UHS beats with $167M Q3 profit, but has more work securing payments, reducing physician expenses on its plate

Payers' "increasingly aggressive behavior," a spike in physician expenses and recruitment are front of mind for executives at Universal Health Services.

The King of Prussia, Pennsylvania-based for-profit system came out slightly ahead of analyst estimates this quarter with a $167 million profit ($2.55 per diluted share).

Much of the success came from a continued rise in patient volumes, particularly on the acute care side of the business where patients are seeking care after delaying procedures during the pandemic, Chief Financial Officer Steve Filton told investors during a Thursday morning earnings call. 

While key to the company's 6.8% year-over-year increase in net revenues, that recaptured care was largely lower acuity services that held same-facility revenue per adjusted admission to a "somewhat more muted" 0.4% year-over-year increase, Filton explained.

That trend isn't expected to last much longer. "Over time, we would expect our volumes to moderate a little bit, but also our revenue per adjusted admission to come up," Filton told investors. 

The other drag on acute revenues was a shift in the behavior of managed care payers. Whereas payers "eased up quite a bit" on denials, patient status changes and other utilization reviews early in the pandemic, 2023's volume recovery "created some pressure on the [medical loss ratios] for managed care companies," Filton said. 

"It's difficult to quantify in a precise way, but our acute care revenue per adjusted admission, which was only up modestly in the quarter, would have been higher if it had not been for this behavior," he said. "A lot of this is sort of an extended process, meaning we'll appeal a lot of these claims denials, we'll work to collect a lot of this money—and I think we will collect a substantial amount of them down the road—but again, in the current period, it is weighing somewhat [on managed care revenues]."  

As for the behavioral health side of UHS' business, Filton said the company is seeing the inverse trend where "pricing has been particularly strong" but that staffing challenges have kept facilities from reaching their full volume capacity.

Additionally, a "handful of facilities" are facing "some very specific issues" such as the impact of Medicaid redeterminations in certain states like Texas—though UHS expects many of the patients affected by redeterminations will eventually re-secure coverage.

In terms of spending, executives noted that physician expense increases across 2023 continue to be "a bigger issue than we anticipated," running at a rate of roughly 7.6% of revenues versus pre-pandemic's 6%. Filton attributed the jump to changes brought about by the No Surprises Act.

"We all collectively learned ... that these physician coverage businesses had relied ... in large part on their billings to out-of-network patients," Filton said. "Collectively, we had no full understanding of that, ... and we had to absorb those costs. In our case, we were just having to pay third parties more."

Filton said he expects the jump in physician expenses to "reset" somewhat in the coming year as the third parties adjust their businesses and his company reassesses its contracts.

"That's not to say that there won't be pressure on physician expense next year. ... It could increase by 10% or 15%, something above the rate of inflation," he said. "But I just don't think we that this is something that you're going to have to face 35% or 40% increases multiple years in a row."

Alongside its above-expected net earnings, UHS beat on net revenues with a 6.8% year-over-year increase to $3.6 billion. Its operating expenses rose by 7.1% to $3.3 billion, which includes a 6.4% increase in salaries, wages and benefits. 

Within its acute care services, which spans 27 owned and leased hospitals as of Sept. 30, UHS reported just over $2 billion of net revenue during the third quarter, a 5.1% year-over-year increase.

On a same-facility basis, adjusted admissions during the third quarter rose 6.8% year over year, while adjusted patient days rose by 3.8%. Overall, same-facility net revenues rose 7.5% from last year, while same-facility net revenue per adjusted admission increased 0.4% and same-facility net revenue per adjusted patient day rose 3.3%.

On the behavioral health side, which includes 331 behavioral health facilities, UHS logged more than $1.5 billion of third-quarter net revenue, a 7.5% year-over-year increase.

On a same-facility basis, adjusted admissions and adjusted patient days rose by 0.8% and 1.1% year over year, respectively. Same-facility net revenues rose by 7.6%, net revenue per adjusted admission increased by 6.8% and net revenue per adjusted patient day rose by 6.5%.

UHS repurchased about 1.3 million shares at an aggregate cost of $175.1 million during the quarter, and year to date has spent $367.2 million buying back shares.

Year to date, UHS now sits at $501.4 million net income, just above the prior year’s $500.8 million.

The for-profit system employs almost 94,000 people across hundreds of locations in the U.S., the U.K. and Puerto Rico. It reported $13.4 billion in revenues during 2022 and is enjoying sequential quarters of recovering volumes.

Editor's note: Updated at 12:00 p.m. ET Oct. 26 with executives' earnings commentary.