Universal Health Services, Inc. Class B 2026 Q3 Earnings Call

Please go ahead. Good morning, and welcome to Universal Health Services' third quarter 2026 earnings conference call.

I am Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller, and our Chief Financial Officer, Steve Filton. Marc and Steve will offer some remarks about the quarter, and then we will open up to Q&A. During today's conference call, we will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, we 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, 2025, and in our Form 10-Q for the quarter ended June 30, 2026.

In addition, we may reference measures during today's call, such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI, and adjusted net income attributable to UHS, which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in yesterday's press release and in our supplemental materials on our website. With that, let me now turn it over to Marc for some introductory remarks.

Thank you, Darren. Good morning, and thank you for joining today's call. I will begin with our key takeaways from the quarter, performance relative to our expectations, the principal operating drivers, and progress on our strategic priorities before Steve reviews the detailed financial results and our outlook. Overall, underlying performance in the third quarter reflected sequential improvement in several areas. Acute care demand remained favorable. Behavioral health volumes demonstrated an increase relative to recent quarters, and labor trends continued to moderate. Expense management remained disciplined overall. Health insurance exchange trends were consistent with our expectations. Steve will provide the reported financial results and segment metrics in his remarks. Third quarter results included certain items that were not reflected in the outlook we provided with our second quarter results in July.

These items included the benefit from the expansion of existing Medicaid supplemental programs in several states, partially offset by other non-recurring litigation and transaction costs, which Steve will take you through in a moment. Against that backdrop, I want to highlight three operating and strategic priorities: expanding acute care capacity and outpatient access points, integrating Talkspace, and advancing the recertification process at Laurel Ridge Treatment Center in Texas. First, our recent investments in acute care inpatient capacity helped us meet favorable demand in our markets. The additional 177 beds added during the second quarter are expected to continue ramping through year-end. We also expanded our outpatient portfolio by opening one freestanding emergency department in the third quarter and another FED that recently opened during the fourth quarter. In addition, our ambulatory development pipeline is expected to add several outpatient access points over the coming quarters.

The key takeaway is that these investments are performing well, broadening access, and supporting growth. We expect their contribution to build over time as the new capacity matures. Second, in behavioral health, we completed the Talkspace acquisition on August 17 and began executing the integration plan. We intend to discuss anticipated synergies in greater detail when we provide 2027 guidance in February. For the balance of 2026, we are taking a phased approach centered on three integration workstreams. The first, deploying a technology platform and tools that enable smoother transitions of care and greater continuity of outpatient care for UHS patients. Number two, establishing referral flow processes to Talkspace from UHS behavioral health and acute care facilities for both individual therapy and medication management services.

And three, developing more flexible market-based outpatient offerings, initially emphasizing a virtual intensive outpatient program or IOP, offerings designed to address strong demand in this area. We expect these initiatives to support the acquisition's long-term benefits over the next 12 to 24 months. Our priorities are to expand access to outpatient mental health services and strengthen our outpatient growth profile. The key takeaway is that our integration is underway, and the expected benefits will develop in phases as technology, new referral pathways, and service offerings are enhanced through our integration efforts. We will provide further updates as the integration progresses and the rollout expands across our operations. Third, at Laurel Ridge, our San Antonio team continues to work productively with regulatory authorities and the local community towards recertification, which we currently expect during 2027. The facility's third quarter financial impact was consistent with the assumptions in our updated July outlook.

In closing, I want to thank the UHS team for its continued dedication to our mission to provide quality care. Our strategy remains consistent, invest in attractive markets, expand access to care, operate efficiently, and create long-term value for patients, employees, and shareholders. We remain mindful of execution requirements and the ever-evolving operating environment, and we believe the strength of our portfolio, the experience of our management team, and underlying demand in our markets, continue to position us well over the long term. With that, I will turn the call over to Steve for additional detail on the quarter.

Thanks, Marc. I will organize my remarks in four parts: reported results and unusual items, segment performance, cash flow and capital allocation, and our 2026 outlook. Starting with reported results, the company reported adjusted EPS of $5.22 for the third quarter of 2026, representing a decline of 8% year-over-year. Third quarter adjusted EBITDA less NCI was $625 million as compared to $671 million in the third quarter of 2025. The net out-of-period DPP headwind in the quarter was $37 million when considering amounts recognized for the Washington, D.C. program approved in the third quarter of 2025, netted against out-of-period amounts recognized in this year's third quarter. To distinguish reported results from underlying performance in the third quarter of 2026, three specific items not contemplated in our annual adjusted EBITDA less NCI guidance provided in July, produced a net favorable impact of $12 million.

These items were $47 million of supplemental Medicaid benefits, not included in our July forecast, $26 million of additional professional and general liability reserves, primarily associated with the tentative settlement of a litigation matter related to our Cumberland facility in Virginia, and $8.5 million of transaction-related costs associated with the Talkspace acquisition. Excluding these items, adjusted EBITDA less NCI was below our internal expectations despite modest sequential improvement. The shortfall primarily reflected a slower than expected ramp-up at our de novo hospitals and softer than expected surgical trends. Turning to segment performance. On a same-facility basis, adjusted admissions at our acute care hospitals increased 4.9% compared with the third quarter of 2025. Volume performance was broad-based geographically and also benefited from capacity additions at three hospitals during the second quarter of 2026.

Same-facility acute care emergency department visits increased 4.6%, while same-facility surgeries decreased 0.7% compared with the third quarter of 2025. Inpatient and outpatient surgical cases declined at similar levels in the quarter. Inpatient medical admissions significantly outpaced surgical admissions, which negatively skewed pricing trends in the quarter. By service line, we experienced strength in cardiology, neurology, and urology similar to recent quarters. By payer class, adjusted admissions growth for Medicare and Managed Medicare was above the acute care segment average. Volume growth for Medicaid, Managed Medicaid, and Managed Care, excluding exchanges, was positive in the quarter, although below the segment average. On a same-facility basis, net revenue in our acute care segment during the third quarter of 2026 increased 4.7%. Excluding the impact of our health plan, same-facility acute care net revenue increased 3.1%.

Acute care same-facility revenue per adjusted admission decreased by 1.7% during the third quarter of 2026 on a reported basis and was slightly positive when excluding the net headwind from out-of-period Medicaid supplemental benefits and the shift in exchange to uninsured volumes. We estimate underlying acute care rate growth was approximately 3% and consistent with recent quarters after adjusting for these factors and normalizing for the higher inpatient medical versus surgical mix. Operating expenses continued to be well managed across labor, supply, and other expense categories. Same-facility acute care salaries, wages, and benefits expense per adjusted admission increased 2.1%, and supply expense per adjusted admission decreased 2.3% over last year's third quarter. Other operating expenses increased primarily due to our health plan, which experienced revenue growth of approximately 25% in the third quarter.

Same-facility acute care segment EBITDA declined 4.5% in the third quarter of 2026. Excluding the out-of-period supplemental program benefit from both periods, third quarter same-facility acute care segment EBITDA increased 2.9%. In our acute care segment, the net out-of-period headwind related to supplemental payments was $29 million, comprised of $26 million in the third quarter of 2026 from expanded funding under existing programs, primarily in Washington, D.C., and California, compared with $55 million of out-of-period amounts in the third quarter of 2025 related to the Washington, D.C., program approved last year. For the third quarter of 2026, we estimate that health insurance exchange trends had an impact of slightly less than $25 million, which was consistent with the updated outlook provided in July. Exchange volumes declined 17% from the third quarter of 2025, accompanied by a similar increase in the number of self-pay volumes.