Universal Health Services (NYSE: UHS) has been capitalizing on a strong market for behavioral health pricing, largely attributed to its strategic negotiations with lower-paying payers, including managed Medicaid. In the company’s Q3 earnings call, UHS CFO Steve Filton outlined how this approach has led to historically high behavioral health pricing levels for its services. By successfully leveraging higher rates from these lower-paying payers, UHS has been able to secure favorable contracts even amid challenges such as limited capacity within the broader behavioral health industry.
Filton noted that while the pricing is currently robust, the company expects that behavioral health pricing will likely moderate in the future. UHS has been indicating for some time that payer pricing will eventually stabilize. However, Filton reassured investors that even though behavioral health pricing is expected to dip at some point, it should remain within a solid range of 4% to 5% growth for the foreseeable future. This ongoing strength in behavioral health pricing has been a key driver of UHS’s performance in 2024, helping the company achieve impressive financial results.
Strong Financial Results Driven by Behavioral Health
In the third quarter of 2024, UHS reported net revenues of $3.96 billion, an 11.2% increase compared to the $3.56 billion reported in the same quarter of the previous year. A major contributor to this growth was UHS’s behavioral health division, which saw a 10.5% increase in same-facility revenues. This was driven in large part by an 8.5% boost in revenue per adjusted patient day. The company’s ability to maintain strong behavioral health pricing in its sector has been crucial to its financial success, especially as overall healthcare costs and inflation have been putting pressure on other segments of the industry.
UHS’s behavioral health pricing strategy showed even greater promise as facility revenues rose by 8.3%, and same-facility EBITDA grew by 9.6% year over year. Notably, these gains were achieved despite the absence of Medicaid supplemental payments, which had not been factored into the company’s original 2024 guidance. While the company had initially set a goal of 3% patient day growth for 2024, volume increases were slower than expected in the first half of the year. However, UHS managed to meet and even slightly surpass its revised target by achieving 3% patient day growth in Q3. Filton acknowledged that the company experienced a slight drag on volume due to the impact of hurricanes in South Carolina and Georgia, which temporarily reduced patient day volumes by about 25 to 30 basis points. Despite these challenges, the company’s strong behavioral health pricing strategy allowed UHS to remain resilient.
Labor and Hurricane Impact on Costs
The hurricanes also led to a rise in labor costs as the company had to pay overtime and additional wages to ensure that its facilities remained adequately staffed. Filton pointed out that while labor costs did increase during the third quarter, largely due to these external factors, overall labor trends have stabilized significantly. As the labor market has become more stable in the post-pandemic period, UHS has been able to better manage these rising costs, and salary increases related to the hurricanes should be short-lived.
Technological Investments and Innovation
UHS remains focused on innovation and technology to improve operational efficiency and care quality. One of the company’s key initiatives is the rollout of electronic medical records (EMRs) across its facilities. The goal is to have 25 to 30 facilities fully utilizing the EMR system by early 2025. This technological investment is aimed at streamlining operations, improving patient care, and driving efficiencies across the organization. In addition, UHS is exploring wearable technology as part of its broader strategy to enhance patient care and risk management. Filton mentioned that wearable devices, similar to Apple Watches, could be used to monitor patients’ health more effectively, reducing the need for in-person rounds and improving overall patient tracking.
Behavioral Health Expansion Plans
Despite the sale of an 80-bed psychiatry hospital in Texas, UHS is not retreating from the behavioral health pricing sector. In fact, the company is in the process of expanding its behavioral health footprint, with plans to open a 96-bed behavioral health hospital in the spring of 2025. This new facility will be developed through a joint venture with Trinity Health Michigan. Filton also highlighted the opening of the River Vista Behavioral Health hospital, which celebrated its ribbon-cutting in June 2023 and has been gradually opening its capabilities in phases. UHS continues to see significant growth potential in behavioral health pricing services, and its strategy is focused on increasing the value of existing facilities and expanding capacity to meet demand.
M&A Strategy and Capital Deployment
While UHS is actively working on expanding its physical presence, it has been cautious about pursuing mergers and acquisitions (M&A). Filton acknowledged that UHS is regularly presented with M&A opportunities but stated that in recent years, the company has not found many of these opportunities to be compelling. As a result, UHS’s capital deployment strategy has focused primarily on capital expenditures and share repurchase programs, continuing the strategy that has been in place for the past five to seven years. UHS remains open to M&A opportunities, but for now, its focus is on enhancing the value of its existing infrastructure.
Looking Ahead: Continued Strength in Behavioral Health Pricing
Looking ahead, UHS is well-positioned to navigate the evolving healthcare landscape. The company’s strategic behavioral health pricing model, strong revenue growth, investments in technology, and ongoing expansion of its behavioral health facilities will continue to support its growth. Despite the expected moderation in pricing, UHS’s continued focus on operational efficiency, patient care, and strategic expansion ensures that the company will remain a strong player in the healthcare and behavioral health pricing sectors.
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