Earnings call transcript: Universal Health Services Q3 2025 beats expectations

Universal Health Services (UHS), a healthcare provider with a market capitalization of $13.56 billion, reported its third-quarter 2025 earnings, significantly surpassing analysts’ expectations. The company posted an adjusted net income of $5.69 per share, a 17.56% surprise over the forecast of $4.84. Revenue reached 4.5 billion dollars, exceeding the anticipated 4.34 billion dollars. Following the announcement, UHS’s stock rose by 4.93% in premarket trading, reflecting investor confidence in the company’s robust performance and future prospects. According to InvestingPro analysis, UHS maintains excellent financial health with an overall score of 3.42 out of 5, suggesting strong operational efficiency.

Key Takeaways

• UHS achieved a 53% year-over-year increase in adjusted net income.
• Revenue grew by 13.4%, driven by strong performance in both acute care and behavioral health segments.
• The company raised its 2025 adjusted EPS guidance to $21.80.
• Stock price surged 4.93% in premarket trading following the earnings announcement.
• UHS continues to expand its outpatient and behavioral health services.

Company Performance

Universal Health Services demonstrated strong performance in Q3 2025, with significant growth across its core segments. The company capitalized on increased admissions and higher net revenues in both acute care and behavioral health. This growth aligns with broader industry trends favoring outpatient services and behavioral health care. UHS’s strategic expansion and innovation efforts, such as opening new facilities and launching outpatient programs, have positioned it well against competitors.

Financial Highlights

• Revenue: 4.5 billion dollars, a 13.4% increase year-over-year.
• Earnings per share: $5.69, up 53% from the previous year.
• Cash from operating activities: 1.3 billion dollars for the first nine months of 2025.
• Capital expenditures: 734 million dollars year-to-date.

Earnings vs. Forecast

UHS’s Q3 2025 earnings per share of $5.69 exceeded the forecast of $4.84 by 17.56%, marking a substantial earnings surprise. Similarly, revenue surpassed expectations by 3.69%, reaching 4.5 billion dollars. This performance reflects the company’s effective operational strategies and market positioning.

Market Reaction

Following the earnings release, UHS’s stock price increased by 4.93% in premarket trading, reaching $224.59. This gain indicates positive investor sentiment, supported by the company’s strong financial results and optimistic future guidance. The stock’s movement places it near its 52-week high of $226.72, underscoring its strong market performance. InvestingPro analysis shows five analysts have recently revised their earnings estimates upward, with analyst targets ranging from $165 to $280. Get access to 12 more exclusive ProTips and comprehensive valuation metrics with an InvestingPro subscription.

Outlook & Guidance

UHS has revised its 2025 adjusted EPS guidance upward to $21.80, reflecting confidence in sustained growth. The company anticipates a 5-6% increase in acute care revenue and a 2-3% rise in behavioral health volumes. Strategic initiatives, including the expansion of outpatient services, are expected to drive future growth. Management’s confidence is further demonstrated through aggressive share buybacks, as highlighted in InvestingPro’s analysis. The company has maintained dividend payments for 23 consecutive years, showcasing its commitment to shareholder returns.

Executive Commentary

Marc Miller, CEO, emphasized the favorable long-term outlook for the company’s new facilities, stating, "We believe the long-term outlook for Cedar Hill remains favorable." CFO Steve Filton highlighted capital allocation strategies: "We continue to view share repurchase... as a compelling use of our capital."

Risks and Challenges

• Potential reductions in Medicaid revenues by 2032 could impact future earnings.
• Staffing challenges in the behavioral health segment may affect operational efficiency.
• Macroeconomic pressures could influence healthcare spending and patient volumes.

Q&A

During the earnings call, analysts inquired about potential Medicaid supplemental payments in Florida and Nevada, improvements in surgical volumes, and pricing strategies with managed care companies. UHS addressed these concerns, providing insights into its operational strategies and market positioning.

Full transcript - Universal Health Services (UHS) Q3 2025:

Conference Call Operator: Good day and thank you for standing by. Welcome to the third quarter 2025 Universal Health Services earnings conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you’ll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to Darren Larick, Vice President of Investor Relations. Please go ahead.

Darren Larick, Vice President of Investor Relations, Universal Health Services: Good morning and welcome to the Universal Health Services third quarter 2025 earnings conference call. I’m Darren Larick, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller, and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then we’ll open it up to Q&A. During today’s conference call, we will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, we recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2024, and our Form 10-Q for the quarter ended June 30, 2025.

In addition, we may reference during today’s call measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI, and adjusted net income attributable to UHS, which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in today’s press release. With that, let me now turn it over to Marc Miller for some introductory remarks.

Marc Miller, President and CEO, Universal Health Services: Thank you, Darren. Good morning, everybody. Thank you for your interest in UHS. I also want to take this opportunity to welcome Darren to the UHS team. We look forward to having him in a dedicated investor relations function for our company. Turning to our third quarter 2025 results, we reported adjusted net income attributable to UHS of $5.69 per share, representing a 53% increase from the third quarter of 2024. Revenue growth for the third quarter of 2025 was 13.4% year over year. Our third quarter performance reflects continued growth in our acute care operating environment, modest volume improvement in our behavioral health segment, and solid pricing across both segments. The third quarter included $90 million of net benefit from the recently approved supplemental Medicaid program in the District of Columbia. Steve will cover the details of this approval and other supplemental Medicaid program updates.

Based on our operational performance year to date and the increased supplemental reimbursement in the District of Columbia, offset somewhat by additional professional and general liability reserves, we are increasing the midpoint of our 2025 adjusted EPS guidance by 6% to $21.80 per diluted share from $20.50 per diluted share previously. During the quarter, we experienced progress in our two most recent acute care hospital openings: West Henderson Hospital in Henderson, Nevada, and Cedar Hill Regional Medical Center in Washington, DC. Specific to Cedar Hill, we achieved accreditation in early September. As a result, the financial drag from our certification timing delay and startup issues began to subside during the third quarter, and we expect to exit this year at breakeven or better, putting us in a stronger position at this facility heading into 2026.

We believe the long-term outlook for Cedar Hill remains favorable due to demand for services and strong support within the community, as well as our longstanding presence in the district at the George Washington University Hospital. Our next de novo acute care hospital opening will be the Alan D. Miller Medical Center in Palm Beach Gardens, slated for the spring of 2026. This project remains on track, and we are encouraged by significant interest in the new medical campus by members of the community and the healthcare professionals that serve patients within this fast-growing market. We have a long track record of expanding presence in core markets with new state-of-the-art hospitals and are excited to build on our existing presence on the East Coast of Florida.

Separate from these new hospital projects, we’ve also been active on the outpatient side within our acute care segment, where we operate 45 outpatient access points, including freestanding emergency departments, surgery centers, and other ambulatory services. On a year-to-date basis, we’ve opened four freestanding EDs, bringing our total to 34, and we believe our FED strategy is highly complementary to our acute care operations by allowing us to capture incremental, higher acuity outpatient volume within our markets. Within our behavioral health segment, we’ve taken a disciplined approach to new bed capacity growth, which has allowed us to focus on the highest potential expansion and de novo projects while we increasingly devote resources to accelerate our outpatient behavioral strategy.

On the outpatient side of our behavioral segment, we operate approximately 100 access points, including step-down programs closely aligned with inpatient and residential operations, as well as step-in programs that allow us to reach patients in convenient community settings. We are on track to open 10 of these step-in programs this year under local brands, as well as our new Thousand Branches Wellness brand in a model that supports outpatient services through both virtual and in-person settings. Our strategies are designed to accelerate our outpatient growth rate, diversify our payer mix, and allow us to be the provider of choice within a behavioral marketplace that continues to have strong demand across the continuum. The behavioral healthcare we provide serves an important need within the healthcare system and our society more broadly.

With that, I will now turn the call over to Steve Filton for a financial review of the third quarter.

Steve Filton, Chief Financial Officer, Universal Health Services: Thanks, Marc. I will highlight a few financial and operational trends before opening the call up to questions. The company reported net income attributable to UHS per diluted share of $5.86 for the third quarter of 2025. After adjusting for the impact of the items reflected on the supplemental schedule as included with the press release, our adjusted net income attributable to UHS per diluted share was $5.69 for the quarter ended September 30, 2025. We recognize approximately $90 million of net benefit during the third quarter of 2025 from the District of Columbia Supplemental Medicaid Program, which covers the time period from October 1, 2024 through September 30, 2025. Approximately $73 million of this benefit was recognized in our acute care results, while the remaining benefit was recognized in our behavioral results.

During the third quarter of 2025, on a same facility basis, adjusted admissions at our acute care hospitals increased 2.0% over the third quarter of the prior year. Acute care volumes were consistent with trends in the first half of 2025, with solid growth in both inpatient medical admissions and outpatient services during the third quarter, and surgical volumes that increased slightly as compared to the prior year. Same facility net revenues in our acute hospital segment increased by 12.8% during the third quarter of 2025 on a reported basis as compared to last year’s third quarter and increased 9.4% after excluding the impact of our insurance subsidiary and the prior period net benefit from the District of Columbia Supplemental Medicaid Program.

Acute care same facility revenue per adjusted admission increased by 9.8% during the third quarter of 2025 on a reported basis and increased 7.3% after excluding the impact of our insurance subsidiary and the prior period impact of the District of Columbia Supplemental Medicaid benefit. Operating expenses continued to be well managed across labor, supplies, and other expense categories. We have not experienced any noteworthy impact from tariff trade policies. Total operating expenses per adjusted admission increased by 4.0% on a same facility basis over last year’s third quarter after excluding the impact of our insurance subsidiary. For the third quarter of 2025, our solid acute care revenues combined with effective expense controls resulted in a 190 basis point increase year over year in same-facility EBITDA margin to 15.8% after excluding the prior period impact of the District of Columbia Supplemental Benefit.

Turning to our behavioral health results, during the third quarter of 2025, same-facility net revenues increased 9.3% on a reported basis and were up 8.5% excluding the prior period impact of the District of Columbia Supplemental Medicaid Program. Same-facility revenue growth was driven by a 7.9% increase in revenue per adjusted patient day as compared to the prior year. Excluding the prior period impact of the District of Columbia Supplemental Revenue, same-facility revenue per adjusted patient day increased 7.1% during the third quarter of 2025. Same-facility adjusted patient days increased 1.3% as compared to the prior period’s third quarter, with volume growth modestly improving as compared to 1.2% in the second quarter and 0.4% during the first half of 2025.

We expect further volume improvements during the fourth quarter, although we now believe a reasonable expectation for same-facility adjusted patient day growth should be in the 2% to 3% range, with our near-term expectations at the lower end of this range. Expenses in our behavioral health segment continue to be well managed with relatively stable margins during the third quarter, leading to a 7.6% increase in same-facility EBITDA as compared to the third quarter of 2024 after excluding the prior period impact of the District of Columbia Supplemental Benefit. We continue to experience labor tightness in some markets, although hiring trends have improved steadily throughout the year. Our cash generated from operating activities was approximately $1.3 billion during the first nine months of 2025 as compared to approximately $1.4 billion during the same period in 2024.

We expect to collect the $90 million of District of Columbia supplemental payments during the fourth quarter of 2025. During the first nine months of 2025, we spent $734 million on capital expenditures, close to 30% of which related to the new hospital in Florida and a replacement facility in California. During the nine months ended September 30, 2025, we also acquired 3.19 million of our own shares at a total cost of approximately $566 million, including 1.315 million shares purchased during the third quarter of 2025. Today, our board of directors authorized a new $1.5 billion increase to our stock repurchase program, bringing our total authorization to $1.759 billion, including amounts remaining under the previous authorization. Since 2019, we have repurchased approximately 36% of the company’s outstanding shares and paid approximately $340 million in dividends to shareholders.

In the absence of compelling acquisition opportunities over the near term, we expect to continue to prioritize our excess free cash flow for share buyback and dividends. As of September 30, 2025, we had approximately $965 million of aggregate available borrowing capacity pursuant to our $1.3 billion revolving credit facility. Turning to an update on Medicaid supplemental payment programs, our current projected 2025 full-year net benefit from various previously approved programs is $1.3 billion. This figure includes amounts recorded during the third quarter for the previously mentioned District of Columbia program and additional amounts related to this program that are expected to be recorded in the fourth quarter of 2025, but it does not include programs pending CMS approval. As we discussed during our second quarter 2025 earnings call, the OB3 legislation includes several significant changes in the Medicaid program, including changes to state-directed payment programs and provider taxes.

At this time, assuming no changes to our Medicaid revenues or other changes to related state or federal programs, we estimate that commencing with the 2028 fiscal years, our aggregate net benefit will be reduced on an annually increasing and relatively pro rata basis by approximately $420 to $470 million in 2032. This cumulative impact range has been increased to reflect recent supplemental program approvals. Given various uncertainties, including the evolving state-by-state interpretations and computations related to this legislation, our forecasted estimates are subject to change, potentially by material amounts. Operator, that concludes our prepared remarks, and we’re pleased to answer questions at this time.

Conference Call Operator: Thank you. We will now open the call to questions and answers. To allow as many people as possible to submit a question, please limit yourself to one question and one follow-up. As a reminder, to ask a question, please press star 11 on your telephone. Our first question comes from Justin Lake with Wushuang Ma on.

Darren Larick, Vice President of Investor Relations, Universal Health Services: Thanks. Good morning, Steve. Appreciate all the details. I was hoping you could give us an update in terms of, I know there’s a couple of states pending approval: Florida and I believe Nevada. Maybe you can give us some color on the potential DPP there that could benefit the company if those are approved, and then maybe give us a quick rundown on or an update on where the exchange contribution looks like. What’s the kind of run rate on the exchange volume and revenue year to date? Any updated thoughts on if those subsidies expire, what you think that estimate is? Thanks.

Steve Filton, Chief Financial Officer, Universal Health Services: Sure, Justin. As far as any new potential Medicaid supplemental benefits, we’ve been disclosing for, I think, several quarters that there’s an approval of a pending plan or expansion of a pending plan in Florida that we estimate would result in about a $47 million annual benefit to us. As I said, that program remains pending CMS approval, while the state of Florida seems confident that it will be forthcoming at some point. Additionally, I think we learned this quarter, and we’ll include this in our to-be-filed 10-Q for the quarter, that there’s another maybe $30 million approximately of Nevada DPP increase, again, pending CMS approval. On a combined basis, these two states would represent somewhere in the $75 to $80 million range. To the best of our knowledge, there are no other material programs or approvals pending.

As far as your second question about exchange contribution, the percentage of our total adjusted admissions, acute care admissions that are exchange patients, is in the 6 to 6.5% range. That number has been ticking up. Most of those patients are in two states, in Texas and Florida. I think all the public companies have been reporting increases, and we have a smaller footprint in those states than some of our peers, but our numbers have been ticking up as well. We have previously given an estimate, assuming that the exchange subsidies don’t get extended, of a $50 to $100 million negative impact on us annually. Given the increase in exchange volumes, we’re probably trending towards the higher end of that range.

As far as I think sort of any prediction about how the exchange subsidy issue is to be resolved, I don’t think we have any particularly pressing insight into that, and you know we’re watching how this develops in Congress along with everybody else.

Darren Larick, Vice President of Investor Relations, Universal Health Services: Thanks.

Conference Call Operator: Our next question comes from Jason Cazorla with Guggenheim.

Great, thanks. Good morning. Just wanted to check in on 2025 guidance. You increased the midpoint by a little over $90 million. Can you just walk through the bridge to the updated guidance, how that’s split between the five quarters of BC DPP, the malpractice reserve increase, the legal settlement in the quarter, and outperformance? You have about a $50 million guidance range at the low and high end. Not a significant range by any means, but just thoughts on what you need to see to trend towards the high end or the low end of guidance at this point. Thanks.

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. Jason, I think you largely captured the components of the guidance increase. As you said, at the midpoint, it’s in that $90 to $95 million range. That’s made up of $140 million of increased DPP. The biggest chunk of that, of course, is the DC number. That’s $90 million that we recorded in the third quarter and another $25 million that we expect to record in Q4. That’s $115 million of new DPP. There’s another $25 million of miscellaneous increases across a variety of states, none of which are singularly material to get us to the $140 million increase in DPP. We deduct from that the $35 million malpractice increase that we described in our press release and another $18 million in a legal settlement that we described in an 8K that we filed a few weeks ago.

That gets you to that sort of low to mid-$90 million number, effectively meaning that we’re assuming from a core business perspective that the trends that we expected when we increased guidance last quarter will continue. When you talk about what it takes to get us to maybe the higher end of that, we’re talking about the two businesses running same-store revenue increases in the 5% to 7% range. What gets us to the higher end is if we land at the higher end of that range either through volumes or pricing. I think all that is pretty consistent with what we’ve said previously.

Okay, thanks. Maybe just as a follow-up, just checking in on managed care activity and state budgets in relation to your behavioral health business. I mean, it looks like behavioral health length of stay continues to hold on. Pricing remains favorable. I guess, are you seeing any different behavior as it relates to managed care at this juncture for behavioral? We’re hearing multiple states enacting budgets that are reducing behavioral rates. Any thoughts on the state budget situation across your markets stepping into 2026 would be helpful. Thanks.

Yeah, I mean, I think we have consistently found that managed care players are aggressive in their utilization management, in their management of length of stay, and in their management of where patients are treated, meaning in inpatient or outpatient settings. I don’t know that that’s changed materially. As you point out, our length of stay has remained fairly constant. A lot of that is, I think, a function of our aggressive behavior in terms of documenting the medical needs of patients, etc., which we are very much focused on. We, again, have not seen, I think, significant changes in payer behavior to date. We understand that payers are under, or any number of payers are under some pressure, but we also understand that their subscribers do need behavioral treatment.

I think given our market presence, given our clinical reputation, etc., we continue to be, I think, a preferred provider for many of those managed care companies. As far as state budgets are concerned, the only state budget that I’m aware of where there have been actual Medicaid cuts is in North Carolina for behavioral. It’s not a state that’s material to us. I think about 2% of our behavioral beds are in the state of North Carolina. Other states have talked about state budget cuts for Medicaid, and we’re sort of tracking that. At the moment, I’m not seeing anything that affects us in any sort of material way.

Okay, great. Thank you very much.

Conference Call Operator: Our next question comes from Whit Mayo with Leerink Partners.

Hey, thanks. I’m just curious how West Henderson is performing now and any cannibalization of that on overall volumes within the quarter. My second question is just on Cedar Hill, whether or not you think it can offset the headwind. If it was, let’s say, a $50 million drag with startup losses this year, that $50 million will reverse itself. Any thoughts on maybe the growth next year? Thanks.

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I think as Marc Miller commented in his remarks, West Henderson Hospital’s been performing well. It’s had positive EBITDA really ever since it opened, which is really quite remarkable for a startup hospital. It does, I think, affect our same-store numbers and particularly our same-store volumes. We’ve talked in the past that there’s probably, and again, this is difficult to quantify precisely, but we would estimate maybe a 50 or 60 basis point impact on our same-store adjusted admissions. Meaning, without a West Henderson Hospital in the mix, our same-store adjusted admissions might be 50 or 60 basis points higher because of the cannibalization, because some of their admissions or adjusted admissions are coming from our existing hospitals in the market. West Henderson Hospital is doing well, and we would expect we’ll continue to improve into 2026.

Cedar Hill Regional Medical Center, as we identified last quarter, lost $25 million in the second quarter. We projected they would lose $25 million in the back half of the year. They did lose that $25 million in the third quarter. I think, as Marc Miller pointed out, we expect them to break even in Q4 and improve into next year. Obviously, the $50 million loss that we incurred in 2025 should be a tailwind going into 2026, assuming that worst case, Cedar Hill Regional Medical Center breaks even. We assume they’ll do better than that and they will be profitable in 2026, although I think our general sense, and we’ll give more detail on this when we give our guidance in February, is that any incremental improvement over break-even will largely help to offset any opening and startup losses from the Alan D. Miller Medical Center in Florida.

Okay, thanks.

Conference Call Operator: Our next question comes from Ben Hendricks with RBC Capital Markets.

Marc Miller, President and CEO, Universal Health Services: Great. Thank you very much. Appreciate your commentary on your outpatient surgical initiatives. I was wondering if you could give us a little bit more color on what you’re seeing in terms of surgical trends, both inpatient and outpatient, and what case mix is looking like in the quarter and just how that’s contributing overall to the volume growth for the acute care hospital segment. Thank you.

Steve Filton, Chief Financial Officer, Universal Health Services: I think in our prepared remarks, we made the comment that outpatient surgical trends increased slightly over the prior year in the quarter, and that actually was an improvement over the first half of the year when I think they were actually down. We were encouraged by that. I think we’ve noted that some of the, I’ll call it surgical softness or softness in surgical volumes, have been difficult comparisons with prior years where we were seeing some benefit from the catch-up of deferred and postponed procedures that had been deferred and postponed during COVID. I think we’re starting to anniversary that and kind of get that behind us, and it feels to us like surgical volumes are returning to sort of more normal levels. I’m sorry, was there a second part to your question?

Case mix.

Oh, case mix. Yeah, case mix was up slightly in the quarter, not a big driver of improvement, maybe 30 basis points.

Marc Miller, President and CEO, Universal Health Services: Thank you.

Conference Call Operator: Our next question comes from Raj Kumar with Stevens.

Hi. Just on the BA side, maybe just trying to kind of understand the overall supply-demand dynamic. You’ve seen kind of like SWB growth of high single digits on a same-store basis, where volumes have kind of been slightly negative to slightly positive throughout the year. Maybe just trying to understand what the dynamics are in terms of you’re kind of increasing staffing and we should expect kind of better volume growth in subsequent quarters, or is this kind of more just in order to maintain capacity that you’re kind of pushing through these SWB trends?

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah, Raj. I mean, I think that we talked at some length in previous quarters. If there are two broad sort of overarching dynamics that I think have muted behavioral volumes, one, as I think we mentioned in our prepared remarks, has been a labor scarcity issue. It’s not pervasive. I think it exists in maybe a quarter to a third of our hospitals where we struggle to fill all of our vacancies, whether that’s nurses, whether that’s therapists, whether that’s a non-degree professional, the people that we describe as mental health technicians. I do think that in those specific facilities, volumes are often muted. I think, as we said in our prepared remarks, our hiring numbers are increasing incrementally, albeit. I think you see a little bit of that in the salary and wage data that you’re referring to.

The other piece of this is what we’re finding, and I think you know we read through what a number of the managed care companies say, is that behavioral utilization broadly and nationally is up across the board. A lot of that seems to be on the outpatient side, and I think that’s being delivered in a very, I’ll describe it as sort of fragmented way, meaning that outpatient care is being delivered in all sorts of settings, including hospital emergency rooms and urgent care centers and retail pharmacy clinics and mom-and-pop operations. We think we can do a better job of capturing more of that outpatient activity through, frankly, better focus as well as new and additional dedicated outpatient facilities. Obviously, that focus and those facilities require additional staff, and we’ve been staffing up for that.

To some degree, I think the increase that you’re alluding to in salaries and wages is something that’s preparing us to be able to treat and absorb more patient volume.

Great. Maybe as a quick follow-up, you had a step up in kind of acquisition spend in the quarter, and I’m assuming that’s kind of more on the outpatient behavioral acceleration that you’ve kind of spoken to. What can we kind of expect forward from a capital deployment on M&A on that front?

The acquisition spending that you referred to is actually mostly, it’s about $35 million or $40 million in the UK in the quarter, and that’s mostly, honestly, on the inpatient side. I think we’ve talked about the fact on the outpatient side in the U.S., creating a greater presence in the outpatient space really doesn’t require a tremendous amount of new capital. It’s probably $1 million or $2 million on average to create one of these step-in outpatient clinics. I think the bigger challenge in those places is finding the appropriate number of therapists more than it is a significant capital spend.

Thank you.

Conference Call Operator: Our next question comes from AJ Rice with UBS.

Hi, everybody. Maybe a couple of quick things here. I think in your updated guidance, there’s about $25 million of sort of miscellaneous DPP payments, and it seemed like in the back half of the year that are incremental. Is that more in the third quarter, or is that something that will be booked in the fourth quarter? On the litigation settlement in Nevada, was that booked in the third quarter, or is that going to be booked in the fourth quarter?

Steve Filton, Chief Financial Officer, Universal Health Services: The litigation settlement was recorded in the third quarter, and it’s reflected in our non-same-store acute results. The additional DPP, I think, is spread pretty rapidly between the third and fourth quarters.

Okay. I know your pricing on both businesses, actually, even if you X out the DPP payments, was pretty strong by historic standards. Anything to call out there? Is that a sustainable level of year-to-year pricing gains? Any thoughts on that?

You know, taking it segment by segment, I think on the acute side, we said that our revenue per adjusted admission was close to 10% increase. Half of that, I think, is DPP related, which means 5% is sort of from core results. That’s on the high side for sure. I think we think that sustainable acute care pricing is more in the 3%, maybe 3 plus % range. I think the excess in the quarter is a result of some revenue cycle initiatives that we’ve undertaken to ensure that our billing is clean and complete, that our denial appeals are as appropriate and aggressive as they should be, dispute resolutions with a number of payers, all that sort of stuff. There are a few small one-time items in terms of an opioid settlement, and we’ve disclosed our accountable care organization profits.

I think our general sense is that acute care pricing in the 3% range is sort of that sustainable level. On the behavioral side, we’ve been in the 4% to 5% range when you adjust out. I think the DPP impacts, we’ve been running that, and probably in the quarter, we’re again at the higher end of that range because of, I think, some of the things we’ve discussed already, some pressure from Medicaid state reductions. I think we believe that the sustainable level of behavioral pricing is probably a notch below that, maybe 3.5% to 4.5%, but still should continue to be quite positive and a good tailwind for that business.

Okay, thanks a lot.

Conference Call Operator: Our next question comes from Craig Heddenbach with Morgan Stanley.

Yes, thank you. On the behavioral side, you mentioned kind of a slight improvement in the hiring. Can you just talk about more broadly how you think about capacity versus demand in behavioral and what that means for volume growth?

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I mean, we’ve said that I think we think a reasonable level of volume growth in the behavioral business in the intermediate and long term is sort of 2 to 3% in adjusted patient day growth. We’re still a little shy of that and feel like there’s a chance we can get there exiting this year. If we don’t, I think it’s a reasonable target for next year, particularly at the lower end of that range. To get there, we need to continue to be able to fill our vacancies and reduce our turnover, things that have been happening, and I think we can improve. I think we can see that process has been somewhat slower than we expected, but we continue to make incremental progress and expect that we’ll continue to make incremental progress.

Got it. Just to follow up on capital allocation on the back of the increased buyback authorization, your net leverage, is that kind of the low end of history? Just how you’re thinking about that and any targets there and how that might influence capital deployment going forward.

Yeah. I mean, we’ve been an active acquirer of our shares for a number of years now. We said in our prepared remarks that since 2019, we’ve repurchased more than a third of our shares. We continue to view share repurchase, particularly at these current stock price levels, as a compelling use of our capital. We have seen an elevation in our activity in share repurchases, largely, I think, tied to the increase in our free cash flow. I think our expectation is that at a minimum, we’ll continue to devote most, if not all, of our free cash flow to share repurchase absent any other compelling opportunities. You know, might we choose to increase that and lever up even more to do that? We might. It’s something that we’ll make that judgment as we move along.

Helpful. Thank you.

Conference Call Operator: Our next question comes from Kevin Fischbach with Bank of America.

Great. Thanks. Maybe I’ll ask the behavioral question again, maybe slightly differently. I guess, like, you know, when we’ve historically thought about this long-term supply-demand imbalance within behavioral, you know, you at least had a competitor who was growing very quickly. Now it seems like they’re slowing, they’re closing down capacity in certain locations. Is there anything else that you’re seeing more broadly? Because 2 to 3% isn’t a Herculean number, I don’t think, but it also was easier to underwrite when someone else was growing much faster. Is there a competitive dynamic that’s going on that’s maybe skewing things as part of the market that we don’t see every day? Anything else that you would kind of point to that might say that the broader market is, in fact, growing faster than we can see from the outside?

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I mean, Kevin, the first thing is, you know, it’s difficult for us, I think, to comment on operating trends in a competitor. We just don’t have access to enough detail to really have, I think, useful insight in that regard. In terms of sort of what, and maybe I’m rephrasing a little bit the question you asked, in terms of what gives us confidence that there is increasing demand out there, I did reference before, I think, I’m not going to say every single managed care entity, but a great many of the managed care entities over the last several quarters in explaining an increase in their medical loss ratios and utilization have cited behavioral health care as a significant chunk of that. We obviously don’t have access to their data, but we do have access to claims data and things that we look at fairly carefully.

What we see is increased behavioral health utilization, as I said earlier, on the outpatient side in particular, being delivered in a lot of, I’m going to sort of call them non-traditional, some not necessarily in dedicated behavioral health facilities, but in emergency rooms and urgent care centers and nursing homes, etc. I think, given the clinical product that we can offer in our inpatient and outpatient facilities, given our in-network position with many of these managed care companies, etc., we believe that there’s an opportunity for us to capture an incremental amount of that. As you point out, it’s not a Herculean effort. We’re at 1.3% patient day, adjusted patient day growth in the quarter. We’re sort of targeting 2%. That’s obviously not a huge gap to fill.

Marc Miller, President and CEO, Universal Health Services: Let me just add also, you know, Steve’s made the point, I mean, some of the limitations have been on staffing. As that stabilizes, we do think that there are significant opportunities that we can take advantage of. We’ve been very responsible the last few years in our growth. Other competitors, multiple competitors, have been a little bit more aggressive, and now, you know, probably, it didn’t make sense, some of the moves that they’ve made, and they’re having to temper that and go backwards. We’re on the same path that we’ve been on. We’ve been responsible in the way we’ve looked at it. We’ve held on some supply increases, so adding beds because of maybe a lack of staffing in some of those markets. As that stabilizes, we’re going to have even more opportunities to grow going forward. We feel really good about where we are with that.

Okay. Maybe just to then follow up on the outpatient side of the equation, because you know, to your point, you do have some advantages here as far as your in-network location, position, and contracts, and things like that. It sounds like you’re not capitalizing or you haven’t capitalized on it historically. Can you talk a little bit about the barriers? Was it just lack of focus? Are there markets where you are doing it well and that are blueprints? How can we get confidence that you’re going to get that if hiring’s been the issue? Hiring’s been kind of an issue for a while now. Why will you be able to kind of capture that volume going forward? Thanks.

Steve Filton, Chief Financial Officer, Universal Health Services: What we’ve talked about, I think, in the last couple of quarters, Kevin, is, I think, two things. One is just an increased focus. We have conceded that for most of our decades-long history as a behavioral health provider, it has been a very inpatient-centric business. While we have always had, or in most of our markets, outpatient programs, they just haven’t been a focus. What we’ve done, I think, that I think will wind up being quite effective is we reorganized such that throughout the organization now, there’s really dedicated personnel or personnel that are dedicated to developing clinical programs, business development, referral sources, etc., that are dedicated outpatient-focused. I think that’s going to make a big difference because historically, when you have inpatient-centric facilities that have sort of, on the side, outpatient programs, the outpatient programs just don’t get the attention that they need.

I think focus, reorganization of personnel, etc., will be a big help in that regard. The second piece, which we’ve talked about quite a bit in the last few calls, is there’s really two components of behavioral outpatient. One is what we describe as step-down business. These are folks who are generally discharged from our facilities, but who require follow-up care, either partial hospitalization or intensive outpatient therapy. We’ve always had that. I think that business will benefit from increased focus. Where we haven’t really had much of a presence historically is what we describe as step-in business. These are patients who enter the behavioral system in an outpatient setting and often are not comfortable doing that and entering the system on a hospital campus. They’d much prefer to get that care in a freestanding outpatient setting.

I think that’s where Marc was referring in his prepared remarks to our Thousand Branches Wellness branded program. We branded that way because we don’t want to necessarily associate it with an existing inpatient hospital. As you said, and repeating what I had said, we have advantages. We already have existing referral relationships, referral source relationships. We have existing managed care contracts, etc., that should help us establish a footprint in that step-in freestanding business a lot faster than a competitor might be able to do.

Great. Thanks.

Conference Call Operator: Our next question comes from Matthew Gilmore with KeyBank.

Hey, thanks for the question. I wanted to ask about the acute performance. As you think about the volume trends and the expense trends that Steve discussed, is there any geographic variation to call out to highlight, particularly in some of your larger markets like Las Vegas?

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I mean, obviously, there’s always some variation in performance. We’ve been asked, I think, about the Vegas economy in the last couple of calls. I think it’s fair to say that our Vegas or the results in the Vegas market are very similar to our overall results. Again, as we pointed out, I think West Henderson in particular is ramping up quite nicely. We do acknowledge that there’s been a lot of data that suggests that tourist volume is down in Las Vegas. It’s something we’re watching. If that decline in tourist volume starts to have a ripple effect on the Vegas economy and unemployment rises, etc., that, I think, could be challenging in the future. At the moment, we’re not seeing those impacts. Unemployment, honestly, I think is remaining relatively stable at the moment in Vegas.

Again, I think our performance in that market is remaining pretty stable and pretty consistent with our overall portfolio in the acute care business. Other than that, no, I don’t think there’s anything real significant from a geographic perspective.

Okay. Fair enough. A quick follow-up on the pending SDP approvals. You mentioned Florida and Nevada. Is there a way for us to think about how that breaks down the net benefit between acute and behavioral?

First, I would say that the Las Vegas number is predominantly acute. I don’t have a breakout in front of me for the Florida number. We can provide that in the future.

Okay, thank you.

Conference Call Operator: Our next question comes from Benjamin Rossi with JPMorgan.

Hey, good morning. Thanks for taking my question. I just wanted to touch on operating cash flow development. You noted that some of the drag due to date has been coming from unfavorable changes in AR. I know you’re expecting to get some of that back next quarter as you collect on the DC approval, but do you have any theories as to the drivers behind this unfavorable trend? Is it fair to attribute some of this to broader payer utilization management trends?

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I think our belief, Ben, is that the increase in our AR is almost exclusively a function of the $90 million of DC DPP that we intend to collect or expect to collect in the fourth quarter. The new receivables, both in DC, you know, we didn’t get our Medicare certification and ability to bill until early September, so there’s virtually no collections in at Cedar Hill Regional Medical Center in the third quarter. Even West Henderson Hospital, as its business continues to grow, its AR continues to grow. I think once we sort of factor in those dynamics, we’re finding our days and receivables to be quite consistent with historical levels.

Okay. Appreciate the confirmation. I guess just a follow-up on some of your acute volume commentary. Specific to your self-pay category, how did volumes trend during 3Q? How have your self-pay volumes developed year to date relative to your expectations coming into the year? Thanks.

I think, as we said in a previous comment, the one sort of identifiable change in payer mix is we saw an increase in exchange volumes that seemed to come at the expense or as a shift on Medicaid. Exchange volumes are up a little bit on an overall basis, and Medicaid volumes are down. In terms of our other payer classes, Medicare, commercial, and self-pay that you’re asking about specifically, we haven’t seen any major changes in those other payer classes.

Got it. Appreciate it.

Conference Call Operator: Our next question comes from Stephen Baxter with Wells Fargo.

Yeah. Hi. Thanks. I think you touched on this a little bit, but just hoping you could elaborate more on the change in surgical trends you saw in the quarter, going from down slightly as of last quarter to up slightly this quarter. I guess, where are you seeing that improvement come from? I think this has kind of been danced around a little bit, but just wondering if you feel like there’s been any kind of pull forward evidence that we’ve seen of that for maybe like exchanges, other populations where coverage loss is a bit of a concern going forward. Thank you.

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I mean, I think we’ve seen the improvement in surgical volumes relatively across the board. I would say cardiology and cardiac services have been particularly strong. As far as sort of pull through, which I think, the crux of that question is, does it seem like exchange patients are sort of accelerating care in anticipation of potentially losing their coverage? I don’t think we’re really seeing that. I think we’ve made the comment before that that exchange population seems to behave, or their utilization behavior sort of mirrors or is more closely tied to the Medicaid population, meaning it tends to be emergency room-centric as opposed to a lot of elective cases. Yeah, we don’t think, I think, that there’s this significant pull-through impact.

Conference Call Operator: Our next question comes from Michael Ha with Baird.

Thank you. On behavioral volumes, I just wanted to confirm you’re now expecting 2% to 3% growth in fourth quarter to clear some of the low end. Should we expect next year to be consistently in that 2% to 3% range? On acute pricing strength, even excluding the DC DPP, 5% is pretty strong, especially off the tough prior year comp. I know, Steve, you mentioned case mix, revenue cycle initiatives, other one-timers. How much did exchange volumes contribute to pricing? I know you mentioned 2% to 3% is still a pretty good long-term target. Just to confirm, you’re still confident on 2% to 3%, even in the face of exchange volume declines over the next couple of years? Thank you.

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. You threw out a lot of numbers, Michael. I’m not sure that I follow all of them. Again, I’ll repeat. I think that our view of the sustainable acute care model is, you know, 5% to 6% revenue, same-store revenue growth split pretty evenly between price and volume. You know, 2.5% to 3% price, 2.5% to 3% volume. I think on the behavioral side, maybe 6% or 7% same-store revenue growth, you know, 2% to 3% volume, 3.5% to 4.5% price.

Conference Call Operator: Our next question comes from Ryan Langston with TD Cowen.

Great. Thanks. Good morning. I appreciate the commentary on capital deployment, but the leverage ratios just keep coming down despite the share repurchase activity. I know you mentioned the new Alan D. Miller Medical Center, but have you sort of contemplated any additional areas you could increase capital spending or sort of absent M&A and, again, additional spending? Are you just kind of comfortable letting those ratios decline? Thanks.

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I don’t think we anticipate our leverage ratios getting any lower than they currently are. Obviously, we’re not looking for ways to spend capital just to increase our leverage ratios, whether that’s acquisition-type opportunities or CapEx. We’ll continue to invest where we think we can earn a compelling return. I think we’ve intentionally kept our leverage ratios low in an environment where there has been some level of uncertainty at the policy, regulatory, legislative level. I think that’s been a prudent approach. As I think we start to experience, and hopefully we do start to experience more certainty, you know, we may be more comfortable increasing those leverage levels.

Okay. Thanks.

Conference Call Operator: Our next question comes from Joshua Braskin with Nephron Research.

I guess one that just left, maybe an updated view on where you think margins can trend in the next few years, you know, sort of thinking about pre-pandemic levels versus the progress you guys have made since the pandemic, and maybe specific areas where you think there’s opportunity to expand margin in each segment.

Steve Filton, Chief Financial Officer, Universal Health Services: Yeah. I think just sort of mathematically, Josh, you know, the general sense is if we can achieve the revenue targets that I just outlined in my last response, you know, 5% to 6% on the acute side, 6% to 7% on the behavioral side, clearly costs at the moment are not rising faster than that. They’re rising to more at the 4% range. As I think has been the case with the historical model for these two businesses for many years, you know, there should be an opportunity for EBITDA growth and margin expansion. In an environment of relatively stable operating costs and I think relatively stable demand and pricing, you know, we’re looking at margins in both businesses able to continue to improve.

Maybe the follow-up, and it’s probably a silly question, but you know, how do you go back to, I know, you know, let’s exclude some of the government segments that are paid, but you know, when you’re negotiating with managed care companies, if you’re seeing that revenue number, I think the core or acute number of 5% that you guys are throwing out, you know, if you’re seeing, you know, numbers in that ballpark and costs are not going up as high, what’s sort of the conversation with the payers and the justification around above-average rate increases that we’ve been seeing lately?

Marc Miller, President and CEO, Universal Health Services: The point that I would make on this is not exactly what you’re pointing to, but when we sit down with these managed care companies, we’ve got much better information these days than maybe we had years ago. Even though we feel like we’re doing well in a number of our areas, we still see some of our pricing lagging competitors in certain markets. That’s what we really point out and hone in on, and that’s where we’re able to have a positive effect for ourselves because we’re still behind what they’re paying some of our competitors. That’s one big area that we bring up in our negotiations.

That’s helpful. Thank you.

Conference Call Operator: That concludes today’s question and answer session. I’d like to turn the call back to Darren Larick for closing remarks.

Marc Miller, President and CEO, Universal Health Services: Thank you, everyone, for participating in today’s call and also for your interest in Universal Health Services. Hope you have a great rest of your day. Thanks.

Conference Call Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.

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