemented, the safety net hospitals that they are really designed to target become so reliant on them that it would be extremely difficult for the states and/or CMS to stop the programs or curtail them in a terribly material way.

Marc Miller: I think that’s the main point, that it’s going to be hard to go backwards because of these safety net not-for-profit hospitals that rely on this. And so the crux of your question as to whether or not you can bank on this in the future, we never know, but I think it’s going to be hard for them to reverse a lot of this. And in fact, to Steve’s point, we’re seeing a lot more activity in other states that we had never seen before. So we think it’s going to increase.

Justin Lake: Thanks, guys.

Operator: Thank you. One moment for our next question. Our next question comes from Joshua Raskin with Nephron Research. Please go ahead.

Joshua Raskin: Hi. Thanks. Good morning. Question just started, I’m looking at the longer term as you sort of think about capital deployment. I’d be interested in your updated views on the relative attractiveness of the behavioral health and the acute care segments and specifically thinking, whether you believe either one of those segments has either a different growth or return profile one more attractive than the other?

Steve Filton: Yeah. I mean, obviously, anyone who looks at our financials, you can see that we are in a higher margin in the behavioral business, I think, probably, higher returns. But I think we’ve always viewed our opportunities for capital deployment agnostically in the sense that we want to invest our next dollar of capital wherever we think it’s going to earn the highest return and that’s not just about which line of business, but it’s about the individual market opportunity. Las Vegas is a great example, we’ve invested a tremendous amount of capital, hundreds of millions of dollars of capital over the last decade or more in Las Vegas and I think for the most part, it has earned a significantly sort of outsized return.

We are not about to stop investing in that market and protecting our number one market share position in that market, et cetera. So our capital deployment decisions are, I think, made, as I said, market-by-market, in terms of the demographics of the market, the competitive environment. And obviously, as I think we commented in our remarks as well, a significant amount of capital has been devoted over the last five years or six years to share repurchase, because we think that that’s been a compelling return and opportunity for us, and we’ll continue to look at that as well.

Marc Miller: I’ll just add one thing to what Steve said. We’re looking, and I obviously agree with everything Steve said, but we’re looking at more outpatient opportunities now than we probably have done in the past. And so I think more of them are being presented to us, and again, if we think that there are good returns there and that they make sense for increasing our success in our markets, we’ll continue to look at those and deploy more capital to outpatient, maybe at a greater percentage than we did historically.

Steve Filton: In both things.

Marc Miller: In both things. Sorry.

Joshua Raskin: Right. So that makes sense, and so in theory, those are margin accretive. Those are certainly return accretive, but margin accretive, I guess, depending on though if there’s more opportunities maybe in the acute care segment in the short-term, maybe that’s not the case. But I guess my follow up would be, I’m curious about the current environment for additional supply then. Are you seeing any major capital deployed in your markets by competitors and I guess, conversely, you know, sort of that Vegas example, what markets do you think are in need of more supply?

Steve Filton: Yeah. I mean, so we — as you know, we’re opening a new hospital in Las Vegas late in 2024 in West Henderson. That’s on the heels of opening Henderson Hospital five years ago, if I’m getting my chronology correct and that’s been a very significant success. We’ve continued to expand our presence in South Texas and Riverside County, California, where we have significant market positions. We’re building a new hospital in Palm Beach Gardens, Florida. And one in the DC market where we’ve had a significant amount of historical success. So, and then, on the behavioral side, we continue to add beds and do joint ventures with non-hospital — non-profit hospital partners. So, again, I think, there are lots of opportunities.

I think, the challenge for us is to be judicious about where we do that. And to your point, Joshua, I mean, I think, our competitors are also investing in markets. I think HCA has invested heavily in Las Vegas as well, because it has been a very lucrative return market for both of us. So, we see that, it really varies by market, it would be difficult to characterize the sort of capital deployment of our competitors in a broad way. But yeah, we certainly see our competitors expanding as well, and again, our whole sort of view is we don’t want to chase what our competitors are doing, we want to really take advantage of the strong franchise positions that we have and build on those and earn greater returns by investing where we’ve had success.

Joshua Raskin: Very helpful. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Stephen Baxter: Hi. Thanks. Two quick ones on the acute business. I guess, good to hear the physician fee expenses that you seem to think the worst of the inflation is behind you there. I was wondering if you could comment a little bit on how or what level of contracting visibility you have on 2024 in particular. And then just a kind of step back on the acute business, there’s been a lot of focus on portfolio management at a couple of your peer companies, a couple of examples of significant value creation. I was wondering how you think about the size of the acute care business philosophically and whether there could be examples potentially, whether you’ve seen any increase in inbound interest on the acute side. Would love to just hear kind of how you guys are thinking about that as you contemplate capital across the company? Thanks.

Steve Filton: Yeah. I think that the notion of contracting visibility in terms of the physician subsidy expense is a little bit flawed. The reality is 18 months ago, if you had asked us and asked, frankly, any acute care hospital in the country, you know, are your hospital based physician contracts locked in, do you have rates locked in? The answer would have been yes. And what we found were because of changes in the operating environment, in particular, the No Surprise Billing Act, et cetera, that made those businesses far less profitable. The providers of those businesses, the physician groups, the companies that were providing those services simply were unable to do it and they were coming to hospitals and saying, look, you either have to provide us greater subsidies or we can’t do this.

There were a number of bankruptcies, et cetera. So what I will say is, I believe that over the last year and a half, most of our hospital-based physician arrangements have been recast. They’ve either been renegotiating with the incumbent providers. We’ve either gone out for RFPs and put in new providers or we’ve employed in some cases the physicians ourselves. We’ve done so, I think, really beginning late in 2022 and early in 2023, such that the increased costs of doing all that is now largely reflected in our financial statements and shouldn’t increase again dramatically in 2024. But I will say again, back to the comments that I made in response to a question that Justin asked, I do think that the volatility in that area is one of the reasons why we’ve been a little more cautious in our overall guidance in 2024, because I think, all hospitals would say, that was a cost that really surprised us in 2023.

We think we have it under control. We think it’s much more stable going into 2024. But we’re certainly concerned about that popping again or happening again in some other areas.

Marc Miller: I’ll do the acute care development.

Steve Filton: Sure.

Marc Miller: As to your second question about the portfolio and acute care opportunities, we track very carefully all the companies familiar with what you’re referring to, to the question of portfolio rationalization for some of those other companies out there. We are most interested in what we can do in our current acute care markets. So if there are opportunities to pick up other hospitals within markets that we are already present, we would certainly look to do that. But in addition to that, we are familiar with the whole portfolios of these companies and if there were opportunities to expand to new markets that we thought made sense, we would do that as well. Like Steve said earlier, we’re kind of agnostic as to which side we deploy capital to. But if there are opportunities, we’ll certainly pursue them.

Steve Filton: And I know your question was not directed at the behavioral business, but I would make the point that, we’ve done quite a bit of portfolio management in the behavioral business over the last five years or 10 years. If somebody wants to take our 10-K list of properties from 10 years ago, behavioral properties and compare them to today, you can see that they’re quite different. We’ve closed facilities, we’ve sold facilities, we’ve merged facilities where they’re underperforming and where we’re looking to increase efficiencies. We tend not to disclose that, because individual transactions are non-material, but there has been a fair amount of portfolio management on the behavioral side and then, again, we’re open to that. I think we’re ready for the next question.

Operator: Thank you. One moment for our next question. Our next question comes from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck: Great. I was wondering if you could give us an update on where wage growth is across both the acute and the psych businesses today and to the extent that, labor is still a gating factor on the psych side of things. How do you think about the incremental return of just raising wages a couple of percent to potentially drive more volume back to the facilities? Thanks.

Steve Filton: Yeah. I would say that wage growth has moderated a little bit from its highs in both segments. I think we’re probably in that 4% to 5% range of annual wage inflation, and obviously, we’ve made, as again, I think, we said in our prepared remarks, a fair amount of progress in reducing premium pay, which includes temporary traveling labor and overtime and shift differential, that sort of thing. And as — I’m sorry, you want to say…

Marc Miller: No. Well, the question is, we look quite often as to whether or not it makes sense to raise wages as a way to increase capacity and we have done that in certain areas. It’s not as easy as one might think, but we definitely look at that and we try to figure out if there are areas where that would make more sense. The other factor for us is we have high occupancy in a lot of these facilities. So we’re constantly looking and reviewing ways that we can add beds to the facilities to increase capacity. And one of the things when Steve talks about the portfolio rationalization that we’ve done on the behavioral side in the last few years, what that also allows us to do is spend less time on facilities that are not growing and really spend more of our time figuring out how to do programmatic growth, not just beds, but just changing program offerings at certain facilities and changes like that that we think will have a positive effect.

So we’re doing a lot of that as well.

Steve Filton: But I would just say, and I think, Kevin, what to some you’re asking, do we think about the efficacy of paying increased wages to attract that last 1% or 2% of the workforce that would help us increase our volumes. And that’s really the why — when and why we use temporary labor, because the challenge is, if we hire somebody for that, last position or last two or three positions in the facility and they’re making $5 an hour more than everybody else in the facility, in short order, everybody in the facility will be making that same wage. So that’s the consideration we have to use. We certainly acknowledge that we want to fill every position we can, but we understand that there are implications to paying up to do that.

Kevin Fischbeck: Okay. Great. And then I guess I just want to maybe push back a little bit on the guidance for acute care hospital volume growth, kind of just being more pre-pandemic growth rates of 2% or 3%. I guess when I look at your same-store volume growth going back to 2019 and just trying to get forward, I think, you’re only like about 4% above where you were in 2019 five years later, when you would normally be thinking you’d be growing 2% or 3%. So you’re still — in 2019, we might’ve thought your volumes would be 10% or 15% above those levels. So, why is normal growth off of only 4% up like the right number? Shouldn’t there be more pent-up demand or normalization in demand within your markets while in normal growth?

Steve Filton: Yeah. I mean, and again, though, particularly the comparison that you’re talking about, Kevin, I think it’s wholly inappropriate to exclude the $150 million of Nevada supplemental from a comparison to 2019, because I think what we would say in Nevada is we’ve had virtually no Medicaid increases for this period of time, and as a result, and we’ve been questioned about this, our margins in Nevada have declined, et cetera. So to then say that, we’re going to exclude the $150 million from comparing where we were margin-wise to 2019, again, I think, is a flawed approach. And again, that’s not to say we believe that even with the supplemental payments, et cetera, there is still more growth to go in the acute division and more recovery to be had to get closer to those pre-pandemic margins. But I think, excluding the supplemental payments from that is a flawed way of looking at it.

Kevin Fischbeck: I’m sorry. My question was kind of more around the volumes, like, it feels like to me, like your volume guidance, it feels like your volumes haven’t really rebounded to the long-term trend line yet. So I’m still not sure why you’re only growing normal. Wouldn’t you still be trending back to the long-term growth rate in volume? Shouldn’t you be growing fast in 2% to 3% for another couple of years?

Steve Filton: I mean, our adjusted admissions in 2023 grew by 5% or I think actually over 6% for the year. Obviously, I think those are historically a high level of admission growth. We’re projecting that at some point that starts to moderate.

Kevin Fischbeck: Okay. All right. Thanks.

Operator: Thank you. One moment for our next question. Our next question comes from Jason Cassorla with Citi. Please go ahead.

Jason Cassorla: Great. Thanks. Good morning. I just want to ask on behavioral, you’ve talked in the past around the labor backdrop as the gating factor for bed growth. You’ve discussed the portfolio rationalization efforts. I guess occupancy rates are still some 200 basis points to 300 basis points below pre-pandemic levels, with labor improvement, I know you’re expecting volume growth to accelerate in 2024. Can you just give us a sense on what you’re contemplating on the behavioral bed growth side moving forward and maybe just the opportunities a little bit more around that expansion at current facilities against maybe perhaps the pipeline of JVs or potential M&A for behavioral business as well? Thanks.

Steve Filton: Yeah. I mean, so I think, we added somewhere around 250 new beds in behavioral this year. We will probably add a like number, maybe a little bit more next year. But I think, the comment that Marc made is, I think we’re seeing, frankly, just as much opportunity on the outpatient side as well. So we are expanding and expanding our existing outpatient services across all lines of service, including addiction treatment, et cetera, and plan to continue to do that as well. I think as Josh Raskin mentioned, that’s kind of a higher returning, higher margin business. So, that’s attracting more of, I think, our investment dollars there.

Jason Cassorla: Okay. Fair enough. And then just following up on an earlier question a bit, just curious on what your expectation around payer mix dynamics for acute next year, obviously, redeterminations, exchange growth. You’ve talked about this return of low acuity of Medicare volumes in 2023. Just any kind of expectation around how that trends into next year or into 2024? And then can you remind us what percentage of admissions are uninsured at this point, and if — just given the backdrop, if you’re seeing any indication that those uninsured admissions could be picking up, just any color, that would be great? Thanks.

Steve Filton: No. We haven’t seen a significant change in uninsured admissions, which run in certainly mid-single digits, 5% or 6% of our overall admissions. I think what the big change in payer mix, which I think, both the providers and payers have talked about in 2023 is that, as we’ve emerged from the pandemic, I think, we’ve seen more of those lower acuity, I think, especially Medicare, lower acuity procedures that patients had deferred or postponed during the pandemic taking place. And again, as our volumes moderate going forward and they have been moderating, not just for us, but certainly for our peers as well in 2023, I think, it’s those lower acuity volumes that especially are moderating, which I think to a degree is what’s driving the increase, let’s say, in the fourth quarter in our acuity and pricing dynamic.

Operator: Thank you. One moment for our next question. Our next question comes from A.J. Rice with UBS. Please go ahead.

A.J. Rice: Hi, everybody. Maybe just to the comment on premium pay first. I think you said you started the year at $153 million in the first quarter and you were $67 million as you exited the year. Do you think the $67 million is a good run rate? Is there further opportunity? And putting it all together, how much of a tailwind do you have from reduced premium pay in 2024 versus 2023?

Steve Filton: Yeah. So just to clarify, A.J., the $153 million was the first quarter of 2022, not 2023.

A.J. Rice: Okay.

Steve Filton: So, yeah, that number — obviously that number has come down considerably. I think we still think that there is — we ultimately have talked about getting to a premium pay number in the $50 million quarter range. So there’s still $50 million or $60 million of opportunity. A lot of that is dependent on what happens to volumes. I think that premium pay has remained a little bit higher than we originally anticipated because acute volumes have been as strong as they’ve been. But, yeah, I mean, we certainly have the goal of further reducing premium pay. I’m not sure we’re going to get back to the pre-pandemic levels where it ran about $35 million a quarter, but we should be able to get at least part of the way there.

A.J. Rice: And I don’t have the full year number for premium pay, but how much have you just stated $67 million, how much of a tailwind would that create in 2024 versus 2023? Do you have that number by any chance?

Steve Filton: Yeah. So I think that would probably — I’m doing this all the time. I think that would probably on its own be like a $30 million, $40 million improvement, because I think in the first half of the year, we were running about $85 million a quarter.

A.J. Rice: Okay. And then my follow-up question, just to ask a little bit more on Medicaid, both from the supplemental and the redeterminations. On the supplemental, I know we’ve talked about individual programs. When you put it all together, what you got in 2023 versus what you’re expecting in 2024, how much of a change is it? I guess it could be gross or net after provider tax, just trying to understand that. And then you mentioned, I think in the press release, sort of a 10-K, that Medicaid redeterminations were a headwind for the behavioral business. I’m just wondering if you’d flesh that out a little bit more?

Steve Filton: Yeah. So as I think somebody earlier has suggested, I mean, we did some pretty robust disclosure about these Medicaid supplemental programs in the 10-K that we filed last night. I’d refer people to that. But we have a table that shows the supplemental increase from 2023 to estimated 2024. It’s about a $200 million increase. Obviously, the $150 million of the lot is the biggest piece of that. But you can see a lot of the detail…

A.J. Rice: Right.

Steve Filton: … if you take a look at that schedule. And as far as Medicaid redeterminations, I think, what we’ve said, A.J., is that in the states, which probably is most notably Texas on the acute side and some other Texas and some other southern states like Louisiana, Arkansas on the behavioral side, it’s largely affected the child and adolescent population from our perspective and that’s had a relatively minimal effect on the acute business, a bigger effect on the behavioral business. We’ve seen a softness, I think in the last six months of 2023 in our child and adolescent business in the behavioral business that we attribute to a large extent to these redeterminations. We think we’re sort of out of the works with that.

The redeterminations for the most part or the disenrollments have taken place. We’re already starting to see some of these populations re-enrolled either in Medicaid or alternative programs like CHIP or in commercial exchange programs. So I think that we’re imagining that the impact of redeterminations in 2024 will be limited.

A.J. Rice: Okay. All right. Thanks a lot.

Operator: Thank you. One moment for our next question. Our next question comes from Pito Chickering with Deutsche Bank. Please go ahead.

Pito Chickering: Yeah. Good morning, guys. On behavioral, like I think for 2024 guidance, I think half of the revenue guidance is coming from pricing. Pricing for behavioral has been very robust the last few years. Can you talk about the sustainability of that strong pricing you’ve seen looking at the exit rate in fourth quarter? How we should think about a step down in 2024? And then any color on sort of what you’re seeing between the different payer mixes, Medicare rate increases versus Medicaid and Medicare, that’d be great?

Steve Filton: Sure, Pito. So again, I think, as we’ve commented, the strong behavioral pricing I think has really been driven in 2023 by two things. One is actual sort of softness in our residential and that’s where a lot of the child and adolescent businesses is. And so a higher weighting of acute patient days to residential patient days and that by definition sort of increases what we would describe as pricing the revenue per adjusted day. As we emerge from the disenrollment challenge, as we emerge from the handful of residential facilities that had particular regulatory challenges in 2023, I think, we’ll see residential growth starting to outpace acute growth and that will have a kind of muting effect on pricing. The other issue that we have talked about pretty consistently, I think, for the last 12 months or 18 months is, a pretty aggressive effort on our part to go back to payers, particularly in markets and in facilities where we are already capacity constrained and negotiate higher rates and that’s, I think, particularly managed Medicaid payers who have been giving us, I think, historically, less than adequate increases.

We’ve had a lot of success doing that, but to some degree, we’re starting to anniversary that impact. So, again, while we are certainly going to continue to strive for the maximum increases we can get from our payers, our general sense of our 2024 budget is that, pricing and acuity will decline a little bit on the behavioral side, but be offset by increased volumes.

Pito Chickering: Okay. Great. And then on acute margin guidance for 2024, it sounds like physician reimbursement is now just slightly over inflation, full-time labor is normal, contract labor is a $30 million, $40 million savings guiding to flat margins, despite revenues growing 5% to 6%. Are there any known headwinds for 2024 to offset all these tailwinds or is this simply just pure conservatism at this point?

Steve Filton: Yeah. Again, as I think I tried to frame it before, Pito, I think it is kind of a broad caution and conservatism that we’ve taken, but informed by the pressures of the last couple of years. And when we were sitting here in, a good example is the physician expense. When we were on this exact call a year ago, we were projecting a pretty big increase in physician expense, a $50 million, $60 million increase. It turned out to be twice that. So even when we’re aware of issues, et cetera, the last couple of years have created a little bit more volatility than we’re accustomed to. So I think we’re — we were trying to account for some of that in what I view as a fairly cautious approach to guidance.

Pito Chickering: So let me ask that differently, ignoring the $30 million, $40 million contract savings and assuming nothing normal labor, et cetera, et cetera. On a 5% to 6% revenue growth, what would be the normal margin expansion coming from that?

Steve Filton: Yeah. I think that’s a hard question to answer, Pito, because it’s sort of, how do you define normal? We’re in a high inflationary environment, et cetera. I’ll just repeat what I said before. I believe that our view is if we can achieve the revenue targets that are embedded in our guidance, we’d be hopeful to bring out more efficiencies and therefore higher margins from the business than are currently reflected in the guidance.

Pito Chickering: Great. Thanks so much.

Operator: Thank you. One moment for our next question. Our next question comes from Whit Mayo with Leerink Partners. Please go ahead.

Whit Mayo: Hey. Thanks. First, Steve, I just wanted to point out that you have also considerably exceeded those initial Medicaid supplemental payment disclosures in your 10-K every year, I can recall. So I just wanted to mention that for the record. But my question really on Medicaid is there’s been a theme for years now where many states have gotten workaround solutions to the IMD where Medicaid is now covering adults that actually have substance use disorders through 1115 waivers. I’m just wondering if there’s any evidence that you see that those policy actions are now manifesting into any volume growth for you?

Steve Filton: Yeah. I mean, there are a couple of individual facilities and markets that I think have been affected by IMD waivers. I would say that, broadly it has had probably not a material effect on this segment, but there are specific examples I could point to. But, yeah, no, I wouldn’t say it’s broadly a material impact.

Whit Mayo: Okay. And back to your comments on outpatient now elevating itself as a higher priority now that Medicare is reimbursing for IOP and Partial Hospitalization Programs. Just wondering if that opens up opportunities for you, if that’s what you’re referencing when you talk about outpatient for behavioral?

Steve Filton: Yeah. I mean, it really, I think, is the full continuum. We have always had what we call intensive outpatient programs in our behavioral facilities or Partial Hospitalization Programs, which are sort of a means of step down from the inpatient facility. But I think what we’re focusing now on, besides those programs, which we continue to maintain, is more sort of pure outpatient. In many cases, not necessarily even affiliated with an existing facility, et cetera, but standalone outpatient. And to your point, it’s the Medicare advantage, it’s the Medicare opportunity. But it’s also, again, we’re finding the need for behavioral care to be growing across all segments of the population and across all diagnoses, including addiction and others.

Whit Mayo: Yeah. Thanks.

Operator: Thank you. One moment for our next question. Our next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Sarah James: Thank you. So earlier, your comments on pricing about being a little bit below the halfway point of the 5% to 6%, I’m assuming that was blended products. Could you speak to what you’re seeing on the commercial rate increase side, because some of your peers are talking about mid-single digits on that and seeing a little bit of traction of being able to work in the physician fees. So I’m wondering what that’s looking like for you guys on the acute side?

Steve Filton: Yeah. I think those characterizations are fair. So if we’re talking about overall — an overall pricing assumption in our guidance, 2.5% to 3%, we’re probably getting twice that on our commercial business, so 5%, 6%. And in terms of specifics about whether we’re able to cover increases in our physician subsidies, et cetera, that really varies contract by contract, et cetera. But the mid-single-digit commercial increases that you’re saying our peers are citing seems to be consistent with our experience.

Sarah James: Great. And one more just on what you guys are doing on technology investments on the acute and behavioral side. Are you implementing any sort of virtual bed checks on either of those segments or where would you focus your technology investments?

Steve Filton: Yeah. So I would highlight, I mean, we have a lot of technology investments, but I think specifically in behavioral, and we’ve talked about this before, we are implementing an electronic medical record in our behavioral facilities. That project is already underway. We are experimenting with and testing a number of technological solutions to more efficient patient grounding in our behavioral facilities where patients will wear something like an Apple Watch kind of device and we’re able to track their location and we’re able to track when we lay eyes on those patients, et cetera. So that’s improving the efficiency of our patients and in our behavioral facilities as well.

Sarah James: Thank you.

Operator: Thank you. I’m showing no further questions at this time. I’d now like to turn it back to Steve Filton for closing remarks.

Steve Filton: Yeah. We’d just like to thank everybody for their time this morning and look forward to speaking to everybody in a couple of months after the first quarter. Thank you.

Operator: Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.

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UNIVERSAL HEALTH SERVICES INC

Q4 2023

Earnings Transcript

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