To the 2023 RBC Capital Markets Global Healthcare Conference. I'm Ben Hendrix, RBC's Healthcare Services and Managed Care analyst. We are pleased to host acute care and behavioral hospital operator, Universal Health Services. With us this morning from management is Steve Filton, CFO. We'll start with a question on the acute business. First quarter volumes came in well out of expectations with adjusted admissions growth of 10.5% and surgical volumes growth of 10%. On the call, you noted that recovery appears to be broad-based as non-COVID volumes are beginning to recover. How do you think about volume growth as you move through the balance of the year? I would make a couple of comments. I mean, obviously, we were, you know, pleased by the robust acute care volume growth in Q1. I think throughout the pandemic, you know, we've made this argument. I think collectively acute care providers that certainly at the beginning of the pandemic, there was some significant amount of postponed and deferred procedures and surgeries, et cetera. That at some point, those procedures would sort of, you know, be recaptured in the system. You know, again, collectively providers sort of talked about getting back to pre-pandemic levels or getting close to maybe 101% or 102%, but I don't think ever at the point of recapturing a significant amount of it. It seemed like across the board in Q1, the acute care industry had pretty strong volumes. While I think it's impossible for us to, as providers, to really parse out, you know, what would be sort of normalized and what would've been recapture, I just think there's a sense that there was some amount of recapture volume in Q1. The other thing I think that we've made the point going into 2023 is that without significant COVID volumes in 2023, there's likely to be kind of a return to the more normal seasonality kinds of trends that we're accustomed to seeing in the business. You know, a bit of a step down in Q2 from Q1 sequentially, et cetera. Again, broadly pleased with the volumes. You know, as you cited, you know, 10% same-store adjusted admission growth in Q1 over the prior year, hard to imagine that that can be sustained at that level for, you know, an extended period of time. Got you. There's nothing from the first quarter into the second quarter that would kind of throw the EBITDA trajectory, as you mentioned, maybe a slight step down in 2Q, weaker 3Q, and then strong 4Q. That seems to be tracking pretty much to your expectations, or is there anything to call out differently from there? Yeah. I think we made the point in, you know, in our fourth quarter earnings call back in February that 2023 would be kind of a combination of a return to normal seasonality, which I think is what you just ticked through, but also a bit of strengthening as the year progressed, as both volumes returned and also as the labor situation eased, you know, which had been really the kind of the two biggest headwinds for the business over the last few years. Again, I think, you know, when we look back on 2023 a year from now, we'll see kind of both that return to, you know, somewhat normal seasonality patterns or historical seasonality patterns, but also a progressive improvement as the year went on, particularly in the labor and then to sort of attendant impacts. Within that, growth we've seen on the volume side, can you talk about acuity and how we're seeing acuity evolve across the various categories, within the acute side? Yeah. I mean, acuity really is a function of a couple of important things. I mean, obviously we see a significant drop in acuity year-over-year as the number or the percentage of COVID patients declines. Those patients tended to bring with them, you know, very high acuity diagnoses and high acuity stays. As we're replacing those COVID patients, you know, we're sort of building up that acuity in part sort of naturally as patients return to, again, what I would describe as some of their pre-pandemic utilization patterns. They're going back to their primary care physicians for annual exams. They're having their routine colonoscopies and cardiac visits and that sort of thing. Then ultimately, those things are resulting in sort of cascading, you know, follow-up treatment and diagnostics, et cetera, that you know, you would expect. I think the return to acuity is something that will occur naturally. I think now the other point that's, you know. Again, I think a lot of these issues have sort of kind of conflicting dynamics. You know, I think one of the things that we're seeing is that a lot of the business that dropped off during the pandemic, by definition, was the less acute, low, you know, lower, less emergent, lower acuity sorts of procedures. As they're returning, that tends to, you know, bring the overall acuity measures down some. You know, they're weighted down some. You attributed the strong 1Q volume growth to filling some permanent vacancies in the hospitals. With contract labor rates decreasing, can you talk about how hiring has improved and turnover and kind of what you're seeing on the staffing front there on the acute? I mean, I think that's probably more true on the behavioral side. I mean, I think the point that we've made throughout the pandemic is that while there has been a labor scarcity challenge in both of the businesses, it has affected them differently. On the acute side, the main impact has been, you know, higher levels of premium pay amounts that we're paying to our own internal staff for overtime and shift differential, as well as the amounts that we're paying to third parties for traveling and temporary nurses, that sort of thing. Obviously, the COVID volumes have declined. We've made a significant amount of progress. We almost cut in half from the first quarter of 2022 to the third quarter, the amount of premium pay that we were incurring. For us, that amount of premium pay has kind of leveled off over the last several quarters, but is still, you know, dramatically lower than it was a year ago during the COVID surge. I know I haven't gotten to it yet, but on the behavioral side, the labor scarcity really manifested itself in an inability to simply fill positions at, you know, effectively any rate. As a consequence, the labor scarcity on the behavioral side tended to result in more muted volumes rather than in higher wages. Got you. In what you saw on the acute side from a, from a, like, contractor labor perspective, do you consider a sustainable run rate for UHS guidance, or do you think that we'll see some improvement from here, and have you kind of factored that into your numbers? Yeah, I mean, you know, I'm doing this, in a ballpark, but I mean, I think our premium pay usage in 2022 was about $435 million, a number something like that. Our guidance was to a number, about a third lower than that in the kind of $275 range. We were probably in Q1, maybe $15 million-$20 million short of that guided goal. I think that was largely a result of the higher volumes that you kinda kicked off talking about. I think our, you know, general view is that as volumes moderate some in the back half of the year, we should be able to get, you know, closer and, you know, get at least within shouting distance of that premium, reduced premium pay goal that we had set for ourselves in 2023. Okay. Just going back to the, kind of the acuity side of things. You've, we've heard everyone talk about, migration to outpatient and that having a somewhat of a revenue headwind on, you know, for the inpatient side. Can you talk about your ASC footprint, your HOPD footprint, and how you're positioned for the migration of, total hips and knees and what have you, to the outpatient setting? I mean, I think it's worth noting, and I, and I'm sure just about everybody in this room knows that this migration of procedures from an inpatient setting to an outpatient setting has been underway for a long time, certainly as long before the pandemic, certainly probably for the last decade and a half, maybe even two decades. I think it accelerated during the pandemic. I think it accelerated in particular in the orthopedic service line and, you know, total joint replacements, which I think you alluded to in your question. You know, certainly, during this period, you know, of, you know, a decade or two, you know, we've done a lot to adjust to those shifting patterns. We've increased the outpatient capacity in our own hospitals, the convenience to having procedures done on an outpatient basis to, for both our physicians and our patients, that sort of thing. We've also increased our footprint of ASCs, either standalone hospital-owned ASCs or ASCs in joint ventures with physicians, and we'll continue to do so. It does feel like, in particular, this really dramatic shift in orthopedic procedures and again, in particular in total joint replacements, you know, has really kinda run through the bulk of itself over the last two or three years. You know, we've gone from three or four years ago, 20% of those total joints being done on an outpatient basis to probably now 80% three or four years later being done on an outpatient basis. The upshot of that dramatic shift is I don't know that there's a whole lot more to go. I think we're gonna return to kind of that incremental shift from in to outpatient that we've been dealing with and adjusting to for many years, that, you know, I think over the last couple of years have really accelerated. How significant would the next, like, cardiac wave be for you guys? It seems like that's kind of the next shoe to drop in terms of the migration. Yeah, I mean, I don't feel like, the cardiology service line is set for that same, again, dramatic acceleration in, you know, whether that's cardiac caths or other cardiac procedures being able to shift from in to outpatient in as quick a period of time. You know, keeping in mind that the cardiac population tends to be older, more acutely ill, et cetera. I just don't think it's likely to happen at that same pace. You've touched a little bit already on behavioral side and how staffing dynamics work there. We've seen some solid volume growth over the last few quarters, though occupancy remains slightly below pre-pandemic levels. Given the strong underlying demand for psychiatric care, when do you believe those occupancy will kind of return to? I think you've mentioned recently, maybe we're still a couple hundred basis points away from normalization. How do we see that trending? Yeah, I mean, that discussion I think came up on the last earnings call a few weeks ago. I think as we return to something that we would consider to be relatively full staffing levels, and I think we're still short of that. As we're able to do that and we're able to increase, to your point, the occupancy levels from the low 70s, where we are now, to kind of the mid-70s where we were pre-pandemic, I think that we are returning to, the process of sort of real-time consideration of where capacity expansion is appropriate. I think I mentioned on the call that we gone through a relatively recent exercise of looking at all of our behavioral facilities that are running at above 80% occupancy to see whether additional bed capacity expansion is warranted and how feasible that is, et cetera. Yeah, I think, you know, we tend to view sort of the maximum efficient level of occupancy on the behavioral side as sort of in the mid-seventies. We're a couple of percentage points short of that. As we get closer and closer, I think, you know, we probably resurrect in a more meaningful way the bed capacity plans and actions that we had in place pre-pandemic. I got the question, between meetings here about what, why is it that kind of mid-70s is that, you know, is kind of that ideal occupancy? What kind of fills that 20 basis points or 25 percentage points of cushion there in occupancy? What requires that to stay open in order to run efficient? I mean, keep in mind that a few things I think come into play there. You know, we're not a hotel business or an airline business that we can book our sort of capacity usage, you know, weeks or months in advance. You know, we're getting 15 calls a day from a hospital emergency room, and the next day maybe we get 30 calls for admission, et cetera. It's difficult for us to manage the really high levels of occupancy that those other businesses can manage. Keep also in mind that there are capacity restrictions that we have in terms of you can't, you know, mix, you know, adults and children in on a unit or in rooms. You can't mix males and females. You can't mix certain, you know, diagnoses, et cetera. You have that restriction. It does, you know, again, 75 is definitely a sort of an average number. We have facilities that run effectively and efficiently, you know, 90 and sometimes close to 100% occupancy. The longer the length of stay is, the higher I think the occupancy level can tend to be and be at an efficient level. The issue is, the reason that we sort of have, you know, identified 75, and again, it's not a perfect number by any means, but as a number that's sort of an efficient number, is that at that number over a year's worth of time or some extended period of time, we're turning a significant number of patients away. Because, you know, again, if you're running at a 75% occupancy in a behavioral hospital for the year, keep in mind that you're probably running at 85% for half of the year and 65% for the other half. Again, the periods of time where you're running at 85%, you're probably turning patients away. Got you. Is there anything in terms of the cases that are coming on the behavioral side that have changed coming out of the pandemic, acuity there? How is that changing your thoughts in terms of how you're approaching development? No, I mean, I think that, you know, most of the macro data that's out there and available suggests that behavioral illness, both in terms of frequency and severity, has increased during the pandemic, really across all diagnoses, across all age groups. I've read a bunch of material that suggests that, you know, children in particular were hurt during the pandemic. You know, being home, being isolated. Actually, I just saw a thing on the news this morning about the frequency of postpartum depression increased quite a bit during the pandemic. I just think that, you know, generally the disruption in our normal routines and the isolation, you know, tended to really increase the, again, the frequency and severity of mental illness. no specific reaction other than, again, you know, the reaction that we've talked about, you know, during the pandemic, which is we're just trying to make sure we have sufficient clinical staff and even in some cases, non-clinical staff to meet the needs of the population out there, which I think, you know, just about everybody who follows the behavioral industry acknowledges that the demand has really exceeded our ability to meet that demand, you know, during the pandemic. It is getting better. It's reflected in our rising occupancy rates. I still think there's quite a bit of runway there because I think, again, the demand for behavioral care has really done nothing but increase across all age groups and across all diagnoses. As you consider new expansion projects to meet the demand, has anything changed with regard to avenues for financing new capacity? We've heard peers talk about tightening of medical office building financing, for example. Do you use MOB financing for expansions, or do you simply lean on available liquidity? Yeah, I mean, so a couple things I would note. I mean, most of our medical office buildings are developed and financed by third parties. Certainly, there's some, I think, a minority that we own. You know, generally our view is the demand is such that it supports, you know, a third party economics, et cetera. You know, sometimes we'll play a role in that. We'll lease part of a building to sort of help get it, you know, off the ground, et cetera. Yeah, I mean, of all the sort of, I think issues that we have in terms of, you know, capital investment and financing, the medical office space is generally not, you know, high on that priority list. Over the last several years, your capital allocation strategy has strongly favored CapEx and share repurchases with much less focus on acquisition and dividends. Can you discuss how your capital spending strategy is enhancing UHS's market franchise and growing portfolio currently, more broadly, I should say? I think as your question suggests, you know, our focus is on enhancing our existing franchises and developing in de novo markets where, you know, we can find a sort of compelling opportunity to do so. I think we have simply found that over the last several years, the opportunity to do that has been skewed much more to the CapEx side than to the M&A side. I think for a variety of reasons on the acute side of the business, I think that there have really been a pretty limited number of acute acquisitions or for-profit acquisitions in the acute segment of not-for-profit assets. There literally are, you know, a handful that I can think of over the last five or seven years. The great majority of those transactions have been not-for-profit to not-for-profit. Again, you know, most of our activity on the acute side has been, you know, organic CapEx. Then on the behavioral side, I mean, I think a lot of the competition for I'm gonna describe them as sort of niche behavioral assets over the last several years, has been with financial sponsors, private equity companies, who up until very recently, you know, have had almost, you know, unlimited, a bit of an exaggeration, but unlimited borrowing capacity, you know, very high leverage levels, low borrowing expense, et cetera. I think that has changed in the last six or nine months, and maybe the M&A environment will change more meaningfully on the behavioral side. That's been a challenge for us on the behavioral side. Again, you know, we've largely pursued organic CapEx and a lot of organic CapEx in conjunction with these joint venture arrangements that we've done with acute care hospitals to build behavioral capacity in partnership with them. Got you. In the last few minutes here, is there any thoughts, early thoughts or impact to note for UHS with regard to Envision's recent Chapter 11 filing? Is this a headwind in any way, or is having the company under a trustee ultimately a good thing? How would... Yeah, Look, I think, you know, Envision is, you know, a vendor of ours, in a number of our markets. I think, you know, we would be concerned in any case when a vendor, you know, is in significant financial distress, although, you know, again, I think Envision has said publicly and to their customers and clients that, you know, in the short run, certainly they're able to continue to deliver their services uninterrupted. We'll see. You know, our goal is to make sure that the services, the physician staffing services that an Envision or quite frankly any other third party provides to us, are reliable and continuous, et cetera. That's what we're gonna focus on. If Envision can continue to do that and do that adequately, we certainly have no, you know, issues with that. If Envision can't, you know, we will make sure that we have alternative plans. At the end of the day, the way I see it is that there are, you know, whatever the service line you're talking about, whether it's ER physicians or anesthesiologists or radiologists, there's a certain number of them in the country who are providing the service. Ultimately, two or three years from now, there will be something close to that same number. Whether they'll all be working for the same people they're working for today, you know, which today I think they're working for a couple of large consolidated companies. A few years from now, they may, you know, more of them may be working for providers like us, or more of them may be working for local or regional providers. Not smart enough to know that. I believe that the, you know, the market will absorb all that pretty efficiently. Is there an effort, by UHS or preference among physicians to come in-house? No. Look, I think at the end of the day, physicians wanna work for somebody who, you know, is gonna pay them what they consider to be a fair wage, who takes a lot of the administrative burden off of them in terms of scheduling and credentialing and billing and collection, et cetera. You know, ultimately, I don't think they really care whether that's a provider or another, you know, third-party physician staffing company as long as they can provide those other services, you know, efficiently. Just last is with regard to fees that you have to pay for supplemental fees to these providers, I know that's been elevated this year. How do you see that trending? I think, you know, that as some of these large consolidated providers of physician services have had financial difficulties, you know, they, you know, one of their main responses has been to raise their fees to their customers and their clients. That's what's, you know, driving up in the short term, you know, our, you know, physician expense. I think, again, in the long run, you know, our view is we'll provide that same physician staffing, hopefully, without the, you know, elevated expense, you know, either by employing those physicians ourselves, by negotiating, you know, reduced rates with our existing providers or with contracting with new providers. I think in the short run, we've been very candid about the pressure that elevated, you know, physician expense, you know, brings to our results, certainly in 2023. Got you. I think that pretty much brings us to time unless there's anything in the audience. Yes. Business has made the labor scarcity situation so difficult. I don't think it's specific to the behavioral business, but I think sub-acute businesses in general, the way that I was skilled nursing nurses during the pandemic who were pursuing these extraordinary opportunities, and I would describe them as short-term opportunities to work in acute care hospitals and, you know, treating COVID patients and the opportunity to make, you know, 3x, 4x times their salary. I think, you know, the issue is, and we said this all along, that as the volume of COVID patients declined, those extraordinary opportunities would diminish, and nurses would return to their sort of original or home jobs. I think that's what you're seeing in recent, you know, weeks and months. Well, great. Steve, thank you so much for joining us.