環球健康 (UHS) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Universal Health Services Fourth Quarter and Full Year 2021 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to Steve Filton. Please go ahead.

Thank you. Good morning. Marc Miller is also joining us this morning. We welcome you to this review of Universal Health Services' results for the fourth quarter ended December 31, 2021.

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 these 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. 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 $3 for the fourth quarter of 2021. After adjusting for the impact of the items reflected on the Supplemental Schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $2.95 for the quarter ended December 31, 2021.

During the fourth quarter of 2021, our operations continue to be significantly impacted by the COVID-19 pandemic. Specifically, we experienced an increased wave of COVID patients in December 2021, which peaked in January of 2022. The negative impact resulting from this elevated level of COVID volumes was primarily a function of increased labor scarcity issues exacerbated by the large number of employees sidelined by the virus itself or quarantined due to exposure to the virus. In what was already a very tight labor market, these incremental labor challenges, in addition to pressuring our salaries and wages expenses, also suppressed patient volumes at our acute care and behavioral health facilities while causing postponement of certain elective scheduled procedures at our acute care hospitals.

Our net cash generated from operating activities was $884 million during the full year of 2021, which includes the unfavorable impact of $695 million of Medicare accelerated payments that were received during 2020 and repaid to the government during 2021. We spent $856 million on capital expenditures during the full year of 2021, which includes the construction costs related to a new 170-bed acute care hospital in Reno, Nevada, that is scheduled to be completed and open next month.

Our accounts receivable days outstanding decreased to 50 days during the year ended December 30, 2021, as compared to 55 days during 2020. At December 31, 2021, our net -- our ratio of debt to total capitalization increased to 40.8% as compared to 37.9% at December 31, 2020. As of December 31, 2021, we had $854 million of aggregate available borrowing capacity pursuant to our $1.2 billion revolving credit facility.

In our acute care segment, our ambulatory care development continued in 2021. We currently have 18 operational, freestanding emergency departments and partnerships with national third-party entities for further development of ambulatory surgery centers and home health operations in our existing markets. In conjunction with our ongoing development of primary care physician networks, these initiatives are meant to create a more fulsome care delivery system in each of our markets.

Our new hospital in Reno, scheduled to open soon, will enhance our statewide presence in Nevada. Bed tower projects, adding new capacities to hospitals in important markets, are underway at Edinburg Regional Medical Center in South Texas, Henderson Hospital in Las Vegas and Inland Valley Medical Center in California. Planning is also underway on new acute care hospitals in west Henderson, Nevada and Palm Beach Gardens in Florida.

In our behavioral segment, 2 new de novo joint venture hospitals opened in 2021 in Clive, Iowa and Cape Girardeau, Missouri. Two more new hospitals have opened already in 2022 in Michigan, which is a partnership with Beaumont Health and Wisconsin. And another is scheduled to open later in the year in Arizona in partnership with HonorHealth. These de novo developments, along with an increased focus on outpatient development and telemedicine in our existing markets is meant to also build out a more fulsome continuum of care in the behavioral segment as well.

In anticipation of a continued downward trajectory of COVID volumes from those experienced during recent surges and relief from the accompanying pressures on our operations and financial results, our Board of Directors authorized a $1.4 billion increase to our stock repurchase program. After the resumption of our share repurchase activity in the second quarter of 2021, we repurchased approximately $1.2 billion of our shares during 2021 and close to $300 million more thus far in 2022. We currently have approximately $1.46 billion authorized for stock repurchases after giving effect to the recent increase approved by our Board of Directors.

Our 2022 operating results forecast, which was provided in last night's release, assumes that the negative impact of the COVID virus will diminish in 2022. While the decline in actual COVID cases appears to be occurring rapidly, we believe the process of backfilling non-COVID cases and, most importantly, the easing of workforce shortages which dominated the health care landscape in 2021 will take place more gradually over the course of 2022.

We have a host of active initiatives in place to increase the efficiency of recruitment and retention of our clinical staff and also implementing innovative care models in recognition that certain changes to the health care staffing dynamic may last well beyond the decline in COVID cases. While the pace of recovery is difficult to predict, we remain confident in the fundamental underlying demand in both of our business segments, the early signs of which have already been emerging in the last few weeks.

Marc and I will be pleased to answer your questions at this time.

(Operator Instructions) Our first question comes from the line of Kevin Fischbeck with Bank of America.

Great. So I guess your guidance for this year, it looks like it has a margin degradation. Can you talk a little bit about how you're looking for the margin outlook in both segments?

So. ye's I think, Kevin, as the remarks, my opening remarks indicated, I think that's premised on the idea that the stabilization of the labor markets will be a more elongated process than the volume recovery. So I think we have a notion that while our volumes and revenues will increase at a pretty decent pace in 2022, so will salary expense, both the continued use of premium pay in the short run and then the underlying wage rate inflation.

I think it's a bit of a trade-off. Obviously, we have hopes that we can do better and make more progress on the salary front than -- more quickly than our guidance has presumed. But I think at the moment, that seems to be the most prudent sort of outlook.

I guess is both -- are both segments seeing the same type of pressure? Or would you say one is seeing more of it? And would you expect one division to kind of come out of this margin pressure earlier than the other?

I think we have made the point throughout the pandemic that while both business segments see the impact of the labor shortage, they -- it gets manifested in different ways. So on the acute side, for the most part, we're able to fill most of our vacancies, but we have done so through the use of premium pay, significant amounts of premium pay. As an example, I think we incurred about $120 million of premium pay in the acute division in Q4.

Alternatively, on the behavioral side, I think we've only incurred about $25 million or $30 million of premium pay expense for the full year. The bigger issue on the behavioral side has been just an absolute inability to fill some of those vacancies. And as a consequence, the labor shortage on the behavioral side really manifests itself on the volume side more so than in actual salary expense. And we expect that those -- both those dynamics continue into 2022, although they begin to recede as COVID volumes begin to recede.

Your next question comes from the line of Andrew Mok with UBS.

Can you walk us through the different growth outlooks between the segments for 2022 with respect to volume and price? And how much new store revenue is contemplated in the guide?

So. ye's I think, Andrew, that the same-store growth in both segments is sort of anticipated to be in the sort of mid-single digits, in that sort of 5%, 6% range. Which, quite frankly, in a normal year would be relatively unremarkable.

I think on the acute side, that's kind of a mix shift away from higher-acuity COVID volumes and more towards, again, a backfilling of all this non-COVID activity, which has lagged somewhat. We've been running at levels that are sort of 95% to 100% of pre-COVID levels of emergency room visits and elective and scheduled procedures, et cetera. We presume that those percentages will increase in 2022 as the COVID volumes decline. But overall, the impact on revenue kind of mid-single digits, and again, sort of harkening back to Kevin's first question, the increase in salary costs outpacing that a little bit.

On the behavioral side, our volumes have been sort of flatter in Q4. Our patient days, I think, were relatively flat compared to the previous year's Q4. I think we're assuming, again, that same sort of mid-single-digit revenue growth but more of it coming from an actual increase in patient days rather than any sort of patient shift mix.

As far as the amount of revenue growth that's coming from non-same-store, I think it's a couple of percentage points. And Marc ticked off, I think, a lot of the major additions in the 2 business segments that are driving that.

Great. And then as a follow-up, you did about $320 million of EBITDA in the behavioral business, but there were a few out-of-period payments even beyond Kentucky. I think there might have been some dollars from Florida there. So how did the core behavioral business perform in the quarter? And is that a good run rate to think about for 2022?

Yes. So we called out the Kentucky Medicaid reimbursement, which is a little over $30 million in the quarter because I think we thought that was one really extraordinary item in the quarter. There were other sort of kind of one-timers, but I think they largely offset each other.

And I will say this about Kentucky, we recorded $30 million roughly of Kentucky reimbursement in the fourth quarter. That represented 2 quarters of earned activity. In 2022, that reimbursement has already been approved for the full year. So there'll be a much more ratable recognition of roughly $55 million or $60 million of that Kentucky reimbursement in '22, and that's included in our guidance. But other than the Kentucky item, I think we purposely did not highlight anything else in the quarter because we generally felt like they were offsetting puts and takes.

Your next question comes from the line of A.J. Rice with Credit Suisse.

First of all, just maybe looking at the pace of the share repurchase activity, running $1.2 billion to $1.4 billion, you're generating good cash flow, particularly as now you get past the repayments to the Feds, but that still is probably a faster pace than you're generating free cash flow. Can you just comment? Do you think you'll continue at that pace?

And then also, I assume if you do, that the leverage will tick up over the course of this year. How -- I mean, you ended at 2.2x debt to EBITDA. How much do you want to let leverage sort of creep back up to fund the repurchase?

Sure, A.J. So as you indicated, we repurchased about $1.2 billion of shares in 2021. That was over the course of just 3 quarters since we didn't resume our share repurchase activity until April. If we continue at that pace, we'll be repurchasing somewhere in the neighborhood of $1.4 billion, which is the amount of share repurchase authorization increase that our Board granted yesterday.

And that's our plan. And that, quite frankly, is what's in our guidance. Obviously, we're doing this on an opportunistic basis as we have historically done. So we are leaving ourselves the flexibility to respond to market conditions and other deployment -- capital deployment opportunities, et cetera. But our current plan is pretty much as the Board authorization increase would indicate over the course of the next year.

And to your point, it would certainly -- we'd be buying back shares at a pace above our free cash flow generation. So our leverage would go from approximately the low 2s, 2.1, 2.2 at the end of 2021 to the high 2s, 2.7, 2.8 at the end of 2022.

I'll just make the point. I mean we're very comfortable with that if the stock remains undervalued. And that's the calculation that we've made. So depending on where the stock is, this, we believe, is the right amount at this time, certainly at this level of our share price.

No, that's great. I think shareholders obviously appreciate that. Maybe my follow-up question. We obviously didn't asked you about geography and were there any differences, and I'll ask you that again about the acute business, where we usually ask. But I would also ask in the dynamics you're seeing in the behavioral business, is the labor challenges, particularly acute, in specific geographies where, for some reason, you have a little more of a challenge than in other geographies? So anything about the geography differences across regions for both sides of the business?

So the way that I would answer the question, A.J., is first by saying that I think what we've experienced, certainly in the most recent, I'll call it, 6 to 8 months, is that the most significant labor pressures are closely correlated to a level of COVID frequency in the market. So markets that are hard hit by COVID clearly feel greater labor pressures for a variety of reasons. Particularly with Omicron, more of our own employees out sick, et cetera, and on the sideline, but also employees leaving in, particularly in the behavioral space, to work for premium rates in more acute settings, all that sort of thing.

And I think what we have found in the last few surges, again, at least with the back half of '21 and into '22, that those surges have been pretty widespread geographically. Obviously, at any point in time, we may be getting hit in one market worse than another.

But I would say broadly, the performance is pretty geographically diffused. Although from a timing perspective, one market may be under pressure one month and not so much in the next month. But it's really much more COVID-related than any other sort of underlying geographic issues.

Your next question comes from the line of Matthew Borsch with BMO Capital Markets.

You have Ben Rossi filling in for Matt here. Regarding patient acuity, on a same facility basis, you reported some good numbers for adjusted admissions, and revenue per adjusted admission also showing some sequential decreases in overall occupancy rates and length of stay in both acute and behavioral. Just curious if that is a reflection of the type of acuity case that you saw this quarter and whether that trend is continuing in 1Q.

So look, acuity is really an issue in the acute care segment, not in the behavioral segment in the sense that reimbursement doesn't change on an acuity basis for the most part in the behavioral segment. I think in the acute segment, what we have largely experienced during the COVID surges in 2021 is that as COVID has surged, acuity goes up, the COVID patients are sicker.

But for the most part, we've been able to maintain a reasonable level of non-COVID business as well, which has really sort of led to these really high acuity and revenue rates in the acute business, which, for the most part, have overwhelmed or offset the higher salary cost, which we alluded to earlier.

That became more challenging. I indicated in the fourth quarter, we had about $120 million of premium pay in the acute business. That's the highest we've experienced to date. I mean compared to just sequentially, I think we had around $80 million in the third quarter of this year. And I think we had about a little over $50 million in the fourth quarter of last year. So it gives you an indication of how much those that premium pay has really pressured the margins in the acute business.

I think the other dynamic that we've noticed or has been noticeable in the acute space is that the Omicron patients, as have been reported I think more broadly, are less acutely ill than the Delta patients before them. The problem is I don't know that we've been really able to take advantage of that. You make the point that our length of stay has remained pretty stable.

I think in theory, we should have been able to discharge some of those Omicron patients more quickly. The challenge is, as we try and discharge those patients, the sites to which we would normally discharge them, long-term care, skilled nursing, nursing homes, home health are struggling with their own labor challenges. And as a consequence, we haven't really seen the benefit of being able to discharge the less acutely ill patients faster.

Again, I think all that will tend to work itself out. As COVID volumes decline, we'll return to kind of a more stable referral network and a discharge pattern that's more reflective of what we've historically been used to.

Your next question comes from the line of Jason Cassorla with Citi.

So you talked about volume and labor backdrop largely improving throughout the year. But is there any way to help frame that -- frame the cadence from an EBITDA perspective? I mean if you look back, you did about $425 million of EBITDA in 1Q '21. Is that the right bogey to think about 1Q? Or maybe how you'd frame that?

So look, UHS intentionally has never given quarterly guidance, and we're certainly not about to begin that this year when I -- there's greater uncertainty than is historically the case. Look, we're looking at a cadence that is certainly not what has been the historic norm. Normally, the first quarter is our strongest quarter. We come out of the gate really strong in both business segments, et cetera. This year, we come out of the gate with our highest COVID volumes to date in the pandemic.

Now they decline pretty quickly and have been declining and continue to decline, and that's encouraging. But as I've alluded to in some previous comments, the labor pressures are declining more slowly, et cetera.

So I think broadly, we've tried to indicate that I think we think the first half of 2022 will certainly be more challenging as labor pressures diminish more slowly than COVID volumes decline. I think the second half of 2022 will begin to look a lot more like a pre-pandemic year like the back half of 2019 might have looked.

Got it. Okay. Fair enough. And maybe just going to your CapEx guidance. So CapEx at the midpoint, so just call it like a 20% increase over '21 and where you ended up spending there. You made some comments in your prepared remarks around some new towers at key facilities and the like. But maybe could you just help flesh out your CapEx priorities for both segments and where you're looking to invest those dollars for '22?

Yes. So as Marc commented on in his remarks and I think also as he had on to a response earlier, I think what really informs our whole approach in terms of what we're dedicating to share repurchase and what we're dedicating to CapEx, et cetera, is our view that the underlying demand fundamentally in our 2 business segments remains strong. And so from a CapEx perspective, we're going to invest in projects that we think makes sense and are economically compelling.

Marc alluded to our de novo development in Reno. We have a small community hospital in Reno, but this really, I think, will position us as a much more competitive player in the Reno market but even more broadly as the preeminent statewide player in the state of Nevada. Same thing. South Texas is an important market to us, Riverside County, California. We've invested both in physical capital. We acquired a significant physician practice in the Southern California market. So we like our franchises in both our acute and behavioral segments, and we're continuing to reinvest in those.

And then, again, as I think Marc pointed out, we have a view that we think -- and we understand why, but those investments and that underlying -- the strength of the underlying demand is somewhat unappreciated in the market. And while that's the case, we also intend to be an active acquirer of our shares, which we think are really well valued at this point in time.

Your next question comes from the line of Pito Chickering with Deutsche Bank.

On the acute side, in the script you quantified -- or I think to Kevin's question, you quantified about $120 million of premium pay in the fourth quarter. How did that track versus 3Q and sort of for all of 2021? And if we think about converting that to a sort of a more of a normalized level, how much was premium pay costing versus normal full-time employee in the fourth quarter?

Yes. So I think I actually mentioned, Peter, that $120 million in Q4 compared to about $80 million in the previous quarter in Q3 and a little over $50 million in the fourth quarter of last year. And the point that you raised is a good one. Honestly, the rise in that expense is, I think, driven more by rate than by volume, meaning we're not necessarily using more nurses, more hours. We're using some greater number. But the rates are just going crazy, as I think has been written about and then sort of reported on broadly across the country.

So normally, I would say to you that we've replaced premium pay, temporary or traveling nurses with our own employee nurses who would make 50% less or something like that. But I think in some cases, we're able -- when you look at it, either we're paying 3x more for a temporary or traveling nurse than we would for base pay. Or if we can replace that nurse with an employee, we'll be paying a 1/3. The difference is quite significant.

On that, have you seen the premium pay begin to inflect at all? I know it's still early in the year, but any color in terms of nurse vacancies? What are you seeing on the hourly rates for those now as well as the hourly you guys are using?

Yes. I mean, look, I'd make the point that the decline in COVID volumes has really been occurring over a really short period of time at this point. I mean it was only in the latter half of January that we started to see those declines. So we're into this for 4 or 5 weeks. And I think as the surge really worsened, hospitals were making longer-term commitments to these nurses. We were making some longer-term commitments. But I think the other piece of this is the nurses themselves were making longer-term commitments. Even if we weren't, they might have been making longer-term commitments with others.

The other issue is that, look, nurses have made a lot of money, those who have sort of sought these premium rates in the last 6 or 8 months. And as a consequence, I think they have some greater flexibility. And so what we're seeing is that some nurses are taking some time off, et cetera, before they return to work, and they're thoroughly entitled to that.

But that's -- I think all those reasons are why I think it takes some time. So I would say to you that I think we've seen -- again, as my remarks have indicated, we've definitely seen encouraging signs of volume recovery in both business segments in the last 4 or 5 weeks. I would say we've seen the earliest signs of labor pressures easing, but I think we've got a long way to go on the labor side.

Okay. Great. And then one quick follow-up there. On the behavioral side, as we look at 2021, how much revenue is impacted by the lack of staffing? And how do you think that evolves in 2022? Do you think you can recapture for those lost behavioral revenues in 2022 from staffing?

As we've indicated, I think, on a number of occasions, we think the single biggest reason that behavioral volumes and, therefore, behavioral revenues have lagged pre-pandemic levels is the labor shortage. A lot of it has been exacerbated by the COVID volumes. And again, the idea that some subset of our employee population has been seeking these premium rates in a more acute setting.

And by the way, as best as I can tell in talking to colleagues in other service industries, et cetera, it's a pretty standard and widespread phenomena in any subacute setting. Nursing homes, home health agencies, skilled nursing, long-term care facilities are all saying the same thing. And as I indicated in a previous response, we're finding that on the acute side to be true, because as we're trying to discharge patients, we're being told by all these sorts of facilities that they simply don't have the capacity because of a lack of staff.

So the question about how do you quantify what the lost revenue is, it's difficult to do. What we have said before is that every indication we have of underlying demand is that it has continued to grow. I would say, for the last several quarters, our inbound activity, incoming phone calls, incoming Internet inquiries, et cetera, are up 15% or 20%. I don't think we've taken the position that we could satisfy all that demand, but there's certainly a significant amount of demand out there to be satisfied.

And again, I think our guidance presumes sort of mid-single-digit revenue growth, which gets us back to sort of 3% or 4% volume growth just over the prior year. We certainly don't think that's the top end of the potential growth in volume. But we'd be pleased if we can get there and if the labor situation resolves itself so we can get there.

Your next question comes from the line of Jamie Perse with Goldman Sachs.

I just wanted to start with the revenue per adjusted admission, if you can give any color on assumptions for 2022. And we're obviously way above the 2019 trended growth line. What's sustainable about that versus as things start to normalize in terms of payer mix and acuity that's starting to come back down?

So Jamie, I think the answer again is different in the 2 business segments. I think in the acute care segment, there certainly is an expectation that revenue per adjusted admission will come down from the very high levels that it has been running during -- particularly during these high COVID surges. But we believe that, that will be replaced in large part by non-COVID to more traditional non-COVID, surgical and other procedural admissions that have lagged some during the pandemic.

I'll also make the point that as that business mix shift occurs, some of the cost pressures will alleviate as well. Because while the COVID patients had very robust revenue, they also had very high expenses, generally more ICU utilization, more supply utilization, all that sort of stuff.

On the behavioral side, there's not nearly, I think, as big a shift or change in acuity. I'll make the point just because I had this question last night. It looks like our revenue per adjusted day in the fourth quarter is quite high in the behavioral segment. But if you adjust for the Kentucky reimbursement that we talked about earlier, I think you get to a much more historically looking reasonable number.

Again, so I think on the behavioral side, just the general sense is that as the labor situation eases, we'll simply be able to admit more patients. Patient days will grow over the previous year instead of the flat patient days, for instance, that we saw in Q4.

Okay. That's helpful. And then just one follow-up on kind of longer-term margin expectations. It seems like there might be a lot of temporary costs in your cost structure for '22 in terms of premium pay and things like that. How should we think about the longer-term margin expectations? Can you get back to 2019 levels in a couple of years or as things start to normalize? Or just any thoughts you can share on where things go after this maybe transition year?

Yes. And again, I think we've said a number of times, I don't believe we feel like the fundamental economic model in either of our business segments has changed, meaning what the historical model has been is that if you can achieve revenue growth in sort of the mid-single digits, generally, you're going to see EBITDA growth and margin expansion over time.

As you characterize it, I think we're viewing 2022 as a bit of a transition year, particularly the first half of 2022, that as volumes recover, those labor pressures are not going to ease as near -- as quickly. And therefore, we're going to see some margin compression, at least in the first half of 2022.

But I think over time, we have an expectation that the models will work as they have worked in the past. And if we can achieve mid-single-digit growth, maybe inflation -- and particularly wage inflation has increased by 100 or 125 basis points post-pandemic. But the model hasn't been turned upside down.

And as a consequence, if that underlying demand is out there, and there's been a significant amount of unmet, postponed, deferred demand in both of the business segments over the last several years, which we firmly believe, then I think revenue growth, I think, beginning again towards the end of 2022 should be relatively robust. We should see EBITDA growth. We should see margin expansion after we get over these labor pressures. And it will look like the way it was.

Can we get back to 2019 margin? The answer, I think, is yes. The question is how quickly. We're certainly not going to get back there in a year, but we certainly believe that we can get back there and go beyond that, quite frankly.

Your next question comes from the line of Josh Raskin with Nephron Research.

I wanted to follow up on the comments both you and Marc made on the outpatient development. I'm curious what types of facilities do you think are most useful to UHS in the next couple of years. I'm thinking more specifically in the acute care segment. And maybe how does that outpatient development work in the broader segment strategy for the acute care segment?

Well, I think it's -- I mean, there's a lot of areas that we're looking at. Specifically freestanding emergency departments, we have had a lot of success with that. And we continue to evaluate a number of opportunities on the FED that I think are going to be very positive as a stand-alone business as well as what they can refer into the acute care hospitals.

On top of that, we're doing a lot more work with physician clinics, and again, being able to open and drive business from those clinics in some part to the hospitals. And we see a lot of opportunity in a number of our markets. We had a significant acquisition in California earlier, I guess, a few months ago with a large physician group, which we have been working with for many years. But acquiring them now and just increasing the synergies and the things that we're able to do with them as an owner of the practice, that's been a little bit enlightening to us. And so we're looking for more opportunities there.

In addition to that, I would say the traditional outpatient radiology services as well as surgical hospitals, it's been a little bit tougher for us to get deals that we like on the ASC front. But we are currently evaluating probably in all -- or just about all of our acute care markets right now. We've partnered with a large surgery center company to do that for the last couple of years. And so I think we're going to gain more traction with that as we go forward in the next 3 to 4 quarters, certainly.

Got you. And just to follow up on that, Marc, then the ASC, I'm curious how you think about that shift from inpatient to outpatient care and how important you think that versus the -- what sounds like maybe not the most rational market. I don't want to put words in your mouth. But it sounds like it's more of a pricing issue than a strategy issue. Is that right?

Yes. I mean as far as I look at it -- look, it's definitely a trend. It's definitely something that we're very cognizant of as far as the desire to move certain business out of the inpatient setting to outpatient. And that's driven by the insurers and -- for a number of reasons. I'm not sure I'd categorize it the way you said, but I do think we have great opportunities to not only partner and create new outpatient surgery center businesses that are advantageous on their own but also to decamp some of the business that is taking up space in our inpatient settings and then have higher acuity, higher paying business replace that lower-end outpatient business.

Your next question comes from the line of Justin Lake with Wolfe Research.

It's [Austin] on for Justin here. Steve, I was just kind of curious on the full year. If you can maybe help us size or give some color on the impact of kind of the direct COVID reimbursement programs, sort of the benefit from sequestration, that 20% bump in HRSA? And then kind of what is embedded in the assumption for '22 related to those programs?

Yes. So we've disclosed the impact of sequestration waiver and the HRSA reimbursement and the 20% add-on. I think historically, in the last few quarters, it's been running in the sort of $30 million, plus or minus a bit, range. We've -- the way we've incorporated that in our projections or guidance for 2022 is based on the current knowledge, the Medicare waiver lapses in the first half of the year, the public health emergency, which drives the 20% add-on. I think it lapses in early in the second quarter. The HRSA money seemed to be running out. So we've assumed all that.

Again, the tricky part of this is it looks like -- and this will be the thing. I mean that reimbursement will largely tail off as the COVID volumes tail off. A month or 2 ago, we were concerned that maybe we'd be facing significant COVID volumes and the loss of that extra reimbursement. But it appears that the 2 will sync more naturally.

But yes, we've assumed those things go away relatively, for the most part of the first half of the year. Again, that syncs up with guidance, which presumes that our overall COVID volumes go down in the first half of the year, that the expenses associated, the really high expenses with those COVID patients go down, et cetera. So that it's really not a significant drag on our earnings.

Awesome. And maybe just a quick follow-up there. Just kind of curious maybe on a percent basis where COVID admissions had kind of trended early in Omicron and kind of where they're settling out here. And then maybe for the full year, is there kind of a given range that you guys are assuming COVID volumes to continue to run at?

Yes. So during the COVID surges, I think at the height of the COVID surges on the acute side, I would say somewhere in the 15% of our admissions were COVID related during the Delta surge, during the Omicron surge, et cetera. And because the length of stay of the COVID patient is about twice what our average length of stay is, COVID patients were taking up 1/3 of our beds across the portfolio, again, during the surges. So it was a significant number. I think the assumptions that we've made for particularly the back half of 2022 is that we'll be in this kind of, as has been described, endemic environment in which something like 3% to 5% of our acute admissions will be COVID related, and probably less acutely ill than we've seen in some of the earlier surges.

Your next question comes from the line of Whit Mayo with SVB Leerink.

I haven't heard about Cygnet or your U.K. operations in some time. So I was hoping maybe to get an update. And I think the broader question, and maybe this is framed more for Marc, is just thinking about a broader portfolio review for behavioral. I mean at some point, does it make sense to get smaller, to get bigger? And maybe making some decisions during a pandemic is ill-advised. But just any update strategically, operationally, anything that you guys are deploying internally that's different this year that gets you excited that we should be probably paying more attention to?

Yes. I mean -- well, I'll start with the portfolio review. I mean we do that all the time. And I'll tell you, we've really done that during the last 2 years during COVID. And to your point, we have scaled down a few places, some operations, a couple of leased facilities and a couple of others where we just saw the changes in those markets. They weren't big players in the portfolio, and we've jettisoned them. So we continue to look to pare down, if possible. While at the same time, we're doing a lot to grow the division as well. So we're trying to always improve the assets.

One of the comments I'll make is our JV opportunities on the behavioral side continue to be robust. And I wanted to just make the point on that. All JV opportunities and all JV partners are not created equal. So there are a lot of JV opportunities, situations that we look at, that we pass on that others do, because we just don't see the merit long term. If you notice the ones that we do, for the most part, are recognizable, nationally known names or they're very strong regional players. And that's purposely done. So we're very excited.

When you say what could we offer as far as getting you all excited, we -- and Steve has already mentioned this. But with the demand being where it is, we're very excited that when we get the staffing stabilized -- and it is stabilizing and it will continue to stabilize throughout this year. We should be able to pop because we know we track every week. We're talking very specifically about which beds are closed due to staffing, due to COVID. And as we see that start to turn, and it's already starting to turn, that's all upside for us.

In regards to Cygnet, Cygnet has really been a terrific hedge for us. They are growing. There are a number -- I speak with them very often, weekly, in fact. Our team over there is very strong. They're competing quite well against historical, in fact, larger players in that market. We're competing much, much better than we have in the past. Others are having some hiccups.

So we're very excited. The list of opportunities just in the U.K. is incredibly impressive. And along with that, we will look at things outside the U.K. if they present and we think they make sense. But right now, we have a number of areas just within the U.K. that we think we can add beds, either to existing facilities or some new facilities. And our relationship with the NHS has never been stronger. So we're quite positive about that business and where it's going to go going forward.

Great. That's helpful. Maybe just one quick follow-up for Steve. If you could maybe give an update on what you're contemplating for Texas DSRIP, UCC as this program presumably will continue now? And your 10-K has an update that there's -- I guess, you guys expect $391 million from state supplemental payments. And that number hasn't historically been that reliable. So I guess I'm just trying to make sure that we're thinking about any of the major puts and takes with some of the state supplemental programs this year.

Yes. So first of all, I'll make a few broad comments. You alluded to the 10-K, which was filed last night. I do think UHS has a rather expansive disclosure on these state programs. So if people are really interested in the details, I would suggest that they spend some time reading our 10-K disclosure on the subject because I think it is rather informative.

Broadly, as it regards Texas, there are a couple of different programs in Texas. I think the one that is sort of most uncertain at the moment is the Directed Payment Program, which the state and CMS are sort of in dispute over. We had about $12 million or $13 million of reimbursement related to that program, which we did not recognize in the last 4 months of 2021. Although we remain hopeful that it will be approved and will wind up getting recognized retroactively in 2022.

The uncompensated care program, which people have expressed some concerns over, et cetera, looks like it is moving forward. The next, I think, payment is actually scheduled to occur within the next week or 2. I just saw a communication in that regard from the HHS or the health department in Texas. So it seems like that's moving forward.

And I'll finally make one last comment. Look, there is some choppiness associated with these state reimbursement programs, and we tend to be conservative about how we account for them, tending to wait until they are approved either at the state and/or the federal levels. And sometimes that means that we're not recording the income or revenues ratably.

But if you look at the trends over time, the trajectory of those programs tends to be increased. And then I think they are because the hospitals really rely on these programs, and a lot of the hospitals that rely on these programs are safety net hospitals within each of the states, et cetera. And so the programs really become an important part of both state and federal funding.

So yes, there's some uncertainty and some volatility in how these things get recorded. But I think our general sense is that the programs will remain at or equal to historical levels. Again, with the one exception that I would note -- we didn't really get into it in detail. But we recorded on the Kentucky reimbursement essentially 18 months' worth of reimbursement in 2021. So in other words, 6 months of the reimbursement that we recorded really related to the last half of 2020. So that's a bit of a headwind going into 2022, because we'll only record 12 months of Kentucky reimbursement in 2022. But that's clearly baked into our guidance.

Our final question comes from the line of Sarah James with Barclays.

When you talked earlier about getting back to the pre '19 margins, how much of that is cost control versus more of a change in the rate environment?

Honestly, Sarah, I think that the real driver, as I think Marc and I both alluded to, is volume recovery. Look, we're certainly looking at cost controls. And I think cost controls focused on the elimination of this really expensive labor component that we've been incurring for the last -- during the pandemic.

But again, I mean, I don't think we anticipate sort of wringing efficiencies out of the business in order to get back to those margins. What I was saying before is we're going to get back to this model of mid-single-digit revenue growth. And if you combine that with efficient operations, which we have historically always had, then I think you sort of get back to that model.

But no, I don't think we're either cost-cutting our way back to 2019 margins nor getting there on extraordinary rate increases. Although we would hope that, both from our government and commercial payers over the next year or 2, there's more and more recognition of the inflationary pressures on labor and other costs.

Got it. That's helpful. And as you think about that recognition across your different types of payers, how do you think about the timing of that? Like which -- would Medicare act first? Or when you think about Medicare, Medicaid and the private payers, where do you think the recognition could start?

It's a great question, Sarah. And obviously, from a Medicare and Medicaid perspective, that's largely out of our control, meaning, I mean, there are bigger forces, bigger lobbying groups, both at the federal and state level. We're active participants in those groups, so we're sort of not driving that. But again, I think the inflationary pressures put the not-for-profit hospitals, in particular, at a disadvantage. And so there will be great pressure on that.

As far as the commercial payers, we have a much more active role there. And I think we're playing that active role and pressing more and more of our payers for what we believe to be reasonable rate increases. And if we don't get them, I think we're more willing today than we have been in some time to terminate contracts, to walk away from business that doesn't have a reasonable reimbursement rate.

I'll now turn the conference back over for any closing remarks.

We'd just like to thank everybody for their participation, and look forward to talking again at the end of the first quarter. Thank you.

Thank you all for joining today's meeting. You may now disconnect.