Universal Health Services (NYSE: UHS), a prominent healthcare provider, is focused on regaining the profitability and operational efficiency of its behavioral health division that were seen before the pandemic. The company is hopeful that by reducing labor costs, improving productivity, and seeing an increase in patient volume, it can reach its pre-COVID margins. This commitment was underscored by Steve Filton, UHS’ Chief Financial Officer, during an investor presentation earlier this week.
Restoring Behavioral Health Margins: The Path Forward
UHS is committed to restoring its behavioral health margins to the robust levels seen before COVID-19. When the pandemic hit, UHS, like many other healthcare providers, faced a disruption in patient volumes, labor shortages, and significant operational changes that affected its bottom line. To get back on track, the company has made a concerted effort to focus on key strategies that include controlling labor costs, improving productivity across its facilities, and stimulating patient volume growth.
“We had originally set a target for 2024 of 3% patient day volume growth for the year,” Filton shared during the investor presentation. “We now say that that’s going to be difficult to achieve, but … if we can grow at 3% given the strong pricing, getting to that 6%, 7%, 8% historical level of behavioral pricing, which is a level in which you can have margin expansion and growth in the business, it shouldn’t be a big stretch.”
Although UHS initially projected a 3% growth in patient-day volume for 2024, the company has acknowledged that achieving this growth may be more challenging than expected. However, Filton remains confident that if the company can achieve even a 3% growth in patient volume combined with strong pricing, it would be enough to push the business to its historical levels of pricing, typically seen in the range of 6% to 8%. This would allow UHS to see significant margin expansion and overall business growth. These efforts are crucial to achieving UHS’s Behavioral Health Expansions goals.
Obstacles to Patient-Day Volume Growth
One of the key factors affecting UHS’ ability to grow its patient-day volume has been slower-than-expected increases in patient admissions. Filton cited several reasons for the delay in achieving volume growth. Labor shortages continue to plague the healthcare industry as a whole, limiting UHS’ ability to staff its facilities effectively and provide care for an increased number of patients. Additionally, Medicaid disenrollments, which have been ongoing since the end of the public health emergency, have led to a reduction in the number of patients seeking care through Medicaid. Furthermore, Filton mentioned that several of UHS’ residential facilities have also experienced reduced volumes.
The company has previously addressed the impact of Medicaid redeterminations on its business, particularly in its second-quarter earnings call. Filton acknowledged that these redeterminations have hurt UHS’ behavioral health business, with the adolescent behavioral health segment being particularly affected. As Medicaid recipients were reevaluated and lost coverage, it created gaps in patient care, which slowed overall growth for UHS’ behavioral health services. Overcoming these challenges is essential for the success of its Behavioral Health Expansions.
Labor Challenges and Rising Costs
Labor shortages have been an ongoing concern for UHS, as they have been for many healthcare organizations in recent years. To address these shortages, UHS was forced to offer significant incentives and sign-on bonuses to attract new employees and retain existing staff. Filton explained that while these costs were considerable in the short term, they have begun to subside as the labor market gradually stabilizes. The decreasing need for costly incentives and sign-on bonuses is expected to translate into savings for the company. These savings, combined with improvements in productivity, will play a crucial role in helping UHS improve its margins moving forward.
Filton emphasized that the small increases in patient volumes—around one to two percentage points—have already started to make a significant impact on UHS’ operating leverage. Even modest improvements in patient volume can have an outsized effect on profitability, especially when paired with improved operational efficiency and a favorable pricing environment. As these small gains continue to accumulate, UHS expects to see improved financial results, particularly in its behavioral health division. These gains will also support the ongoing Behavioral Health Expansions initiative.
Geographic Footprint and Business Growth
While UHS is actively working to improve its behavioral health business, Filton also noted that the company sees more significant potential for growth in its behavioral health services compared to its acute care services. This is largely due to UHS’ extensive geographic footprint, which includes over 400 facilities spread across acute care hospitals, behavioral health centers, and ambulatory care centers.
With this broad presence, UHS is uniquely positioned to capitalize on the increasing demand for behavioral health services, particularly in underserved areas where access to mental health care is often limited. Filton emphasized that this geographical reach is a key asset for UHS, providing the company with significant growth opportunities in the behavioral health market. This expansion is essential to the broader vision of Behavioral Health Expansions.
Despite its large footprint, UHS has taken steps to refine its behavioral health network by focusing on the most profitable and high-potential facilities. In June, the company sold River Crest Hospital, an 80-bed psychiatric facility in San Angelo, Texas. Filton explained that evaluating the performance of its facilities and identifying areas for improvement is a routine part of the company’s operations. When certain locations or services show minimal potential for growth or improvement, UHS makes the decision to exit those markets to focus on higher-value opportunities. This approach is in line with UHS’ long-term Behavioral Health Expansions strategy.
Future Expansion and California Legislation
Looking ahead, UHS is planning to further expand its behavioral health capacity, particularly in regions where demand for services is growing. Filton mentioned that UHS is considering multiple localities for expansion opportunities, keeping a close eye on state-level policies that might impact its ability to profitably deliver care.
In particular, Filton highlighted recent legislative changes in California, where Proposition One has created a more favorable environment for providing behavioral health services. Proposition One is a state initiative aimed at improving access to mental health care and enhancing the quality of services available to residents. Filton suggested that the legislation bodes well for UHS’ ability to expand its behavioral health offerings in California, providing the company with opportunities to increase its presence and profitability in one of the country’s largest and most underserved mental health markets. This legislative shift also aligns with UHS’ larger Behavioral Health Expansions efforts.
Looking to the Future
As UHS navigates the path toward restoring its behavioral health margins to pre-COVID levels, the company is carefully managing its resources and focusing on opportunities for strategic growth. The challenges of labor shortages, Medicaid redeterminations, and reduced patient volumes remain, but UHS is optimistic that its plans for cost reduction, productivity improvement, and patient volume growth will enable it to overcome these obstacles.
UHS’ expansive geographic reach, commitment to operational efficiency, and focus on high-growth markets position the company well for long-term success in the behavioral health space. With continued investment in its workforce, facilities, and strategic partnerships, UHS aims to not only return to its historical margin levels but also secure a stronger, more sustainable future in behavioral health care. The ongoing Behavioral Health Expansions will be a key factor in realizing this vision.
