For-profit hospital operator Universal Health Services on Tuesday raised its lower-bound revenue forecast for the year from $14.0 billion to $14.1 billion after posting second quarter earnings that beat Wall Street expectations.
UHS reported revenue of $3.55 billion, up 6.8% compared to the prior year period. The hospital operator reported profit of $171.3 million, compared to $164.1 million during the second quarter of 2022.
The King of Prussia, Pennsylvania-based operator declined to raise its upper-bound revenue projections, Steve Filton, CFO, said on an earnings call Wednesday, in part because of unforeseen regulatory events.
UHS, which has a large presence in Nevada, had initially based 2023 financial projections off of assumptions that it would receive $25 million in supplemental revenues from a Nevada Medicaid program. Now, UHS expects to receive just $3 million.
Still, Filton and Mark Miller, UHS CEO, said they were “mostly pleased” with the quarter’s results.
Filton attributed the earnings in part to an uptick in demand for services at acute care hospitals, which observed an adjusted admissions increase of 7.7% year over year. He noted the volume growth was skewed toward lower acuity and outpatient procedures — a trend noted by competitors on earnings calls last quarter. Same-facility net revenues from its acute care services increased by almost 10% year over year.
Miller said that the quarter was the first “apples-to-apples” comparison investors have seen since the pandemic began, with the second quarters of 2022 and 2023 both being low-COVID periods that demonstrate recovery in the acute care market.
“Acute care volumes have continued their recovery trajectory and have gradually become to resemble the pattern variants before the pandemic,” Miller said. “And the 60 basis points year over year margin improvement in q2 is a step towards a more extended margin recovery we hope to sustain for the next several periods.”
Investors questioned whether this growth, which UHS and analysts have attributed in part to patients seeking services they deferred during the pandemic, is sustainable. Filton acknowledged that adjusted admission growth in acute care this year has been “historically unprecedented” at 10.5% in the first quarter and close to 8% this quarter. He believes that while volumes may “moderate in the future,” acuity will likely rise.
Executives also noted pain points for UHS. Operating expenses rose 5.8% year over year to $3.3 billion this quarter.
Contract labor expenses are still high. Although they tended to run at a rate of about 6% of revenues pre-pandemic, they were closer to 7.6% in the second quarter, according to the CEO.
The CFO acknowledged UHS initially expected to spend $55 million to $60 million on physician contract expenses, but it is spending “roughly twice that” as contract service providers face financial challenges and UHS is forced to pay higher base wages to recruit talent.
Ultimately, Filton expects the cost of labor will level off or decline as competition for talent lessens.
“The argument we made all along was that as COVID volumes declined, those opportunities for extraordinary pay increases would decline, and nurses would return to their home base of employment,” Filton said. “I think that's what we've been seeing.”
In the back half of the year, Filton said UHS will be paying close attention to relationships with payers, specifically as the impacts of Medicaid redetermination play out across the country.
“With a lot of the payers reporting an increase in their own medical loss utilization, we have an expectation that we're going to see more aggressive behavior on their part … To limit length of stay on the behavioral side or challenge more in-patient versus observation,” he said.