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Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2024 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 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 speaker today, Steve Filton, Executive Vice President and CFO. Please go ahead sir.

Steve Filton: Thank you. Good morning and welcome to this review of Universal Health Services Results for the third quarter ended September 30, 2024. During the conference call, I’ll 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, 2023 and our Form 10-Q for the quarter ended June 30, 2024. I’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 recorded net income attributable to UHS per diluted share of $3.80 for the third quarter of 2024 after adjusting for the impact of the items reflected on the supplemental schedule as included with the press release, our adjusted net income attributable to UHS per diluted share was $3.71 for the quarter ended September 30, 2024. As we anticipated, acute care volumes have moderated somewhat and have gradually begun to resemble the patterns we experienced before the pandemic. Adjusted admissions to our acute hospitals increased 1.5% year-over-year, with surgical growth slowing. Overall revenue growth was still a solid 8.6% excluding the impact of our insurance subsidiary. Meanwhile, expenses were well controlled.

Specifically, the amount of premium pay in the third quarter was $60 million, reflecting a 12% decline from the prior year quarter. Included in our operating results during the third quarter of 2024, were aggregate net incremental reimbursements of approximately $20 million recorded in connection with various state supplemental Medicaid programs, approximately half of which was earned by our acute care hospitals. These net reimbursements were in excess of the supplemental program projections included in our earnings guidance for the full year of 2024 as revised on July 24, 2024. On a same facility basis, EBITDA at our acute care hospitals increased 36% during the third quarter of 2024 as compared to the comparable prior year quarter and the increase was 17% when excluding the impact of the incremental Medicaid supplemental payments earned in Nevada during the third quarter of 2024.

The increase in operating income comparison to last year’s third quarter for our acute hospitals is a further step towards a more extended margin recovery we hope to sustain for the next several periods. In our acute segment, physician expense, which was a significant headwind in 2023, has stabilized at approximately 7.2% of revenues thus far in 2024. During the third quarter, same facility revenues at our behavioral health hospitals increased by 10.5% primarily driven by an 8.5% increase in revenue per adjusted patient day. Even after adjusting for Medicaid supplemental payments not included in our original 2024 guidance, facility revenues increased 8.3% and same facility EBITDA increased 9.6% in the third quarter of 2024 as compared to the comparable prior year period.

As a result of unfavorable trends experienced during the last several years during the third quarter of 2024, we recorded a $30 million increase to our reserves for self-insured, professional and general liability claims. Our cash generated from operating activities was $1.4 billion during the first nine months of 2024 as compared to $815 million during the same period in 2023. In the first nine months of 2024, we spent $698 million on capital expenditures and acquired 1.7 million of our own shares at a total cost of approximately $350 million. Since 2019, we have repurchased approximately 31% of the company’s outstanding shares. As of September 30, 2024, we had 1.01 billion aggregate available borrowing capacity pursuant to our 1.3 billion revolving credit facility.

In our acute care segment, we continue to develop additional inpatient and ambulatory care capacity. Construction continues on our de novo acute care hospitals consisting of the 150 bed West Henderson Hospital in Las Vegas, Nevada, which is expected to open shortly, the 136 bed Cedar Hill Regional Medical center in Washington, D.C. which is expected to open in the spring of 2025 and the 150 bed Allen B. Miller Medical center in Palm Beach Gardens, Florida, which is expected to open in the Spring of 2026. In our behavioral health segment, we recently opened the 128 bed Riva Vista Behavioral Health Hospital in Madera, California and we are developing the 96 bed Southridge Behavioral Health Hospital in West Michigan, a joint venture with Trinity Health Michigan, which is expected to open in the spring of 2025.

The approval processes continue in connection with new Medicaid supplemental payment programs in Tennessee and Washington, D.C. as well as a proposed funding increase to the existing program in Nevada. Although we cannot provide assurance that any or all of these programs or program changes will ultimately be approved by CMS or the timing of such approvals, which may not occur until 2025. If approved in their current forms, the Tennessee program, with estimated annual net benefit of $40 million to $56 million, would be effective July 1, 2024. The Washington, D.C. program would estimate an annual net benefit of approximately $85 million would be effective October 1, 2024, and the funding increase to the existing Nevada program, with estimated annual net incremental benefit of approximately $56 million, would be effective July 1, 2024.

Our previously provided earning guidance for the full year of 2024, as revised on July 24, 2024, did not include the estimated incremental net benefit related to any of these programs. I’d be pleased to answer your questions at this time.

Operator: [Operator Instructions] One moment for our first question. And our first question is going to come from the line of Josh Raskin with Nephron Research. Your line is open. Please go ahead.

Marco Criscuolo: Hey, good morning. This is actually Marco on for Josh. Appreciate you taking the question. I was just wondering if you could speak to any changes you may be seeing in the behavior of managed care plans during the quarter, including activity around patient denials or downgrades across both the acute and behavioral segments. And then it would also be helpful if you just give some color on what trends you’re seeing between commercial and MA plans and whether this activity is focused around any specific areas like two-midnight. Thank you.

Steve Filton: Sure. So I think if you go back and review some of our transcripts and other commentary from late in 2022 and early into 2023, we first began to note, I think more aggressive behavior on the part of our managed care payers, especially coming off of the initial years of the pandemic, 2020, 2021, 2022, where clearly we felt like payers had become less aggressive, I think in response to a large degree to the significant decreases in utilization during the early stages of the pandemic. So since then, since I would say late 2022, early 2023, again we’ve seen I think payer behavior become more aggressive as it relates to denials, as it relates to patient status changes, length of stay, management when patients are in the facility, etcetera.

I don’t believe that we saw a dramatic change in the current quarter. I think again the more aggressive behavior that we’ve been citing I think has been ongoing for more like a year or four or six quarters, but wouldn’t necessarily suggest that we saw dramatic change in the current quarter. As far as whether and behavior is focused on any particular area. You specifically asked about the two-midnight rule. Again, I think we’ve made a comment that we’ve been focused on the two-midnight rule and the appropriate coding consistent with the two-midnight rule and appeals consistent with the two-midnight rule. For several years we’ve been using a third party firm to help us properly code admissions. We’ve been using that same firm to help us with denial appeals, etcetera.

And so I don’t think we’ve seen again some of the perhaps significant difference in how two-midnight coding claims are being handled with our claims as maybe some of our peers have really changed their behavior as a result of the recent clarifications that CMS issued in terms of two-midnight rules.

Marco Criscuolo: Thanks, appreciate all the color on that. And then just to squeeze in one more quick one, I was wondering if you could just give a quick update on physician recruitment and turnover trends in the acute behavioral segments, especially as it relates to opening up additional capacity and then whether you’re seeing any more incremental competition in that area. Thank you.

Steve Filton: Yes, so I think there’s been much discussion about physicians and especially as it related to hospital based physicians. Last year when there was a significant increase for almost all providers in the expense of hospital based physicians, in our case especially emergency room physicians and anesthesiologists, I think that increased expense was more a result of billing changes and I think specifically the no surprise billing act and the constraints that that put on those specialties, emergency room anesthesiology, in terms of their ability to bill for out of network patients. So I think the pressures on those expenses were driven more by those billing changes than they were by a lack of or scarcity of those sort of physicians.

I don’t think that there’s a dearth of physicians, nor do I think there’s a glut necessarily in every market. Different specialties, are more challenging, etcetera. But I don’t think we would describe physician recruitment as particularly, difficult in the current period. I don’t think it’s changed much over the last several years.

Marco Criscuolo: Great. Thank you for all the color.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Ann Hynes with Mizuho. Your line is open. Please go ahead.

Ann Hynes: Great, thank you. Heading into 2025, are there any maybe major headwinds and tailwinds you want to call out? And to that I know it sounds like you’re getting incremental providers stuff in 2024. Is there anything we should be on the lookout for 2025? Thanks.

Steve Filton: So I think for us, Ann, as I mentioned in my prepared remarks, we will have two new facilities open in 2025, our West Henderson facility in Las Vegas which will open late this year, and then a hospital in the District of Columbia which will open in the spring. I don’t believe, and we’ll be more precise about this when we give our detailed 2025 guidance in February, but I don’t believe that either of those facilities will create a significant drag on EBITDA. There will be some opening expenses and some ramp up, but I think both are well positioned. So again, they should not create much of a drag. I think otherwise for the two businesses, we are expecting the continued margin recovery that again I alluded to in my opening comments.

And then finally, the major tailwinds are the ones that I mentioned again in my remarks, the specific ones in terms of Tennessee, District of Columbia, Nevada. These are either new or additional supplemental programs that have been submitted to CMS for approval. There’s been some reporting and some things have been written about programs, either new or expanded programs in California and Florida that could be effective next year. But those I think are in sort of earlier stages of development. So I think broadly there’s some significant potential tailwinds in the Medicaid supplemental area, some of which we’ve disclosed in some detail, others which I think are a little bit more or not quite as precise at this point. But those to me seem to be the big puts and takes for 2025 at this point.

Ann Hynes: Great, thanks.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Andrew Mok with Barclays. Your line is open. Please go ahead.

Andrew Mok: Hi, good morning. Wanted to focus on the acute volumes. Maybe if you just take a step back and comment on the volume progression in that business and now that we’ve established a more normal baseline for volumes like what’s the outlook in the acute care segment for volume growth? Thanks.

Steve Filton: Andrew, I think we’ve been pretty clear and consistent in our commentary in this regard. And that is, we’ve been saying for some time that we expected acute, broadly acute care growth to return to sort of more normal, I’ll call them pre-COVID levels. So same sort of revenue growth in the 6% to 7% range. That would be split pretty evenly between price and volume. I think if you actually look at our year-to-date metrics in acute care, I think our adjusted admissions are up 3%. I think our pricing or revenue per adjusted admissions is up 5%. I think if you adjust that for the Nevada Medicaid supplemental, you’re sort of in that range of 6% to 7% revenue growth split pretty evenly between price and volume. I think that’s been our view for a while.

I know that some of the commentary from our peers have been a little bit more bullish about what acute care volume may look like and suggesting that there have been some structural changes in the business that would result in elevated acute care volume growth for the foreseeable future. We haven’t seen that yet and obviously I think if there are these structural changes, we would benefit from them as would the average acute care hospital. We just haven’t seen really evidence of that just yet. The other issue which I kind of alluded to earlier is I think a number of acute care hospitals are anticipating a fairly significant benefit from the two-midnight rule change and a consequent change in the way they’re coding these things, etcetera. As I’ve indicated, again, I think pretty clearly and consistently for a while now.

We think we’ve been focused on that issue for several years now and as a consequence don’t necessarily anticipate an incremental benefit from that. So again, I think we view acute care volumes or the future of acute care volume growth, and I think broadly acute care revenue growth is something that should be solid, etcetera, but that some of the really elevated acute care volume growth that we’ve seen over the last several years has been a result of the catch up in postponed and deferred procedures or procedures that had been postponed and deferred during the pandemic. And by definition I think those were sort of a onetime thing and I think we’re largely past that at this point.

Andrew Mok: Great. And then your corporate expenses tracked a bit higher than our estimates in the quarter. Can you help us understand any one time items there or other drivers of the increase in the corporate segment? Thanks.

Steve Filton: Yes, we had a $5 million loss on the extinguishment of debt related to our refinancing that we did during the quarter. We probably had another 5 million settlements of miscellaneous smaller lawsuits that $10 million of corporate expense I would clearly characterize as non-recurring in the quarter.

Andrew Mok: Great, thanks for the color.

Operator: Thank you. One moment for our next question. And our next question is going to come from the line of Justin Lake with Wolfe Research. Your line is open. Please go ahead.

Unidentified Analyst: Good morning, this is Dylan on for Justin. Thanks for the question. Just had a couple quick ones for you. Is there any color you can provide on the trajectory of volumes in the behavioral business in the quarter? And then second, behavioral pricing clearly remains a strength. Are you expecting to see similar opportunities heading into 2025 or do you expect that to moderate? Thank you.

Steve Filton: So as far as the trajectory of behavioral volumes, again, I think for the last several quarters we’ve been talking about our sense that while we originally guided to 3% same store patient day growth for behavioral for the full year of 2024, that growth was occurring more slowly than we originally anticipated. And we sort of revised that view to we’d be able to exit the year at that sort of 3% level. We were able to exit the third quarter at that 3% level. And that’s despite a little bit of drag from the hurricane impact in South Carolina and Georgia on some of our facilities at the very end of the quarter Hurricane Helene. So yes, I think we remain confident that we should be able to exit the fourth quarter at that at least 3% patient day growth rate and remain confident that we can do so.

As far as behavioral pricing, behavioral pricing as people know, has been quite strong for several years now throughout most of the pandemic. We attribute that to some degree to our efforts to leverage better pricing from some of our lower paying payers, particularly managed Medicaid payers. And I think in an environment where there’s not a great deal of excess capacity in the behavioral industry writ large. That’s been an effective sort of strategy. We’ve been suggesting for some time that behavioral pricing is likely to moderate at some point, and we continue to believe that. But to be fair, it is hanging in there very robustly and very strongly at the current time. And obviously we’re not doing anything to try and reduce that. But we do believe that behavioral pricing, which has been running at historically high levels, will moderate at some point, but still should track in sort of that 4% to 5% range for the foreseeable future.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Sarah James with Cantor. Your line is open. Please go ahead.

Unidentified Analyst: Hey guys, this is Gabion [ph] for Sarah. You had a nice beat on acute revenue permission. Could you just walk us through the drivers there? And was any of that related to the extra day in the quarter?

Steve Filton: Yes, I mean, the extra day, I think is a mechanical sort of thing. We tend not to really focus on that largely because I think in the end, obviously, the longer the period, if you look at the full year, all that comes out in the wash. I think more importantly, we had a difficult acute care comparison. I think our same store adjusted admissions in last year’s third quarter were up close to 7%. But I think even more importantly, if you go back and you listen to our or read our commentary from last year’s third quarter, we attribute a lot of that to again, this catch up in the deferred and postponed procedures, those procedures that have been postponed or deferred during the pandemic. And as a consequence, if you go back, while our volumes, both admissions and surgical volumes, were strong in the third quarter of last year, they tended to be skewed towards those lower acuity kind of more discretionary procedures that people had the ability to defer during the pandemic.

And so when you’re looking at now that comparison to 2024 to 2023, you see, volumes sort of look unfavorable. And they’ve come down some, but acuity’s come up because so much of that activity last year’s quarter was due to the lower acuity, lower revenue sorts of procedures.

Unidentified Analyst: Okay, awesome. And then any color on the inpatient surgical trend?

Steve Filton: Yes, as I noted in my prepared remarks, surgeries were so often they were probably down slightly in the quarter. And again, I think it’s a lot of the same dynamic that surgeries were quite strong in the third quarter of last year, but that was skewed towards a lot of what I’ll describe as sort of catch up, lower acuity, more discretionary, more elective sorts of procedures.

Unidentified Analyst: Okay, great. Thank you, guys.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of A.J. Rice with UBS. Your line is open. Please go ahead.

A.J. Rice: Hi, everybody. Maybe just to ask about the labor, you commented that your use of premium pay was down to 60 million, 12% down year-to-year. Any more broad comments on what you’re seeing in both business lines and labor? Are we sort of at a stable point at this point, and if you can sort of hold your SWB ratio as a percent of revenues going forward, or do you think there’s still further opportunities?

Steve Filton: Yes. What I think has happened, A.J., is that, again, we’re in sort of now this post pandemic environment in which wage inflation, I think, has stabilized. It is clearly lower than it was at the height of the pandemic. Obviously, our use of premium pay has diminished dramatically, although it is also, I think, starting to stabilize and sort of flatten out. And I think that should continue that’s benefiting us obviously, in an environment where the revenue growth in both businesses has been quite robust. It’s contributing to the margin recovery that salaries are somewhat stable. And I will say people have noted to me that, on the behavioral side, salaries as a percentage of revenue did sequentially increase from Q2 to Q3.

And I’ve asked about whether that’s kind of emerging trend. And I would say not. I think that that’s a function probably of the impact of the hurricane that we saw at the very end of the quarter where a number of our facilities, particularly in the Georgia, South Carolina market, saw diminished volumes but also it’s a double whammy because we see diminished volumes, but we’re also paying overtime, etcetera, to keep people in the facility and make sure it’s properly staffed. But I think outside of that, I would say that labor trends have stabilized substantially in both business segments.

A.J. Rice: Okay. And maybe just thinking about growth, development capital deployment, etcetera. Any comment on the behavior side, the JV pipeline, you paid some new bed additions as you start to think about 2025 and then obviously, to the extent there is free cash flow beyond any of that, whether there’s M&A opportunities? Or should we think that most of that cash flow is going to go to stock buybacks from the year?

Steve Filton: Yes. I mean we continue with a pretty aggressive and robust capital expenditure program. I talked about some of the big spends in my prepared remarks, but we’ve started or maybe more properly, I would say we restarted to add that to our behavioral business. We’ve been doing that pretty consistently prior to the pandemic — during the pandemic, we paused many of those expansion activities with the sort of logic being, we were struggling to staff the existing beds we had there was no point in building new beds. But now that, again, the labor market has stabilized, we’re looking in those markets where there is an opportunity to increase volumes by adding beds. Now to be fair, our overall occupancy in behavioral stands on the low 70s.

So there are plenty of facilities where we should have the potential for upside volume without having to add any new beds, but there are some facilities that are running at higher occupancies than that. And in those facilities, we are, again, either resurrecting or entertaining new programs to build beds and we’ll continue to do that. As far as opportunities for M&A, I think we often comment that we are presented with opportunities reasonably regularly. We have found if you look at the last five, seven years, not a great deal of those opportunities to be very compelling, although we will continue to look at them. And so my guess, because this is M&A, I think can be hard to predict. But my guess is that as you think about it, our capital deployment will remain focused probably on capital expenditures and on share repurchase, much as it has been for the last five to seven years.

A.J. Rice: Okay, thanks a lot.

Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Pito Chickering with Deutsche Bank. Your line is open. Please go ahead.

Pito Chickering: Good morning guys. Looking at same store occupancy here, that’s a fun metric because it probably underestimates the busier days of Monday through Wednesday for neglected procedures. So my question is what is the max occupancy for the portfolio before it impacts same-store mission growth? And as you think about hospital occupancy, if you can’t sort of expand beds fast enough, does this create a more aggressive conversations with your lowest yielding MA payers like you did a few years ago when you’re at max capacity in behavioral?

Steve Filton: Yes. So Pito, I’m not sure if your question was specific to one or both of the segments, so I’ll try and answer for both. I think on the acute side, occupancy over the years has become a somewhat less relevant metric. Obviously it measures your occupied inpatient beds, but my experience is I’ve been in a hospital any number of times that maybe at 2/3 occupancy from an inpatient bed perspective, but you walk through the emergency room and there are stretchers in the hallway or you walk through the OR and you’ve got a real busy schedule or the Cath lab, that sort of thing. So I think that acute care inpatient occupancy is not as relevant as sort of a metric as it used to be, or at one time it was. There are, I think, a number of other equally important variables in measuring sort of the efficiency and the output of an acute care hospital.

I think in terms of the broader question, I don’t know that we have too many OR hospitals that we’re really at max capacity in any of those areas. We’re certainly not there in terms of inpatient beds, but I don’t think we’re necessarily there in terms of emergency room capacity or Cath labs or ORs, etcetera. And to the degree that we are, I think we’re responding to that with capital improvement and expansion programs that address that. On the behavioral side, I do think that inpatient occupancy or an inpatient bed occupancy number is more relevant. There are sort of fewer ancillary sorts of procedures in a behavioral hospital that account for that. Although obviously outpatient activity needs to be measured as well. But the same thing. I mean, as I said, for the most part, I don’t think we have physical capacity constraints in our behavioral business, but there certainly are facilities and geographies where that is an issue.

And those are the places where we’re doing debt expansions or at least contemplating debt expansions.

Pito Chickering: Great. And then a follow-up here is on physician expenses. Like you talked about sort of that being stable at like 70% of revenue. Are there other areas like radiology and NICU which have not been pressure points in the past, which could be asking for subsidies going forward or pretty much across portfolio across all different groups of physicians at stable? Thank you very much.

Steve Filton: Yes. So the answer is yes. And I would say in the portfolio I can find examples in almost every specialty where we’ve had requests for greater subsidies or increased expense, etcetera. As I noted in comments earlier, I think for us the biggest pressure, by far the most expansive, has been in the emergency room and anesthesia areas. But yes, we have, I think, one off situations where we’ve seen pressure from hospitalists or laborists or radiologists, as you asked about. But they clearly, I think, have accounted for much less pressure than ER and anesthesiology. And I think broadly, while we continue to sort of deal with those issues every day, I think that situation, which was such a headwind in 2023, has largely stabilized.

Pito Chickering: Great. Thanks so much, guys.

Operator: Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Joanna Gajuk with BofA Securities. Your line is open. Please go ahead.

Joanna Gajuk: Hi, good morning. Thanks so much for taking the question. So I guess first to clarify the commentary around the outlook for psych business into next year. So you sort of alluded to the idea of, maybe pricing excluding supplemental, growing 4.5 and, and I guess you still expect to exit at 3% volume growth. So is that sort of the trajectory to expect next year in terms of growth for that segment?

Steve Filton: Yes. So Joanna, I mean we’re not, we’re going to give sort of precise 2025 guidance on this call. We don’t do that until our fourth quarter call in February. But I think we have broadly described our expected sort of trajectory of growth in the behavioral business is same. So revenue growth in the kind of mid-to-upper single digits, 6%, 7%, 8% probably skewed a little bit more to pricing. So 4% to 5% pricing, 3% to 3.5% volume. But I’m not suggesting that that’s going to be our precise guidance for next year. But I think in terms of thinking about next year, that’s I think how we start. And then obviously to the degree that there’s any significant Medicaid supplemental programs, etcetera that would be sort of incremental to that.

Joanna Gajuk: Right. And I guess on site in terms of volumes, so this quarter maybe wasn’t very close to 3%, but I guess you still expect to kind of exit that year. But as we think about all these different tailwinds, so can you kind of walk us through what you’re seeing out there in the market? So obviously there’s the mental health parity with a deal that has, I guess more teeth requiring, to actually execute on this mental health parity and also sounds like states are adding more benefits. So are you seeing higher demand and I guess, are you able to meet that demand? I guess is there something to be said about increased rates to be able to then, staff for that volume?

Steve Filton: Yes. So Joanna, I apologize because I’m having a little trouble hearing you, but I think I got the crux of your question. I’ll say this. We as I indicated in some earlier comments, I think our volume recovery in behavioral has, I think we’ve been candid about saying it’s taken a little bit longer than we expected. We’ve cited a number of issues that have been challenges, labor scarcity issues in specific pockets and specific geographies has been one. We had a handful of residential facilities that struggled with some very sort of unique issues that they’ve been recovering from. And I think over the last year or so we’ve talked about the impact of Medicaid disenrollments and the sort of challenges that that’s created even for those patients who have been able to re-enroll or enroll in commercial exchange products.

While that I think tends to be a benefit on the acute side, I don’t think it tends to be as much of a benefit on the behavioral side because the large co pays and deductibles that generally come with those commercial plans have sort of been challenging. But I think for the most part the recovery in our behavioral volumes and our optimism about being able to sustain that recovery in the fourth quarter is really about the improvement of all these issues. We continue to be able to hire more staff and have more adequate staff to allow us to take more patients. The residential facilities that have struggled are continuing to improve and the Medicaid disenrollment impact continues to dissipate as either patients are able to re-enroll in Medicaid or get commercial exchange coverage and they exhaust their copays and deductibles.

So I think it’s the improvement in those areas that’s really contributing to the behavioral improvement. I think you specifically asked about whether we’re seeing or anticipating a significant benefit from the Biden administration’s sort of tightening of rules on mental health parity. Mental health parity, which was implemented any number of years ago, sort of to great fanfare and I think expectation that we would really benefit from that. I think we’ve benefited to some degree, but I think the payers and the payer community broadly has been challenging in terms of really getting them to comply with I think both the spirit and the actual intent of mental health parity. I do think that the strengthened government regulations are helpful, but I don’t know that they’re likely to really create a landscape change.

I think where they’re helpful is as we appeal these things, as we appeal denials and that sort of thing, strengthened government regulations are often helpful in that regard. But I don’t think that’s going to drive a huge increase in behavioral volumes.

Joanna Gajuk: Thank you. And some excuse. Very last I guess clarification question, I’ll comment on the 2024 guidance or assuming no change so you put up $20 million, I guess, good guide in the quarter from supplemental that wasn’t in there, but then there was a $10 million back, I guess, for debt and debt cost and — I guess settlement, so roughly no change to your 2024 guidance? I just want to confirm that? Thank you.

Steve Filton: Yes, there is no change to our revised 2024 guidance.

Operator: Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Jamie Perse with Goldman Sachs. Your line is open. Please go ahead.

Jamie Perse: Hey, thank you. Good morning Steve. I just wanted to go back to acute care volumes in the quarter at 1.5%. I appreciate you’ve been expecting some normalization but that was just weaker than expected. And want to get a sense of if you saw any change across the quarter, any callouts by payer class. If you can give us any detail on how some of the larger payer classes grew relative to that. And then as we think about normalization, is this what the new normal looks like or are there any dynamics in the third quarter that make this not representative of the go forward?

Steve Filton: Yes. So on this one Jamie, I think I’m just going to have to repeat comments that I’ve already made. I think that the most significant sort of dynamic in the quarter is the difficult comparison to last year which I will say we have clearly and consistently pointed out during the quarter and tried to manage people’s expectations. But more importantly is that difficult comparison to last year I think was really related to the fact and I think if you go back and read or listen to our commentary from last year it was this sort of exhaustion of deferred and postponed procedures which we did view as kind of a one-time thing. What I also said earlier was I thought that if you looked at the year-to-date performance of the acute business 3% adjusted admission growth, 5% revenue per adjusted admission growth.

And if you ex-d [ph] out the impact of the Nevada supplementals you start to get an acute care model that in my mind a was reflective or is reflective of our historical model but also our expectations for the future which is kind of mid-single digits 6% 7% same store revenue growth split pretty evenly between price and Volume.

Jamie Perse: Okay, that’s helpful. And then maybe just a bit of a longer term question. We’ve been in a pretty unique environment really for the last five years or so. A number of structural dynamics have either emerged or maybe intensified over that period. ASC utilization, aggressive payer tactics that probably impacts administrative burden, growth in MA and HICS. I guess, just as you think about the next five years, can you level set us on strategy and in particular internal investment priorities going forward?

Steve Filton: Yes, I mean, it’s a pretty broad question and one that I’m sure we could speak for an extended period of time about all the dynamics that you mentioned. I think broadly the way I would answer the question, which seems to be an acute care centered question, is we have a view that the care continuum has clearly been expanded and payers are looking to ensure that patients can be treated in the most cost effective settings of care, which has resulted in a growth of ambulatory surgery facilities and freestanding imaging facilities and much greater access points. We’ve had great success with our penetration of freestanding emergency departments as an example. But broadly, I think we are trying to participate in the investment in that broader continuum.

Whether it’s again, ASCs, freestanding imaging, freestanding EDs, etcetera. That’s certainly one component of it. The other, I think is a continued alignment with our physicians, whether that’s through accountable care organizations. We have at least one of those in every single market in which we operate, whether it’s employed physicians, which we have in virtually all of our markets, etcetera. But I think we view that as we sort of continue into a pretty challenging environment and where utilization is going to be viewed carefully by payers and by the government. We think being properly aligned with our physicians is most important dynamic. So to me, I would cite those two issues, the continued emphasis on physician alignment in a bunch of different ways and the continued expansion of the care continuum as two of our major focuses as we think about the next five years.

Jamie Perse: All right, appreciate it. Thank you.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Ryan Langston with TD Cowen. Your line is open. Please go ahead.

Ryan Langston: Hey, Steve. Thank you. Quick one and then maybe a more broad one first. Does the SDP program benefit you called out for DC. Does that include the new facility that you’re opening?

Steve Filton: Yes, it does. Although I think for the most part it’s been difficult to predict what the impact on the new facility is because obviously we have no track record of utilization, etcetera. So the number that we’ve given is largely based on the historic performance of our acute care hospital in the district as well as we do have a behavioral hospital in the district that would have a smaller benefit from this program. But the new hospital will participate in any new Medicaid supplemental program that’s approved.

Ryan Langston: So that would just be some upside potentially to what you’ve ranged already. I guess maybe modest.

Steve Filton: Correct. Okay.

Ryan Langston: And then maybe just more broadly, we’ve seen some, I guess, increase in frequency and legal headlines both on behavioral and the acute side. So just curious on your thoughts on is that just sort of the avalanche of you see one and now you’re going to get three more. And if you think that might subside, I mean, it just seems like these are much higher, at least frequency than pre-COVID. So just any kind of high level thoughts on some of the legal news flow would be great. Thanks.

Steve Filton: Yes, I mean, certainly there have been some kind of headline grabbing verdicts in I think, particularly in the behavioral space in the last year. I think, as we’ve indicated, we believe that the two verdicts that we have disclosed are both subject to appealable issues. At least one of the verdicts has been substantially reduced just at the trial judge level. But again, I think there’s a great deal more appeal activity to go on both of those cases. I think it’s hard to say whether those cases really reflect a significant, change in the landscape. I think they’re both, they were both extraordinary verdicts in terms of any sort of history, in terms of the facts of the case or the jurisdictions or whatever. As I mentioned in my prepared remarks, we are increasing our reserves for malpractice expense to recognize.

I think just more broadly an increase not so much in the frequency of cases, but in the severity of cases and the severity of settlements and verdicts, etcetera, but not necessarily really driven by the two cases that we’ve been disclosing, because I do think those are sort of extraordinary and are both likely to be significantly reduced.

Ryan Langston: Got it. Thank you.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Matthew Gillmor with KBCM. Your line is open. Please go ahead.

Matthew Gillmor: Hey, Steve, So the outlook for the Medicaid supplemental payments. I think we’ve heard you talk about Tennessee and DC in the past. I think today you mentioned some additional funding for Nevada of $56 million. Did that be understood to be something new that’s developed, or was that already sort of baked in and understood previously?

Steve Filton: No, I think what gives rise to that incremental benefit is the state increasing the size of their Medicaid supplemental pool as a result of updating their Medicaid utilization statistics and data and submitting that to CMS. So that is something that was sort of incrementally newsworthy to us and obviously we’re disclosing it now. But I think it’s triggered by the increase in Medicaid utilization that the state is experiencing and as a consequence is increasing their pool of these Medicaid supplemental payments available.

Matthew Gillmor: Got it. And then, Steve, I wanted to see if you would be able to provide any comments on the hurricane dynamics. I think you mentioned some impacts around the edges with behavioral volumes, but any way to think about sort of any EBITDA impact or is it just small enough that it doesn’t matter that much?

Steve Filton: Yes, I mean, I would say that we thought that probably in the behavioral side of the business, patient day volume would have been maybe 25, 30 basis points higher had it not been for the impacts of the hurricane. I mentioned that, I think there was a bit of a, creep up in salary expense during the quarter as a result. I think broadly we had the view that trying to quantify the impact of the hurricane in both of the segments, it was just not material enough to sort of call out as a discrete item. It certainly was, a bit of a drag during the quarter. But I think, I think our point of view was it wasn’t significant enough to call out as a discrete item.

Matthew Gillmor: Got it. Thank you.

Operator: One moment for our next question. Our next question is going to come from the line of Whit Mayo with Leerink Partners. Your line is open. Please go ahead.

Whit Mayo: Thanks. I’ll just keep it to one question. Steve was just looking for an update on some of the EMR investments you guys have been making within the behavioral segment. How many facilities now, any benefits that you’re seeing on labor or other efficiencies, and then just maybe any new strategic initiatives within that segment that we should be mindful of as we enter 2025. Thanks.

Steve Filton: Yes, I don’t necessarily have the precise data in front of me with, but I think, by early next year, we’ll probably have 25 or 30 facilities live on the EMR and that implementation and installation process will continue. I think, we feel like it’s generally been successful, and I think it tends to lend itself to greater efficiencies when you don’t necessarily have a paper record. But also, higher quality of care, different clinicians are able to view the record more, more easily, etcetera. And that improves, I think the quality of the patient care that you can provide. I think the other technological development that we’ve talked about before in behavioral has to do with what we describe as patient observation or patient rounding.

Having eyes on behavioral patients very, very frequently is a significant part of keeping patients safe and well. And to date, that’s been a physical exercise that literally someone is laying eyes on every patient every 15 minutes or so. But to the degree that we can enhance that process technologically, have a patient wear what looks like an apple watch and have our clinicians carry what looks like a tablet around and be able to know where patients are and whether they’ve been observed and keep track of them more effectively that way, I think that’s going to be a significant development that will help in the behavioral business in a great many ways in terms of quality of patient care and risk management, etcetera, in the next few years.

Whit Mayo: Okay, thanks.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Michael Ha with Baird. Your line is open. Please go ahead.

Michael Ha: Thank you. Steve, I think last quarter you mentioned a lot of cost management in your acute care business in preparation for that sort of eventual return to pre pandemic volume. And then basically the aim of being able to continue EBITDA and margin expansion even when things moderate. So now that volumes appear to be moderating and acuity seems to be picking up, it feels like it might be materializing faster than most expected. So I wanted to revisit this topic, ask about those cost management efforts, how it’s been tracking, how has it been tracking. And at this point in time, if volumes do continue to moderate, what’s your confidence level that you’re right now in the right position to drive that EBITDA and margin expansion in the queue?

Steve Filton: Yes, I mean, I think the point that I tried to make last quarter, maybe in the last couple of quarters is this sort of idea that some of the traditional kind of blocking and tackling that we have done from a productivity standpoint was, if not suspended, maybe paused temporarily during the pandemic. We were so challenged in finding an adequate workforce and keeping an adequate workforce during the pandemic. There were, we definitely sort of, there was a reluctance to manage to what we would sort of consider peak efficiency. I think as we emerge from the pandemic more willing to do the sort of things that I think we’ve always historically done, including adjusting to volumes as they moved up and down. And I think you saw that last quarter and I think you saw that this quarter as well, where salaries as a percentage of revenues has been coming down and coming down pretty steadily, and I think is really one of the main contributors to that margin recovery.

I think that’s continuing. And I think the point being I don’t exactly know where acute care volumes will move, and I don’t think anybody really knows for certain. But I think we’re in a position where we’re much more, flexible about reacting to that and reacting to that in an efficient way than, we were at the height of the pandemic when we face so many more staffing challenges.

Michael Ha: Thank you. And then follow up, California and New Mexico supplemental payments for 2025. We’re hearing it could be potentially 70 million to 80 million for California, 30 for New Mexico. To UHS was wondering if you’ve any sort of additional clarity on sizing. And then with all the recent discussion around state proposals and the CMS raising those payments to average commercial rates for next year, I was wondering if you could talk more about those proposals. The potential tailwind, not just California and Florida, which everyone’s been focused on, but across all your states, I guess. How real of a potential tailwind is this? Thank you.

Steve Filton: Yes, so just responding to the specific questions you asked, New Mexico, I don’t think is a significant, again, upside for us. We have one small behavioral facility in New Mexico, California, we obviously have a much bigger presence, both for acute and behavioral. And I think the challenge in terms of sizing the potential benefit in California is that the state has not created a formal plan or an allocation methodology, etcetera. So even though we understand that the potential benefit in total could be quite significant, we really have no way of knowing exactly how that would impact specific hospitals, how it would be allocated among specific hospitals until the state issues a more specific plan, which at least we understand is not likely to happen until sometime maybe next year, early next year.

Your broader question about are more states likely to increase their programs or develop new programs, increase their funding to average commercial rates? It really varies by. And you know, we’ve sort of had this practice of we really only disclose them when the states have a formal plan, that they submit it to CMS and are awaiting approval. But we certainly, like others, are aware that other states are contemplating this in earlier stages, etcetera. And so we continue to believe that the potential benefit could be significant beyond just the ones that we disclosed, which are significant, I think, in and of themselves, but difficult to size that opportunity in any sort of precise way until the states develop their plans and Submit them to CMS.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Ben Hendrix with RBC Capital Markets. Your line is open. Please go ahead.

Ben Hendrix: Great. Thank you very much. Just a quick follow up on some of the psychiatric questions, especially in residential psych. And I think I’ve asked this question, but just wanted to get any update or any updated thoughts on your strategic initiatives around psych. I know you mentioned, the higher liability reserves and some very specific issues at some of your facilities. Is there any thoughts on kind of changing strategic direction or evolving strategy there? And could we potentially, amid this heightened security, could there be consolidation opportunities in residential? Thanks.

Steve Filton: Yes, I mean, I was asked kind of a more strategic question earlier. Well, that focus was on acute care. But then I think in some ways the, my answer on behavioral and my outlook is similar in the sense that we see an expanding continuum in which outpatient care is likely to play a greater role and there’ll be more demand for access to outpatient care. And we’re expanding our outpatient footprint in response to that. I think we continue to expand our services to military members because that seems to be a growing and significant part of the business. The SUD [ph] or addiction business continues to grow and demand is increasing there. And I think we’re increasing our exposure there. Yes, I don’t know that it’s particularly an acute residential sort of issue of paying attention or focusing on one more than the other as much as it is these other service lines, which we think are growing.

And I would add to sort of the outpatient dynamic, continuing expansion of telehealth capabilities as well.

Ben Hendrix: Thank you very much.

Operator: Thank you. And I’m showing no further questions at this time. And I would like to hand the conference back over to Steve Filton for any closing remarks.

Steve Filton: Yes, we’d just like to thank everybody for their time and look forward to speaking with people at the end of next quarter. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.