Good day, and thank you for standing by. Welcome to the Second Quarter 2023 Universal Health Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Filton, CFO. Please go ahead.

Thank you, and good morning. 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, 2023. During the conference call, we'll be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and 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, 2022, and our Form 10-Q for the quarter ended March 31, 2023. 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 net income attributable to UHS per diluted share of $2.42 for the second quarter of 2023. After adjusting for the impact of the item reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.53 for the quarter ended June 30, 2023. Our acute hospitals experienced strong demand for their services in the second quarter with adjusted admissions increasing 7.7% over the prior year. Even though the volume growth was skewed somewhat to lower acuity procedures, overall revenue growth was still a very robust 9.7%. While overall surgical volumes were solid, increasing about 5% from the prior year quarter, there was a continuing shift from inpatient to outpatient. Meanwhile, the amount of premium pay in the second quarter was $75 million, reflecting approximately 10% to 12% decline from the amount in the previous several quarters. The continued robust increase in acute volumes is the major reason that premium pay has not declined further. It's worth noting that our average hourly rate, which includes…

Thanks, Steve. We were generally pleased with our second quarter results, as both of our business segments continued their transition into a post-pandemic world. As we anticipated, acute care volumes have continued their recovery trajectory, and have gradually begun to resemble the patterns we experienced before the pandemic. The comparison to last year's second quarter for our acute hospitals is the first apples-to-apples comparison of two low COVID volume quarters we have had since the pandemic began and the 60-basis-point 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. In our acute segment, we highlighted the upward pressure on physician expense which tended to run at a rate of about 6% of revenues pre-pandemic, but is running closer to 7.6% in 2023. Based on the generally favorable operating trends in the first half of the year, we are increasing the lower end of our 2023 EPS guidance from 9.50 a share to 9.85 a share. As we have previously disclosed, our 2023 guidance had originally assumed recognition in the fourth quarter of 2023 of $25 million of supplemental revenues from a Nevada Medicaid program. The state has dramatically reduced the funding for this program, and we now believe our fourth quarter revenue recognition will be only approximately $3 million. This reduction has informed our decision not to change the upper end of our guidance range at this time. It is worth noting that we believe a new Nevada state directed program which we also have previously disclosed appears to still be on track for a 2024 implementation with a potentially materially favorable impact on our Nevada hospitals. We are pleased to answer questions at this time.

Thank you. [Operator Instructions] Our first question comes from Jason Cassorla from Citi. Your line is open.

Great. Thanks and good morning. I just wanted to ask about acute care volumes. I guess, obviously, a strong result for the first half, but wondering how you're feeling about the trajectory of those volumes in the back half of the year. And I know it's early, but do you think this creates a new base from which you grow off of for next year, or do you think it still create kind of a set of difficult comps that you have to kind of overcome and work through in the first half of 2024? Just any color or commentary around that would be helpful.

Sure. I mean I think part of what we're experiencing in -- certainly in the first half of this year is what both, I think, providers and payers have anticipated for some time, and that is during the pandemic, there was some amount of deferral and postponement of procedures. And I think what both providers and payers have been reporting in the last quarter or two is that we've seen an uptick in volumes, particularly lower acuity volumes, elective, and surgical procedures. Again, I think particularly skewed towards the Medicare population that probably was most prone to defer and postpone during the pandemic. It's very difficult for providers like us. And I think, quite frankly, for almost everybody, except for individual physicians to really try and precisely determine how much of current volume is an exhaustion of demand that was sort of postponed or deferred during the pandemic. I think the comment that we have made simply is that we had 10% adjusted admission growth in acute care in Q1, close to 8% in Q2. Those are really historically unprecedented numbers. So, our expectation -- and again, I think Marc's comments were in Q2, for the first time, we had kind of an apples-to-apples comparison with last year in terms of low COVID volumes. We're expecting, I think, volumes to moderate in the future, but also for acuity to rise and to return to sort of that mid-single-digit level of topline growth in acute care that has sort of long been the model. Whether that occurs in the next couple of quarters, whether we have a run of somewhat extended and enhanced volumes, I think is difficult for anyone to project. Obviously, it's been pretty strong for the last six months, early indications in July that remains that way. But we'll see. So, again, I think some of our caution about guidance in the back half of the year is also informed by this idea that we're not exactly sure at what pace acute care volumes moderate, but there is some sense if they will. But generally feeling pretty good about overall acute care volumes which did suffer -- at least non-COVID volumes, which did suffer definitively during the pandemic.

Got it. Okay. Thanks. And maybe just as a follow-up on the acute care physician subsidy expense. It sounds like that's coming in at an even greater pressure point than originally anticipated in guidance. I guess, one, is that fair? And curious if that level of spending is at a tipping point now where maybe you need to perhaps consider greater levels of in-sourcing or other strategies to help offset and create kind of a good guy sort of set up for '24 and beyond? Any just thoughts on that would be helpful. Thanks.

Yes. So we have certainly been talking about and anticipating that 2023 would be a challenging year when it came to this issue of physician subsidy expense. We talked about back in February when we gave our 2023 guidance providing like a $55 million to $60 million increase in our guidance in physician expense. The reality is the rate of increase is probably running at about twice that. I do think that this is to some degree, sort of a transitory pressure. These contract service providers who provide much of our specialty emergency room and anesthesiology coverage are -- many of them are facing pretty significant financial stress. There have been a number of high-profile bankruptcies in that area by these contract providers. And in this interim period, where we're having to replace or kind of substitute and either pay greater subsidies to our existing providers or to new providers or your question alluded to in source and hire these physicians ourselves, there's this sort of kind of onetime, hopefully, expenditure of money and dollars to make this transition. But at the end of the day, I think we have a point of view that there's x number of ER providers in the country, there's x number of anesthesiology providers in the country. And when this sort of current disruption settles out, those dollar increases like in 2024, will at a minimum level off and hopefully will actually decline. But we're not going to see this rate of increase over an extended period of time.

Great. Thanks for the color.

Thank you, one moment for our next question. The next question comes from Ben Hendrix from RBC Capital Markets.

I was wondering if you could answer pretty much the same question on the softness in the behavioral that we saw this quarter versus first quarter. I think you had called out maybe some headwinds at some specific facilities. Just wanted to see kind of how that looks like in the back half? Is that an easy fix and what we can expect going forward?

Yeah. Well, I'll go back to the point that Marc made earlier. The first quarter comparison was a bit anomalous because we were comparing kind of a low COVID volume in Q1 of 2023 with a very high volume in COVID quarter in 2022. So particularly on the behavioral side, that comparison was very favorable and volumes, revenue, EBITDA growth all looked very favorable in Q1. Q2 volume growth was a little more normalized, frankly, a little softer than we anticipated. I think that our acute behavioral volumes, and I made this comment in the prepared remarks, we're actually in line with our expectations, but the volumes in our residential treatment centers were somewhat lower than expectations as we kind of, delved into those numbers. It really seems like they were focused on a handful of facilities that we're having specific issues with referral sources or regulatory issues that we believe will be corrected and largely resolved in the back half of the year, but didn't seem to be pervasive in any sort of company-wide or industry-wide sort of dynamic. So I think our view as we think about the behavioral business trajectory, the point that we've made for some time during the pandemic is that as COVID volumes eased, we would be able to hire more people. As we would be able to hire more people, we'd be able to generate more patient days, more volume, greater efficiencies, greater EBITDA growth. I think if you look at the first six months of the year, which, again, I made the point in my prepared remarks, EBITDA is up 12%. I think if you look at the last four quarters, EBITDA is up substantially. And I think that's how we're looking at the earning power of our behavioral business. A bit of a slowdown in Q2, but I think we think the long-term trajectory is much more reflective of the experience we've had over the last two to four quarters.

Thank you.

Thank you, one moment for our next question. We have a question from Andrew Mok from UBS. Your line is open.

Hi. Good morning. Same-store inpatient admissions were up about 7% in the quarter. But I think in patient surgeries were only up about 1% or so. You mentioned lower acuity procedures, but I think those stats would imply some very strong medical growth or nonsurgical growth. Can you elaborate on the nature of the procedures you're seeing on the inpatient side? Thanks.

Yeah. So what I said in my prepared remarks was that overall surgical growth was up about 5% Q2 over Q2, which we view as a pretty solid outcome skewed more towards outpatient growth so outpatient procedures -- outpatient surgical procedures were up 8%, inpatient were only up 1%. But that obviously affects acuity. And again, I think in my mind, this is sort of an intuitive result. If what we're seeing in terms of the volume growth in acute care is, to some degree, a recapture of postponed and deferred procedures, it makes sense that those deferred and postponed procedures were of the lower acuity nature. Almost by definition, if people had emergency health care needs during the pandemic, those were attended to. But the things that were deferred were more elective, more discretionary procedures, both surgical and medical. And again, I think that's the dynamic you're seeing in terms of very high volumes but somewhat more muted acuity.

Got it. And just a quick follow-up. How is the Reno hospital tracking against expectations, can you help quantify the contribution that, that hospital had on same-store admissions growth in the quarter? Thanks.

Yeah. I don't have those exact admission numbers for the Reno hospital in front of me, but I'll say that -- what we have said was included in our 2023 guidance was about a $25 million or $30 million turnaround at the Reno Hospital. I think we're tracking I think we anticipated that, that would be a little back-end loaded, and I think that's right. I think we probably had about a $4 million to $5 million improvement in Q2. But I think we're generally tracking for that level of improvement for the full year, and that's our expectation. My sense is the Reno Hospital is not large enough to have had a significant impact on admissions one way or the other in the quarter.

Thank you.

Thank you. Our next question comes from Joshua Raskin from Nephron Research. Your line is open.

Hi, thanks. Good morning. Just the first question, getting back to the behavioral health margins. I think in the past, you've suggested, and I think you just alluded to this, Steve, that there just weren't enough clinicians to hire and that sort of slowed your volumes. Are you now able to find these clinicians? If so, where are they coming from? And are different categories, maybe nurses versus MD is performing different roles. I'm just curious how you're feeling that capacity.

Yes. I mean, so what I think we have said pretty consistently throughout the pandemic is that the pandemic itself -- and I should start by making the point that prior to the pandemic, in late 2019, early 2020, I think we would have described, and I think most of our provider colleagues would have described the labor market. It's pretty tight back then. The overall unemployment rate in the country was, I think, pretty close to full employment, clinical employment, particularly nursing employment was very tight. The pandemic then really exacerbates that tightness, particularly for sub-acute providers like behavioral providers because we started to lose a great many nurses, especially nurses to these high-level premium pay opportunities they were having working in acute care hospitals and COVID units or ERs or ICUs, et cetera. And the argument we made all along was that as COVID volumes declined, those opportunities for these extraordinary pay increases would decline and nurses would return to their – we'll sort of call it home base and employment. And I think that's what we've been seeing I'm going to say, for the last 12 or 15 months, I'm going to say at least back to the spring -- the early spring of 2022. And we're seeing that. Now what we're seeing is an increase in base wage rates in order for us to get those folks back. So I think wage inflation and behavioral or average hourly rate increase in Q2 over the prior year is more like 4.5%, 5%, which is certainly higher than it was running in the pandemic. And again, you see some of that in our salary, overall salary increases. But at the end of the day, and this is the point that I was trying to make before, I think what we've demonstrated, especially over the last three quarters, and to a lesser degree, in Q2 of this year as we're able to hire more people, we're able to generate more volumes and as a consequence, EBITDA growth, margin improvement, et cetera. It's not a directly, it's not a ratable increase every single quarter. But -- and again, there's some element of timing here as we hire new people, they have to be trained and oriented and that causes some level of inefficiency. But over time, I think we have the view that we're going to continue to be able to hire more people in behavioral and admit more patients and that's going to lead to a long-term growth trajectory in that business.

Got you. Got you. And then just one more on United spoke about a large increase in the incidence of mental health utilization, just more people seeking services. Do you think that translates to more inpatient care, or is that a level of acuity that's been more steady on the inpatient side and maybe that's more lower acuity?

Yes. My recollection from reading the United transcript was that they specifically talked about that increase being skewed to outpatient procedures. And, obviously, I think outpatient is a more highly competitive market for behavioral, there's a lot more competitors. I think our view is over the long-term, the more people who are getting care and getting appropriate assessments, et cetera, is good for our business, which tends to have a much broader continuum of care that includes more intensive outpatient and partial hospitalization and all sorts of inpatient care across many diagnosis. So I think we have a view that while we didn't necessarily experience that same growth in outpatient that United referred to specifically, I think, in their first -- second quarter call, that ultimately down the road, we're likely to benefit from more and more people getting the appropriate level of behavioral care and assessment.

Great. Thanks.

Thank you. Our next question comes from Whit Mayo from Leerink Partners. Your line is open.

Thanks. Steve, I appreciate the comments on Nevada and the supplemental Medicaid program changes. Any way to potentially size how you guys are thinking about the potential contribution of that in 2024? I know there's still some moving pieces and approvals that need to happen.

Yeah. So we're waiting Whit for the state to resume more specific guidance about how their specific methodology is going to work, et cetera. But based on our broad understanding of how this program is going to work as I think Marc commented in his prepared remarks, our expectation is that this could have a materially favorable benefit on our Nevada hospitals. But we're anxiously waiting for the state to issue more specific or more specifics surrounding the calculations and the methodology and the size of the pool, et cetera, which we think could be forthcoming going to sort of say in the near intermediate term. But certainly, we think there'll be a lot more clarity by the end of the year.

Yeah. Okay. No, that's helpful. We've gotten some questions around the Cerner Oracle EMR investments you guys are making, none of this is new. But just maybe remind us the income statement, CapEx impact, how many hospitals you're thinking about converting? I can't imagine that's all of your facilities, just timeline and any review of that initiative?

Sure. So as you said, this is not necessarily really new news. We originally committed to a behavioral EMR implementation with Cerner. Going back a couple of years and after Cerner's acquisition by Oracle, Oracle wanted to do this press release, which is fine. But to be clear, I mean, it's not new. We've already implemented a handful of facilities in 2022. We'll implement another round of facilities in 2023. If you read the press release, it doesn't refer to the number of facilities. I think when at least one of the news media outlets picked up the story based on the combine the fact that we were making this announcement with the fact that we've got 200 behavioral facilities here in the US, and said that we were committed to implement 200 facilities, as your question alludes to, we’re certainly have not yet committed to that. We have smaller residential facilities that may not be appropriate for an investment of this scale, et cetera. So I think the point -- I mean, I think that we will spend significantly less on behavioral EMR than we did on the acute care alone, I think, around $220 million, $230 million a number of years ago on the implementation of an acute care MR. I think we'll spend substantially less on behavioral and they'll be spread out over, I think, a five or six-year period. So, I don't think that the individual impact of the investment is going to have a significant impact. The other piece is we had an expectation that there are operating efficiencies that we'll gain and garner from the implementation. So a significant chunk of that investment should be offset with operating efficiencies.

Okay. Thank you.

Thank you. We have a question from A.J. Rice from Credit Suisse. Your line is open.

Thanks. Hi everybody. I know you've gotten some good rate increases on the behavioral side the last year or so is -- I know a lot of states reset their rates midyear. I also know you've got ongoing discussions on the commercial side. Medicare, we can track that easier. But any update on thinking about where rates settle out back half of the year into next year for commercial and Medicaid in the behavioral side?

Yes. I mean, A.J., I think our comments on rate increases and behavioral have been pretty consistent. They definitely -- historically, revenue per day in the behavioral division has generally increased sort of 2% or 3% a year, pretty consistently pre-pandemic. During the pandemic, we saw those numbers rise to something much closer to 5% to 6%. And then I think we've generally discussed that, and we think the main reason for that is we've been able to leverage the fact that there is capacity constraints in the industry as we've already talked about on this call because of labor capacity especially. And we've been going to our lowest payers and either demanding increases from them or canceling those contracts that we view to be inadequate and simply admitting patients whose insurance will pay us more, again, in an environment where we can only treat a limited number of patients, we can be more selective about who we treat and the fairness of what we think we're being paid. What we have said is we think that as we're able to admit more patients, our ability to leverage that diminishes a little bit and maybe that revenue per day increase that had been running 5% to 6% moderates more to 4% to 5%. We were again a little over 6% in the quarter, although that, I think, is a function not only of the rate increases we're getting but also of the mix of acute versus residential patients. as I mentioned before. But I think generally, our price -- the pricing environment in behavioral remains strong. We remain aggressive that we've terminated or issued notice of termination in a great many markets to a great many payers. We're pursuing this strategy pretty aggressively and feel like there's a runway to do so for the foreseeable future.

Okay. I know you talked about the new facility in Vegas and the trajectory there. But maybe stepping back, I know you've got concentrated portfolios in the acute side in Vegas and Southern California and D.C. and Southwest, Texas, any dispersion? Obviously, you had good overall volume growth. Was there much of a difference in the performance in those major geographic markets this quarter?

So I think like most of our -- or several of our public peers, HVA antenna, I think most notably have commented in the last year or so that their facilities in Texas and Florida have been recovering at a more rapid rate than in other geographies. I think as those states have emerged from the pandemic more around the economies in those states have emerged on the pandemic more rapidly. I think honestly, that has been sort of a bit of a negative comparison for us. Again, over the last year or so because we've got less of a relative footprint in Texas and Florida and more in Nevada and California than our peers, but I think what we're seeing now is the recovery in those geographies is starting to pick up pace, et cetera. I think our performance in Nevada was particularly improved in the quarter. And obviously, that's always a significant piece of good news for us. I will say that to have the sort of acute care performance we had, in particular, the top line and EBITDA growth of 16% that's got to be pretty broad-based. It really can't be specific to one single market, and I don't think it was. But again, the encouraging, I think, element for us specifically was the improvement in our Nevada results in the quarter.

Okay. Thanks a lot.

Our next question, one moment. We have a question from Jamie Perse from Goldman Sachs. Your line is open.

Hey. Thanks. Good morning. I just wanted to go back to the other operating expenses within acute for a second. You spoke about some of the bankruptcies for vendors in the space. Are there specific sort of onetime disruption costs in the $590 million you realized this quarter? I'm just trying to understand where we're going from here, if that's the right new baseline, or if you can take cost out at some point? Just any more color on the near term and how to model that line item?

Yeah. Look, I made the point earlier, Jamie, that we anticipated a significant increase in those physician subsidy expenses in our 2023 guidance. But in the first six months, they're tracking at twice the rate that we anticipated. But I also tried to make the point that I think we believe that these really dramatic increases are a function of this current disruption. We've got providers who are telling us one of two things. One, that they just can't continue. They've declared bankruptcy, and they can't continue to provide the contract services that we're contracted for, and we're having to replace them generally at a higher cost, whether we're contracting out to somebody else, or hiring these folks in. And again, there's these sort of transition costs that I think are largely onetime in nature. But I think we're going to continue to experience these for the next quarter or so I think we have a general view that by the time we get to 2024, However, this has settled out either -- and I'm not sure there's a single answer, but I think either a lot of these providers, these ER and anesthesiology physicians will be employed by hospitals and by us or they'll be employed by more local and regional providers who are more healthy financially, et cetera. But we're going to see a leveling off of this expense. I don't know that we're able to predict exactly how you should model that in the future. And again, I think in my mind, the positive view of this in the quarter is acute care EBITDA 16% higher than it was last year's Q2 despite the fact that we've got this significantly increased burden of physician expense. We feel like when that levels off next year, that's going to provide a boost to our earnings power.

Okay. And you and other hospitals have always talked about a strong margin profile on surgery. Just given the tailwinds that seem to be in the surgical space at this point, can you give us any color on how to think about profit margins in your surgical business or profit contribution on average from surgeries?

Yeah. I mean I think if you think about if -- however, you want to find our long-term acute care margins in the upper teens, I'm going to call it 17%, something like that. But I think surgical margins tend to be probably five to 10 basis points above that and medical margins tend to be five to 10 basis points below that. Obviously, there's a lot of difference depending on the specific procedure, the length of stay, the demographics of the patient base, et cetera. But historically, surgical margins have been measurably higher than medical margins.

Okay. Thanks for the color.

Thank you. Our next question will come from Scott Fidel from Stephens.

Hi, thanks. Good morning. A couple of recent developments or proposals on the policy side, I would be interested to get your initial thoughts on -- the first was the CMS proposal that came out around the intensive outpatient benefit for behavioral in Medicare. And then just yesterday, I know it just came out, so don't expect too detailed commentary, but the Biden administration did also just come out with an updated proposal really focused on health plans around mental health parity and sort of enforcing that around in-network for behavioral. So just interested on both those proposals, if you have any initial thoughts on potential risks and opportunities there?

Yeah. So I'll tackle the parity one, which I know is the more recent one, Scott first. As you pointed out, I mean, I think the Biden administration announced yesterday that they were going to issue new rules on mental health parity, which they did this morning, and I appreciate your acknowledgment that we have not had a chance to review those. I think the broad context here is mental health parity legislation originally passed almost 15 years ago. But I think the industry has always been frustrated that the amount of adherence and an enforcement on the part of the government has never at least been as fulsome as the industry would have liked. And without reading the specific regulations or having a chance to read the specific regulations, I think the one positive that we take away is that the current administration seems focused on the fact that there needs to be better enforcement, there need – the mental health parity legislation originally was, I think, viewed very positively for the industry. And I do think it had a positive impact, but I think it should be more positive. And I think we would argue that there have been plans and payers that have sort of tried to dodge the – the intent of the legislation and we believe that any effort on the part of this administration to more aggressively enforce those parity laws is welcome. The intensive outpatient regulations, I'll sort of make repeat the same comments I was making just about United's commercial comments or commercial utilization comments before I think that any new developments that allow people or encourage people to get more access to in terms of outpatient or behavioral care in general are generally going to be positive for us. We have a lot of intensive outpatient offerings. But I think more than that, I think we had this complete continuum of care from very low acute outpatients or very high acute inpatient that the more people who are given access to care and behavioral diagnosis and assessment, I think that's generally good news for us. So I would say we view both of these developments as a positive. I think we view them consistent with I think general legislative and administrative sort of favorability to the behavioral business at both the federal and state level difficult to quantify the benefit for either of those in any sort of precise way.

Got it. And then just one quick follow-up. Just on the Medicare volume sort of normalization that we've been seeing. Anyway, can you sort of tease out just in the second quarter, how I guess that's sort of skewed between outpatient and inpatient? Obviously, we know that it's felt seem to be sort of heavily driven by outpatient. But I'm interested whether you saw a pickup in the inpatient side on the Medicare volumes as well. Thanks.

Yes. I mean, so we saw, as we said, adjusted admissions increased by almost 8% in the quarter. Some of that is certainly driven by the outpatient activity. But obviously, pure admission growth was also pretty strong. again, I just feel like what you're seeing is it is a bit skewed towards the lower acuity procedures. And again, not by a tremendous amount. I mean, we saw overall revenue per adjusted admission on the acute side increased by 2% or so in the quarter. I think normally, we would expect that number to be more in the 2% to 4% range. So it's kind of on the low end. But there's a little bit more of that skew to -- I think it's not so much -- I mean, it is clearly an inpatient and outpatient issue, but I think it's more of an issue of skewing more towards those elective and deferred procedures that were postponed whether they were in or outpatient during the pandemic and are now being realized in greater numbers.

Okay. Great. Thank you.

Thank you. Our next question comes from Justin Lake with Wolfe Research. Your line is open.

Thanks. Good morning. First question, I wanted to ask about what you're seeing from the payers. I know you already got asked about pricing. But given Medicaid payers are heading into redeterminations, Medicare Advantage payers are talking about higher utilization. Steve, are you seeing any early kind of signs of increased medical management claims, denial, et cetera, the typical stuff that managed care will do when their costs are or might be a little bit higher?

Yeah. So two things or two comments that you made, Justin. I mean, one is we're not seeing, I think, at least a measurable impact that we can identify from Medicaid redeterminations so far. I do think again, we -- Marc commented on the rationale for not raising the upper end of our guidance, he commented on the Nevada supplemental payment. I do think that's a big piece of it. But I think we also have a view that there may yet be an impact from Medicaid redeterminations in the back half of the year in both of the businesses that we have not yet seen. So we're paying very close attention to that, and that's a focus. But, yeah, I think your other comment is also well taken, and that is with a lot of the payers reporting an increase in their own medical life utilization, we have an expectation that we're going to see more aggressive behavior on their part to whatever it may be limit length to stay on the behavioral side or challenge more inpatient versus observation classification on the acute side. I can't say that, we can say definitively that we've seen that change in a measurable way just yet. I think it sometimes takes a quarter or two for that information to sort of play out. But I will tell you that we're very prepared for and very focused on it. I think in all sorts of ways, I think we're trying to change our contracts, so that these issues are more defined that are in upfront in the contract, but also in the way that we provide billing information and we go through the appeal process. So all those things are a significant focus of ours. But I think you are suggesting that managed care payers are likely to become more aggressive in their utilization review procedures is something we're very sensitive to and prepared for.

I appreciate that. Maybe you can expand on your commentary around redeterminations. I know a lot of us are uncertain how this plays out. But one kind of line of thinking is that a bunch of people are going to be kicked off Medicaid, and a lot of them could end up on the exchanges or on private employer health plans, which pay a lot better, right, especially on the acute side, but even on the behavioral side. So how do you think about that vis-à-vis? Do you just think that is your concern that a lot of folks are going to be unfortunately removing the roles and not pick up other coverage. Is it your market specific to you, given your geographic exposure, or do you think that's just broad-based? And what drives that?

Yeah. So I think that, we generally concur, as your question sort of alluded to with the sort of broad way that a number of analysts both, I'm going to say, dispassionate analysts like CMS and the Urban Institute, et cetera, when they looked at the potential impact of redeterminations and then the number of sell-side folks have done exhaustive studies. And I think they all conclude largely the way you framed your question that ultimately, there will be a sufficient number of people who are redetermined off the Medicaid roles but who can requalify on better paying commercial products, commercial exchange products that the net impact to positive one. I think our sort of skepticism or concern or caution is more short term or timing related in nature and that is as we go through the process and people get redetermined off, how quickly can they requalify for commercial products, et cetera. And again, I just don't think we've had enough time to really measure whether there could be sort of a short-term bump or a drain on this. But I think in the long run, we think we probably come out at least whole, if not somewhat ahead. The good news from my perspective is based on the redetermination data that I've seen while there have been a lot of people redetermined off, a lot of those redeterminations a good chunk of them are sort of more for administrative reasons. Their paperwork is not up to date. Their address is not up today, whatever it may be. And so it feels like those people will be able to get back on the Medicaid roles quickly. So, it feels like maybe the impact in the long run is not going to be as significant as we might have thought. But again, our point of view is maybe some short-term uncertainty over the long term, I don't think we think this is really going to be a net negative for providers.

Got it. Thanks for all the color.

Sure.

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

Great. Thanks. I want to go back to, I guess, Marc's comments about both segments starting to transition to that post-pandemic world. Do you guys -- how are you thinking about what the company's two businesses look like in that world? Is it right to just assume that from a margin perspective, things look like 2018, 2019, is there reason to believe that margins might be higher or lower over time? And how do you think about that path and the timing of getting to whatever that normalization is?

Yes, I think the answer, Kevin, is a little bit different for each of the segments. I think -- and I think we touched on this to some degree in the call today, but certainly in previous calls as well. I think on the behavioral side, our view is that margins during the pandemic, particularly were diminished or negatively impacted by the labor scarcity. And again, the argument goes that as we are able to hire more people, we'll be able to create and really not create but exhaust more of the unmet demand that's been out there. And I think our view on behavioral is not only should we be able to return to 2019 margins ultimately, but to return to sort of peak behavioral margins, we'd probably go back to 2014 or 2015. Now, just to be clear, when I say that, I mean, I don't think that's an immediate. I don't think that happens obviously in the next quarter or two. But I think it is this sort of gradual trajectory of relatively robust topline growth and relatively fixed and semi-fixed expenses that allow us to do that. I think on the acute side, it's a bit -- a little bit more of a mix story. There was certainly some benefit to the acute care business from the pandemic itself from the acuity of the COVID patients from the special reimbursement that we received related to COVID patients, et cetera. And so I think it's a little bit more challenging for the acute business to get back to those pre-pandemic margins because they've got to replace a lot of that, I'm going to say, COVID patient-related benefit. Now clearly, they've been doing that over the last few quarters. And again, this gets back to, I think, a question of how sustainable this higher level of acute care volume is going to be. But again, pretty much -- pretty similar. I think we certainly feel like we're 400, 500 basis points on the acute side, below where our pre-pandemic margins were, as Marc's comments in his prepared remarks where we got 60 basis points of that back in Q2. We view that as a first step, which we hope to sustain for many more quarters to get back there or get close to pre-pandemic margins.

Yeah. So it sounds to me like to some degree in both cases, it's the volume number that's going to get you back to where you were. I guess the behavioral one makes sense, labor is a constraint you fix that. The Q1 though, it's still a little bit unclear to me. I understand the concept of pent-up demand, but when you just finally got above 2019 levels when historically, you've been growing volumes a couple of percent per year, kind of well below that long-term trend line. What is it that makes you cautious to say that you wouldn't get back to that long-term trend line? Are the population growth, demographics and fundamental demand drivers in your markets really unchanged? So why do you get concerned at this as a bolus rather than the new normal?

Yes. And again, I'm not -- I don't think we've -- in any way, given up the hope that we can get back to acute care margins -- pre-pandemic acute care margins. I'm simply suggesting that I think the recovery or the path to recovery is a little more complicated on the acute side because there were some benefits from the pandemic that they just clearly were not on the behavioral side. The pandemic really had only negative consequences for our behavioral business. And therefore, I think recovery from the pandemic is sort of steeper and more robust and quicker, quite frankly, on the behavioral side than it is on the acute side. Look, I think what you're seeing is some pretty rapid recovery on the acute side. But again, it's being driven by what I think we would argue are probably some level of extraordinary volumes that will moderate some. But look, I think if you look at the acute care business model and earnings trajectory over an extended period of time with kind of mid-single-digit revenue growth in that 5% or 6% range we have generally been able to produce EBITDA growth, margin improvement, et cetera. And I don't think there's any reason we can't sustain that level of top line growth for the foreseeable future. I do think it may take us a little bit longer to get there than it will on the behavioral side.

Okay. All right. So I think I got it, but just to make sure to it up, you're not saying that this year's volumes become a headwind to next year because there's some sort of unsustainable bolus. This is probably a good base, but we just shouldn't assume 7% volume growth, we should assume from here more normalized volume growth or are you saying that there could be a headwind next year from a comp perspective?

Yes. Again, hard to know, Kevin, but we had 10% revenue growth, obviously, this quarter. Again, that's at a historically high level. I don't -- again, I think getting 2024 guidance at this point, but I don't know that we'll be able to sustain that level of revenue growth. Two things. I think the level of revenue growth probably moderates a little bit. I think the – the makeup of that revenue growth changes to somewhat less volume, some of more acuity in pricing. But I think, again, if that 10% revenue growth moderates to 6% or 7%, I still think that's a model in which we're likely to see increased EBITDA and margin expansion.

All right. Perfect. Thank you.

Thank you. One moment for our next question. We have a question from Stephen Baxter with Wells Fargo. Your line is open.

Yes, hi, thanks. A follow-up on an earlier question. I wanted to see if you could expand a little bit more on the behavioral margins in the quarter. Usually pre-COVID margins increased sequentially in the second quarter. Obviously, you had a different experience this quarter with SWB and other OpEx as a percent of revenue up sequentially. Wondering what drove those increases? And how did margins internally compare to your expectations? And do you think we should see something closer to typical seasonality in the balance of the year? Thank you.

Yes. And operator, I'm just going to make the point this is going to have to be our last question. So we had a few non-recurring items in the quarter. We had a loss on disposal of assets that were about $3 million. We had an unfavorable exchange rate, which was affecting us in the UK by a couple of million dollars. But just generally, I think we saw salaries increased a little bit more than we expected in the quarter. And this is a point I was making in to an earlier question. I mean I think generally, our ability to hire people and fill these vacant positions is a positive development. In the short run, it can be somewhat inefficient. We have a lot of people in orientation and training. A lot of these people that we're hiring are somewhat less experienced and less trained and particularly in behavioral care, then were used to historically. And that creates a little bit of inefficiency again, in the short run, I think in the long run, and that's why I'm suggesting to people not to focus so much on just the second quarter, but on the first six months of the year or the last four months -- of the last four quarters where we've really been emerging from the pandemic not being impacted by COVID, being able to hire people. And I think the -- broadly, the results there show that we're going to continue to grow the top line but also generate the efficiencies that we think generally come with that top line growth. And I think that's still fundamentally our belief. So I think that's the way we're looking at the business. Thanks for your question. And operator, I think we're going to have to stop at this point in time.

Okay. I'd like to turn it back to Steve Filton for any closing remarks.

Yes, just to thank everybody for their time this morning, and we look forward to speaking with everybody again after our third quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.