Universal Health Services' Q2 profits halved following slow labor, volume recovery

Lingering labor pressures and a slight dip in admissions cut Universal Health Services' second-quarter profits in half compared to its quarterly performance a year prior, the King of Prussia, Pennsylvania-based for-profit announced Monday after market close.

Net income attributable to UHS landed at $164.1 million on the back of $3.23 billion in net revenues and $3.09 billion in operating expenses, according to the company’s most recent earnings.

The acute and behavioral hospital operator had posted a $325 million profit during the second quarter of 2021, driven by $3.2 billion in net revenues and $2.76 billion in operating expenses.

Year-to-date net income attributable to UHS now sits at $318 million, down from $534.1 million during the first six months of 2021.

UHS had signaled each of these hiccups to investors late last month when the company lowered its full-year guidance due to a “significant shortfall in operating results” during the quarter’s first two months. 

UHS’ acute care hospitals saw a 0.7% year-over-year decline in adjusted admissions but a 1.8% year-over-year increase in adjusted patient days and a net revenue per adjusted admission increase of 2.5%.

Speaking to investors Tuesday morning during the company's earnings call, Chief Financial Officer Steve Filton said that the decline of COVID volumes from 13% in the first quarter to 3% in the second wasn't offset by the return of non-COVID patient volumes UHS had expected when it closed out the prior quarter.

Filton explained that UHS based its original projection on post-surge volume recovery trends the company had seen during 2021. An early-year COVID surge had led non-COVID patients to postpone their care until April, May and June, he said, effectively making the second quarter of 2021 "the most profitable, most robust quarter of the year for both of our business segments."  

Filton and CEO Marc Miller said UHS now believes the trajectory of non-COVID volume recovery has been extended into the back half of the year. They also stressed that the company does not believe that the quarter's lower-than-expected volumes are a sign that overall demand for services has dropped. 

Additionally, “although the decreased patient volumes at our acute care hospitals has relieved some of the staffing shortages and related cost escalations previously experienced at those facilities, recovery from the effects of the labor pressures has been occurring at a somewhat slower pace than expected,” the system wrote in its earnings release.

The first quarter of the year had UHS paying out $153 million in premium acute pay due to staffing shortages, Filton said. Declining utilization and dropping rate reduced that number to $117 million in the most recent quarter—less of a dip than UHS had hoped, but still on track for the roughly $75 million the company had projected reaching by the fourth quarter, Filton said.

The company said that some of its labor shortages led to restrictions on capacity, particularly within its behavioral health segment where Filton said a "significant number of patients" were turned away.

UHS reported adjusted admissions within the behavioral division dipped 0.1% year over year on a same-facility basis while net revenue per adjusted admission rose 2.6% year over year. Still, Filton said the company is still optimistic about the growth its behavioral business has seen in recent years and believes a continued upward trajectory will be within reach once the labor challenges are resolved. 

The system also noted a net favorable after-tax impact of roughly $29.8 million during the quarter due to a combination of Kentucky Medicaid managed care hospital rate increase program revenues, an increase to its reserves for self-insured professional and general liability claims, and commercial insurance proceeds tied to the pandemic and a prior IT incident.

As with other health systems reporting their earnings this past week, investors polled executives on the impact of inflation across the business. 

UHS is "certainly" feeling the pressure on its labor expenses and other areas throughout its business and is looking to recoup some of those costs from managed care payers, Filton said.

The health system has been handing out notices of termination on underpaying contracts across both sides of its business "at a pace faster than, quite frankly, I can remember," he said. UHS has been particularly discerning in areas where its facilities are already capacity constrained due to labor challenges, allowing the company to focus on the patients and contracts it believes are "adequately reimbursed, he said.

Filton said he believes UHS and other providers could see an unusual amount of cooperation from commercial payers who have recently signaled "a different tone" to their own investors. 

"United in their quarterly earnings call acknowledged that they would be giving some level of price increases in 2023 to providers to acknowledge the increased inflationary pressures—which, at least for me, was the first time a payer had acknowledged that," Filton said. "So our expectation is that payers will be more receptive to it in 2023. But we’ll also continue to be aggressive and try to grab the bull by the horns where we’re able to and wrangle rate increases from reluctant payers where we can and, where we can. I think we’re willing to reconfigure our business and rid ourselves of some of those lowest payers."