Prepared remarks
Good day, and thank you for standing by. Welcome to the Q2 2026 Universal Health Services earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Darren Lehrich. Please go ahead.
Thank you. Good morning, and welcome to Universal Health Services second quarter 2026 earnings conference call. I am Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc D. Miller and our Chief Financial Officer, Steve G. Filton. Marc and Steve will provide some prepared remarks and then we will open it up for Q&A. During today's 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, we recommend a careful reading of the section on risk factors and forward-looking statements in the Form 10-K for the year ended December 31, 2025, and our Form 10-Q for the quarter ended March 31, 2026. In addition, we may reference during today's call measures 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 our supplemental materials on our website. With that, let me now turn it over to Marc for some introductory remarks.
Thanks, Darren. Good morning, and thank you for joining today's call. I am pleased to share some operational and strategic highlights for the second quarter before Steve discusses financial highlights. Overall, our second quarter of 2026 featured a rebound in acute care volumes and behavioral health volumes that were consistent with recent trends. Continued expense management, and exchange trends that progressed in line with our expectations. During the quarter, we also benefited from the approval of the Florida DPP program for 2025 which was not contemplated in our original outlook. From an operational perspective, I want to highlight the investments we are making to expand capacity in the communities that we serve. We continue to see favorable demand trends across our markets, supporting confidence in the long-term need for capacity in both inpatient and outpatient service lines in our acute care and behavioral health segments, allowing us to extend our footprint with access points that are convenient to our patients and help further align us with physician stakeholders. In acute care, we added 177 licensed beds in three hospitals during the second quarter. These new beds represent a 2.5% increase to our same facility bed capacity and position us to respond to strong demand in these communities. In May, we officially opened the Alan B. Miller Medical Center in Palm Beach Gardens, Florida. And we are very pleased to have achieved Joint Commission accreditation for this de novo hospital in July, reflecting sound execution by our local team. We have experienced a strong reception from the Palm Beach Gardens community and are excited to serve this fast growing area of Florida with the newest and one of the most advanced medical campuses in the region. Within our behavioral health segment, we continue to make strong progress in our integration planning for the pending Talkspace acquisition, which we expect to close in mid-August of this year. Talkspace represents not only a unique opportunity for us to accelerate our presence in the outpatient market, but also creates the nation's first end-to-end continuum of behavioral health care services, from acute inpatient and residential services, in-person outpatient care, and soon with Talkspace, virtual services nationally. As Steve will detail shortly, we have increased our professional and general liability reserves and now assume higher anticipated operating losses at our de novo hospital in Washington, D.C. as well as the San Antonio, Texas behavioral hospital that we are in the process of recertifying in order to reestablish much needed mental health services capacity in that region of Texas. Accountability and delivery of high quality care are at the core of our purpose. We are deeply committed to addressing any instances that fall short. Overall, the broad portfolio continues to perform well operationally and clinically, and we have a 46-year track record of strong quality and safety performance across both our behavioral health and acute care divisions. Before passing it over to Steve, I want to make a brief comment about our share repurchase activity during the second quarter, which accelerated to $320 million as compared to $127 million in the first quarter of 2026. The recent dislocation in our share price represents a compelling opportunity to deploy capital and retire UHS shares at heavily discounted levels. Given the strength of our balance sheet and the confidence we have in our ability to generate cash flow, we intend to remain highly active with our share repurchase program at these levels. In closing, I want to thank the UHS team for their focus on quality patient care and for their ability to adapt in such a dynamic environment. I want to emphasize that our strategy remains steadfast: to invest in high growth markets, expand access to care, operate efficiently, and create long-term value for patients, employees, and shareholders. I remain very optimistic about our long-term outlook given the quality and strength of our portfolio, the experience of our management team, and the underlying demand characteristics of the markets that we serve. With that, I will now turn the call over to Steve G. Filton for more details on the quarter.
Thanks, Marc. I will highlight a few financial and operational trends before opening the call up to questions. The company reported adjusted EPS of $5.98 for the second quarter of 2026 representing growth of 12% on a year-over-year basis. Second quarter adjusted EBITDA less NCI was $678 million representing growth of 5% on a year-over-year basis. When excluding the $100 million out-of-period Florida DPP benefit not contemplated in our guidance, our Q2 adjusted EBITDA less NCI fell short of our internal expectations, primarily attributable to three items approximating $63 million, including $28 million attributable to higher professional and general liability reserves, approximately $20 million attributable to the San Antonio behavioral facility and approximately $15 million attributable to a continued slower ramp-up of our Cedar Hill Regional Medical Center de novo facility in Washington, D.C. At the segment level, on a same facility basis, adjusted admissions at our acute care hospitals increased 2.9% as compared to the second quarter of 2025. Volume performance improved sequentially from the first quarter of 2026 and was broad based geographically. Same facility acute care emergency department visits increased 4% while same facility surgeries decreased 0.8% as compared to the second quarter of 2025. Although surgical volumes continue to be somewhat muted, the trend in the second quarter improved slightly compared to the past several quarters. From a service line perspective, we experienced positive trends in certain higher acuity inpatient service lines notably urology, neurology, and cardiology, as compared to last year's second quarter. Payer mix trends remain consistent with recent quarters with stronger growth in Medicare and managed Medicare, modest growth in managed care volumes excluding the exchanges, and slightly lower Medicaid volume. Year to date, same-store facility acute care adjusted admissions growth through the second quarter of 2026 was 1.4%, and we believe it is appropriate to fine tune our volume guidance for the full year to a range of 1.5% to 2.5% or 50 basis points lower at the midpoint of our prior range to reflect the year-to-date trends. On a same facility basis, net revenue in our acute care segment during the second quarter of 2026 increased 8.2% and increased 5.9% excluding the impact of our health plan. Acute care same facility revenue per adjusted admission increased by 3.0% during the second quarter of 2026 on a reported basis, and increased 2.7% after excluding net out-of-period Medicaid supplemental benefits from both periods. Acute care rate growth continues to track in line with our expectations overall. Operating expenses were well managed across labor, supply, and other expense categories. Same facility acute care salaries, wages, and benefits per adjusted admission increased 2.7% and supply expense per adjusted admission decreased 2.5% over last year's second quarter. Contract labor was 2.5% of acute care segment revenue or 20 basis points lower year-over-year. Other operating expenses increased primarily due to our health plan which experienced revenue growth of approximately 35%. In the second quarter of 2026, our acute care performance resulted in 8.2% same facility segment EBITDA growth. Excluding the out-of-period supplemental program benefit from both periods, second quarter 2026 same facility acute care segment EBITDA increased 6.3% on a year-over-year basis. In our acute care segment, the net out-of-period benefit related to supplemental payments was approximately $7 million comprised of approximately $23 million in the second quarter of 2026 from the Florida program as compared to approximately $16 million of out-of-period amounts in the second quarter of 2025 related to other state programs. With respect to health insurance exchange trends during the quarter of 2026, we estimate an impact of approximately $20 million which was in line with our expectations. Exchange volumes declined approximately 15% as compared to the second quarter of 2025. The reduction in the number of exchange volumes corresponds to the increase in self-pay volumes during the second quarter. Based on the trends during the first half of 2026, we expect the full year pretax impact to be within the upper half of our originally contemplated guidance range or approximately $85 million. While the first half decline in exchange volumes was below the 25%-plus range in our original forecast, we believe our impact estimate is supported by the trends we have observed year to date in our business and other dynamics such as shifts in the metal tier that are playing out within the exchange market. As it relates to our acute care de novo hospitals, our Palm Beach Gardens facility opened in May and second quarter startup losses at this facility were in line with our expectations. In Washington, D.C., Cedar Hill Regional Medical Center entered the same facility hospital group in the second quarter and continued to ramp at a slower than expected pace. Second quarter performance at Cedar Hill represented an improvement of approximately $1 million year-over-year although results there were similar to our first quarter. Turning to our behavioral health segment results during the second quarter of 2026, same facility net revenue increased 7.4% supported by a 6.1% increase in same facility revenue per adjusted patient day and a 1.4% increase in same facility adjusted patient days as compared to the second quarter of 2025. Year to date, same facility adjusted patient day growth through the second quarter of 2026 was 1.5%, and we believe it is appropriate to fine tune our volume guidance for the full year to a range of 1.0% to 2.0%—100 basis points lower than the prior range at the midpoint—to reflect year-to-date trends and an outlook for second half volumes to be similar to Q2 performance. Same facility behavioral health segment EBITDA increased 9.0% in the second quarter of 2026. Excluding the net benefit from out-of-period supplemental payments, same facility revenue per adjusted patient day increased 5.3%, and same facility segment EBITDA increased 5.7% on a year-over-year basis. In our behavioral health segment, the net out-of-period benefit related to supplemental payments was approximately $18 million comprised of approximately $77 million in the second quarter of 2026 from the Florida program as compared to approximately $59 million of out-of-period amounts in the second quarter of 2025 related primarily to the Tennessee program. For the second quarter of 2026, behavioral health segment facilities salaries, wages, and benefits per adjusted patient day increased 4.8% on a year-over-year basis showing improvement on a sequential basis as headcount moderated further to 2% growth. In California, based on our success in hiring and training, we remain on track with the $35 million impact that we contemplated in our original 2026 outlook with respect to the state's nurse staffing ratio requirements that went into effect June 1. As it relates to our behavioral health hospital in Texas that is in the process of getting recertified, we stopped receiving reimbursement at the end of April and do not expect to receive reimbursement from government or managed care sources until we regain certification, which we anticipate in 2027. The facility will operate in the meantime with limited patient census and therefore, we will incur operating losses and the facility will be excluded from our same facility performance. During the second quarter of 2026, pretax losses at this facility totaled approximately $10 million including staff severance costs. We expect operating losses to run between $5 million and $10 million per quarter for the balance of 2026. During calendar year 2025, this facility's EBITDA was approximately $25 million. Moving on to cash flow and balance sheet highlights. Second quarter cash generated from operating activities was $44.3 million as compared to $549 million during the same period last year. During the second quarter of 2026, we spent $228 million on capital expenditures, reflecting the de novo hospital opening and bed capacity expansions Marc referred to earlier. During the second quarter of 2026, we acquired 1.89 million of our shares at a total cost of $320 million. As of June 30, 2026, we had $978 million of repurchase authorization available pursuant to our stock buyback program and we expect to remain active with share repurchase throughout 2026. From a balance sheet perspective, we end the quarter with cash of $139 million, total debt of $4.85 billion and net leverage of 1.8x. As of June 30, 2026, we had $1.27 billion of additional borrowing capacity available pursuant to our revolving credit facility. Turning to our outlook for 2026, we are updating our financial operating forecast to reflect year-to-date performance and recent developments. The components of our updated 2026 guidance compared to our previous forecast can be found in our second quarter earnings press release and our supplemental earnings material. Our updated guidance represents approximately 7% revenue growth, 3% EBITDA less NCI growth, and 6% EPS growth at the midpoint. Focusing my remarks specifically on adjusted EBITDA less NCI, our updated 2026 forecast is in a range of $2.61 billion to $2.72 billion, representing a decrease of approximately $50 million from our prior outlook at the $2.66 billion midpoint. At a high level, we include approximately $150 million of additional Medicaid supplemental net benefit for the full year that is offset by approximately $200 million of adverse items not originally contemplated in our outlook. The primary drivers of these factors are as follows. First, we now expect the net benefit from Medicaid supplemental funding to be approximately $1.5 billion for the year, or an increase of approximately $150 million from our prior outlook. This $150 million is comprised primarily of the $100 million net benefit from Florida recognized in the second quarter, growth in other programs during the first half of 2026, and approximately $25 million related to the Texas ATLIS program that we expect to record in the third quarter. It is worth noting that more than one-fifth of the $1.5 billion total is derived from state-based programs not subject to the reductions in the OBBBA legislation. Second, we now include $50 million of impact associated with the Texas Behavioral Health Facility that is in the process of being recertified. This includes the loss of approximately $30 million in earnings originally budgeted for this year and approximately $20 million of operating losses as assumed for the full year while we work towards recertification. Approximately $20 million of this impact was in the second quarter and the remaining $30 million is expected to impact the second half of 2026. Third, we are adjusting the year-over-year tailwind related to Cedar Hill Regional Medical Center in Washington, D.C. from $50 million to $20 million. Our original guidance assumed Cedar Hill would be breakeven during the first half and have positive earnings in the second half of 2026, which would have yielded a $50 million de novo tailwind net of anticipated startup losses at the Palm Beach Gardens de novo hospital. The $50 million difference in our guidance now assumes Cedar Hill will reach breakeven during the fourth quarter, and therefore approximately $20 million of startup losses at our Florida hospital will not be contained by second half operating gains at Cedar Hill as originally contemplated in our prior outlook. Approximately $20 million of this impact was in the first half of 2026 and the remaining $30 million is expected to impact the second half of 2026. Fourth, we are increasing our professional and general liability expense estimate for the full year by approximately $50 million, of which $28 million was recognized during the second quarter of 2026 and the remainder represents increases to our quarterly expense going forward. It is important to point out that the increase to our reserve and additional expense for the balance of 2026 is split somewhat evenly between our acute care and behavioral health segments and reflects industry-wide trends generally associated with higher claim severity across all health care settings. The P&L adjustments are in connection with our semiannual third-party actuarial review process conducted during the second quarter. Finally, we are fine tuning other aspects of the 2026 outlook, including the same facility volume assumptions for both segments, which resulted in an EBITDA less NCI impact of approximately $50 million. As mentioned earlier, we now expect acute care adjusted admissions to be in a range of 1.5% to 2.5% and behavioral health adjusted patient days to be in a range of 1% to 2% as compared to our prior range of 2% to 3% for both segments. We believe centering our same facility outlook at approximately 2% for acute care and 1.5% for behavioral health still reflects a healthy demand environment while being respectful of our more recent performance. Operator, that concludes our prepared remarks. And we are pleased to answer questions at this time.
Thank you. We will now open the call to questions and answers. To allow as many people as possible to submit a question, please limit yourself to one question and one follow-up. We also ask that you wait for your name and company to be announced before proceeding with your question. If you would like to ask a question, please press 1 on your telephone. You will hear the automated message advising your hand is raised. If you would like to remove yourself from the queue, press star 1 again. One moment while we compile the Q&A roster. Our first question today will be coming from the line of Ann Hynes of Mizuho. Please go ahead.
Hello, Ann.
Questions and answers
Your line is open.
Oh, sorry about that. I was on mute. Just my question is focused on the acute care volume change. Is that non-exchange related, meaning seeing some pressure just on your base business? And if that is the case, can you just provide a little bit more detail on what you think is happening?
Yep. So I think as we said in our remarks, we are just trying to be practically reflective of our first half performance. Acute care volumes sort of trended in that 2% adjusted admission range for the first half. I think we are seeing a continued shift of certain elective and outpatient procedures into alternate site settings, ASCs, freestanding imaging, etc. I think that is the primary contribution. But we are pleased overall with our acute care volume growth in Q2. Pleased with the surgical volumes in Q2, which both overall volumes and surgical volumes rebounded in Q2. So feel good about that, but felt like we were being, as our comments indicated, respectful of the first half performance by slightly lowering the midpoint of our admission growth for the back half of the year.
Next question. Our next question is coming from the line of Andrew Mok of Barclays. Please go ahead.
Hi. Good morning. When we contemplate all the puts and takes to the guidance revision for this year, it looks like underlying EBITDA growth accelerates several hundred basis points in the back half. Can you walk us through the drivers of that back half acceleration? Thanks.
Sure, Andrew. I think as we contemplated the revised guidance, we felt like we identified a number of positive developments that should occur during the back half of the year. One, which we referenced in our prepared remarks, was the new capacity. We added 177 beds across three markets in our acute facilities during the second quarter. Those projects will continue to ramp-up as the year goes on. The initial openings of all three of those projects, I indicated, had strong demand. So we are very positive about that. Those beds represent about a 2.5% increase in our bed capacity. So that is one item. I think both Marc and I mentioned that Cedar Hill benefit will continue to grow as the year goes on. If you recall, we lost $25 million in the third quarter of last year at Cedar Hill. We are expecting Cedar Hill to be breakeven this year, so that is another positive swing there. In behavioral health, headcount growth was 3% in the first quarter, moderated to 2% in the second quarter. We expect the headcount and labor cost growth to continue to moderate during the second half. And finally, our comparison in the second half in Nevada, particularly in the fourth quarter, had seasonally softer trends during 2025, and we continue to see more normal growth trends in Nevada during 2026. So that is another opportunity for accelerated growth in the back half of the year.
Great. Thank you.
One moment, please, for the next question. Our next question will be coming from the line of Matthew Dale Gillmor of KeyBanc. Please go ahead.
Hey. Thanks for the question. For the Florida DPP program, I heard that you booked the 2025 portion in the second quarter. If this program is renewed for fiscal 2026, would the sizing of the 2026 program be about the same? And I think bigger picture, just wanted to better understand if there are more opportunities with DPPs to be recognized during 2026.
So I think the answer, Matthew, is we are not certain what the impact of the 2026 approved program would be, which is partly why we have not recorded any benefit in 2026 nor included it in our guidance. Obviously, if the program is approved, we will record it and we will be benefited by that. As far as other programs, there was a recent approval of a California program that we have been recording. I do not think we think that has a material impact on us. There are a couple of other states that are contemplating either new programs or expanded programs. I do not know that any of them at this point would be material, and certainly none of them are included in our guidance.
Got it. And then as a quick follow-up, Steve, can you give us a sense for how we should think about the ramp of the facility in San Antonio once it gets the CMS certification back in 2027?
Yeah, that is hard to do at this point, Matthew. Obviously, we do not know when the facility would or could be recertified. We do not know if it would be recertified with certain conditions as to its ramp, etc. As we go through the process of getting surveyed and dealing with the regulatory environment, as we learn more about it, we will be relaying that to you all both in terms of timing and ramp expectations. The one thing I will say is just reiterate what Marc said, and that is we have had a lot of support from the broad San Antonio community. The beds at Laurel Ridge Hospital represent about half of the behavioral beds in the market, and so they are sorely missed in the community by the population and by referral sources. So our hope would be, and our expectation that the demand will be there when and if we get recertified, and we would be prepared to ramp up relatively quickly and efficiently. But we will continue to keep you posted on the timing of that. Thank you.
One moment for the next question. Our next question will be coming from the line of Jason Cassorla of Guggenheim Partners. Please go ahead.
Great. Thanks. Good morning. Maybe just hoping you can discuss behavioral volumes, just how that 1.4% compared to your internal expectations, I guess, particularly after the headcount increases you have added over the past few quarters. Anything changing on the demand front? Or is this very much like more of the same as you have flagged before around outpatient preference or outpatient shifts? Just any thoughts on the behavioral health volume demand environment would be helpful too. Thanks.
Yeah, Jason. In the case of behavioral, I think the 1% to 2% change to our estimated volume range is very consistent with what we have been running for a number of quarters. We had originally anticipated a slightly higher growth rate largely based on increases in outpatient demand. And to date, outpatient has been growing at about the same rate as inpatient. To your point, we have added some headcount in order to allow us to accommodate more outpatient capacity. I think it is just growing a little bit slower than we originally imagined. As we have talked about in the last couple of calls, we do expect the acquisition of Talkspace to be a significant accelerant to our outpatient growth, really providing our patients this virtual option for outpatient treatment and outpatient care that we really were not able to offer before in any sort of sizable way. Obviously, the Talkspace acquisition will not be completed till August. It will take a little bit of time to complete that integration fully. But feel like at that point in time, we may revisit our outlook particularly for outpatient growth. But yeah, I think the change that we made was largely to recognize that is the environment we have been operating in for some time.
Got it. Thanks. Very helpful. And then if I could I just wanted to ask about the malpractice reserve headwinds. It looks like increases to those reserves had like a 2% to 3% annual EBITDA headwind over the past few years. I guess just stepping back, do you think these types of hefty increases will be simply structural moving forward? Or are there any developments that could give some sort of visibility into deceleration in those costs or any thoughts around that would be helpful. Thanks.
Difficult for us to predict, Jason. What I would say is we include in our guidance and in our budget the amounts from our third-party actuaries. We do not independently come up with those numbers. On a twice-a-year basis, we have a third-party actuarial review of where our expense and reserves stand. To your point, they have been increasing. I think the main reason they have been increasing has been an overall increase in the severity of claims across health care providers of all sorts, including acute and behavioral. I do not think this is anything UHS-specific. In terms of the things that we do to control that, internally we have significant risk management programs to reduce the number of negative outcomes, and we are very focused on that. But in terms of the broader environment where cases are just worth more both in settlements and in verdicts, that is difficult for us to control. There is a significant amount of lobbying going on by the industry for malpractice and tort reform at both the state and federal levels, but very difficult to predict how that will turn out.
One moment for the next question. Our next question is coming from the line of Pito Chickering of Deutsche Bank. Please go ahead.
Hey. Good morning, guys. A question on surgical volumes: Can you talk about the emergent versus elective surgeries that you saw in Q2 and split out between inpatient and outpatient? And what do you think the demand setup is for that in the back half of the year?
So, Pito, we do not necessarily track emergent versus elective surgeries. What we said in our prepared remarks was overall surgical volume was down 0.8% in the quarter, a bit of an improvement from the first quarter sequentially. On a blended basis, it reflects an increase in inpatient surgeries and a slight decline in outpatient surgeries. I will say that surgical performance seems to be a little bit better than some of our peers. Always hard to know exactly why that is. Internally, over the last several quarters, we have been very focused in an environment where we are otherwise trying to be tight on expense control and capital spending, on investing in those equipment and other investments that will be revenue producing, whether that is robotics or more advanced imaging equipment. It feels like that is having some positive impact. So we are pleased with that.
Then a follow-up there. Were there any areas within specific weaknesses because you do not track emergent versus elective? Overall, are there any categories that were stronger or weaker within the quarter? And then you talked about this in the script, but how should we think about the continued focus from CMS to push outpatient procedures into the ASC and how do you guys combat that? How do you view medium-term outpatient surgical growth? Thanks.
We did not necessarily comment specifically on surgeries, but having talked about service line growth in areas like urology, neurology, and cardiology, I would suggest those are areas where procedural volumes were strong as well. Obviously, the shift to outpatient is nothing new. We combat that in a number of ways. We continue to invest in ambulatory surgery centers where they are appropriate and where they make economic sense. We certainly have at least one ASC in every single one of our markets and in many cases multiple ASCs. We continue to expand and invest in our own outpatient surgical capacity, whether that is physical capacity—building more OR suites—or investing in equipment responsive to the needs of our proceduralists. We continue to do that, and based on the second quarter performance, I would say we are doing it effectively. The shift to outpatient will continue and we will continue to pursue the initiatives that we have been pursuing to address it.
One moment for the next question. Our next question is coming from the line of Ryan Langston of TD Cowen. Please go ahead.
Hi. Sounds like you had fairly strong same-store ED volume, Steve. I think I heard you say around 4%, but a little less growth in inpatient admissions and surgical procedures. Anything in particular driving that lower ED conversion to inpatient rate?
No, Ryan. That is not a new phenomenon. I think the issue is that for a portion of the population who do not have their own primary care doctors, they use hospital ERs as their primary care. As a consequence, those visits are not necessarily traditionally emergent. We continue to see a lot of acutely ill patients in our ERs, but we also see patients who are coming there for what have traditionally been more like a primary care visit.
Got it. And then just quick follow-up: any way to size how much of the $978 million authorization you may use through the rest of the year? And maybe how much you have repurchased quarter to date? Thanks.
We are not in the practice of reporting share repurchase on an intra-quarter basis. We went into the year with the notion that we have repurchased somewhere in the $800 million to $900 million range. We will certainly meet that, if not exceed that. We do not have a specific plan, but we will continue to monitor the market. As Marc indicated, we view the current share price dislocation as a compelling opportunity. We will continue to be active and evaluate it against other capital deployment opportunities we might have. In this environment, we are committed to remaining an active acquirer of our own shares.
One moment for the next question. Next question is coming from the line of AJ Rice of UBS. Please go ahead.
Hi. Thanks, everyone. First, this is something we get asked a lot about, so I will throw it out. You sort of sized your EBITDA from supplemental payments. Obviously, in 2028, they will start to ratchet down somewhat because of the OBBBA Act. Are you doing anything to think about that? I know there is a chance that Congress could act and delay it, but how do you think about how that might impact your long-term growth rate? I know there are technology investments you are doing and other things like that. Just wondering how you think about that and are there things you are doing now to prepare to offset that?
AJ, that is a comprehensive question. I will answer at a high level. One, Marc talked about strong expense management in the quarter. A number of initiatives to control productivity and make operations more efficient. Supply expense on the acute side on a per adjusted admission basis was actually down in the quarter. Those initiatives will continue, and we will build on them. Second, we have significant investments in technology, both AI and non-AI, that are leading to productivity improvements and revenue cycle improvements. We have undertaken a significant review of our entire revenue cycle on the acute side with the aid of a third-party consultant, yielding measurable results and improvements. We are beginning a similar process on the behavioral side. Third, as we think about OBBBA pressures largely on Medicaid reimbursement, particularly in behavioral, we are looking at ways to manage our exposure to Medicaid. The emphasis on outpatient growth in behavioral is a recognition that demand is growing there and outpatient revenue tends to be more Medicare-centric and managed care-centric than Medicaid-centric. All these issues consume a fair amount of focus and are ways in which we are anticipating and trying to stay ahead of the OBBBA reductions scheduled to start in 2028.
Okay. Maybe just a follow-up around results. You gave some comments about your payer mix, and it does not sound like the public exchange impact is as materially different as we saw for some other peers. Are you seeing any uptick? You did not really mention uncompensated care in your comments on payer mix. Are you seeing any meaningful shift in your uncompensated care burden?
What was fairly apparent in the second quarter was that the decline in exchange volumes was offset almost on a one-for-one basis by an increase in self-pay volume. It felt like virtually everyone who lost their exchange coverage became an uninsured patient. We had assumed in our original assumptions that a small percentage of those folks—maybe 10% to 20%—would replace their exchange coverage with other commercial coverage, perhaps through employers. That did not seem to be true, and probably that phenomenon is what gave rise to the $10 million increase in our exchange impact projection from $75 million to $85 million. That has been the primary observation about self-pay and its relationship to exchange coverage lapsing.
One moment for the next question. Our next question is coming from the line of Craig Hettenbach of Morgan Stanley. Please go ahead.
Yes. Thank you. Following up on the comments around advanced integration planning for Talkspace ahead of that closure in a few weeks: anything else you would add in terms of things you think you will be able to hit the ground running on and how you are thinking about that outpatient ramp over the next 12 to 18 months?
What we have talked about in previous calls is that one of the things that limits our ability to capture step-down business—patients discharged from inpatient who require follow-up care—is often geographic constraints and limited therapist capacity. If patients live two hours from our facility, making frequent outpatient visits is difficult. A virtual alternative or other in-person alternatives through our Thousand Branches initiative is helpful. Talkspace has a panel of over 6,000 therapists that can be available to our patients once the acquisition is completed. Those two items cement our view that the Talkspace acquisition should help accelerate our outpatient growth.
Got it. Then following up on the acute side, you mentioned the new capacity—177 new licensed beds. Any update on freestanding emergency rooms in terms of investments there? And you also talked about ASCs; curious about outpatient investments you are making.
Our investments in freestanding emergency departments have really been among our best investments in the last five years. We currently operate around 40 freestanding EDs, with probably another five to ten in development. Patient demand for these freestanding EDs is significant. Payers are receptive, care is delivered more efficiently, and those facilities are among our best investments over the last decade or so.
One moment for the next question. Our next question is coming from the line of Benjamin Hendrix of RBC Capital Markets. Please go ahead.
Hey. Great. Thank you very much. We have heard some of your peers talk about higher professional fees, specifically higher subsidies related to radiology and anesthesiology, hospitalists, etc., amid service line mix shifts. Just wondering if you could elaborate on what you are seeing in that department. Thanks.
The comment we have made about professional fees is that we did see significant increases in professional fees in late 2023 into 2024. Beginning in 2025 and into 2026, what is embedded in our guidance is generally inflationary, maybe slightly higher than inflation, uptick in professional fees—maybe in the 7% to 9% annual increase range. That is reflective of our experience in 2026. We are getting that pressure and responding by, in some cases, hiring hospital-based physicians and putting contracts out to bid, trying to control locums coverage which is very expensive. It is a challenge, but our operators are responding and keeping increases to a manageable upper-single-digit level.
One moment for the next question. Our next question is coming from the line of Andrew Cooper of Raymond James. Please go ahead.
Hey, everyone. Thanks for the questions. A lot covered already. Maybe just one I want to touch on Cedar Hill. If you could give a little more color on what the drags are, whether it is demand versus cost, just kind of the friction of getting up and fully running. And then what does that mean for the way we think about the ramp for the 177 beds you added and maybe a bit more color on where those are geographically?
As far as Cedar Hill goes, in partnership with the District of Columbia, the facility was built in an underserved area in Ward 7 and 8. We thought and they thought demand would be significant, and it has been reflected in emergency room volumes almost from the outset. What has been lacking is an established physician base—primary care and specialists—who had generally been treating those patients in other facilities across the district. We have been building up the physician component in the region; it takes time and patients have to reorient their utilization practices. That is occurring, and that is why we have the view that by the end of this year the facility will be at breakeven—just taking a little longer than we thought. Our long-term view of the prospects for that hospital remains positive because we believe the population needs and will use the hospital fully as physician components are in place. Regarding the 177 beds we added, they were added at Lakewood Ranch Hospital in Florida, a Henderson hospital in Las Vegas, and a Rancho Inland facility in Southern California. Those are additions to existing facilities with demonstrated demand, and the ramp-ups at those openings should occur much faster.
Okay. Great. That is helpful. And maybe somewhat related, curious how you are thinking about capital allocation and how it has changed given the current environment, potential challenges in state Medicaid supplemental programs and other dynamics. Does that change the focus between de novo acute facilities versus bed additions, outpatient, and freestanding EDs? What is the latest thinking on where the best use of capital is today?
If you look at how capital has been allocated over the last several years, there has been an emphasis on organic capital spending versus M&A. The focus has shifted more to outpatient. We are doing more investment in outpatient—freestanding EDs on the acute side and freestanding outpatient behavioral clinics, and our Thousand Branches initiative on the behavioral side. We have also been an active acquirer of shares because that has been a compelling investment. I do not see that changing dramatically in response to OBBBA or other regulatory changes other than the emphasis on outpatient and services that are somewhat less Medicaid-centric than historically.
One moment for the next question. Our next question is coming from the line of Benjamin Rossi of JPMorgan. Please go ahead.
Great. Thanks. Sticking to the de novo discussion, on the Florida facility, you previously mentioned that facility would carry startup losses that offset the improvements to Cedar Hill. More specifically, with the changes to Cedar Hill, where are you today on your initial census trajectory, staffing readiness and ability to ramp with expectations? And is that facility eligible for the Florida DPP under the approved program for 2025? Does that change your thoughts on that ramp? Thanks.
The Florida DPP program approval was for 2025. The new hospital was not open in 2025, so it was not eligible then. The hospital's drag in Q2 was about $15 million, which was consistent with our expectations. The hospital got its Medicare certification in late June and opened in July. We are seeing patients and volumes are building. We have every expectation that—and our guidance presumes—it will perform consistent with our initial expectations and the expectations in our original guidance.
Great. Quick follow-up on denial trends: How did denial rates and net yield trend during Q2? Are you expecting denial trends to improve or worsen during the back half of the year? Thanks.
We are not seeing significant change in denials, payer behavior, or patient status changes. Payers continue to be aggressive in how they approve treatments and process claims. We have been investing in revenue cycle initiatives—people, process, and technology—and feel we are staying even with payers. We are not seeing huge changes reflected in denials and patient status trends.
That does conclude today's Q&A session. I would like to turn the call back to Darren Lehrich for closing remarks. Please go ahead.
Yes. Thanks, everyone, for participating in the call today, and for your interest in UHS. Have a great rest of your day.
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