Q4 2023 Earnings Summary
- UHS is strategically investing in high-return opportunities, including expanding outpatient services in both acute and behavioral segments, expected to enhance growth and profitability.
- Improved operational efficiencies, particularly in labor costs, with contract labor expenses expected to decrease by $30 million to $40 million in 2024, are anticipated to positively impact margins.
- The company is securing favorable commercial rate increases in the mid-single digits (5%-6%), which should support revenue and margin growth in the acute segment.
- Uncertainty around margin expansion due to high inflation and unexpected cost increases, particularly physician expenses, which in prior years have doubled initial projections, indicating potential continued volatility in costs that may impact margins.
- Increased competition from major providers like HCA investing heavily in key markets such as Las Vegas may pressure UHS's market share and margins, as competitors expand their capital deployment in these lucrative markets.
- In the Behavioral Health segment, pricing and acuity are expected to decline in 2024, with management noting that previous strong pricing gains may not be sustainable; occupancy rates remain below pre-pandemic levels by 200 to 300 basis points, potentially impacting revenue growth and margins.
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2024 Guidance and Margins
Q: Why is 2024 EBITDA growth lower than expected?
A: Steve Filton explained that after facing elevated costs in recent years, they're cautious about expanding margins. Excluding the $150 million increase from Nevada supplemental payments, EBITDA growth appears modest. However, these payments are essential to offset higher expenses. They anticipate mid-single-digit growth but remain prudent due to unpredictable costs like physician subsidies. -
Medicaid Supplemental Payments Impact
Q: Will increased Medicaid payments continue or stabilize?
A: Steve noted that Medicaid supplemental payments have grown significantly, reaching $809 million or 41% of EBITDA in 2024, up from $225 million in 2019. These payments are crucial for sustaining operations amid inadequate Medicaid reimbursement and rising costs. While CMS may cap growth rates, they're unlikely to reduce payments, and other states might adopt similar programs. -
Volume Growth Expectations
Q: Should acute volumes grow faster to return to trend?
A: Despite adjusted admissions growing over 6% in 2023, volumes are expected to moderate in 2024. Steve believes the high growth rates are unsustainable long-term. They project a return to historical mid-single-digit growth, accounting for potential moderation in lower acuity volumes. -
Labor Costs and Wage Growth
Q: How is wage growth impacting volumes and margins?
A: Wage growth has moderated to around 4–5%. While raising wages might fill remaining positions, it risks elevating pay across all staff. They've reduced premium pay from $153 million in early 2022 to $67 million in Q4, aiming for further reductions towards $50 million per quarter, potentially saving $30–40 million annually. -
Capital Deployment Strategy
Q: How are you prioritizing capital between segments?
A: Capital is allocated based on the highest returns, regardless of segment. While behavioral health offers higher margins, opportunities in acute care, especially in strong markets like Las Vegas where they've invested hundreds of millions, remain attractive. There's also an increasing focus on outpatient opportunities in both segments. -
Behavioral Pricing Sustainability
Q: Can strong behavioral pricing continue in 2024?
A: Strong pricing in behavioral health has been driven by higher acuity and successful rate negotiations. However, as these impacts are annualized, they expect pricing and acuity to decline slightly in 2024, with increased volumes offsetting the impact. -
Physician Expenses and Contracts
Q: What's the outlook for physician fee expenses?
A: Hospital-based physician contracts have been renegotiated due to industry changes. The increased costs are now largely reflected in financials, and they don't anticipate significant increases in 2024. Nonetheless, they remain cautious due to potential volatility in this area. -
Technology Investments and Efficiency
Q: How are technology investments improving operations?
A: Investments include implementing electronic medical records in behavioral facilities and utilizing patient-tracking devices to enhance efficiency in patient rounding, improving overall operational effectiveness.
Research analysts covering UNIVERSAL HEALTH SERVICES.