After a down first quarter, investors question why UHS isn't adjusting its 2022 guidance

Updated at 11:40 a.m. on April 26

Investors' eyes were on the future as King of Prussia, Pennsylvania-based Universal Health Services (UHS) reported missing its internal Q1 earnings target by 6% but declined to adjusted its guidance for the rest of 2022.

Much like its public for-profits contemporaries recently reported in their own earnings, the acute care and behavioral health hospital company fielded an uptick in January omicron cases and was caught off-guard by the slow recovery of the contract labor market, executives said during a Tuesday morning investor call.

“The primary driver of the shortfall was the fact that the labor scarcity has not moderated as quickly as we had expected," CEO Marc Miller told investors. 

"We do believe the demand for this premium-price 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 hirings. Where appropriate, we are also developing alternative patient care models that allow us to use a wider variety of available care givers to render the most efficient and highest quality care that we can."

Alongside questions on the specifics of when contract labor rates may stabilize, investors pushed UHS' executives on their decision not to revise guidance for the remainder of the year as fellow hospital operator HCA Healthcare did just last week.

Both Miller and Steve Filton, executive vice president and chief financial officer, highlighted promising upward trends in UHS' recent hirings and said they were confident in the underlying demand for acute and behavioral services alike. 

Still, Filton voiced some frustration with the critique over projections and noted that his company was dinged by investors for being too conservative when it initially published the 2022 forecast two months back.

"I think we were roundly criticized for that—that we’d expressed too much caution about how quickly the labor situation would resolve itself, etc. Now two months later, some people … are saying ‘okay, now you’re being too aggressive,’” Filton said. “I don’t mean to imply that the labor situation has turned, or we have 100% certainty that it will or when it will. I think we’re just suggesting that more time is not an unreasonable request to have two months after that guidance was initially issued.

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

UHS reported $153.9 million in net income for the quarter, down from the $209.1 million it logged during the same period last year. However, net revenues grew year over year from $3 billion to nearly $3.3 billion.

Within the company’s acute care segment, same-facility net revenues grew 9.7% year over year.

Adjusted admissions increased by 5.7% and adjusted patient days rose by 5.5% among facilities owned in the first quarter of 2021 and 2022. COVID-19 patients comprised roughly 14% of the quarter's total admissions, which executives said was largely front-loaded but still among the highest numbers the system had seen throughout the pandemic. 

Income within the segment before taxes fell from $173.8 million in early 2021 to $152.5 million in the most recent quarter, thanks in large part to the jump in operating expenses from $1.5 billion to $1.7 billion.

For the behavioral health side of the business, UHS saw same-facility year-over-year adjusted admissions dip by 1.9% and adjusted patient days decline by 1.3%. However, net revenues grew by 3.8% year over year.

First-quarter income before taxes also fell for the behavioral health segment with UHS reporting a year-over-year decline from $173.1 million to $148.7 million.

Here again, rising operating expenses were the culprit as UHS saw its costs grow from more than $1.5 billion to nearly $1.8 billion year over year.

While the company called out nationwide nurse, clinical staff and support personnel shortages as factors for both sides of the business, “at certain facilities, particularly within our behavioral healthcare segment, we have been unable to fill all vacant positions and, consequently, have been required to limit patient volumes. These factors had a material unfavorable impact on our results of operations during the first quarter of 2022,” UHS wrote.

Executives said that the reduction in behavioral volumes doesn't speak to reduced demand for these services in UHS' markets, as evidenced by consistent and sometimes rising inbound inquiries the company received through its website and other contact points. The low conversion rates—again primarily due to workforce-related service restrictions—means that many of these patients are currently going untreated and will likely seek out services once capacity returns. 

"Our bullish view of the underlying strength of our core businesses remains intact," Miller said. "Reflective of that sentiment, we remain an active acquirer of our own shares in the first quarter, repurchasing $350 million of those shares."

More broadly, the executives spoke to economic inflation and its cost implications on medical supplies or device purchases, noting that it was a substantially less pressing issue for UHS than the premium labor situation. 

Filton also addressed the Center for Medicare and Medicaid Services' proposed Inpatient Prospective Payment System rule, saying that the pay bump was disappointing but "pretty much" what the system was expecting when it issued its guidance.

"Along with the rest of the hospital industry, we were disappointed that Medicare and CMS did not seem to acknowledge the inflationary pressures, in particular the labor inflation, that hospitals across the country are experiencing," he said. "I expect that in this period between the preliminary and final rate, Medicare will come under significant pressure from lobbying groups across the country, representing hospitals of all stripes and sizes."

UHS owns and operates 28 inpatient acute care hospitals, 19 freestanding emergency departments, six ambulatory surgery centers and one surgical hospital. Its behavioral health business unit comprises 335 inpatient facilities and 14 outpatient facilities.

The chain employs roughly 89,000 people and reported $12.6 billion in revenue and nearly $992 million in net income during 2021. This was up slightly from $11.6 billion and $944 million, respectively, during the year prior.