Thank you, everyone, and welcome. My name is Michael Ha, the Managed Care and Healthcare Facilities Analyst at Baird. Our next session, our first session, is with Universal Health Services, an operator of acute care hospitals and behavioral health facilities. I'm very pleased to have with us today Chief Financial Officer Steve Filton. Thank you very much for being here. My pleasure. Great. With that said, Steve, do you have any introductory comments or... Happy to jump right in. Perfect. OK, policy. From our end, incredibly focused impact on hospitals. I know we have our upcoming panel in a few hours to talk about it. Maybe to spend the first handful of questions on policy, you've been one of, if not the only, publicly traded hospital to really help us size the impact of enhanced subsidies, Medicaid supplemental payments. There is one more policy impact that I'm not sure if you've sized for us, which is work requirements. It's biannual re-verification of expansion. I understand on the behavioral side, you're more insulated given the fact that you have optionality on your patients. On the acute side, a bit more exposed. I think Medicaid's only 15% of your revenue, and expansion is probably even a smaller sliver. I was wondering if you have any initial estimate or at least a way to frame up how to think about that impact. I think the reason that none of the other companies have tried to, or I shouldn't say tried, but have not sized the potential impact from Medicaid disenrollment and the work requirements, et cetera, is because it's very difficult to do. There's a lot of varying estimates about how many people could be impacted. I've seen 7 or 8 million. I've seen 12, 13 million. Who's impacted and sort of what their utilization patterns are is equally as important. At the moment, I think this is almost all speculation. The argument I think that the Republicans made during the BBB debate was, look, they weren't really eliminating work requirements, weren't really eliminating anyone who needed coverage. They were largely young, healthy males, et cetera. If that's true, and I don't know that we have the macro data to really support that, but if that's true, I don't know that it has an enormous impact on us as hospitals. Those are not people, young, healthy males, who you would presume to be significant utilizers of the hospital system. I think we're going to have to wait. In the bill, the work requirements don't begin until 2027. Some states apparently are anxious to implement them earlier. We'll see how many do so. I think hospitals are going to have to wait and see until we get a better sense of exactly who's impacted. To your point, on the acute side, there's really not a great deal that we can do to react to that. In other words, the vast majority of our Medicaid, as well as our uninsured population, comes to our acute hospitals through hospital emergency rooms. We're obligated both legally and morally to treat those people. We do, and we will. As you suggest, on the behavioral side, we have more optionality about the patients we take, which is why when you look at the financial statements of the two segments compared to each other, there's far less uncompensated care in the behavioral segment than there is in the acute segment because of that optionality. There's maybe 20% of the uncompensated care in acute care, or 20% compared to the acute segment in behavioral. We'll see. I think the Medicaid work requirements remain to be seen. I think one of the things that we're expecting a little bit is similar to what we experienced a couple of years ago when coming out of the pandemic. There was this push for Medicaid disenrollment that had been delayed for a number of years during the pandemic. The initial disenrollment was muted in the sense that a lot of folks who were disenrolled were disenrolled for what I would describe as administrative reasons. They hadn't updated their address or their income data, et cetera. When we worked with those folks, a lot of them were able to re-enroll. I think there's an expectation that we may see some of that same dynamic here. Great. Thank you so much. On the supplemental payments, you've sized that at $360 to $400 million by 2032. How does the breakdown, the cadence of that reduction look starting in 2028 and ramping to 2032? In other words, what do you anticipate is a starting 2028 impact? How does that move up to 2032 over time? I know Marc has mentioned this is the worst-case scenario. Could you please expand on what he meant by that, trying to get a better sense on areas of conservatism within this range that you could point to? Your first question, which is more of a mathematical question, we didn't give the breakout by year. It's relatively ratable. It does accelerate each year. It sort of, if you will, compounds. It's not a significant difference. Especially if you're doing five-year projections that really don't even begin until 2028, if you do it ratably or you do it in a way that just sort of ramps up incrementally each year, I think that's a fair estimate. I think Marc's comment on our Q2 call was a reference to the fact that it seemed to us, and I think to the industry, that Congress purposely delayed these cuts for several years. These Directed Payment Programs cuts don't begin until 2028, and then they play out over 10 years. The notion was, I think, twofold. One, Congress was acknowledging that these cuts could and would be meaningful, particularly to rural hospitals, smaller hospitals, hospitals that were already operating at razor-thin margins. I think these are largely public, not-for-profit hospitals. It felt like they wanted to give themselves some room to potentially modify or find ways to mute or mitigate the cuts in the future. Certainly no guarantee of that. As the hospital industry was lobbying during this process, and Marc happens to be the President of the for-profit Federation of American Hospitals this year, I think he's even more attuned to this than he might normally be. We were hearing from a lot of legislators that, look, some of these cuts may not be fully implemented, et cetera. Like I said, no guarantee. I think he was just referencing this idea that keep in mind that this time frame is quite elongated and things could potentially change during that time. Got it. Helpful. You've spoken at a high level about things like shifting revenue sources, cost-cutting initiatives to help offset the impending cuts to supplemental payments. I wonder, I wish the years ahead, but if you have any more concrete thoughts and plans on what these efforts could look like. Should we expect these initiatives that you're planning and preparing to implement to fully offset the $360 to $400 million? I mean, I think it's too early to make a statement like that in any sort of precise way. I think what we have said and we have cited, and by no means a perfect analogy, but we've talked about the way that the industry collectively, and specifically Universal Health Services, responded to the COVID, the advent of COVID back in the spring of 2020. That was a much more sudden something we didn't really have time to prepare for. We responded very quickly. There was really an immediate reduction in our revenues and in the way people, their utilization patterns, the way they were visiting their physicians, the way they were visiting hospitals. If you go back to that time period, you'll see that hospitals in general, Universal Health Services specifically, we froze hiring. We had a number of headcount reductions. We froze salaries. We froze 401(k) matches. We reduced capital spending. We froze vendor increases. We did a great many things. Honestly, I don't, obviously, we'll have a lot more time to react to these impending cuts if, in fact, they are all fully implemented. I think we'll be able to be, quite frankly, a little more thoughtful. We cite, I think, that experience, which was only a few years ago, as an example of the, I'll call it the agility, the flexibility that the for-profit operators have generally had and that I think we've demonstrated. We'll certainly do that. On the behavioral side, and you alluded to this a little bit earlier in one of your questions, we talk about having a scarcity of capacity, not so much a scarcity of physical capacity, but largely driven by some labor scarcity. We can't always, in some of our hospitals, treat all the patients who are presented to us because we simply don't have enough staff. In an environment where we are already capacity-constrained and turning away patients, there's more optionality about what patients we take or don't take. If Medicaid in a particular geography becomes a lot less profitable as a result of either disenrollment or Directed Payment Programs cuts or whatever it may be, we can think about managing the patient population in a way that helps us. We can focus on programs, perhaps, that are less Medicaid-centric and more Medicare or commercial-centric. Again, lots of optionality. We're talking about all these things, planning all these things, not doing anything immediately because, as we already alluded to, most of these cuts don't even kick in for a year, two years, three years. We'll certainly be prepared if and when they do. Got it. Last one on policy. State budgets are coming under pressure, provider tax reductions. We're already hearing some states have lowered or are exploring lowering provider rates. I was wondering if you've had conversations with states on this topic. Any thoughts on really their ability to manage budget pressure while also implementing all these new policies in the years ahead? Are there different ways you think states could explore to even potentially supplement the Medicaid program? If so, what might that look like? Yeah. I should have mentioned this. I'm going to go back just to an earlier question you had about Marc's comment. I think the other point that Marc was trying to make on the call was that, as people know, the bill, the big, beautiful bill, allows programs that, they call them preprints, these applications for either new or modified Directed Payment Programs, to be grandfathered and approved. The biggest one for us is the Washington, DC program. We've been waiting for months and months and months for that program to be approved. Late yesterday, we heard from the District Hospital Association that the program, the preprint, had been approved. We have not yet seen the documents that would verify or validate that. It is hard to imagine the Hospital Association would get it wrong. For example, we expect that our Directed Payment Programs reimbursement will increase over the next few years before it begins to decrease, according to the big, beautiful bill. As to the direct question that you asked, are we having conversations, I would say that as collectively as an industry, with states about their providing some relief, et cetera, the answer is yes. I think the industry, state hospital associations are having all those conversations. States, as you might imagine, are reacting to some degree the way that I was sort of talking about Medicaid disenrollment, et cetera, saying, let's see how this plays out. We're not going to make any commitments. They listen. They acknowledge that the reduction in the Directed Payment Programs could have a pretty significant impact on many of their hospitals. They are, I think, open to the idea of finding other ways to support them within their budget constraints. Again, nothing specific at the moment because I think the states are essentially taking that wait-and-see position, which I think makes sense. None of us really know exactly how this is all going to play out. They say, we'll plan, we'll think about, we'll consider, but give us some time to see how this all plays out. It's great to hear that, especially in the DC DPP approval. Could you remind us on the benefit that you're expecting? Is that $85 million, if I'm not mistaken? Yeah. Is that low all-through earnings, and can you recognize that this year, you think? The program we're expecting will be approved effective October 2024. In our third quarter, we should, in theory, have a year's benefit. We've estimated that benefit previously in our SEC filings to be in the $85 to $90 million range, as you suggest. Again, we haven't seen the specific documents to verify those numbers, although we're not expecting them to be materially different. Presumably, in our third-quarter filings, we'll have all that in detail. That's great to hear. Should we expect all of that to, or most of it, to flow through to earnings? Is that reasonable? Yes, there's really no, when we give these DPP benefit numbers, we've historically given them as a net benefit, net of any provider taxes. Great. On the topic of Washington, DC, I think last week at Wells Fargo, you mentioned Cedar Hill that you might get deem status in the coming days or even early this week. Any quick update there? Did you receive it? In thinking about that $25 million headwind embedded in your guide, do you have a specific date, or as long as it's approved by third quarter, then you're tracking to $25 million? Trying to understand that better. Yeah. What I said last week at another conference was we had seen the paperwork from the Joint Commission, who does the survey, that they had written a letter to CMS recommending that we receive our deem status as of last week, I believe, as of September 4. We haven't actually gotten the documents from CMS, but anticipate, again, that they generally accept that and that we will have our deem status as of September 4. As to your question, we had a $25 million negative EBITDA from Cedar Hill in Q2. We projected in our revised guidance another $25 million negative loss in this back half of the year, probably heavily weighted to the third quarter. We didn't really have an absolute specific date in that, but assumed it would be within this time frame. I think we're comfortable with that $25 million in the back half of the year as a reasonable estimate. Hopefully, we do better than that because now that we have our deem status, or presumably have our deem status, we'll begin to sort of ramp up, accept more patients. We'll, importantly, begin to be paid for all of our patients. Hopefully, the turnaround can be executed pretty quickly. Thank you. On a similar topic, different, but Proposition 35 in California. I know you have a pretty sizable presence. Has there been any update on the benefit there? I know that there's been lots of conversations, but not much movement. Any sense on magnitude or timing? Could you actually recognize that this year, or is that pretty unlikely? Any new developments? Yeah. I think the way you framed the question is correct. Prop 35 was a measure passed in California that presumably makes available significant incremental funding for behavioral hospitals in particular, but very nonspecific. We've had lots of conversations with the county and city governments in which we operate behavioral facilities about ways in which we could improve access for behavioral patients in those areas, etc., if there was increased reimbursement or if there was funding for capital improvements or capacity expansion. I don't believe there's been any objective, definitive sort of developments there. I certainly don't think there'd be any impact of note in 2025, and whether there would even be something like a material impact in 2026, I think is very much up in the air at this point. OK. Thank you. Now switching or flipping to volumes, I guess any update on interquarter volumes? How are you tracking through third quarter? Everyone's focused on that 2.5%, the 3% adjusted patient day growth. I know on the acute side, you've seen some cannibalization in West Henderson, softer surgical volumes. You're also entering a third quarter with a relatively easier prior year comp. Would just love to hear an update on volumes. Yeah. On the acute side of the business, we have said that we think that a sustainable acute care model at this point is mid-single-digit revenue growth, 5%, 6%, 7%. I'll call it 6% at the midpoint, split pretty evenly between price and volume. On the volume side, roughly kind of consistent 3% adjusted admission growth. We've been hitting those numbers, honestly, or candidly, I think adjusted admission growth in Q3 was actually a little bit better than our peers. It feels to us like that's a reasonably sustainable number. I know some of our peers continue to talk about an environment in which they believe acute care volumes may grow sustainably at a higher rate. This is one of those issues that I hope they're right. I think we're comfortable with that kind of 3% growth rate that we've talked about. Nothing in the third quarter would suggest that that becomes more or less reasonable. I think we're tracking to a number pretty close to that. On the behavioral side, patient day or adjusted patient day growth has been slower than we've anticipated for several years. It has improved incrementally, but it's been, as I said, slower than we expected. What we've talked about is the original goal for patient day or adjusted patient day growth for 2025 was 2.5% to 3% for the full year. At this point, it's clear to us we're not going to be able to get to that number, but have said that we think we should be able to exit the year at something close to that number and, again, continue to believe that's the case. Just reminding people that probably the two biggest issues I think that we've discussed are labor scarcity issues. These were, of course, predominant during the COVID epidemic. They've certainly improved since then. Still, in probably, I'm going to say, a quarter to a third of our facilities, we still struggle to some degree with filling all of our vacancies. That could be nurses in some cases. It could be therapists, counselors, psychologists in some cases. In many cases, it's the folks that we call mental health technicians. These are non-degreed people, but they're critical to the treatment of patients in a behavioral setting. Sometimes we can't hire enough of those folks. I think we're making incremental improvement in that regard, which is helping improve our volumes in behavioral. What we talked a lot about in the last couple of quarters is the sense that a significant amount of the demand growth broadly in the behavioral space is in outpatient, and I'll call them more alternative settings. That hasn't been a huge focus of ours in the past. I think it will be a greater focus in the future, both in terms of the patients we discharge from our inpatient facilities who need continuing outpatient care, as well as patients who enter the system in an outpatient setting. These are more freestanding outpatient providers. We've really not played in that space in any sort of significant way, but we'll do so in the future. I think we have not been getting what I would consider to be our fair share, our fair market share of that outpatient growth. I think that will be a big contributor to getting back to that sort of 2.5%, 3% target that we've been citing for some time. Great. Thank you. I'd love to stay on that topic on staffing and then outpatient. I know you mentioned a quarter to a third of your facilities still experience shortages and still high turnover. I think, if I'm not mistaken, turnover has been as high as 50% in recent years. Is it still at that level? Have you made improvements? Do you have a hard target on that turnover rate improvement? Where was it pre-COVID? Just trying to get a sense on maybe internal metrics that you're looking at daily, weekly, get a better sense on internal goal pulse. Sure. I think during the pandemic, turnover rates, and I always make the point, because I think it's important that this is not a Universal Health Services-specific issue, quite frankly. I I don't think it's a behavioral health-specific issue. I think it's broadly a sub-acute issue, meaning behavioral health facilities, nursing homes, skilled nursing facilities, home health facilities struggle with keeping and filling all their positions. It's because, I think, in large part, nurses in particular always have the option of working in an acute care setting, in an acute care hospital setting, and honestly, probably at a higher salary, probably at a higher base salary. This dynamic was exacerbated greatly during the pandemic when acute care hospitals were paying, I'm going to say you hear these apocryphal stories, but they really weren't apocryphal. They were very true. Nurses were making $10,000 a week during the pandemic, working in a COVID unit or an acute care, et cetera. Certainly, those dynamics have passed. There still is that opportunity. There still is, I think, a relatively tight labor market for nurses, and again, for other therapists and even for the mental health techs. That turnover rate certainly has diminished significantly. It's, I think, below 50% today in most cases. We tend not to sort of publish that on a routine basis, et cetera, because the numbers can be distorted. In other words, a lot of times, a nurse will leave our full-time employment but continue to work for us as what we would call a per diem nurse. That is, they sort of work when they want to be on call, et cetera. We really haven't really lost that nurse in that sense. There are other things where one nurse will leave one of our hospitals and go to work in another, and whether we count that as a termination and turnover, all these things, the statistics aren't perfect. I think they are consistent internally, which is important to us. We certainly have made improvements. The turnover rate is still high. I would say it's at least in the 40s. That's an incredibly inefficient rate to be losing people, to have a third or more of your workforce turnover every year. During the pandemic, quite frankly, a lot of our focus was on recruiting and bringing enough nurses into the pipeline. I think post-pandemic, we're much more focused on the retention piece of it, that once we bring a nurse or another employee into the fold, are we providing them the appropriate level of orientation and education? Are we providing them educational opportunities to want them to stay? Are we providing them the mentorship so they feel needed and wanted? All these things are quite important. I think we're making progress, but it is certainly incremental. Great. Anecdotally, I've heard year one turnover is much higher. After they make it past year one, it diminishes drastically. I was wondering, is that true? Are there ways financially that you're incorporating into compensation guarantee, like two-year packages, if not, to help drive that retention? Are those things you're considering? It is very true. Our retention rates, once a nurse, or quite frankly, any employee, behavioral employee, has been at work for more than a year, goes up, I'm going to say, exponentially. Part of it is, particularly in nursing schools today, many nursing schools really don't have any behavioral-specific education. A nurse might come to work for us out of nursing school, never having worked in a behavioral facility before, and find that he or she, this isn't what they kind of imagined, this isn't what they want, this isn't what they like. We're doing a lot of different things. Number one, we're partnering across the country with nursing schools to provide that opportunity for nurses to get an onsite work experience in behavioral, to understand what it's like. There's a better match that the nurses who do join us are nurses who understand what the environment and the milieu is like, and that that's what they want, and the nurses who don't, don't, and provide that opportunity. Also, I think, like during the pandemic, we were so desperate for nurses that nurses were coming, and we were orienting them as quickly as possible. Sometimes, I think that was a bit overwhelming for them. I think we're much more deliberate today about how we're orienting and educating our nurses who come in, particularly those without behavioral experience, to make sure that when they go out on the floor and when they begin to see patients in a live setting, et cetera, that, again, they have the right mentorship, somebody's partnered with them, they feel more comfortable, much more likely to not throw up their hands and say, I'm not really prepared for this. Yes, a big part of our emphasis is on that first year of experience, making sure that nurses are appropriately oriented and prepared. Great. In the last couple of minutes, I think we'll focus on behavioral outpatient. It just seems like such an attractive market, how fragmented it is. It is the market share grab opportunity. Managed care companies are coming out and saying how elevated the trends are. I understand your focus here has started about a year ago with opening 10 facilities, and now you're planning on 10 to 15. If these trends continue to inflect higher, stay elevated, just given how healthy your balance sheet is, would you consider levering up or shifting it higher in your deployment priorities, or just allocating more dollars to de novo builds, getting to more than just 10 to 15 per year? Just to make a point or clarify the point, when we talked about adding 10 or 15 facilities a year, these are new, as you suggest, de novo, freestanding outpatient facilities. We do have a larger outpatient presence than that. We probably have somewhere in the 70, 75 outpatient facilities around the country. Many of them are what we would describe as step-down facilities. When a patient is discharged from a behavioral hospital, they are often done so in need of continuing care. We call this intensive outpatient care or a partial hospitalization. This is not just an hour's therapy a week with a therapist. This is four, five, six hours a day. It essentially mirrors the treatment that they were receiving in many ways in the inpatient setting, but they're not staying overnight. They've reached a point in their recovery where they don't need to be cared for 24 hours. We have a bunch of those facilities. The new facilities we're talking about are more of these freestanding facilities that we have not had as much emphasis in. The limitation, Michael, is really not a CapEx or a facility one. Probably the biggest challenge, going back to a theme that I described before, is finding the right number of therapists and making sure you have the right number of therapists. It's really not a question of the capital. The capital required to put up a freestanding outpatient facility is somewhere between $1 million and $2 million. That's not a big hurdle here. It's making sure you have the right number of therapists. To your point, we do, I think, have significant advantages as we open these things. We already have established referral sources who know us, who understand our outcomes, et cetera. We have relationships with payers. One of the things you talked about, payers citing behavioral care as an increasing part of their medical losses, one of the things they've cited is a lot of out-of-network care, which means that they're sending patients to out-of-network facilities when we're largely, in most cases, an in-network provider. That's another advantage to us as we move forward to this area. Perfect. That's time. Thank you so much, Steve. Thank you so much, everyone. Have a great rest of your day. Thank you.