Good day, and thank you for standing by. Welcome to the Universal Health Services, Inc. First Quarter 2022 Earnings Conference Call. [Operator Instructions].

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

Thank you, Mary. Good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the first quarter ended March 31, 2022..

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, 2021..

We'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $2.02 for the first quarter of 2022.

After adjusting for the impact of the item reflected on the Supplemental Schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.15 for the quarter ended March 31, 2022..

During the first quarter of 2022, our operations continued to be impacted by the COVID-19 pandemic as well as pressures on staffing and wage rates. Specifically a surge in patients with the Omicron variant of the virus, which began in December of 2021, tended to peak in most of our geographies in January of 2022.

In our acute segment, we would note, in general, the Omicron patients were less acutely ill than the COVID patients treated in previous surges and thus display lower acuity..

Meanwhile, the amount of contract nursing hours used, and even more importantly, the rate we had to pay for those hours, increased significantly in the first quarter, both on a sequential basis as well as a year-to-year -- in a year-to-year comparison.

Although in our behavioral segment contract nursing cost did not increase quite as dramatically, our inability to fit all of our labor -- to fill all of our labor vacancies had a notable limiting impact on our patient volumes and related revenues. .

We do note that our results were benefited in the first quarter from approximately $12 million of revenues net of related provider taxes from special Texas Medicaid reimbursements, which related to the last 4 months of 2021. Recognition of those revenues were deferred until formal government approval was obtained..

Our first quarter also included approximately $15 million of startup losses incurred by recently opened de novo acute and behavioral health facilities and $6 million of losses related to temporarily closed beds at 2 behavioral health facilities, which were impacted by natural disasters. Those beds have since been reopened. .

As disclosed in our last night's press release, our operating results for the first quarter of 2022 were unfavorably impacted by labor costs that were higher than anticipated and patient volumes at our behavioral health facilities that were lower than anticipated due to the continued uncertainties related to the COVID-19 pandemic as well as cost escalations related to the nationwide shortage of nurses and other clinical staff.

Although we're not changing our previously released 2022 operating results forecast at this time, we may make reductions to our forecast at a future date if the unfavorable operating trends experienced during the first quarter of 2022 do not improve. .

Our cash generated from operating activities was $445 million during the first quarter of 2022 as compared to $72 million during the same period in 2021. We note that first quarter 2021 cash generation reflected the repayment of the Medicare accelerated payments.

We spent $200 million of capital expenditures during the first quarter of 2022, our accounts receivable days outstanding decreased to 48 days during the first quarter of 2022 as compared to 50 days in the first quarter of 2021..

Due in large part to the continued repurchasing of our shares at March 31, 2022, our ratio of debt to total capitalization increased to 42.3% as compared to 35.7% at March 31, 2021. .

Our first quarter 2022 operating results were behind our internal forecasts, and our internal forecasts were below the consensus estimates. The primary driver of the shortfall was the fact that the labor scarcity has not moderated as quickly as we were expecting.

We believe, in part, this is because at the height of the Omicron surge, providers were entering into longer-term commitments for temporary or traveling nurses, not necessarily predicting that COVID volumes would decline as rapidly as they ultimately did. .

We do believe that the demand for this premium-priced labor will continue to gradually decline. In the meantime, we continue to invest heavily in recruitment and retention initiatives and have substantially increased the pace of our hiring.

Where appropriate, we are also developing alternative patient care models that allow us to use a wider variety of available caregivers to render the most efficient and highest quality of care that we can. .

While the pace of the recovery from the current labor scarcity is still uncertain, we're comfortable that it will occur over time and combined with our confidence in the long-term baseline demand in both of our business segments, our bullish view of the underlying strength of our core businesses remains intact.

Reflective of that sentiment, we remained an active acquirer of our own shares in the first quarter, repurchasing $350 million of those shares. .

At the same time, we continue to reinvest organically opening the new acute care hospital in the Reno market and behavioral de novo and/or joint venture hospitals in Arizona, Michigan and Wisconsin. At this time, we're pleased to answer your questions. .

[Operator Instructions] Our first question comes from the line of Josh Raskin from Nephron Research. .

This is actually Marco on for Josh. Just to start with the behavioral side, it looks like volumes came in below expectations due to the continued capacity constraints. So I wanted to get your view what is the ultimate solution to attracting more staff to meet the strong underlying demand you're speaking about.

I mean it doesn't sound like raising base wages is enough at this point.

Or do you think this is just more of a structural impediment in behavioral care for the foreseeable future?.

Yes. So we've talked about this at some length before. I think the solution and -- as I think our prepared remarks indicated, we don't think this problem gets solved overnight, but we do believe it will continue to gradually improve.

Number one, I think the market dynamics -- and we've been through nursing shortages before in our tenure, although this one is certainly probably more severe than anything we previously experienced. .

But the system will generate more nurses and other clinical personnel because wages are going up and will become a more attractive profession. And that supply of newer nurses will be helpful.

At the same time, and Marc alluded to this in his remarks, we've really upped our investment in recruitment and hiring initiatives, the number of people involved in those processes making sure that our wage structures in every market are as competitive as they can be.

We're reviewing competitive wage rates in most markets, multiple times a year, whereas historically that's a process that took place maybe once every year, once every other year. We're changing patient care models, even Marc referred to that as well..

And again, we're seeing the beginnings of improvement in those areas. So you specifically were asking about behavioral. I think we've been on the behavioral side of things, hiring nurses and other clinicians at record rates now for -- record historical rates for us for well over 6 or 8 months.

The real challenge is on the back end, where the turnover rates continue to go up and that's the challenge that I think providers around the country are facing. .

But I think the encouraging thing for us is at least in the last few periods, our net hires are actually positive. Now again, I don't mean to imply that the problem has been solved, but I think we think it will continue to get better.

And as we continue to have net positive hires, it should allow us to treat more patients and that patient day number, which was slightly negative in Q1 compared to last year, should turn positive in the near future, that would be the whole and continue to improve from there because, again, as I think Marc indicated in his prepared comments, we believe the underlying demand is there.

We believe that for a long time, not really -- that quarterly has not changed at all. .

We have a question from Matt Borsch from BMO Capital Markets. .

You have Ben Rossi here filling in for Matt. Just regarding the recent release of the Medicare IPPS proposal contract for 2023, I can appreciate that there are still some moving pieces, but I was curious if you could provide us with the projection for your rates from that proposal.

And then more broadly, how you feel about CMS factoring this inflationary pressure? And whether you think that CMS will start to factor that in more accurately as we look out to 2024 and beyond?.

Yes. So as you suggest, there are a number of moving parts in the release When we do the calculation for the best of our ability, we think that the net blended increase for UHS hospitals will be about 2.5%.

That is pretty much the number that we included in our guidance for the year, beginning in October, which is the beginning of the federal fiscal year..

I think, along with the rest of the hospital industry, we were disappointed that Medicare and CMS did not seem to acknowledge the inflationary pressures and particularly the labor inflation the hospitals across the country are experiencing.

I suspect that in this period between the preliminary and final rates, Medicare will come under significant pressure from lobbying groups across the country, representing hospitals of all stripes and sizes..

Now to your question, what impact will that have on CMS this year or next year? It's hard to know. But we certainly had feedback both I think formally and informally from peers, both for-profit and not-for-profit peers, both in our markets and in other markets across the country that hospitals are struggling, again, particularly on the labor side.

And certainly, they will be making Medicare and CMS aware of that as acutely as they can over the course of the next week to few weeks and months. .

Our next question comes from the line of Andrew Mok from UBS. .

Steve, can you provide more detail for how labor expenses trended in the quarter relative to internal expectations in each of the segments? And exiting the quarter and into April, what level of improvement have you seen in contract labor rates? What are the expectations there for the balance of the year?.

Yes. So the cadence of the year so far, Andrew, obviously, January still had very high Omicron volumes in many of our geographies. In some of those geographies, the Omicron volumes really didn't recede until the end of January, in some cases, even early February.

And so labor was definitely an overarching issue on the first, I'll call it, 4 to 6 weeks of the quarter. .

I think what was disappointing in terms of our expectations was that the labor scarcity, again, I think we said this in our prepared remarks, did not recede or ease as much as we thought in the final 6 to 8 weeks of the quarter as COVID volumes receded relatively rapidly.

And again, I think as Marc alluded to in his comments, we think some of that was that hospitals were making longer-term commitments. .

I know a number of our commitments to temporary or traveling nurses instead of being for 1 week or 4 weeks where in many cases, for 8 or even 13 weeks, and we've certainly heard of other hospitals making commitments for even longer than that.

And so to some degree, I think we found labor issues to be kind of stickier and more difficult to navigate in the back half of the quarter than we were expecting. .

I also think it's complicated when you have a tight labor situation in March and April, going through Spring break and the Easter and Passover holidays and people, I think, resuming their normal kind of vacation plans and this and that for the first time in a few years, it made, again, sort of backfilling and getting back to sort of a normal labor supply and demand dynamic a little more challenging..

I think in both of our business segments, the hope is that in May, as the calendar sort of settles down, as we have more success in hiring more success in sort of trimming that turnover rate, become a little bit more aggressive and not entering into nearly as many longer-term commitments on the temporary and traveling side of things, rejecting the highest rates that those temporary and traveling companies are demanding, we'll see some relief, some measurable relief we will be getting in the May time.

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Got it.

Can you help quantify the moderation in contract related rates that you've seen in the market thus far?.

Yes. I mean, again, the first quarter was a quarter of escalating, I'll say dollars especially. On the acute side, we talked about our premium pay in Q4 as being $120 million, that increased in Q1 to $150 million and compares to Q1 of '21 when it was $70 million. So the overall dollars premium pay certainly increased in Q1.

We are seeing a reduction in rates at the very end of Q1 and into April, and we presume that will continue into Q2. But it's difficult to say the exact pace at which they're decelerating, but certainly, we're seeing decelerating rates. .

Our next question comes from the line of Justin Lake from Wolfe Research. .

I wanted to start off following up on that question around labor. So Steve, you talked about $120 million going to $150 million.

How do you expect that within the guidance to kind of play out through the year? Are you assuming a pretty material decline there as we go through the year in terms of that temp labor?.

Yes. So Justin, I think our commentary has been pretty consistent really beginning with our third quarter call in October of last year into our year-end call in February. And that commentary has sort of suggested that the labor recovery was happening slower than we expected. .

First of all, it was clearly set back by the Omicron surge in December of '21 and then January of '22. That definitely set things back from where our expectations were in the fall of last year.

But even, as I said, even from our commentary that we made just 2 months ago when we issued our guidance and did our year-end announcement, I think the recovery is clearly slower than we expected. And obviously, I think that's been true at least for 2 of our acute care peers, who I think have made similar comments in the last week or so. .

Our original guidance always presume that it was certainly a different cadence than has been the historically normative cadence for our company that earnings would improve as the year went on. And then the fundamental driver of that sort of cadence in that trajectory is the idea that labor pressures would ease as the year went on.

I think it's worth noting in terms of the labor pressures being greater than we expected in Q1, we certainly acknowledge that our earnings missed our own internal forecast. Again, Marc suggested, we were off of our forecast. We were about 5% or 6% off of our forecast in Q1, we know that we were probably 11% or 12% off of consensus. .

But I think we have a sense that we may be able to recover that as the year goes on. Now again, as our press release indicated, if the labor recovery does not occur as fast as we think that it will, we may have to revise that guidance later in the year, but we're at the moment still hopeful that, that improving cadence will occur as the year goes on.

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Okay. But is there a number you can give us, Steve, in terms of like -- it's really helpful, you're saying $120 million and $150 million in the last 2 quarters.

Is there a number that you can anchor us to in terms of where you think this is going to go through the year?.

Yes. I think what I would say is, look, I don't know that any of us know where it's going to go. I think what our guidance presumed is that by the end of the year, we would add a minimum return to kind of last year's pace. And like I said, in the fourth quarter of last year, the premium pay was sort of that $70 million range, et cetera. .

And it's really important to understand that, that incremental, let's call it, $50 million of premium pay is essentially it hit -- direct hit to the bottom line because we're not getting any more nurses for that. We're getting the same amount of nurses for the most part and just paying premium rates for them..

So as those premium rates go down -- I mean, as the premium rates have risen, they've clearly put a real strain on our earnings and on our peers' earnings. But as they come down, you get that same benefit. You'll be replacing a temporary nurse with an employee nurse who's making maybe 1/3 of what that temporary nurse was making. .

Okay. So to just put some math around this to finish it up, you're talking about $150 million going down to $70 million by the end of the year. But you haven't seen any -- actually, it sounds like you've seen a little bit of a moderation in the payment terms, but not much of a moderation in the hours, right, even through April.

Is there anything you can point us to that's saying you've got visibility here? And if not, why not just take down the guidance and assume some more conservative path through the year?.

Yes. I mean so honestly, Justin, I have to confess being a little bit frustrated, 2 months ago, we issued guidance that I think was more conservative generally than our peers.

And at least from a number of quarters, I think we were wrongly criticized for that, that we explain but we express too much caution about how quickly this labor situation would resolve itself, et cetera. .

Now 2 months later, some people and you, in the moment, are saying, "Okay, now you're being too aggressive." All we're suggesting, I think, and again, I don't mean to imply that we're saying that the labor situation has turned or where we have 100% certainty that it will or when it will.

I think we're just suggesting that more time is not an unreasonable sort of request for people to have 2 months after that guidance was initially issued. I pointed to a number of metrics. I said our net hires, in the behavioral segment, it turned positive in the last few periods.

I suggested that we're seeing lowering rates, et cetera, again, not needing to imply that there's a complete turnaround here.

But I do think there's enough of these sort of early indicators that things are improving to a degree that makes us think that, that 6% shortfall from our own internal forecast that we experienced in Q1 can be maybe partially or completely recovered as the year progresses. .

Our next question comes from the line of Stephen Baxter from Wells Fargo. .

I appreciate the commentary on the impact of behavioral volumes from labor.

I was hoping you could help us think about a little bit operationally about what happened in the acute care business in the quarter? So when we look at it, I guess, against baseline levels, it does seem like the adjusted admissions took a step back versus where you've been running over the past 3 quarters.

I guess those quarters also had some COVID impact to them. .

So just trying to understand, was there an impact on the volume side? And I guess if there was an impact on the volume side, it does seem like you're using a greater quantity of contract labor against that? What does that mean for how you maybe your retention rates are performing?.

Yes. I think it's worth noting that the COVID volumes, again, and this is really acute care commentary, were so high in the beginning of the year that -- even though they declined fairly rapidly, our acute care segment finished the quarter with about 14% of their admissions for the quarter being COVID diagnoses..

And that's about as high as we've run during the 2-plus years of the pandemic. So I know people tend to have sort of recency bias and they think of COVID being behind us, et cetera, but COVID played a significant part in Q1.

And on the acute side, that's challenging because it's challenging on the labor side, as we've discussed, it's challenging on our ability to have effective throughput with non-COVID cases and procedural cases, et cetera. .

I think by the end of the quarter, most of the operational sort of throughput in terms of patients, et cetera, have returned in large part to normal.

But again, those labor pressures persisted late into the quarter, maybe in some cases, even into April, because I think of this phenomenon -- and I make the point that it's not only our commitment that we're locked into longer-term commitments for nurses but to the extent that the nurse is who we think will ultimately return to our facilities are locked into longer-term commitments at other facilities or other geographies that has to play out before those nurses will ultimately return to us.

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And while we certainly acknowledge that some of those nurses probably don't return anytime soon and are more committed to sort of that traveling or temporary or lifestyle, we do believe, and I think both our internal and external data suggests, that more and more of those nurses are not going to pursue that lifestyle indefinitely. .

Our next question comes from the line of Jason Cassorla from Citi. .

I just wanted to go to CapEx quickly.

Just in context of this continued kind of pressured labor environment, does it change how you're thinking about the pacing or timing for future capital deployment priorities, as it relates specifically to service line build-out or investment in equipment or otherwise at this juncture?.

So what I would say is, we certainly have to take that into account on an episodic basis. Each project we look at and try to make a determination on market factors. So for capital equipment, things like that, probably no change.

But for the larger projects, in general, we look at them specifically and taking into account each factor or all the factors in a particular market that might affect that project. And in some cases, we'll choose to hold at least for a period of time until we feel better about what's happening in a particular market. .

Our next question comes from the line of Pito Chickering from Deutsche Bank. .

A couple of ones here. With what you've seen in the first quarter, it looks like labor pressure is continuing in April before hopefully turning in May.

And because you said that The Street first quarter estimates were 5% to 6% higher than your own internal estimates, any chance you can give us a range for how we should think about 2Q sequentially or percent of the annual EBITDA, just so we get this number right?.

Yes. So I'm not exactly sure what you're asking. I mean we've discussed on many occasions, Pito, we don't give quarterly guidance and that's an intentional decision on our part. As I said, we were 6% short of our own internal forecast in Q1. .

And I think part of the reason that we particularly enumerated some of those startup losses and nonrecurring losses in our prepared remarks was we were potentially suggesting a reason why I think we budgeted for those things probably more accurately than The Street was able to. I don't know that for a fact.

I don't know that that's the main difference between our internal forecast in Q1 versus the consensus, but I think it's a possible explanation. .

I think, again, our perspective is that EBITDA basically gradually increases as the year goes on, which again is different than what would be our normal historical cadence.

But again, getting back to this idea, in order to make up that 6% shortfall in Q1, we have to be a couple of percentage points higher in each of the next quarters on average to still get to the midpoint of our guidance. Again, I don't think we think that's a certainty by any stretch. It's a difficult environment.

But I think we certainly don't feel at this point that we would say with precision that we can't get there. .

Okay. Great. And then can you provide some of our gross hires as to net hires in the fourth quarter versus 1 quarter -- or first quarter.

How is it tracking in April? And basically, any color on turnover? Is it consistent? Is it getting better or turning worse? And then the third tag on there is as I think about turnover, it means that your wages are uncompetitive and that you may need to increase those rates?.

Yes. So I mean, as I said in an earlier comment, this question of whether wages are competitive is certainly far from a static question and literally we are doing competitive market reviews in all of our markets. In some cases, as frequently as quarterly, I mean, that's how quickly the supply and demand dynamics are changing.

But again, the point that I would make is the labor or the wage pressure that we're feeling, I'll speak to the acute business, in particular, is not from the increases that we're giving from an underlying wage perspective, but it's from that premium pay. .

And as that premium pay declines, even if we're increasing our wages -- our base wages by 100 basis points or 150 basis points, the economics are such that we benefit greatly if -- again, the example that I was giving before, I think, in response to Justin's question, if our premium pay goes from $150 million that we spent in Q1 to the $70 million we spent a year ago, that benefit drops almost directly to the patient -- to the bottom line.

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Now again, it's not going to happen immediately. It will take some time, probably gets offset a little by underlying wage increases, but there's still an enormous amount of leverage that comes from being able to reduce that number. The challenge that all the hospitals, in general, have had is that number has been increasing.

And the sense is, I think, at the moment, that we're getting pretty close to the peak if we're not there. And now I think the focus and all of our calculations are how quickly can it be reduced? I don't think there's a sense that, that number is likely to go up anymore in any significant way. .

Okay. Great. And then sort of 2 quick follow-ups here. Supply inflation, we're going to hear from suppliers about sort of pushing costs on the hospitals.

I guess, what are you seeing from supplies? And then from medical devices, are you guys seeing inflationary pressures getting pushed to you on the supply side?.

Yes. Look, I think like every -- both business and personal consumer, we're seeing inflation affecting all of our spend -- but the labor inflation -- and again, I'm not even sure I would describe it as inflation per se.

But what I would describe as the reliance on this premium pay is so much denominating dynamic in the space that even with inflation -- 2 things, I think if we see those premium rates come down, we'll get a direct benefit from that. .

And I think as we see those premium rates come down, we'll also see our own hiring improve, and particularly on the behavioral side, that will allow our volumes to increase and that will provide a pretty significant offset to those inflation rates. So again, inflation is definitely a factor.

But I think we have a point of view that if we can solve the labor scarcity problem that will more than overwhelm the pressures that we're feeling from increased inflation. .

Our next question comes from the line of Ann Hynes from Mizuho. .

Can you let us know what is embedded in guidance for base labor wage rates and what that compares to on a historical basis? Is your estimate tracking in line with your estimates? And then how should we think about that in 2023? I know it's early, but just given wages as a big -- biggest cost structure, we probably want to assume the right pressure point for next year?.

Yes. Sorry, and we talked I think about it, just a little bit, in the Q4 call. I mean I think if pre-pandemic our wage inflation was, let's say, on the acute side 3%, 3.5%; on the behavioral side, it was probably 2%, 2.5%, I think post pandemic, we're thinking those rates are up 100, 150, maybe even 200 basis points..

I think we think those rates ease some in 2023 for a number of reasons that we've already talked about. But again, I think when we do that math, if we're replacing nurses who were making $65 or $70 an hour with temporary or traveling nurses who are making $225 an hour, that's really the drag on our earnings in the current period. .

If we ultimately replace those nursing hours that we were paying $225 for $75, even though that's a reasonable increase from what we had been paying pre-pandemic, it's still an enormous improvement over where we're sitting right now. .

All right. And then just a follow-up question. When I think about the nursing issue, like the acute care seems very obvious. You have the premium rates, you had COVID spikes and that should come down.

But I struggle more with the behavioral side and whether there are some structural shift in nursing going on? I guess, what is your view on that?.

And is there anything you can do to reduce your reliance on nurses.

And if it is more structural in nature, would you consider portfolio rationalization, like in certain markets? Are you closing units right now? And maybe I know you've gotten a lot of nursing staff, but do you have like an absolute number of nurses you had pre-pandemic and what it is versus now in the behavioral business? I'm just curious to see how much your nursing staff has been reduced and what you have to overcome to return to growth.

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Yes. So again, we've talked about this. The most difficult position generally to fill during the pandemic has been the registered nurse position on both the acute and the behavioral side.

And we're experimenting -- more than experimenting, I think we're implementing newer models of patient care that rely less heavily on the RMs and more heavily on LPNs and LVMs and paramedics and all sorts of other folks who are rendering care. .

And not what the -- I always want to make this point very clear, we're not having people practice the phrase that gets used in the prevention is above their license. What we're trying to do is relieve our RNs from doing more clerical and administrative work than they need to do.

Somebody else can answer the phone, somebody else could speak with families, somebody else can change the sheets in the room, whatever it may be, and let's allow the nurses to do the things that are at the top of their license, doing psychological assessments and behavioral care and delivering medication and all those sort of things.

So that's really a big focus of ours. .

Now again, to be fair, those sorts of patient care model changes take some time to hire the other non-RN positions, takes some time to train people, takes some time for people to get oriented, et cetera. But we think we're making incremental improvement in those areas, and we'll continue to do so.

As far as portfolio rationalization, no, we're not really -- I think we're closing down capacity temporarily when we don't have sufficient clinical staff to treat patients. But I think we've talked about this again in previous calls, we are, I think, rationalizing our capacity to a degree as we're negotiating our managed care contracts. .

If our managed care payers are not giving us sufficient increases to recognize this elevated level of labor cost, we're canceling some of those contracts. We're changing payer mix, et cetera. So I think we're rationalizing capacity of the portfolio in that way.

And I think -- and I said this earlier, we're also saying no to some of the really, really egregious temporary and traveling rates, where we're just saying, "Look, it doesn't make sense for us to pay XYZ for a nurse if we're only getting paid ABC from a payer." And so I think unlike some providers we don't have the point of view that we're going to pay whatever it takes for a nurse.

I think in some cases, we believe that it just makes sense to rationalize using near term some of the capacity and just run a lower volume for a period of time until rates come into a more normalized range. .

Our next question comes from the line of Sarah James from Barclays. .

I'm trying to run through some of the -- you said that you were 5% to 6% of internal forecast in behavioral [Technical Difficulty] $19 million to $20 million and acute premium pay went up 30%. Can you give us what site it was? I know last quarter you said it was about $25 million to $30 million in premium pay for the year.

And then were there any positive offsets? Because it seems like they're -- there were to get to that 5% to 6% of the internal forecast. .

Yes. So Sarah, I mean, what we've talked about before is that -- the premium pay on the behavioral side is much less of an issue than it is on the acute side. It's probably 1/3 or lower.

And when you talk about premium pay as well as things like retention bonuses and sign-on bonuses, et cetera, the real issue on the behavioral side is insufficient volume and revenue growth. So in Q1, our adjusted patient days were I think 1% below the prior year. Our overall revenue growth was 3.5% to 4%.

Clearly, those -- that level of growth in both volume and revenue is not sufficient to support the increased labor inflation and just the general inflation we're experiencing. .

But it's not -- the issue on the behavioral side is not to get rid of the premium pay, but that's certainly a goal as well.

But the real issue on the behavioral side is to hire sufficient clinical staff and to change the patient care model to hire sufficient clinical staff so that our patient days are growing at least at their historical normal levels of 3% to 4% a year. .

Okay. And then earlier in the call, you talked about considering expanding into alternative care models.

What do you mean by that? Is that like outpatient methadone clinics? Or can you be more specific?.

Yes. So what it means, I think, are the folks who are delivering patient care are less RN intensive and more lower license level people, whether that's LPNs or LVNs or techs whatever.

And again, what it's really designed to do is to allow the RN to practice at the top of his or her license and allow other people to do the more administrative and clerical activities, and as a consequence deliver the highest efficiency and best quality of patient care that we can in a way that allows us to treat as many patients safely as we can. .

Got it. And last question is just a follow-up to Ann. So when you mentioned canceling some payer contracts or shifting payer mix, is there any other details you can provide on that of what payers are there [Technical Difficulty]. .

Yes. So you're breaking up a little bit, Sarah. I'll try and answer what I think you asked. Again, I think the detail that I offer around that is if you look at our Q1 behavioral results, our revenue per adjusted day is up 5-plus percent.

I think that's reflective of the fact that we're doing a pretty judicious job of negotiating increased payer rates and choosing and trying to engineer payer mix so that -- where we're not dealing with payers who are sort of refusing to give us the sorts of annual rate increases that we would need to kind of replacement. .

And I think we're being very successful at that. I think we're very pleased with that 5-plus percent of revenue per adjusted day on the behavioral side of the business. Again, now the real challenge for us is to move from a negative 1% patient day growth to the historical normative 3% or 4% or even above that. .

Our next question comes from the line of A.J. Rice from Credit Suisse. .

Maybe just a couple of questions. On the behavioral side, I know we're mainly talking about the labor component here, but I just want to make sure that you're still feeling like the underlying demand for the service is still strong. .

I know your biggest hospital peer, which has behavioral health units reported that they were actually down year-to-year, too, in behavioral.

So I wonder if it's still so strong, where are these patients going? Do you have a sense of what's happening to them?.

Yes. Look, I think the reality, A.J., is that -- in many cases, they're going untreated. In many of our markets, you have -- you definitely have a sense that where we're unable to take a certain number of patients because we don't have sufficient clinical staff, it's not like we believe that our peers in the market are able to do something we're not. .

So I think some of those patients wind up not getting the care that they really need.

And so back to your point -- and we've made this point, I think, very consistently during the entire pandemic and that the ways that we measure the underlying demand, I think we measure them in a number of different ways, but one of the ways we measure the underlying demand is what we describe as inbound activity. .

These are the phone calls that we get to our 800 numbers, the Internet inquiries we get to our website, et cetera. And those -- the volume of those inbound inquiries have been doing nothing but generally consistently rising during the pandemic.

And on conversion rate, the number of those inbound inquiries that ultimately resulted in admissions, that percentage has declined pretty dramatically during the pandemic, really, primarily because of the labor scarcity issue that we've been talking about. .

So to answer your initial question, which again, I think Marc addressed in a broader way in his comments earlier is, we have a lot of confidence that the underlying demand for both of our business segments has not changed in any fundamental way. .

Okay. I know one thing relative to your other public peer in behavioral that you're a little different is that you have some markets like in Massachusetts and Texas where you have multiple behavioral health facilities in one metropolitan area or a cluster of them.

When you look at that, are those presenting specific challenges? Do you have more labor issues.

How do you manage the fact that one behavioral health facility is not competing against the other behavioral health facilities for labor? Do you coordinate that? Any thoughts?.

Yes. I think the reality is, obviously, having multiple facilities in a market, which we do in a number of markets you mentioned, Boston, Philadelphia, Atlanta, are all markets in which we have a pretty significant market share and a multiple facility presence.

And obviously, that affords you some luxuries of being able to move employees amongst facilities that allows you to centralize some of the recruiting and HR functions and be more efficient in that regard, et cetera. So there is some benefit to that. .

But the real issue is that some geographies are just more challenging than others in terms of the labor scarcity. And I think what we find is that when a market is challenging, all the providers in the market are challenged, and that's just the way it is.

Now again, I will tell you, we have certain facilities that are fully staffed, that are not struggling. .

We have other facilities that struggle to higher RNs. We have other facilities that have sufficient number of RNs but struggle to hire mental health technicians to unlicensed professionals. So it really varies. And I wouldn't say that having multiple facilities is even more or less difficult. I think it just really depends on the geography. .

Okay. And maybe just one final question. So obviously, your step-up pace of share repurchase is an important part of the UHS story for this year. I guess, how should we think about that activity? You did about $350 million in Q1.

On the one hand, the market's giving you an opportunity here where there's a significant sell-off in the stock today, and so you get an opportunity to buy it cheaper than you could yesterday. .

Alternatively, you're just talking about the fact that you've got to see some improvement or you may adjust guidance at midyear? Should we think that you would step up to try to take advantage of the pullback here? Or do you sort of hesitate until you get better clarity on whether there's going to be a need to adjust guidance.

What's your thinking about share repurchase activity going forward?.

Yes. So we indicated in our initial guidance that our plan for share repurchase for 2022 was roughly $1.4 billion with the $350 million in Q1, we're right on track to get to that number. To your point, obviously, the market has changed a great deal just in the last few days.

And to be fair about it, we haven't made any firm decisions about how to think about that whether we'll try and accelerate share repurchase, et cetera. We certainly will think about that. .

But the comment, I guess, that I've made today is simply that I think we have every intention of fulfilling the annual share repurchase amount or something close to it that was in our original guidance. That's certainly -- our view hasn't changed.

And again, I think for all the reasons that Marc articulated in his prepared comments are confident that the labor scarcity situation will get resolved and that the underlying demand is still quite strong in both of the businesses. .

But just to go a bit further, as Steve said, we are going to look at this. And so we're right on track for our previous guidance. If our shares continue to be this undervalued, it would be a pretty fair bet that whether we go above that $1.4 billion, we haven't made a decision yet. .

But we're certainly going to look very carefully at doing something when our shares are so undervalued, given what, Steve, just said about our belief in the business. The demand is there. This labor issue will subside at some point. So we know that fundamentally we'll be in a good position.

So we can take advantage of the undervalued share price, so we'll certainly consider that and probably do that. .

Our next question comes from the line of Jamie Perse from Goldman Sachs. .

Can you give us any color on profitability by month in the acute care segment? Even directionally, it seems like the labor environment was similarly challenged across all the months, but the big difference in January, you had a lot of COVID. March looked a lot more normal.

And I'm just trying to understand the trajectory of profitability and that type of mix shift happens. .

Yes. So I think as we have found throughout the pandemic the acute business benefits to some degree from the COVID surges. The COVID patients historically have been more acutely ill than that. I think that was a little bit different in this most recent surge. Obviously, we got the benefit of the 20% Medicare add-on for COVID patients.

We had the benefit in the quarter of HRSA reimbursement for uncompensated or uninsured COVID patients, although that is pretty much been exhausted. .

So I think the acute care business weathers the COVID surge in December and January better than the behavioral business, where they really, on the behavioral side of things, there's no benefit from the COVID surge. There's only pressures that sort of a company is.

I think the dynamic of the quarter is that we assume that as COVID volumes decline the labor scarcity issue would ease more than it did and would benefit both of our segments in -- more than it did. .

So I would say that acute profitability didn't change all that much during the quarter. I think our budget increased. So our budget shortfall increased as the quarter went on, although profitability only changed much.

I would tell you that on the behavioral side, profitability was really challenged in January when the COVID volumes were as high as they were and got better to some as the quarter went on. .

Okay. That's helpful. And then just we've talked a lot about all the money you're spending on premium labor today.

I'm just trying to think about as rates and utilization of premium labor come down, if that gives you an opportunity to redeploy some of that into base wage rates, just thinking about the recapturability of some of these excess costs right now, is it all recapturable or 2/3, half, just any thoughts on that would be helpful. . .

Yes. I think that the reality is, there's not a lot of -- after just the term you used, there's sort of transferability between the 2.

I've made this point before when the nurse comes to her supervisor to a hospital, the Chief Nursing Officer, whatever, and says that he or she is leaving to make $10,000 a week, which is probably 4 or 5x what his or her salary is, there's really no counter we can make to that. .

And raising base wages by 100 basis points or 200 basis points is not an effective counter to that sort of an offer. So that -- those opportunities really have to diminish in number in order for those nurses to come back.

We're not going to entice those nurses to come back with, again, a 100 basis point increase in wage rates, which, again, I think is why the underlying base wage rate inflation, while it's up in both acute and behavioral, is not up by hundreds and hundreds of basis points, but just by 100 or 150 basis points because they're not really being changed to meet those -- that premium pay.

We just can't do that. .

I'll make one more point on this. What we're trying to do -- we're doing -- Steve already mentioned earlier, we do market surveys and we're doing adjustments like on a quarterly basis in a lot of our markets, trying to understand exactly what the correct base rate is for market.

One of the things I want to make sure people recognize is that a lot of traveling nurses don't actually travel anywhere. .

So in certain markets, I've seen traveling nurses up to 50% of those "travelers" are people that live within 4 or 5 miles of where they're traveling to. So a lot of them are people that have actually not gone anywhere. They're taking traveler contracts in their home market.

And what is happening now is going to continue to happen is that those opportunities for the traveling contracts are going away. .

And so hopefully, sooner than later, a lot more of those "traveling nurses," if they want to stay in their home market, which they clearly do because they haven't gone anywhere, they're going to have to go back to the local hospitals at the local wage rates and not the traveling rates that they were getting for those contracts previously, and we're already starting to see that.

And hopefully, that's going to accelerate in the next couple of months. .

Our next question comes from the line of Kevin Fischbeck from Bank of America. .

Actually, this is Joanna Gajuk filling in for Kevin. Thanks for just a couple of follow-up questions. So you mentioned on the psych business, the pricing is pretty strong, and I guess you are managing your contracts there.

Can you talk about on the acute care side? Or are the commercial rates now contracting there? Are you pushing rates there also to get some -- after the inflation and what the success rate is and kind of any way you can frame it for us that piece of the business on the acute care side in terms of the commercial payers?.

Yes, Joanna, I mean, I think we're doing the same thing on the acute side.

I think it's a little bit harder to see on the acute side because I think on the acute side, revenue per adjusted admission tends to be impacted by other variables besides just pure pricing and especially during the pandemic, probably acutely has had a bigger impact on acute care revenue per adjusted admission than anything else, including the underlying pricing.

.

But yes, I mean, we're making those same judgments and for the same reasons, quite frankly, if payers are unable to give us sufficient rate increases at a minimum to sort of absorb at least a portion of this inflation and particularly the labor inflation, that I think we're willing to cancel contracts, terminate contracts, move into trying to shift payer mix to other more reasonable players.

.

Great.

And I guess on the sites, when you talk about the 5% increase you experienced in the quarter, is that kind of how you think about this going forward? Is this kind of assuming your guidance in terms of the pricing?.

Yes. So what we had said is that pre-pandemic our behavioral pricing for a number of years tended to go up about 2% or 3% a year. During the pandemic, we've seen it up in that 5% to 6% range, which is what we saw in Q1.

I think it settles out as we emerge from the pandemic kind of in between in maybe that sort of 3% to 4% range because I think some of the payer behavior, which got a little bit less aggressive in terms of denials and things like that during the pandemic probably reemerges post pandemic. .

So yes, I think, again, I think we think behavioral pricing settles into more like a 3% or 4% range. Again, what's really needed to turn the behavioral segment around and start meeting our expectations is got to kind of increase those adjusted patient days from your negative 1% to up 3% or 4% or beyond that. .

Right, exactly. That's the bigger issue we talked for the last hour. But I guess in terms of the volumes on the acute care segment, so did I hear right, why do you say that the volumes returned to normal, I guess, towards the end of the quarter.

Did you mean kind of the pre-COVID levels? Any kind of commentary in terms of the types of volumes and what are you seeing there on the acute care side?.

Yes. So one of the most important metrics that we factor in the pandemic is surgical volume because it encompasses a lot of those elective procedures.

Our surgical volume in Q1 was above our pre-pandemic surgical volume, to be fair, slightly above, not by a lot, but I think it was the first time during the pandemic that our surgical volumes actually exceeded the pre-pandemic or 2019 levels.

So again, another encouraging sign that, again, once we get some of these labor pressures, at least partially behind us should help in the recovery. .

Our next question comes from the line of Whit Mayo from SVB Securities. .

Just one more question on premium pay, take the $150 million. What did it look like the very first 3 quarters of 2021? I'm just trying to get a better comparison here. .

Yes. So I don't necessarily have those numbers in front of me, Whit. I think what we said, which I know last quarter, it was -- that in the fourth quarter of '21, it was $70 million. I think in the first quarter of '21, it was $50 million. So I think you could sort of bridge that gap. .

Yes. No, that's perfect.

And -- just one other follow-up question, just the DRG add-on and the HRSA payments, can I get that -- those 2 numbers from you?.

Yes. So I think we just have disclosed all along that the impact of those numbers, I believe, in 2021 was about $11 million a quarter each for HRSA and for the 20% now. .

And Mary, we're going to have to make that our last question because we have some other commitments here. .

Thank you. .

So we'd like to thank everybody for their time. Thank you. .

This concludes today's conference call. Thank you, everyone, for participating. You may now disconnect..