UHS: Wait until H2 for margin growth

 Universal Health Services executives are warning investors that it'll likely take until the second half of 2023 for revenue and volume recovery to catch up with labor rate increases and other rising expenses that have hammered providers' finances over the past year. 

Speaking in UHS' Tuesday morning earnings call, President and CEO Marc Miller described 2023 as "a year of continued transition into a post-pandemic world."

The acute hospital and behavioral health facility operator expects it will be able to cut down its premium pay expenses by a third from 2022's elevated levels, representing roughly $150 million to $160 million in reduced spending. Hiring rates and worker turnover should also improve in the coming year, Miller said, and the behavioral health segment in particular has shown "encouraging" operating indicators during the first several weeks of the year. 

Still, the resulting margin improvement will likely be "incremental" and are being offset by inflation and labor shortage-fueled wage pressures, executives said.

"Where we're at in both businesses is that ... even though revenues are recovering particularly on the behavioral side, salary expense or wage expense is still outpacing the growth in revenues," Steve Filton, executive vice president and chief financial officer, told investors. "We believe that by the second half of 2023 that begins to sort of stabilize and we start to get to a more normalized historical pattern of revenue growth exceeding salary growth. But in the first half of the year that's not the case and, again, I think that's probably the main driver of the margin pressure next year."

Filton told investors that UHS expects that the second half of 2023 should resemble the same period in 2019 and that "unless there is some unforeseen development, [2024] begins to look like a really true post-pandemic year."

UHS capped off 2022 with a quarterly net income of $174.8 million ($2.43 per diluted share) and a full-year net income of $675.6 million ($9.14 per diluted share), the company announced in earnings results posted Monday after market close.

The fourth-quarter and annual performances fell below 2021’s respective $239.1 million ($3 per diluted share) and $991.6 million ($11.82 per diluted share).

While the quarter's numbers were slightly above consensus market estimates as recorded by Seeking Alpha, the company's conservative projections for 2023 led UHS stock price to drop roughly 10% by midday Tuesday.

Net revenues for the quarter increased 5.2% year over year to $3.45 billion, again beating the consensus market estimate by about $50 million. Operating expenses grew 7.5% to $3.19 billion, leaving operating income at $261.3 million in the fourth quarter (down 16.7% year over year).

Across the year, net revenue rose 6% to $13.4 billion. Operating expenses grew 9.9% to $12.4 billion, with operating income landing at $1 billion (down 26.4% year over year).

UHS highlighted a 5.5% year-over-year increase in quarterly adjusted admissions and a 1.6% increase in adjusted patient days, though net revenue per adjusted admission fell 3.8% and net revenue per adjusted patient day dipped by 0.2% . Full-year volumes saw a 3.1% increase in adjusted admissions, a 0.9% increase in adjusted patient days, a 0.3% dip in net revenue per adjusted admission and a 1.9% increase in net revenue per adjusted patient day.

Speaking to investors, Miller and Filton said that the acute care business's softer per-job revenues the result of lower case acuity. This was due in part to a drop in the number of COVID-19 inpatients and the ongoing shift to outpatient care—Filton, for instance, noted that fourth quarter surgical volumes were up "3% or 4%" from the same time in 2019, with outpatient procedures up "probably 7% or 8%" and inpatient procedures "sort of flattish."

In the behavioral health segment, adjusted admissions for the quarter rose 0.7% year over year, adjusted patient days grew 2%. Net revenue per adjusted admission increased by 3.4% as net revenue per adjusted patient day rise by 2.2%. For the year, adjusted admissions were up 0.7%, adjusted patient days grew by 1.2%, net revenue per adjusted admission rose 4% and net revenue per adjusted patient day increased by 3.5%.

Here the winding down of COVID-19 has been an unconditional boon for UHS, namely due to the greater supply of labor that allowed behavioral hospitals to cut down the number of capped beds to "a few hundred ... we would consider capped on most days," Filton said.  

UHS’ $174.8 million net income for the quarter includes after-tax commercial insurance proceeds of $19.6 million tied to business interruption and property damage at one of its facilities and an IT incident. The quarter also includes a $42.3 million after-tax hit that largely came from a Las Vegas hospital’s asset value write-down.

Looking ahead, UHS forecasted 2023 full-year net revenues between $14.04 billion and $14.31 billion. It expects adjusted EBITDA net of non-controlling interests in the range of $1.55 billion and $1.75 billion, translating to $9.50 to $10.50 adjusted earnings per diluted share. The company plans capital expenditures between $725 million and $875 million.

King of Prussia, Pennsylvania-based UHS operates 28 inpatient acute care hospitals, 331 inpatient behavioral health facilities, 39 outpatient facilities and other locations across 39 states. It employs nearly 94,000 people.

https://www.fiercehealthcare.com/providers/uhs-beats-street-profits-175m-q4-6756m-across-2022