UHS Considering More Than 40 New Behavioral JV Opportunities

Universal Health Services (NYSE: UHS) has more than 40 behavioral health joint venture opportunities in the pipeline, on top of ten projects recently completed or in the works.

CFO Steve Filton highlighted those opportunities Thursday morning during the company’s fourth-quarter and year-end 2019 earnings call.

“It reflects a very active pipeline,” Filton told investors. “It reflects real interest on the part of a large number of geographically diverse not-for-profit, acute care hospitals.”

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King of Prussia, Pennsylvania-based UHS is one of the nation’s largest hospital management companies. It owns and operates acute care hospitals and behavioral health facilities, with a roughly equal revenue split between the two segments.

On the behavioral side, UHS has 328 inpatient facilities and 21 outpatient facilities across the U.S., the United Kingdom and Puerto Rico. In 2019, 46% of its nearly $11.4 billion in net revenues came from its behavioral health arm.

The company’s JV strategy is a large part of its behavioral business. UHS teams up with non-UHS acute care providers to improve the delivery of their behavioral health services, usually building new facilities to make it possible.

UHS recently opened three new behavioral health JV facilities and has another seven underway, all slated to become operational this year or next.

One such example is Via Linda Behavioral Hospital, a 120-bed behavioral health hospital under construction in Scottsdale, Arizona. The facility is the result of a JV between UHS and HonorHealth, a non-profit community healthcare system serving the greater Phoenix area. UHS will be the majority owner and manager of operations for the hospital, which is set to open next year.

Most of UHS’ current JV partnerships fit a similar mold, Filton explained on the call.

“Generally, all of these new hospitals are in the 100 to 120 bed range size,” Filton said. “Most of them are probably in that 80/20 [ownership] range. … It would be highly unlikely that we would enter into a joint venture in which we have less than 51% share and basically the management control of the facility, but each deal is negotiated separately.”

While a number of factors likely contribute to UHS’ robust JV pipeline, growing flexibility around the IMD exclusion could also be piquing hospitals’ interests, company leaders said on the call.

The rule prevents Medicaid from paying for patients to be treated in inpatient behavioral health facilities with more than 16 beds. While the exclusion is as old as Medicaid itself, there are new ways to get around it, with a growing number of states taking advantage of waivers that allow them to bypass the exclusion.

“[We] felt like we would see more of those adult Medicaid patients shifting relatively quickly from the acute care setting to the freestanding setting,” Filton said on the call. “But what we saw from the IMD exclusion is that the acute hospitals were not necessarily all that anxious to part with those patients. And as a consequence, we see those JV conversations being much more active and much more robust.”

New behavioral leadership

On the call, UHS executives also discussed the impact they expect to see from the company’s new Behavioral President Matt Peterson, who joined the company last year and recently connected with Behavioral Health Business to discuss his goals for the company.

“He … has a perspective that there are real opportunities for us to partner with some of our managed care payers and create arrangements that are mutually beneficial,” Filton said, speaking to Peterson’s background in managed care.

Those conversations are underway, Filton said, but it will be a while before those relationships develop. He also commented on the strengths Peterson’s military background bring to the company.

“I don’t think he’s identified terribly new issues or different issues,” Filton said. “But … Matt is bringing some level of rigor and discipline to those processes that we haven’t necessarily had before, and I think, ultimately, that will certainly be helpful.”

Overall, UHS’ revenue for Q4 and 2019 as a whole were up. Net revenues for the quarter were nearly $2.9 billion, a 5.1% increase from a year earlier. For the year, net revenues were nearly $11.4 billion, up 5.6% from 2018.

Meanwhile, behavioral net revenues were up 4.5% on a same facility basis in the fourth quarter and 3.1% for the year. Behavioral admissions were up just under 1% for the quarter and 1.2% for the year.

However, UHS’s behavioral health business did see some headwinds in Q4 and in 2019 as a whole.

For example, one of its behavioral facilities in Florida was damaged by Hurricane Michael in the fourth quarter, and staffing shortages continue to be an issue.

“And on the behavioral side, we’re challenged because a lot of the labor vacancies result in [us] having to cap our beds or turn away patients,” he said. “It continues to be a challenge that our operators are very much focused on.”

UHS’ stock was down more than 5% as of end-of-day trading Thursday, at $128.24 per share.

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