Good morning, and thank you for standing by. Welcome to the Universal Health Services, Inc. Second Quarter 2022 Earnings Conference Call. I would now like to hand the conference over to our speaker today, Steve Filton, Chief Financial Officer. Please go ahead, Mr. Filton.

Thank you, and good morning, everyone. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2022. During the 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 those forward-looking statements, I 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, 2021, and our Form 10-Q for the quarter ended March 31, 2022. We’d like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported an adjusted net income attributable to UHS per diluted share of $2.20 for the second quarter of 2022. As previously disclosed in our preannouncement on June 30, 2022, our acute hospitals experienced a significant decline in COVID-related patients during the second quarter of 2022. As a percentage of total admissions, COVID diagnosed patients made up 13% of total admissions in the first quarter of 2022, but only 3% in the second quarter of 2022. The decrease in COVID-related patient volumes during the second quarter was not offset by an equivalent increase in non-COVID-related patients resulting in significant shortfalls in revenues and earnings compared to our original forecast for the quarter. And even though we did make progress in reducing premium pay in the acute segment, which went from $153 million in the first quarter to $117 million in the second quarter, overall costs did not decline sufficiently to offset the weaker revenues. Specifically, a surge in patients with the Omicron…

Our second quarter 2022 operating results were significantly behind our original forecasts. The primary driver of the shortfall was that non-COVID volume did not recover as quickly as we had anticipated based on our previous experience during the pandemic when COVID volumes declined rapidly. We believe there are multiple contributing factors to the slower demand rebound, most notably labor scarcity issues, which continue to constrain our ability to meet demand in certain circumstances. In the end, however, we believe that the majority of the demand shortfall has been simply delayed or postponed and that ultimately, it will be realized. We are encouraged by the progress made in reducing premium pay and filling vacancies, and we continue to invest heavily in recruitment and retention initiatives. Where appropriate, we are also developing alternative patient care models that allow us to use a wider variety of available caregivers to render the most efficient and high quality of care where we care. In reaction to the earnings softness and the fact that we are completing a refinancing during the quarter, we reduced the pace of our capital expenditure spend by about 20% or $100 million for the first six months of the year. Similarly, we moderated the trajectory of our share repurchases although we still expect to acquire approximately the same number of shares as in our original guidance. We are pleased to answer your questions at this time.

[Operator Instructions] Our first question comes from Marco from Nephron Research. Your line is now open.

Hi, good morning. Thanks for taking the question. So, you spoke to some of the developments you saw on contract labor during the quarter. But I was wondering if you could provide a little more detail on what you’re seeing in terms of the hourly rates and utilization, and how that’s tracking into July? And also, is there any detail you can provide on base hourly nursing rates and how those compare today to last year or even two years ago? Thanks

Yes. So, what we said in the first quarter was that we had $115 million or $153 million of premium pay in the acute segment, and we said that our guidance presumed that, that number would be cut approximately in half by the fourth quarter, so that we’d have something like $75 million or $80 million of premium pay in the fourth quarter. We’re pretty much on track for that trajectory. As I said, we had $117 million of premium pay in Q2, which is about 20%, maybe a little bit more reduction. I think that reduction came from a combination of both rate declines and hours utilized, I think split pretty evenly in terms of their impact. And I think that’s where we are. As far as underlying base wage rates, I think as we’ve noted before, they have gone from sort of pre-pandemic increases also on the acute side specifically, from, let’s say, 3%, 3.5% to something more like 4.5% to 5%. On the behavioral side, they probably started at somewhat lower. But again, something in the neighborhood of 125 basis point, 150 basis point increase in base rates, pre-pandemic, post-pandemic comparison.

Great. Thanks. And then if I could ask one quick follow-up on the behavioral side. Is there any way to quantify the lost patient volumes from the lack of your ability to find the staffing? In other words, is there any detail you can provide on how many admissions or patient days you think you’ve lost from that? Thanks.

We do track that internally. We don’t disclose those numbers in part, because I think different hospitals track them a little bit differently, et cetera, and we don’t view them as the most precise statistics. But we do know that we have turned away during the pandemic, a significant number of patients either because we didn’t have the staff to treat them or because we had certain beds blocked because patients couldn’t be exposed to other patients with COVID, et cetera. I think, what I would say is, we continue to believe that the historic levels of growth that we’ve experienced in our behavioral business of mid-single-digit volume growth, 3%, 4%, 5% same-store patient day growth year-over-year, we believe there’s certainly still achievable once we can get beyond the current labor scarcity. And I think the second quarter represents an incremental improvement towards that goal still a ways to go. But I think the trend is a positive one.

Okay. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from Andrew Mok with UBS. Your line is now open.

Thanks, good morning. Steve, acute results missed internal plan by a pretty wide margin. Can you help parse out the impact from the health plan business within the acute segment. How much of an earnings drag was that? And is that expected to get better for the balance of the year? Thanks.

Yes. I mean the insurance subsidiary was somewhat of a drag on earnings. It certainly was not the significant – most significant or even close to the most significant, I think, obviously, as we discussed, both in the preannouncement and our remarks again today. It was – difficulty we had in replacing COVID patients with non-COVID patients. The insurance subsidiary winds up being a drag because as we add new subscribers or establish new accountable care organizations in our markets, there are generally startup costs and losses associated with that. But that drag in the quarter was, in my mind, no more than $10 million.

Got it. Okay. And then on the behavioral side, behavioral revenue per patient day had been trending 5% plus over the last seven quarters. That moderated to less than 2% this quarter. Is there anything to call out that’s driving the slowing increases on the behavioral pricing? Thanks.

Yes. I mean probably a chunk of that and probably the most significant chunk is if people recall and we did disclose, we recorded that special reimbursement, special Kentucky reimbursement, in June of last year. And in the comparison between years, at least some of that is included. So, as we’ve noted, the recording of that Kentucky revenue is much more ratable in 2022. So, we’re comparing a more ratable reimbursement rate in 2022 with that big chunk received in 2021. So probably that drives down the revenue growth rate more than anything else.

Great. Thanks for the color.

Thank you. [Operator Instructions] Our next question comes from Stephen Baxter with Wells Fargo. Your line is now open.

Hey, thank you. It looks like about a – when you look at the acute care reported EBITDA and the same-store EBITDA, it looks like there’s about a $20 million drag from non-same-store items. It sounds like, if I remember correctly, the insurance company results are not reported in same-store. Just wondering if you can confirm that or not? And then should we think about the balance of that as being driven by start-up losses or any other items impacting that? That would be helpful color to have. Thank you.

So the insurance subsidiary results are certainly included in our same-store acute results and always have been, obviously, except for when they first started. What I said in my prepared remarks was we had $20 million of startup losses at new acute care and behavioral facilities. The biggest chunk of that is our new hospital in Reno, which opened, I believe, very late March or early April. And one of the things that we’re experiencing, just yet another difficulty of the pandemic, is a slower process in getting a new hospital certified and getting their Medicare numbers and therefore, being able to bill patients in a more timely way. Historically, that used to be literally just a few day process between opening and getting your Medicare number certified. I think in the case of our hospital in Reno, it took us almost a couple of months. And as a consequence, I think we suffered more significant losses than we really anticipated, and that’s a big chunk of that $20 million that I mentioned in my prepared remarks. One of the significant improvements we’re expecting in the back half of the year is that, that hospital will ramp up fairly significantly in our forecast of leases that it will be profitable by the back half of the year.

Got it. Okay. Thank you. And then just as a quick follow-up. It does seem like there – a little hard to tell what might be some pressure on the other OpEx line beyond the insurance company results. Can you talk about anything else you’re seeing impacting that line item, whether it’s physician staffing costs or anything or the like? Thank you.

Yes. I mean the acute care, other operating expenses appear to be going up fairly significantly. But as you pointed out, I think the biggest chunk of that is the impact of the insurance subsidiary. The insurance subsidiary records its medical losses or we record is medical losses in that other operating expense line, because their medical losses tend to run 85%, 88% of revenue as opposed to other operating expense at the hospitals, which tend to run at 20% of revenue, something like that. When we have an increase in subscribers and increased revenue on the – in the insurance subsidiary, it tends to distort that other operating expense line. So as an example, in Q2, if you exclude the insurance subsidiary from on our acute care reporting, our same-store revenue growth, which we reported 3% would be adjusted to 2%, but our other operating expense growth, which we report as 14% would be at 6%, which I think is probably much more in line or what would be an in-line expected number for that other operating expense. There’s nothing else extraordinary in that other OpEx line that I can think of.

Thank you. [Operator Instructions] And our next question comes from Benjamin Rossi with BMO. Your line is now open.

Hi, good morning. Thanks for taking my question. Just going in for Matt Borsch here. Just regarding inflationary pressures for 2023. I know it’s early, but how do you think we should be thinking about key inflationary pressures for 2023 versus historical trends? And with managed care negotiations and ability to pass some of these inflationary pressures through pricing, can you just give us some timing on how we should think about that?

Yes. Look, I think that by far, the biggest challenge is that our hospitals have faced have been on the labor side of the business. And I don’t think that’s purely just sort of normal inflationary pressures. I think we have had a point of view for some time that as COVID volumes declined and settled into something more of an endemic level, the pressure, particularly on premium pay, would ease. We certainly saw that sequentially from the first quarter to the second quarter. And as I commented in an earlier response, that’s our expectation as the year goes on. That will – if that plays out the way that we expect, it will certainly significantly diminish the pace of our cost increases. Now, as you point out, we certainly are experiencing other inflationary pressures throughout the business in the same way that all consumers and all businesses are, and we’re certainly doing our best to recoup them from our managed care payers. I’ve mentioned in previous calls that we’ve been aggressively giving notice of termination on contracts in both the acute and the behavioral business at a pace faster than quite frankly, I can really remember ever historically because as we identify contracts that simply in our minds, are not even remotely keeping up with inflationary pressures and labor pressures. And especially in places, whether it’s behavioral or even in some of our acute facilities where we’re already capacity constrained, we are willing to part with what we believe are inadequately reimbursed contracts and focus on patients and contracts that are, in fact, adequately reimbursed. I also would note that it struck me at least that there was a different tone from some of the payers, I think United in their quarterly earnings call acknowledge that they’d be giving some level of price increases in 2023 to providers to acknowledge the increased inflationary pressures, which at least for me, it was the first time that a payer had acknowledge that. So, our expectation is that payers will be more receptive to it in 2023, but we’ll also continue to be aggressive and try and 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’t. I think we’re willing to reconfigure our business and rid ourselves with some of those lowest payers.

Got you. Great. And then quickly on recruiting. We’ve been continuing to hear about tight labor conditions for clinical staff, particularly LPNs. Just looking for a quick update on how your internal initiatives for recruiting retention are playing out? Thanks.

Yes. I mean so the comments that I made at the outset indicated a roughly 20% decline in premium pay on the acute side sequentially from Q1 to Q2. On the behavioral side, we continue to have a number of months, five months or six months, certainly, at least, of continuous net new hires, meaning the number of people we’re hiring is exceeding the number of people that are exiting the company. Our focus, quite frankly, is really now on that back end and reducing the number of folks who are leaving. And again, I’ll repeat sort of what I said earlier, I think we have a view that as COVID volumes decline and we settle into sort of more of an endemic kind of an environment where there are not these extraordinary opportunities for nurses to chase premium dollars that are four times or five times their base salary that we’ll see a bit more of a return to historic norms of nurses returning to full-time jobs, et cetera. I’m not suggesting that there have been no changes during the pandemic. I think we are probably going to get used to a higher level, a higher normative level of temporary and traveling nurses maybe than we’ve had in the past, et cetera. But I do think those numbers will continue to come down from where they are today to something approaching what we were used to in a pre-pandemic environment.

Great. Thanks for your comments here.

Thank you. And our next question comes from Jason Cassorla with Citi. Your line is now open.

Great. Thanks. Maybe just for the acute business. Can you discuss the utilization by payer across commercial, Medicare and Medicaid? And if there’s any particular payer buckets where you’re seeing outsized pressure on volumes. And then just a follow-up on mix. Acuity seems to remain elevated. But are you seeing any relative pressure on the medical versus surgical side of the business worth noting? And then maybe how we should think about those trends for the balance of the year? Thanks.

Yes. I think, we have said throughout the pandemic that we have not seen dramatic changes in our payer mix. I think, for the most part, our acute hospitals have tended to experience higher levels of COVID during the surges than at least our public peers. I assume that’s just a geographic sort of luck of a draw in that you get the COVID patients in your market, nobody sort of advertises or does anything to try and track those patients, you get what you get. And so we’ve tended to have, I think, a slightly higher Medicare to commercial mix than some of our peers, particularly during surges. But other than that, I don’t see that. The managed care companies, I think, otherwise, from a mix of business perspective, continue to talk about a shift from inpatient to outpatient. I think in our minds that’s really just a continuing dynamic that has been present in the industry now for at least a decade, probably quite a bit more. And within our own hospitals, I don’t know that we’ve really seen that shift accelerated. But again, I’ll get back to it. I think the fundamental challenge that we faced in our acute care business in Q2 was that as COVID volumes declined and they declined rapidly, we were unable to replace them at the same pace as we did, let’s say, in 2021 with elective and scheduled procedures and the more acute and more profitable sorts of procedures that have sort of go missing during the COVID surges. So, I’ll just remind everybody that in 2021, Q2 really proved to be the most profitable, most robust quarter of the year for both of our business segments after again, a very significant surge of COVID in January 2021, and we were really kind of built our original 2022 forecast off of that experience. And I think what we found is that particularly, again, on the acute side, that recovery of non-COVID volumes, which occurred earlier in 2021, it occurred in April and May and June 2021 has been just sort of extended out into the back half of the year. And I think that was the crux of Marc’s opening comments that we believe that demand has really been postponed or deferred and not, for the most part, lost in any significant way. And so we understand that we have a pretty significant forecast in the back half of the year for increasing volume and continued decreases in labor. But that was our experience during the quarter. The quarter got better sequentially with each month. July seems to be getting sequentially better than June. And so we’re encouraged. We know we have steep held decline, but we’re encouraged that those should still be achievable forecast.

Got it. I appreciate that color. And maybe just a follow-up, just on the CapEx side. If I heard this correctly, it sounds like you’ve reduced CapEx spend the expectations by about 20%. And I think last quarter, you discussed that you’re taking CapEx spending in account on an episodic basis given the labor and volume backdrop. And perhaps, if you can give any more detail around the CapEx reduction and the developments there, that would be helpful.

Yes. So a significant amount of our CapEx is on large projects. Obviously, there was a significant amount of money spent in the early part of the year to open the hospital in Reno. Capital spending on new hospitals is back-end loaded in the sense that a lot of it takes place in the month or two before the hospital opens when most of the equipment is delivered and installed and that’s a significant expense. But we also opened several new behavioral hospitals. We’ve talked about our projects to build new hospitals in California. We’re opening a new patient tower in Edinburg, Texas very shortly, et cetera. So those projects and all of our large projects, are difficult to really slow down or certainly stop in any efficient way. I think we’ve learned this over the years. So most of that reduction that I referred to is really in sort of discrete equipment spending and smaller capital projects that can be postponed or delayed. And I think we just felt it was kind of a prudent course to slow those projects at a time – twofold when earnings were pressured number one, but also when labor constraints were such an overarching issue, why build new capacity or open new capacity if we were going to have difficulty staffing it. So all of that is, I think, sort of being done in real time, and we’ll continue to monitor it. And if I think volumes begin to improve as we believe they have already begun to and believe they will continue to do so. We’ll make our judgments about restoring the pace of capital. But I would say for the foreseeable future, the pace of our capital spending will be moderated below what our original forecast for this year were.

Got it. Thanks. Appreciate all the color.

Thank you. [Operator Instructions] Our next question comes from Whit Mayo with SVB Securities.

Thanks. Steve, on the malpractice charge, is this a onetime prior year negative development? Or did you raise your estimates and reserves on a go-forward basis? I know we had a higher malpractice development last year. So just trying to understand kind of what you have in your plan now?

Yes. Whit, I mean, I think – and I think we said this last year, our malpractice experience is that we’re not seeing an increased number of cases. And I think broadly, what our actuaries tell us is that this is the general experience across the country, but the value of cases that are being brought just is increasing at a fairly significant rate. So, you’re right. We did have an increase to our reserves last year. We did have an increase to our reserves in the second quarter of this year. We view it as a onetime thing in the sense that I think otherwise our malpractice expense and provision from our practice in the back half of the year will be as we originally forecasted.

So it’s the size of the claims, not the frequency of the claims.

Correct.

Okay. And maybe just two other quick questions. I’m curious how the UK operations are performing now and if there was any sizable impact from currency in the quarter? And then if you could just talk a little bit about the surgical trends in the quarter, any service lines stronger, weaker than your expectations.

Yes. So sort of do it backwards and hopefully remember everything. Surgical trends, as I said, I mean, I think we’re seeing what seems to be kind of a common theme, which is that our outpatient procedures tend to be growing faster than inpatient. Honestly, I’m not sure that’s a new development nor as I said earlier, do I think we see that sort of trend or that gap accelerating, but it’s certainly continuing. As far as within our surgical services, are they particularly strong or weak service lines within cardiology, orthopedics, et cetera, no, I don’t think so. I think they’re tending to all grow at around the same levels. As far as the UK goes, I think interestingly, with through most of the pandemic, I think our behavioral business in the UK has been a little bit more stable than the acute business, while they experienced many of the same issues, particularly with labor staffing because they tend to have a longer length of stay in smaller facilities, I just don’t think that they were quite as pressured as we are in the U.S. on that issue. So they’ve actually performed much closer to our forecast than the U.S. business. Now keep in mind, it’s still a pretty small part of the overall business. It’s about 5% of our consolidated revenues. As you point out, recently the UK economy has come under some significant pressure, the exchange rate has become unfavorable to us, again, because it’s such a small part of the business, it certainly has had an unfavorable impact, but I think it’s only a few million dollars in the quarter. And I think other than the sort of broad pressures on the UK economy and some of the taxes they’re implementing and raising their corporate taxes, there is some macro, I think unfavorable sorts of issues, but I think the underlying business in the UK continues to do very well.

Okay, thanks.

Thank you. [Operator Instructions]. And our next question comes from the line of A. J. Rice with Credit Suisse. Your line is open.

Thanks. Hi, everybody. Maybe first, you mentioned, Steve, you’ve seen progression throughout the quarter and July trends looked like there at least as strong as June, if not a little better. Normal seasonal pattern would have you stepped down in the third quarter, probably in both businesses and then have a strong finish to the year in the fourth quarter. When you’re thinking about the way guidance lays out for the back half of the year, I know you don’t guide on a quarterly basis. But can you give us any flavor for how you’re thinking about the trajectory? Will it be a normal seasonal year? Or would it be somewhat different than that?

Yes. I mean I think almost by definition, if you sort of go through the math of our back half expectations for revenues and EBITDA, you have to see that we pretty much assume that kind of the normal seasonal progression that you alluded to. We’re assuming it’s going to be overcome by this kind of deferred and postponed demand. So we assume that the third quarter will be sequentially better than the fourth and the fourth will be sequentially better than the third and by a significant amount. And again, it’s this idea that I’m going to go back to what I was saying before, if you look at the recovery in 2021, the second quarter was the strongest of the year, which is, again, historically not the traditional seasonal pattern, but it was the emergence from the COVID surge sort of the pickup in volumes, the easing of labor pressures. We think all those things are occurring in 2022 as well. We just think they’re occurring in a sort of more elongated and slower pace. So that a good chunk of that recovery, a good chunk of that labor improvement will take place in quarters three and four this year rather than the way they did in quarter two of last year.

Okay. And then maybe I’ll ask on the behavioral business. You had a sequential improvement in margin of about 200 basis points that was encouraging. And that really didn’t come with a big rebound in volume or step-up in volume. Is that – how do you think then where do we go from here? Do you need volume to step up somewhat you get further margin improvement? Are there other things that are specific to the labor situation, whatever that suggest that you can see more margin improvement? And any sense of where you think that would ultimately settle out coming out of the pandemic?

Yes. So look, I think you highlighted, A. J., kind of an important point in the way that COVID surges sort of manifest themselves and impact the two business segments, and I think they’re impacted quite differently. So on the acute care side; we have the COVID surge in January. And while COVID patients present a lot of sort of operating challenges for an acute care hospital from an earnings and financial perspective, there is a significant benefit to them. They’re high acuity patients, there’s very little bad debt or there had been very little bad debt because of government programs to cover the uncompensated COVID patients, et cetera. You’re running very efficiently, all that sort of stuff. So as those patients decline – as the COVID patients decline on the acute side, now there’s this sort of air bubble, if you will, created and you’ve got to fill that bubble with non-COVID business. And as I said, for a number of reasons, that’s been a more challenging and I think a slower recovery in 2022 than it was in 2021. As a result, the weakest month that we’ve had this year on the acute side of the business is April, and it has gotten better since then, as I’ve said, sequentially each month. Whereas on the behavioral side, the COVID surge is sort of immediately devastating. There’s really no benefit to it. It makes our staffing challenges wildly exacerbated. We have a lot of challenges when we have to isolate COVID patients and close beds, et cetera. So the weakest month of the year for our behavioral business this year has been January when we have the biggest COVID surge and then we’ve just generally seen a sequential improvement since then. But your overall point, I think, is well taken in order for us to meet our forecast that are out there, we clearly need an improvement in volumes, which again, I’m going to say, we believe the underlying demand in both businesses is there, as the labor situation eases, as the COVID surges ease, it should be easier to execute on those volume increases. We thought we would do it earlier in the year, but our revised forecast has slower and some of it, quite frankly, not even taking place in 2022, but that’s the crux of our revised forecast.

Okay. Maybe I’ll just slip in one last one because it hasn’t been addressed. It seems like some of the specialty hospital peers, whether it’s rehab or behavioral, they’re talking about seeing an uptick in acute care companies or entities being interested in doing joint ventures as they’re repositioning and trying to deal with their own labor challenges. Are you seeing that? Any update on discussions around potential JVs with other big health systems?

Yes. No. Look, we’ve talked about this for some time that, yes, we think there are a significant number of acute care hospitals who have existing behavioral services either a dedicated floor or a discrete building in which they’re offering behavioral services, but feel like they’re not terribly efficient or focused on delivering those services and are looking for a partner who is more expert, more experienced in doing that. We mentioned earlier that we had a number of de novos open this year in Wisconsin, our first behavioral hospital in Wisconsin, in Iowa, in Missouri. We’ve had the Iowa and Missouri hospitals are joint ventures with acute care hospitals. We have a number more in the pipeline. So I think it’s an accurate comment that you’re hearing from others, I think we’re trying to measure that against sort of a real uptick in capital investment at a time when there are challenges in opening new capacity with labor, et cetera. So I think we’re trying to create a pipeline that – of these joint ventures that can be absorbed in a sort of proper way without creating a drag in earnings. But yes, I think we have said for some time, we think that the opportunity to joint venture with some acute care hospitals and probably even more importantly, some acute care hospital systems to offer behavioral services. We have said for some time, we think that the opportunity to joint venture with some acute care hospitals and probably even more importantly, some acute care hospital systems to offer behavioral services is a significant opportunity over the next five or seven years.

Okay, thanks a lot.

Thank you. [Operator Instructions] Our next question comes from Ben Hendrix with RBC Capital Markets. Your line is now open.

Hey, thank you very much. Just to follow up on the behavioral side. Certainly, you mentioned that the volumes have got sequentially a little bit better since low point in January, but they seemed to trend a little bit better than we had expected. It seemed to be a little bit better than some commentary for your peers on behavioral. I was just wondering if you could – are there any particular areas that you saw or were a little bit different from your expectations. And just how that’s trending in general? And if there were any particular mix issues with payer mix or if there was any kind of patient mix that deviated from your original expectations? Thanks.

No, Ben, I think we tried to alluded to before, the main challenge for our behavioral hospitals during the pandemic has been a lack of staff. And as a consequence, we feel like we’ve had to turn away significant numbers of patients because we didn’t have adequate staff to treat those patients, mostly RNs, but in some cases, therapists, physicians, psychologists, family counselors, and in other cases, non-professionals, mental health technicians, et cetera. Progress in that area has been slow, but since the COVID decline in January, especially, we’ve made a lot of progress. And I think more than anything else that has allowed us to make incremental improvements in our volumes. And I think those have continued into July, and our expectation is they’ll continue into the balance of the year. But I don’t know that it’s in any particular service line or payer I think, again, it is more than anything a reflection of the fact that we are slowly getting our arms around the labor scarcity issue, increasing our net hires, experimenting – maybe not even experimenting anymore, but implementing new patient care models that rely somewhat less on RNs and on other caregivers so that the ultimate total care that’s given to patients and attention that’s given to patients is the same and it’s the same quality, but just not as reliant on registered nurses.

Thanks. And just a quick follow-up on the CapEx side. I know you talked about a reduction in CapEx and part of that going to discrete equipment spending. But is there any particular color you can give us on in priorities for those cuts kind of in the equipment side? Thanks.

No. I mean, it’s really – I think we’re making discrete decisions in – for each hospital and every market based on where are they sort of struggling, if we invest in new equipment, will they be able to have the staff to realize the benefits of that investment? Or should we wait until the staffing issues resolve themselves. But no, I wouldn’t say that it’s functionally we’re not buying CTs, but we are buying MRIs. It’s not that sort of thing. I think we’re making these individual judgments about where it makes sense to postpone or wait on an investment until we are not as sort of capacity constrained from a labor perspective.

Thank you. And our next question comes from Kevin Fischbeck with Bank of America. Your line is now open.

Great. Thanks. I apologize to some of these questions because sometimes it gets confusing to me about whether we’re talking about acute or behavioral volumes. So maybe just to clarify, when you talked about labor being the biggest headwinds of volume growth you talked about the behavioral side more than the acute side? Because it sounded like in Q2 as more COVID dropped and then core didn’t come back rather than a staffing issue on the acute it. Do I have that right? Or would you say labor is also a real gating factor to volume growth in acute?

Yes. So thanks, Kevin. It’s a good question, and I probably should have been a little more precise in my commentary. I think absolutely from the beginning of the pandemic, we have talked about the major headwind or gating factor on the behavioral side as being the labor capacity constraint and shortage. But I do believe that in Q2, and I think on the acute side, through most of the pandemic, the issue has been – we’ve been able to fill most of our vacancies, but we’ve had to do so at an extremely high cost. And therefore, on the acute side, most of the focus has been on that premium pay rather than sort of an absolute scarcity or vacancy sort of an issue. I will say that in Q2, we did see that issue arise in the acute care segment. I don’t know that we saw it pervasively. I don’t know that it was the single biggest issue by any stretch. But for instance, I think our surgical volumes overall were impacted in some of our markets by a lack of anesthesia coverage, anesthesiologists and their assistance, et cetera, tend to be independent contractors, not our employees. So it’s not necessarily something we’re in direct control of. But we were hearing feedback during the quarter that we were having to limit surgery schedules, et cetera, in some markets because there simply weren’t enough anesthesia – wasn’t enough anesthesia coverage. Same thing in some markets, we had to go on emergency room divert because we didn’t have simply enough staff in the emergency rooms, et cetera. Again, I don’t know that it was a pervasive issue in the acute care space in Q2. But I do think it contributed to the Q2 weakness in a way that we hadn’t necessarily seen before.

Okay. I guess when we hear some of the other companies talk about how they think about managing their business during this labor shortage. Some companies that we’ve just deemphasized certain business lines because it doesn’t make sense from labor is $150 an hour. And therefore, are growing more slowly. I haven’t heard you guys talk about that. I mean when you think about cutting back on CapEx because it might just be hard to staff to that growth, I mean, are you at all changing your model or your thought about managing through this? Or just trying to understand the thought process has changed and what, if any, implications are for volume growth or margin improvement from here over the next few quarters.

Yes. Look, Kevin, I think that the notion that where there’s a labor scarcity, you’re going to want to emphasize your high-margin service lines and deemphasize your low-margin service lines is sort of theoretically an attractive idea and something that I think we do and we do all the time to the degree that we’re able to. I do also believe that in a business in which at least half of our patients or more than half of our patients, but about maybe half of our admissions come through the emergency room, I’m sure you can understand that that’s not an easy business to control, and you basically take what comes in and you treat those patients same thing. OB, as an example, tends to be one of a lower-margin service lines in most hospitals. But when a woman comes into the hospital in labor, there’s really no option to do anything but to treat that women, and that’s of course, what we do. So again, I’ve heard what the other companies say, and I think we certainly try and do it to the degree that we can. But I also believe that in a hospital, there’s really a limit to how much of that you can do. I think what we can do in terms of being selective in our business is what I alluded to before in terms of managed care contracting. We don’t have to be in network with managed care payers who are not offering us adequate rates, et cetera. So I think in that regard, that’s an easier sort of function to manage because you can sort of do that in advance. And if somebody is out of network, they’re either going to pay a higher price or they’re going to go to another hospital. But that’s something that I think you can deal with in a more, in my mind, more sort of measured and rational way, and we certainly have talked about that now for several quarters.

Okay. Great. And then maybe just last question. I guess, on the psych side, demand has been strong for a number of years, and you guys have been growing slower than how we think about overall demand in psych even before the last couple of years during the pandemic. So just trying to think about, what it means when labor gets better from here, but maybe it’s a little bit elevated than it was in 2019? So like what exactly does that mean from growth? Can you then grow from the way that we think about how this business should be growing in that type of labor environment? Or does that still create a situation where labor is still tight and so they’re still going to be struggles to kind of get to where that business should be? Thanks.

Yes. So Kevin, I go back to late 2019 right before the pandemic, I’m going to say November, December of 2019; January, February of 2020. And you’re right; we were coming off some challenging years. We had seen labor shortages back in 2015 and 2016 that I think we had largely overcome. We saw length-of-stay pressures in 2017 and 2018 from our managed Medicaid payers; I think we have largely overcome. And I would say that four, five month period, late 2019, early 2020; I think we were generally feeling like we were firing on all cylinders for the first time in a long time. And it certainly was still a tight labor market. But there’s a difference between sort of a tight labor market and one in which there are extreme scarcity, which I characterized the way it was during the pandemic. So we had, I think, a four or five month period of kind of just a brief window to see what it would be like to be able to operate without any significant sort of overarching headwinds still in the tight labor market. And we were doing pretty well during that short period. And then, of course, the pandemic occurs in the middle of March of 2020. I think that’s really kind of what we’re shooting for. And I don’t know that we’re going to get back to that environment in the next month or the next quarter. But I think, we feel like it’s not something that’s so far away that we can’t see getting there. And I think we feel like there’s a lot of incremental improvement as we return to an environment where we ought to be able to grow the behavioral business revenues in sort of mid- to upper single digits, which we have done for a very long time for a decade and half or so before all this started. And I think that’s the overall plan. And we’re very focused on it. I think Marc alluded to all the money that we’ve invested in recruitment and retention initiatives. We think that there’s a real payoff to all those things over the next couple of years. And again, fundamentally, every measure that we have is that there’s still significant demand out there for behavioral and that, quite frankly, demand for behavioral services is probably in the general population increase during the pandemic rather than decreased.

Great, thanks.

Thank you. [Operator Instructions] Our next question comes from Pito Chickering with Deutsche Bank. Your line is now open.

Hey, good morning guys. Thanks for fitting in me here. A couple of quick questions. A follow-up question for A.J.’s guidance questions. We said our models appropriately. – historically about 46% of your EBITDA in the back half of the year comes in 3Q and the rest in 4Q, which means that 3Q, EBITDA about 420 [ph] ballpark. Is that just the right range we should be focusing on?

Yes. So Pito, as you know, we don’t give quarterly guidance. And I think, as I’ve mentioned a number of times, we’re not going to start doing it during the pandemic when I think there’s greater uncertainties. But I think you’re right. I mean I think in the sense that – those percentages are probably reasonable. I think what we’ve – what I’ve said earlier is, clearly, we’ve back loaded more of our earnings into the back half of 2022 than we are in the normal year. And I think what you’re suggesting is there still has to be some level of seasonality. The third quarter is when our patients and our physicians take their vacations, et cetera, during the summertime. So I’m not going to say that those are the right numbers. But I think the thought process is certainly reasonable.

Great. And then a multipart question for you just back on the labor topic. I guess the first one is, as you look at your RN hourly wage in January versus June or July; have those changed at all in 2022? Or are they stable? And then the same question for techs and LPNs. Are you hiring a lot more LPNs and techs than you used to? And are we seeing sequential labor pressures from those rates? And then finally, can you refresh us on what percent of S&B is RNs and non-RNs? Thanks so much.

Yes. So – the answer, I think, as I think every business in America is facing is we’re having a harder time hiring just about everybody. And again, as – not like I follow other industries as closely as some of the folks on this phone but certainly, everything I read, everything I talk to peers, et cetera, indicates that hiring – quite frankly, hiring people even here in our corporate office is more challenging than it was pre-pandemic. So yes, I mean I think that’s all a challenge. I think what we said a number of times, however, is that while there is certainly some upward pressure on nursing rates and RN rates, in some ways, the pressure has been so great and the opportunities have been so great for nurses to work in these temporary and traveling jobs that raising their rates has really not even been sort of an appropriate reaction. So if a nurse is leaving to take a traveling job in which she is going to earn four times or five times our base salary, there’s really nothing we can offer him or her to compete with that. And so what we do is we try and look at the competitive rates in the market, base rates for RNs, et cetera. But we’re not trying to match those sort of crazy opportunities that nurses are finding in the temporary and traveling area. And what we also have found is that as COVID surges decline, the number of those crazy opportunities decline pretty precipitously as well. So again, I believe back to this, I mean, I think that the labor situation will continue to be a tight one for some time. I think there’ll be upward pressure on nursing rates for some time, but just not nearly the sort of crazy kind of opportunities and crazy pressures we felt when we were paying $225 an hour for a temporary nurse, et cetera, those rates, I think have come down almost by half since their height.

Okay. And then the hiring of techs and LPNs. Does that sort of change today versus pre-COVID. Do you think that, that sort of this level of LPNs, techs versus RNs, do you think this is right level going forward?

Yes. Look, what I think is ultimately going to happen, and certainly, we’re doing our best to encourage it is we’re going to see more people enter the workforce as – what we do is we encourage our mental health technicians to go to school and become LPNs or some certified clinical person, we encourage our LPNs to get their RN degrees, et cetera. And obviously, we’re providing help and support for them to do that. So hopefully, over the course of the next few years, not just UHS, but the industry will build a better pipeline. And what we found is that occurs sort of naturally when there is a nursing shortage. Obviously, I think what the pandemic did was it exacerbated that shortage and so made it occur almost overnight in a way that – that’s not something we’ve experienced before. But I think the overall reactions or focus on building a bigger pipeline of sort of nurse education, progression, et cetera. We’ll start to have a real impact over the course of the next couple of years.

Great. Thanks so much, guys.

Thank you. And at this time, I would now like to turn the call back over to Mr. Steve Filton for any closing remarks.

None other than we thank everybody for their time. And wish everybody a good rest of the summer. Thank you.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.