Good day and thank you for standing by. Welcome to the UHS Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your host today, Steve Filton. Please go ahead..

Thank you, Michelle. Good morning. Marc Miller is also joining us this morning. We both welcome you to this review of Universal Health Services results for the third quarter ended September 30, 2021.

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

For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend the 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, 2020 and our Form 10-Q for the quarter ended June 30, 2021.

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 $2.60 for the third quarter of 2021.

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 $2.67 for the quarter ended September 30, 2021.

For most of the third quarter, we experienced an escalation in the number of COVID-19 patients being treated in our hospitals. In our acute segment, this COVID surge resulted in measurably increased revenues due to the higher acuity and incremental government reimbursement associated with COVID patients.

Unlike previous surges, however, non-COVID volumes, including emergency room visits and elective and/or scheduled procedures were not crowded out. And in fact, generally, we are running at or near pre-pandemic levels.

As a result, acute care revenues in the quarter were higher and managed to offset the premium labor costs and increased supply expense associated with the COVID patients, leading to an acute care EBITDA result in the quarter that was above our internal forecast.

At the same time, the most recent surge created significant challenges for our behavioral segment. Volumes were pressured throughout the quarter due to the capping of bed capacity, in some cases, to properly isolate COVID patients and in other cases because of a shortage of appropriate patient care personnel.

Generally, behavioral patient days during the quarter ran 4% to 6% below comparable pre-pandemic levels. The effect of the reduced volumes combined with higher labor costs led to a behavioral EBITDA result in the quarter, measurably below our internal forecast.

Our cash generated from operating activities was $442 million during the third quarter of 2021 as compared to $767 million during the same period in 2020.

Included in our cash generated from operating activities during last year’s third quarter was approximately $400 million of additional funds received in connection with various governmental stimulus programs, most notably the CARES Act. We spent $667 million on capital expenditures during the first 9 months of 2021.

At September 30, ‘21, our ratio of debt to total capitalization declined to 37.4% as compared to 37.7% at September 30, 2020. During the third quarter of 2021, we opened 157 new beds in our Las Vegas market, including 69 new beds at Henderson Hospital.

We acquired 88 new beds through the acquisition of the Las Vegas Specialty Hospital, which will serve orthopedic and surgical patients. And we acquired Elite Medical Center, micro-hospital, offering emergency and in-patient care adjacent to the Las Vegas strip.

In addition, we continue to grow our freestanding emergency department footprint with 19 sites expected to be operational by the end of the year in 2021 and an additional 5 approved and under construction, which are expected to open in 2022.

Construction also continues on Northern Nevada Sierra Hospital, a 170-bed acute care hospital in Reno, Nevada, which is expected to open in March of 2022.

Additionally, during the third quarter of 2021, we continue to be an active acquirer of our own shares based in large part on our view that the underlying patient demand for our services and particularly in our behavioral segment remains fundamentally strong and that our ability to more fully – to meet that demand will incrementally improve as COVID volumes continue to decline.

During the third quarter, we repurchased approximately 2.78 million shares at an aggregate cost of $419 million. Since the inception of the current share repurchase program in 2014, we have repurchased more than 20% of the company’s outstanding shares. We will be pleased to answer your questions at this time..

Thank you. [Operator Instructions] And our first question comes from the line of Kevin Fischbeck with Bank of America. Your line is open. Please go ahead..

Good morning. This is actually Joanna Gajuk filling in for Kevin. So, thanks so much for taking the question here. I guess, first clearly, you just said that the acute care segment results were better than expected offsetting a site which came in lower than your internal expectations.

So how does the quarter I guess stack up versus internal views overall as it’s been and also I am asking in the context of any comment on your full year guidance?.

Yes. So, the adjusted EPS of $2.67 which we reported last night was very much in line with our internal forecast overall, obviously, as noted in my comments, with the acute care segment outperforming and behavioral underperforming and largely offsetting each other.

As far as our full year guidance, our customary practice, which was true this quarter as well is with – absent any comments to the contrary, we are just maintaining and reaffirming our guidance..

Okay. I appreciate that comment. And I guess I have one question here, in terms of the issues you are seeing in the site segment.

So obviously, where you have the – a lot of COVID activity and the virus activity in the community and you have to have hold on that, but then I guess you also mentioned some of the labor shortages there? So, can you talk about any actions you are taking to kind of try to sort of stick that trend there? And also, what happens to these patients, if you cannot take them or they are staying in the hospitals longer? And also, any color you might have on the labor shortage whether there is any difference between different product lines or geographies? Thank you..

Yes. So, you asked multiple questions there. I will try and answer them. But some of them I suspect will be clarified by other people as well. So, as far as the labor shortage in the behavioral segment goes, to the degree that it is caused by the COVID surge itself, as you know, that’s largely out of our control.

On the other hand, we are extremely focused and have a great number of initiatives to increase the efficiency of both our recruitment and retention functions. We are actually hiring employees, nurses as well as other personnel at record levels over the last several months.

The challenge is that the churn or the turnover or the number of employees leaving at the same time for us as well as I believe most other hospitals is also quite large and I think driven in large part by the COVID surge as well, because many nurses, in particular, have the opportunity to work in a more acute setting, in an ICU and ER, etcetera and earn 400% or 500% of their salary if they are willing to travel or to work in a COVID environment.

And so that challenge I think is difficult for us to overcome, although we are certainly trying, but I think that it will naturally abate as COVID volumes decline and those opportunities for nurses to earn those premiums or to dollars will decline.

And I think most nurses will ultimately return to their home both literally and figuratively, geographically as well as back to their original jobs. And many of our nurses have told us that. So, we continue to be extremely focused on those activities. To the degree, I think that you had other questions I will wait and allow others to follow-up.

Thank you..

Great. Thank you..

Thank you. And our next question comes from the line of Josh Raskin with Nephron Research. Your line is open. Please go ahead..

Good morning. This is actually Marco on for Josh. Thanks for taking the questions.

Just a quick one, I was wondering if you had seen any impact from the vaccine mandates on the healthcare workforce in your markets? And then you talked a little bit about the trends in labor and behavioral care, but I was wondering if you could provide a little more detail on the staffing and wages within the acute care segment? Thanks..

Yes. So, we had a number of geographies in the state of California, the state of Oregon, the city of Philadelphia and there are others that have vaccine mandates. I think for the most part, we have found that those vaccine mandates have not had a material impact on the labor situation in part because the mandates are pervasive.

So, it’s not like if an employee wants to continue working and doesn’t want to get vaccinated, they can work in somebody else’s facility rather than ours.

We have not on our own mandated the vaccine in any of our facilities where it is not mandated by a government authority, in part because given the shortage of labor personnel, we are not anxious to give people a reason to go elsewhere although we certainly are encouraging our employees as strongly as we can to become vaccinated.

So, I don’t think it’s been a real significant factor. As far as staffing in the acute side, I mean, I think we are feeling these labor pressures that I alluded to certainly in both business segments.

But I think what we have found and I think this has been true throughout the pandemic is that on the acute side, the labor shortage tends to manifest itself in higher premium hours and premium pay.

So, in other words, we are able to fill most of our vacant, mostly nursing hours, but we fill it with premium pay that could either be over time from our own employees, shift differential, temporary nurses, traveling nurses, etcetera. It’s a very expensive alternative, but for the most part, we are able to fill most of our hours.

And the good news on the acute side is, as I indicated in my prepared remarks, the higher acuity, the higher revenue, the higher volumes has been effectively offsetting those higher labor costs. The challenge on the behavioral side is that we are unable to fill a lot of those vacant hours even with premium dollars.

We are certainly spending some premium dollars. But in some cases, we are just unable to fill the hours. And as a consequence we are having to turn patients away and therefore, we have got lower volumes.

Again, as I indicated in my prepared remarks, 4% to 6% below pre-pandemic levels and not enough revenue to offset the higher labor costs, so different manifestation of, I think, the same sorts of broad dynamics in the labor shortage in the two business segments..

Great. Thank you..

Thank you. And our next question comes from the line of Andrew Mok with UBS. Your line is open. Please go ahead..

Hi, good morning. Thanks for the question. Steve, I was hoping you could provide a bit more color on the revenue and volume trends in the behavioral business by geography.

In geographies where COVID was present, but not surging, can you give us a sense for revenue performance there?.

Yes. I mean, I think what we have found, Andrew, is that the pressure on labor, in particular, but therefore, the pressure on volumes is very much tied to the level of COVID. I mean there is not – I actually have tried to sort of see if there is an absolute formula and I don’t know that there is, but I think there is a very close correlation.

And so we are – we have got behavioral facilities in 37 states all around the country, etcetera. It would be difficult for me to sort of tick off literally geography by geography where we have seen kind of above average levels of COVID, etcetera.

But where we see above average levels of COVID, we tend to see the labor pressures and therefore softer volumes. And in those markets where we don’t, we tend to see demand being manifested strongly.

We are able to satisfy that demand, etcetera, which is why we remain pretty bullish about the idea that as COVID volumes overall recede as they have started to do, I think in the last 4, 5, 6 weeks, we will start to see some easing of those labor pressures, maybe not immediately, because I do think there is a time lag associated with a lot of these commitments of traveling and temporary nurses.

And I think we saw that in Q1 where even as COVID volumes declined as early as mid-January 2021, it took a while for us to really sort of enjoy the benefits of that. So, we still struggled some in Q1, but then Q2 with lower COVID volumes saw upticks in volumes and not nearly as much pressure on the labor side.

And I think we are hoping that’s sort of the same trend we are likely to see now..

Got it. Thanks for the color. And just a quick follow-up, we are now 20 months into the pandemic, have you had an opportunity to formally assess market share shifts in the behavioral segment, whether it’s geographical or by side of care? Thanks..

Yes, so market share data on the behavioral side is not, I think, as robust or precise as it is on the acute side.

But our sense and both objectively to the degree that objective data is available and subjectively to the degree that we are able to talk with our competitors and the nature of the hospital industry is that employees, particularly nurses and patient care employees tend to move in many cases from one facility to another.

So, it’s relatively easy to keep track of what’s happening in the market. And I think what we find is that in markets where we are struggling for labor, it seems like all of our peers are struggling in the same way and vice-versa.

So while we are very focused on the things that we can do to improve and be more efficient from a recruitment and retention perspective, we acknowledge that these labor pressures are sort of more broad and more comprehensive than we have control over.

But certainly, from a wage competitiveness issue, etcetera, we are always following what the market conditions are and literally changing and adjusting if not on a daily basis, on a weekly basis so that we are being as competitive as we can possibly be..

Great. Thanks for all the color..

Thank you. And our next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open. Please go ahead..

Hey, good morning guys.

Quick guidance question for you, for fourth quarter guidance, can you tell us what needs to happen or if the low versus the high end of guidance? And what do you direct toward the Street models to sort of focus towards the mid-range for the fourth quarter? And as you think about 2022 guidance, any color of how much you believe you can grow in 2022 off of your 2019 EBITDA?.

So Pito, I think that the commentary as already indicated in today’s call, the most difficult aspect of projecting future results is understanding the pace of COVID decline. And frankly, if in fact, COVID continues to decline, we suspect that it will, it has been certainly at the moment.

So how quickly the COVID volumes recede and therefore, how quickly the labor pressures ease. And again, with the notion that I think there is some delay of at least a couple of months, etcetera.

So my sense is because we’re probably – it will be difficult to sort of have a full recovery in Q4 from the labor pressures, it would be difficult to sort of have an outperformance in both of our business segments in Q4. As a consequence, I think getting to the high end of our range would certainly be a little more challenging.

But – and I think the fact that we’re reaffirming guidance is indicative of the fact that we feel like getting into the lower to mid-range of our guidance should be achievable as long as we continue to see the COVID trends and the labor trends that we’ve started to see at the very end of September and into October.

As far as 2022 goes, even in what I would describe in quotes is the normal year, we wouldn’t be giving guidance for the following year as part of our third quarter call. And so in an environment that is as uncertain as today is, we’re certainly not going to do that either.

But I will say this, I mean I think as we think about creating our 2022 guidance and think about what the business looks like next year, we tend to use 2019 as a base, 2019 being a pandemic-free year. And even though we don’t expect 2022 to be COVID free, we just think that 2019 is kind of a more meaningful base.

And I think we – as we would in any normal year, we would expect to grow off that base.

And the question sort of becomes, do we expect to experience sort of cumulative 2 or 3 years growth off of that base? Or do we expect to get just 1 years’ worth of growth? And I think that’s ultimately, where we’re going to spend a lot of our focus when we do sit down and do our 2022 forecasting with more precision.

And my gut is somewhere in between. We will expect 2022 to grow more than just a year’s worth over that 2019 base, but certainly not the full sort of 3 years’ worth of I think that there has been some development activity and growth activity that we’ve just lost during the pandemic and won’t be sort of recapture-able.

So I’ve seen some consensus numbers, which I don’t look at in great detail that show us in the sort of the high single digits, 7%, 8%, 9% above 2019. And levels and at the moment can certainly change, but that doesn’t feel unreasonable..

Okay, great. And then just a quick follow-up one here on the labor side for both acute and behavioral.

How much of this pressure do you think is short-term is from COVID or do for long-term pressure? Do you believe it normalizes in 2022? If you had to quantify, we think that inflation would be for nurses in 2022, not your premium labor but just your full-time employees, sort of what type of inflation you see versus a year later? Thanks so much..

Yes. I mean, so – again, I would make the point that I think the underlying wage inflation is not what is mostly driving the wage pressure. It is the premium pay. It’s – the use of over time it’s the payment of temporary nurses and traveling nurses and sign-on bonuses and that sort of thing.

And to your point about the outlook, is this temporary or structural, I think the honest answer is something in between. I do think there is no question that a lot of this demand, heightened demand has been created by the COVID surge itself.

Again, if you can go online, and look for nursing opportunities, not that any of this call is necessarily going to do that. But if you did, you’d see that those opportunities are working in COVID units, in ICUs and ERs, etcetera.

And I think as the virus recedes and just become sort of settled in at what they described as endemic – rather pandemic levels, we just think a lot of those opportunities will naturally sort of fall away. And nurses, again, will sort of retreat back to their original jobs, if you will. So that part, I think, is certainly temporary.

I do think there is some structural changes that have been made. I think there are some nurses that have permanently left the workforce, either to take new jobs, and they have been retrained in different specialties, or they have just been burned out, etcetera. And I think it’s incumbent upon us.

And quite likely, I think, hospitals in general will come up with, as a result, new patient care models that rely less on RNs in particular and other caregivers, LPNs and tech and EMTs, etcetera, as well as more – relies more on technology that allows us to deliver the same level of patient care without necessarily the same number, particularly registered nurses.

So part of I think this issue is structural, and we will address that. And part of it is temporary that I think will naturally get better as the virus numbers recede..

Great, thank you..

Thank you. And our next question comes from the line of Justin Lake with Wolfe Research. Your line is open. Please, go ahead..

Hi, this is Perry on for Justin. Steve, I was wondering if you could give us a little bit more color on your thoughts around 2022. It seems like high single digits isn’t totally unreasonable. I was wondering if you can sort of break down what that growth will look like between behavior and acute? Thanks..

Yes, I don’t think we’re prepared to get into that level of detail on today’s call. And again, I think a lot of it depends. We won’t give our formal 2022 guidance until the end of February in our year-end earnings announcement. So it’s a good 4 months from now.

And in this pandemic, 4 months feels like a lifetime in the sense of how things can change, etcetera.

But I think – how we think about the two business segments, how we think about overall growth is, again, going to very much depend on whether the cadence of virus frequency continues to recede as it has been doing over the last month or so, whether there are any new variants or upticks in the wintertime, etcetera, which some people expect there might be and then how the labor shortage is really affected.

And sort of getting back to the previous question, we will have a better feel for how much of this labor pressure is really temporary and gets better and how much we have to, sort of, address in a more structural way.

So again, other than the comments that I’ve already made, as I said, we wouldn’t be giving precise guidance in a normal, predictable year, and this is far from that. So I don’t think we’re going to get into any more detail than we already have..

Okay. Maybe just one more question. I think earlier this year, you had said during the high that the pandemic contract nursing was about 12% of your total nursing hours. Can you give us an idea of what percentage that was this quarter? Thanks..

Yes. So again, those numbers vary by business segment pretty dramatically. I would say on the acute side, the percentage of premium hours in this surge was probably in the high single digits, 8%, 9%, getting close to 10%.

Not quite as high as it was back in the January ‘21 period because I think the COVID numbers themselves were not as high, but still pretty high.

On the behavioral side, I think our premium hours are only around about 2% of our overall hours and harkening back to comments I’ve already made, it’s because we can’t get enough of those premium hours to satisfy the need that we have. We wish we could, quite frankly.

And that’s why it’s been more of a challenge on the behavioral side because filling those hours is more difficult. Keep in mind that employees in the behavioral setting, particularly nurses, are generally making less than they would otherwise make in an acute setting. I think that has always been true.

And when there is been a small differential, I think there is always been sufficient reasons why many nurses prefer to work in a behavioral setting. It’s very different, and every nurse has sort of a different view of what they are looking for in a patient care experience.

When a nurse has the opportunity to make 400% or 500% of her base salary, all of a sudden, I think a lot of those other factors become less important, and the financial dynamics just overwhelm everything else. And I think that’s what we’re seeing in this current surge.

And I think the other thing that’s worth noting is the current surge related to the Delta variant is the first surge we’ve seen during the pandemic in which many of the nurses are vaccinated.

And so pursuing these very lucrative financial opportunities, I think nurse’s view is a less risky proposition than they might have a year ago or 18 months ago before they were vaccinated..

Great, thanks..

Thank you. And our next question comes from the line of Frank Morgan with RBC Capital Markets. Your line is open. Please, go ahead..

Good morning. Just on the topic of the COVID volumes as a percentage of total admissions in the acute side of the business, could you talk a little bit about how that affected the rest of your business in terms of in and outpatient surgeries or overall payer mix, ED volumes, those kind of things? That’s my first question.

And then the second one is just with regard to all these issues since the end of the quarter, have you seen any incremental changes in anything like – or COVID, are you seeing COVID volumes going down? Are you starting to see the use of temporary labor start to change? And are you seeing any kind of changes in the overall mix of your patients from a payer standpoint? Thanks..

Sure, Frank. So the percentage of our acute care admissions that had a COVID diagnosis during the third quarter was around 14%. Keep in mind that because the length of stay is probably, on average, about twice for a COVID patient than a non-COVID patient.

That’s something close to 30% of our patient days were represented by patients with a COVID diagnosis, so pretty significant impact. But as I indicated in my earlier remarks, we did have that same crowding up dynamic for most of the quarter.

For most of the quarter, ER traffic, elective and scheduled procedures were really have recovered and rebounded to pre-pandemic levels, maybe a little above, maybe a little below. September, we saw some surgical and elective deflections and postponements.

It feels like – and I don’t have all the data, but it feels like we’ve already recaptured a lot of that in October. So it doesn’t feel like there is a real, sort of, permanent loss there. And again, in the sense, as I’ve now said a few times, is COVID volumes have clearly been declining for the last 4, 5, 6 weeks.

We’re seeing some early indications of that leading to some also easing of the labor pressures, although again, I’ll repeat what I’ve also said again a number of times. I think there is a time lag there.

And because a lot of these commitments – both that we make to nurses, traveling nurses and temporary nurses and that nurses make to other facilities have a sort of time lapse associated with them. We don’t feel the impact of those declining COVID volumes on the labor pressures immediately.

But we’ve certainly seen the first early signs of it, and I think they’ll certainly continue during the quarter if the COVID volumes continue to decline..

And anything you would call out on surgery inpatient versus outpatient? Did you see any more impact on one versus the other? And I will hop. Thank you..

Yes. I mean – so when we talk about postponements and deferrals, they have tended to be on inpatient surgeries. Because the concern has always been, do we have enough beds if there is kind of an unexpected surge in COVID patients. I’m sure that anecdotally, we canceled or postponed an outpatient surgery here or there.

But for the most part, to the degree that there were postponements and deferrals, and I don’t think there was a material amount of them in Q3, but to the degree there were, I think they were mostly in the inpatient area..

Thank you..

Thank you. And our next question comes from the line of Matthew Bosch with BMO Capital Markets. Your line is open. Please, go ahead..

Good morning. Thanks for taking my question. You have Ben Rossi filling in for Matt here. Regarding payer mix, would you talk a little bit about utilization by payer across commercial, Medicare and Medicaid and whether you’re seeing differences in acuity or utilization between them? Thanks..

Yes. I mean the interesting thing, I think, is that payer mix has remained relatively stable during the pandemic. Obviously, there is some government assistance there.

So first the program pays hospitals for uncompensated patients or patients who have COVID that are uninsured and that’s been helpful to keep down uncompensated volumes and bad debt expense.

We’ve seen, I think, as most hospitals have reported, a shift in COVID patients in this most recent surge to a bit of a younger cohort, because I think such a large proportion of the Medicare age population has been vaccinated and because so many of the COVID patients now are unvaccinated, they tend to be younger and more patients in their 40s and 50s.

They tend to be a little bit more commercial than Medicare. But again, honestly, I don’t think the payer mix and – I mean the stability of the payer mix has been helpful. But the slight improvement in the payer mix is, in my mind, not what’s driving the strong acute care results.

It’s the combination of the acuity, the reimbursement, etcetera, associated with the COVID patients, combined with the relative strength and recovery in the non-COVID volumes, I think has much more of an impact than actually a slightly improved payer mix..

Got it. Thank you so much..

Thank you. And our next question comes from the line of A.J. Rice with Credit Suisse. Your line is open. Please, go ahead..

Hi, everybody. Two quick questions here, I guess. First of all, the debt-to-EBITDA is down below 2x, which is, obviously, stands out in this sector to see someone dropping that low in leverage. Can you comment – I know you guys were active on the share repurchase in the quarter.

As you’re articulating that you think this is an unusual situation that converged to depressed results a little bit, especially on the behavioral side, and you see that turning around, any thought on doing anything even more aggressive in terms of share repurchase to take advantage of what sounds like, at least in your mind, hopefully a temporary pullback in the shares?.

Yes. So I think it’s worth noting, A.J., that our original guidance for the year and then even our revised guidance, we presume we’d be repurchasing about $750 million worth of our stock pretty much ratably over Q2, Q3 and Q4.

Through the end of Q3, we’ve already repurchased over $750 million of stock for the reasons that we articulated in our opening comments. I suspect we will continue to be an active acquirer, particularly if there is any sort of weakness in any further weakness in the stock, etcetera.

We remain pretty bullish on the prospects of both of the business segments and are very comfortable investing in our own shares, and I think we will continue to do so unless the dynamics change in some measurable way..

Okay.

There have been some discussion – obviously, you have the firepower to do it about the potential coming out of the pandemic to both on the acute and even potentially on the behavioral side, there might be increased deal opportunities as people look to maybe align with someone with deeper pockets on the acute side and then obviously not only acquisition, but JVs with acute care players on the behavioral side.

Can you just comment on – have you seen any pickup in discussions or dialogue around any of that? And any reason to think you will see an accelerated pace coming out of the pandemic here?.

Yes. And so on the acute side, I actually think in retrospect that the significant amount of infusion of government subsidies, reimbursement, mainly in the form of the CARES Act funds, has helped support not-for-profit hospitals that might have otherwise felt more financial duress during the pandemic.

So, I don’t think you are seeing a real robust deal flow of not-for-profit hospitals looking for an exit strategy or partner, etcetera. But there are deals that we are always looking at.

I mean I highlighted in, again, my opening comments, we have done a couple of smaller deals like buying a micro hospital and specialty hospital in Las Vegas, continuing to invest in our freestanding emergency room development. And I would add that those freestanding emergency rooms have really performed very well.

I think they have performed very well from the outset, but I think have done particularly well during the pandemic. There seems to be the willingness of patients to potentially get their care at a freestanding ED and feel somewhat safe or less threatened than they do in a large hospital emergency room. So, all of that’s good stuff.

I think on joint venture initiative side of behavioral, we didn’t talk about it this quarter, but I think we mentioned last quarter that we have opened joint venture hospitals with acute care partners in Iowa, in Missouri this year. We are scheduled to open in the next few months in Michigan, in Wisconsin, our first behavioral hospital in Wisconsin.

So, that deal flow of these joint venture opportunities continues. And I think – we think, is a source of significant growth for us. So, we will continue to pursue those. And then there are other deals out there in behavioral.

I think we view it as an indication of the fundamental strength of the behavioral business that these deals attract a lot of interest, both from strategic players as well as financial sponsors. So, there can be pretty frothy auction processes. But we look at a lot of those as well and we will continue to do that..

Alright. Thanks..

Thank you. And our next question comes from the line of Jamie Perse with Goldman Sachs. Your line is open. Please go ahead..

Hey, good morning Steve and Marc. I wanted to follow-up on some of the comments on the acute care side. It sounds like you said in a number of categories you are at or near pre-pandemic levels, and there wasn’t a big crowding out from COVID this quarter. So, I wanted to dig into that a little bit.

It does seem like adjusted admissions took a slight step back versus 2019 compared to the second quarter.

So, where are you seeing some of these at or near pre-pandemic levels by setting or by category versus where are things still lagging a bit?.

Yes. So, I do think Jamie, that the higher the COVID levels, the more challenging we are in sort of backfilling that non-COVID business.

And to your point, I think we have less issues with that in the second quarter, which was probably our lowest COVID quarter certainly for several quarters than we did in the third quarter, which I think is probably our highest COVID quarter.

And so that dynamic and I mentioned it before that even though we mostly ran at pre-pandemic levels, we did have some deferrals and postponement in – particularly in the September timeframe and particularly on the inpatient side.

I think our point of view is that as COVID volumes decline, the demand for non-COVID activities will be able to backfill the sort of the loss of COVID with those non-COVID activities as long as the labor situation allows us to do that.

I think again, in both of our business segments, I think we are more focused on our ability to meet the demand than whether the demand is really going to be there. We have every indication that demand for both business segments remain quite strong..

Okay. Thanks for that. And just switching over to the behavioral side, you talked about the capping of bed capacity and the clinical and other labor as two components driving the – the pressure in the quarter. Just wondering if you can tease apart those two, I mean which was more impactful in the quarter.

And more importantly, looking forward into 4Q is it fair to assume the first one, the bed capacity improves a little bit and the labor stays kind of where you are at? Just would love any thoughts on the progression of those two factors into the fourth quarter..

Sure. Well. Jamie, first, I would make a point that to a degree, although we sort of talk about these factors as being discrete and separate, they often sort of interplay on each other. So, when we have a COVID surge in a facility, we are likely to have more COVID patients.

We are likely to have more of our employees who are either out with the virus or out because they have been exposed to the virus. And so – and whenever there is a COVID surge, we are going to face incremental challenges.

And sometimes, we will say that we have capped the beds because we have got COVID patients and sometimes we say it’s because we can’t find enough staff. Often, it is both in a combined way.

But again, as I think we have said multiple times, I think what we find and have found every time in the second quarter, I think it was reflective of this, that as the COVID volumes decline, both of those pressures tend to ease.

But if I have to say one was more prevalent than the other, I would say that the labor shortage has been a more pervasive, impactful issue than the actual, sort of, isolation of the patient’s issue..

Alright. Thank you..

Thank you. And our next question comes from the line of Whit Mayo with SVB Leerink. Your line is open. Please go ahead..

Hi. Thanks. So, you guys rarely talk about your health plan, which I think is in Reno, maybe I am incorrect or your ACO. Are there any trends or developments, any changes in network coverage that we should be aware of? And I believe the performance of the MSSP ACO has been pretty strong in prior year.

So, just wondering if this is something that you guys think differently about strategically, maybe more broadly across the portfolio?.

Yes. Thanks Whit. It’s a good question. I mean I think the reason that we don’t specifically address our ACO activity, or the activity of our insurance plan, is because I think we view it as integrated very closely with the overall strategies of our hospitals in their markets.

So, we don’t operate the insurance plan anywhere where we don’t have hospitals. We have some sort of accountable care organization in every acute care market in which we operate, in some cases, a majority equity ownership as in Las Vegas, in other cases, some equity ownership.

But we view sort of an ACO strategy, sometimes the presence of a Medicare Advantage insurance product as integral to those markets. And I think they have been very helpful.

And again, we don’t really talk about our insurance company sort of as a separate entity because at the end of the day, it largely exists as sort of an adjacency or a corollary to the strength of our kind of fully integrated delivery network in a market and we tend to talk about the markets themselves rather than the individual components, same thing really with our freestanding EDs.

We mentioned them today because I think it’s a worthwhile. But for the most part, we view them again, as an integral component of a broader integrated network..

Okay. No, that’s helpful. And Steve, I think you recorded a few million dollars of the Kentucky Medicaid program in the quarter. Is that a prior period number? And then just maybe refresh us on expectations for CMS approval.

And then maybe any comments around Texas DSH?.

Yes. So, just to remind everyone, we recorded in the second quarter, $55 million of special Kentucky Medicaid reimbursement that was approved during that quarter.

As the state did it’s sort of final calculations, etcetera, we have realized that there was an additional $7 million to be recorded as part of that program, which went from July of 2020 to June of 2021. So, we have recorded that additional $7 million in Q3 that related to the previous state fiscal year program.

We are expecting the state has applied for CMS approval for a similar program, which will cover the period from July of ‘21 to June of ‘22. We are expecting that program to be approved by CMS. We are expecting the benefit for our Kentucky hospitals to be something comparable to what we have recorded in the previous fiscal year.

But we will wait to record that until the final CMS approval is granted. We are hoping and maybe expecting that, that will be before the end of the calendar year. But no guarantee of that, but we will record it when we get it.

As far as district goes, I think that Texas DSH program will either – it’s either going to continue for a period of time or will be replaced by a comparable program. And therefore, I think the amount of DSH dollars should not really change significantly going forward..

Okay. Thanks..

Thank you. And our next question comes from the line of Ralph Giacobbe with Citi. Your line is open. Please go ahead..

Great. Thanks. Good morning. Excluding COVID Steve, do you think underlying acuity is still up? And I only ask because when I look at the absolute dollar of revenue per adjusted admission, it was up, but obviously, there is a lot more COVID this quarter.

So, just interested in, I guess your thoughts on sort of core acuity and how you think about the pricing stack going into next year?.

Yes. I think it’s a reasonable point, Ralph. I mean I think what we have seen throughout the pandemic is that the lowest acuity procedure is that we would tend to have as part of our emergency room traffic, etcetera, with those that fell away early on and to a degree, I think remain those that have not returned.

So, while I think the increase in acuity is driven mostly by the COVID patients themselves, I do think that when you look at the non-COVID cohort of patients, that acuity has also increased slightly.

And I am not sure it’s because we are seeing more acute procedures as much as we are seeing, sort of the absence of some of that really lower acuity stuff. And honestly, I am not sure we know exactly where that’s gone, but it seems to have fallen away from the hospital emergency rooms..

Yes. Okay, fair enough. And then just maybe can you talk about the pricing backdrop with payers? Maybe remind us of the average rate increases you have been getting, I guess on the acute care side? And whether you would think you can sort of price up more going forward, given sort of just the labor and inflation dynamics.

And I guess both for acute and even behavioral, we don’t talk about it a lot on the behavioral side, but maybe if there is any leverage there, given the current circumstances? Thanks..

Yes. I mean I think that our contractual managed care or insurance contractual activity has sort of continued at around the same levels. I would say our average price increases on the acute care side are in that sort of 4% to 6% range annually, on the behavioral side, 2% to 4%.

And we have – I think specifically talked in previous quarters about having had some success on the behavioral side in getting some managed Medicaid contractual increases, in some cases, on contracts where we have not seen increases in multiple years, we continue to sort of work at that.

But I don’t envision that the managed care pricing dynamic has really changed a great deal during the pandemic or is likely to change significantly coming out of the pandemic..

Got it. Okay. Thank you..

Thank you. And our next question comes from the line of Sarah James with Barclays. Your line is open. Please go ahead..

Thank you. I wanted to go back to paying premium in-site leading to record hiring. We sell out in our research tracking your shifts and bonus strategy. But are you saying that because of churn, the net headcount of site nurses isn’t higher.

So, we wouldn’t see higher patients being served or bed openings in 4Q as a result of the strong 3Q hiring? And then bigger picture-wise, when you think about recruiting new grads into site as opposed to acute, do you think the hourly wage gap between those two segments has to shrink?.

Yes. I mean again, I am going to make the point that I have made before. I mean I think that the COVID crisis has created an opportunity for nurses, both acute and behavioral nurses, to earn wage rates that are just beyond anything that has been previously comparable.

Again, it sounds like you have done a lot of research, you know you are going to have to do a ton. But if you go online and look for nursing opportunities, you can see that there are nursing opportunities in which nurses can easily earn $10,000 a week working in a COVID environment.

So, these are nurses who maybe are earning $70,000 or $80,000 a year, maybe $80,000 or $90,000 a year. But now they are earning at a rate of $500,000 a year. So, when you have those sort of opportunities, there is no way we can close that gap. That gap will be closed by the elimination of those opportunities. So, that I think is the issue.

And again, I think the comment that we were making before, I was making before, is while we have hired a record number of – and not just nurses, by the way, this includes therapists and mental health tech, etcetera, we are seeing quite a bit of churn.

And again, as you know, I mean I think the American labor force in general is seeing quite a bit of churn. Obviously, I think it’s more exacerbated in healthcare in hospitals. But it is a bit of a dynamic that we are seeing across the labor landscape.

So, we continue, in every market, we have always spent time making sure that our wages are competitive and performing compensation studies, etcetera. We are more attuned to that now and are doing it more frequently than we have ever had before. And we certainly acknowledge that.

Particularly, we have got to be competitive with our peers, with other behavioral hospitals, etcetera. But behavioral nurse is always going to be able to make more money in an ICU setting in an ER setting than in a behavioral setting. Again, I have talked to many, many nurses, both acute and behavioral, over the years.

And I think for the most part, they work where they work because they enjoy the patient care dynamics in the setting in which they work. And again, when there is a 10% or 20% pay differential, I think nurses can convince themselves that they want to work where they are happier.

When there is a 400% or 500% differential that becomes a tougher argument to make..

Okay. And then last question, can you speak to how we should think about cadence for ‘22, because some of your acute peers have been hinting at a back-end loading of ‘22 with some of the labor pressure lightening or COVID pressure lightening in the back half of the year.

So, how should we think about UHS seasonality first half versus second half versus a normal year?.

And again, Sarah, my apologies, but I think at the level of detail and precision that we are not prepared to talk about today. Not because we don’t want to talk about it and we know how we are thinking about it, but because we don’t know how to think about it just yet.

Again, I think a lot of this is dependent on how the next few months unfold in terms of the COVID volumes and labor shortages. I think it’s way too early to talk about cadence for 2022, at least from our perspective. To the degree our peers are comfortable doing that, more power too..

Okay. Thank you very much..

Operator, are there any more questions?.

I am showing no further questions at this time..

Okay. We would like to thank everybody for their time and look forward to speaking to everybody on our year-end call. Thank you..

This concludes today’s conference call. Thank you for participating and you may now disconnect. Everyone have a great day..