Q4 2025 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Q4 2025 Universal Health Services Earnings Conference Call. [Operator Instructions] 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, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Universal Health Services Fourth Quarter 2025 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then we'll open it up to Q&A.

During today's conference call, we will be using words such as believes, expects, anticipates, estimates and similar words that represent 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 and risk factors in our Form 10-K for the year ended December 31, 2025. 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 today's press release. With that, let me now turn it over to Marc Miller for some introductory remarks.

Thank you, Darren. Good morning, everybody, joining our call. Thank you for your interest in UHS. We closed out 2025 with strong results.

Revenue growth for the fourth quarter was 9%. Adjusted EBITDA net of NCI increased 10% and adjusted EPS increased 20% as compared to the fourth quarter of 2024. For the full year 2025, revenue growth was 10%, adjusted EBITDA net of NCI increased 15% and adjusted EPS increased 31%. Our fourth quarter and full year performance were highlighted, in particular, by continued strong expense management in acute care, sequential volume improvements in behavioral health, solid pricing across both segments and significant share repurchase activity. Looking back on 2025, I am very proud of the progress we've made across the organization in several critical areas.

We strengthened our growth agenda with the addition of new inpatient capacity while also intensifying our focus in the outpatient arena through the addition of new service locations across both segments. We demonstrated financial discipline by managing expenses well in the face of a dynamic operating environment. And we accelerated the pace of technology adoption to improve clinical outcomes and drive greater operating efficiency. Speaking first to our growth agenda.

Over the past 2 years, we've opened 2 new acute care hospitals and laid the groundwork for significant new acute care capacity to come online during 2026 with 3 inpatient expansions totaling 178 licensed beds in Florida, California and Nevada and a state-of-the-art 156-bed de novo hospital in Palm Beach Gardens, Florida that will open in the second quarter. In our Behavioral segment, we've taken a disciplined approach to new bed capacity during 2025 as we devoted more resources to accelerate our outpatient behavioral strategy. For 2026, we have 2 behavioral de novo projects totaling 264 beds, including a joint venture project with the Jefferson Health System in Pennsylvania.

On the outpatient side, we operate 119 outpatient behavioral locations, including 10 new freestanding centers opened under our 1,000 branches Wellness brand during 2025. We are on track to open at least 10 more branches locations during 2026 and our team continues to pursue opportunities to accelerate our outpatient behavioral growth rate and diversify our segment, payer mix and service offerings to sustain our leadership position as a provider of choice. In terms of expense management, our acute care margins improved in 2025 due to reduced contract labor costs and strong supply chain management performance.

Labor productivity also improved through a 2% reduction in same-facility acute care length of stay, and this remains an area of opportunity for us in 2026. In our Behavioral segment, margins were stable in 2025 as compared to 2024, even as we made investments in staffing capacity to relieve some of our labor constraints that have held back our volume growth in certain markets. These investments position us more strongly for volume improvements during 2026. Finally, from a technology perspective, we've deployed AI and advanced technologies in two primary domains within our business, in our operations to impact quality and patient experience and in our administrative operations to increase efficiency.

We have a strong team in place with demonstrated success in evaluating and deploying technology at scale across both acute care and behavioral health divisions. On the operational side, we fully rolled out Agentic AI to improve post-discharge care and reduce readmissions. In 2026, we are focused on rolling out new patient safety technologies in behavioral health. And in acute care, we are deploying AI across several departments and functions [Technical Difficulty] and outcomes.

On the administrative side, we enhanced our acute care revenue cycle operations by deploying AI-based solutions to improve documentation and streamline our claims appeals process. Over the next several quarters, we will be rolling out process improvements and new technologies in our behavioral health revenue cycle operations. In behavioral health, we are also leveraging AI features in an existing digital tool to streamline the referral and intake process to improve response times to new referrals and improve volumes. In closing, we are optimistic about the future because we continue to invest in our people, our facilities and in technology that will improve quality, patient experience and operating efficiency.

With that, I'll now turn the call over to Steve Filton for more details on the quarter and our financial outlook for 2026.

Thanks, Marc. I will highlight a few financial and operational trends and outline our 2026 financial guidance before opening the call up to questions. The company reported net income attributable to UHS per diluted share of $7.06 for the fourth quarter of 2025. 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 $5.88 for the quarter ended December 31, 2025. During the fourth quarter of 2025, on a same-facility basis, adjusted admissions at our acute care hospitals were flat as compared to the fourth quarter of the prior year.

Acute care volumes were impacted in part by softness in the Las Vegas market due to factors that we consider somewhat transitory in nature, including lower respiratory case levels on a year-over-year basis. Excluding the Las Vegas market, our facility acute care volumes would have increased by 1% during the fourth quarter. Same-facility net revenues in our Acute Care Hospital segment increased by 6.9% during the fourth quarter of 2025 on a reported basis as compared to last year's fourth quarter and increased 5.2% after excluding the impact of our insurance subsidiary. Acute care same-facility revenue per adjusted admission increased by 5.4% during the fourth quarter of 2025. Operating expenses continue to be well managed across labor, supplies and other expense categories.

Excluding the impact of our insurance subsidiary, same-facility acute care salaries, wages and benefits increased 4.4% and supply expense increased 1.8% over last year's fourth quarter. Same facility contract labor was 2.4% of Acute Care segment revenue or 20 basis points lower year-over-year. For the fourth quarter of 2025, our solid acute care performance resulted in 10.4% growth in Same Facility segment EBITDA and a 50 basis point improvement in Same Facility segment EBITDA margin to 14.8%. For the full year, Same Facility segment EBITDA margin improved 150 basis points to 15.8%.

Turning to our Behavioral Health segment results. During the fourth quarter of 2025, same-facility net revenues increased 7.2%, supported by a 5.6% increase in same-facility revenue per adjusted patient day and a 1.5% increase in same-facility adjusted patient days as compared to the fourth quarter of 2024. Expenses in our Behavioral Health segment increased at a slightly higher pace than revenue due to growth in headcount in certain markets where volumes have been impacted by staffing constraints. For the fourth quarter of 2025, Behavioral segment headcount growth was 3.1%. Total same-facility labor expense growth, including the increase in headcount, was 7.3% per adjusted day in the U.S.

Overall, we believe expenses were well managed during 2025, leading to total Behavioral Health segment EBITDA growth of 6.9% in the fourth quarter and 7.8% for the full year 2025. Cash generated from operating activities was $1.9 billion for the 12 months ended December 31, 2025, as compared to $2.1 billion during 2024. Cash flows during 2025 were impacted by $50 million related to an increase in receivables at our two most recent de novo hospitals and $145 million related to the timing of payments for certain Medicaid supplemental programs. During 2025, we spent $1 billion on capital expenditures, approximately 35% of which related to the de novo hospital in Florida and major expansions in Florida and California.

During 2025, we also acquired 4.65 million of our shares at a total cost of $899 million, including 1.46 million shares purchased during the fourth quarter of 2025. At December 31, 2025, we had $1.425 billion of repurchase authorization available pursuant to our stock buyback program and we had approximately $900 million in aggregate available borrowing capacity pursuant to our $1.3 billion revolving credit facility. Turning to our outlook for 2026. We expect revenue to range between $18.4 billion and $18.8 billion, representing growth of 6% to 8%. We expect adjusted EBITDA net of NCI to range between $2.64 billion and $2.79 billion, representing growth of 2% to 8%.

We expect adjusted net income attributable to UHS per diluted share to range between $22.64 and $24.52, representing growth of 4% to 13%. Our guidance assumes same-facility volume growth to be in a range of 2% to 3% for both segments for the full year 2026, although it's likely we'll be below this range during the first quarter due primarily to the winter storms, which we are currently assessing in our Behavioral Health segment and the Washington, D.C. operations of our Acute Care segment. We expect capital expenditures in 2026 to range between $950 million and $1.1 billion, reflecting the culmination of spending for several large inpatient projects that will come online during the first half of 2026. Our guidance includes several assumptions unique to the 2026 operating environment as follows: we assume an adverse pretax earnings impact of approximately $75 million related to reductions in the health insurance exchanges.

We assume that exchange volumes will decline by 25% to 30% and approximately 10% to 20% of this volume will shift to other forms of coverage with the vast majority shifting to self-pay or uninsured. The exchange headwind is concentrated in our Acute Care segment based on historical utilization patterns. For the full year 2025, exchanges represented approximately 6% of Acute Care segment adjusted admissions and slightly less than 5% of the segment's revenue. We expect a negative pretax earnings impact of approximately $35 million in our Behavioral segment associated with the recently enacted California inpatient psychiatric hospital staffing regulations that will go into effect on June 1, 2026. The regulation is expected to increase labor costs due to the need to adjust the mix of licensed nursing staff at our facility.

Our 2026 estimate includes a higher burden of recruiting and training costs and some short-term census disruption as our California operations ramp up to comply with the regulations. Beyond 2026, the ongoing costs are expected to be approximately $30 million after considering a full year of higher labor costs. Our 2026 outlook assumes a total net benefit from Medicaid supplemental payments of $1.36 billion and includes a new Nevada supplemental program that was approved this month, but does not include any other new programs pending approval. As compared to 2025, we expect the net benefit from Medicaid supplemental payments to increase by approximately $23 million.

Our 2026 outlook assumes approximately $50 million of favorability related to improvements at Cedar Hill. We assume that incremental improvements we expect to make at Cedar Hill beyond the breakeven level will be offset by start-up costs associated with our de novo hospital in Palm Beach Gardens. Finally, we expect a favorable pretax earnings impact of approximately $50 million comprised of 3 smaller and discrete items, including a onetime legal settlement recognized in 2025 that we do not expect to reoccur, operational improvements in our Nevada health plan with revenue growth at similar levels as in 2025 and modest contributions from Behavioral segment M&A completed in 2025, primarily in the U.K.

In conclusion, we're pleased to share our positive growth outlook for 2026, which assumes core growth from our consolidated operations of approximately 5%, underpinned by the strength of our markets, continued expense management and ongoing efficiency opportunities. Operator, that concludes our prepared remarks, and we're pleased to answer questions at this time.

[Operator Instructions] The first question for today will be coming from the line of A.J. Rice of UBS.

Yes. Two things. First of all, just to drill down a little bit more on the guidance for '26. I know you mentioned 2% to 3% volume growth across both the segments. Give us any flavor on what's embedded in pricing? Is it more of the same what you saw this year across the 2 segments? Are you assuming any change in managed care rates or whatever?

Sure. So A.J., I mean, I think on the acute side, our guidance implies a 3% to 4% pricing increase. That's in line. If you look at sort of the 10-year average of pricing increase in Acute Care, I think it's averaged right around 4%.

And I think that continues to be -- or that pricing is supported by a steady increase in acuity over that period that we expect will continue. On the Behavioral side, we're expecting pricing in the sort of 2% to 3% range. And we acknowledge that, somewhat lower than we've been running for the last several years. As you know, we've been expecting that price -- really strong pricing over the last several years to begin to moderate at some point as these increased contract prices have begun to anniversary, et cetera.

And I think we're starting to see that evidence. So slightly lower pricing expected in behavioral compared to the last several years, but I think also, again, in line with historical rates.

Okay. And I appreciate all the comments that Marc offered on the AI applications, and it does seem like hospitals and health systems are AI-rich environment for opportunities. The question I get asked is not an easy one, but how do you think about how that translates into operating performance in terms of financial impact of those applications? And over what time frame might we start to see that have an impact on revenues or margins, those type of things that you're calling out?

Yes. So I think as Marc described in his comments, A.J., we have focused and I certainly believe we, like most are in the early innings of this AI game. I think our initial efforts have really focused on administrative sort of efforts like within our revenue cycle management. I think Marc alluded to claims appeals and coding.

And we've used that, I think, to great effectiveness. I think really, what we're doing and otherwise, I think you also referred to post-discharge activity. So historically, a nurse would make a post-discharge follow-up phone call with a patient to ensure they're being compliant with their medications and their diet and follow-up appointment or physicians. And now we're using an AI agent to make those calls in many cases.

And so in both cases, I think we're driving efficiencies. It allows us to reduce headcount. It improves the outcomes as measured by revenue cycle metrics or reduction in readmissions, which I think Marc alluded to. So again, I think it's impossible to precisely quantify -- even precisely quantify what we've been able to achieve, but certainly precisely difficult to precisely quantify what the opportunities may be, but we think they're significant.

And our next question coming from the line of Ann Hynes of Mizuho Securities.

Within your Acute Care volumes of 2% to 3%, can you let us know what you're assuming surgical volume versus medical volume? And then with the Nevada market, how does that market do in 2025? And how do you expect it to grow in 2026?

Yes. And so I think surgical volume in 2025 lagged our overall by a slight amount. It was positive. Our surgical volume growth in Q4 was positive over last year's fourth quarter.

So we're encouraged by that. I think that our expectations for next year are somewhat similar that surgical volumes probably don't grow quite as fast as our overall volumes, but I think sync up pretty closely. As far as Nevada goes, I think Nevada in 2025 has grown in line with the rest of the acute division. I think historically, that market has tended to grow faster.

It was a little bit challenged in 2025. There's been much reporting of tourist volumes and tourist activity in Las Vegas being down in 2025. And that's impacted us, I think, to a small degree. We don't get a lot of patient activity directly from the tourist population, but obviously, it has a cascading effect. We're encouraged by the fact, however, that employment trends have remained quite stable in Las Vegas. And that historically has been the leading indicator of sort of how we're going to do and how the economy is going to do there.

And so -- and the casino or gaming industry reports, I think, pretty bullish prospects for their 2026 convention and conference bookings. So we're assuming that the Vegas market experiences a bit of an uptick in 2026.

And our next question is coming from the line of Justin Lake of Wolfe Research.

This is Anna on for Justin. Can you share what you're seeing on exchange volumes so far given there are a significant number of members that haven't paid their premiums yet? And I know that in Feb and March, the plans don't have to pay the provider on members that don't pay premiums. Are you able to see this information from plans?

And what's your level of visibility on the potential bad debt here?

Yes, Anna. So as I said in our prepared remarks, we're assuming a 25% to 30% decline in exchange volumes. That's largely based on CBO and other sort of public projections. We've seen -- we've already seen a decline in exchange volumes in the first couple of months of the year.

I don't think quite to that extent. But I think as your question alludes to, we believe that some of the early reporting on how much exchange volume has been lost is understated because the insurance companies won't report exchange volumes down until people start to miss premiums, et cetera. So yes, I mean, that's a challenge for us because we are in the position sometimes of verifying a patient's insurance with the payer and the payer verifying their insurance. And then when we bill the payer, the payer comes back to us and says the premiums haven't been paid and they don't pay -- they won't reimburse the charges at that point.

That has always been a risk for us. Obviously, it will be an increased risk in this period where there's a dramatic decline in exchange volumes. But we believe that we've accounted for that in our assumptions. But I think one of the things we -- all of us, meaning all the hospital companies have made estimates about what's going to happen with the exchanges, et cetera.

But the truth is we're going to need a few more months to really see how this sorts out what the real loss in volume is, how many of these people who lose their exchange coverage can get other coverage, et cetera. So we've made our best estimates. We feel comfortable with the estimates we've made. But I think we're all going to become -- be able to be more precise over the next few months as we get more and more accurate data.

And the next question will be coming from the line of Andrew Mok of Barclays.

Steve, you mentioned a $35 million headwind from the new California behavioral staffing requirement for 2026, but also noted a $30 million annual ongoing impact. Can you give us a bit more detail on the nature of the headwind and help us understand why the headwind from the midyear implementation wouldn't annualize into a larger run rate headwind?

Sure. So Andrew, the task before us is that the new California staffing requirements don't necessarily require us to increase our headcount overall. I think actually, we have in excess of the headcount that they're requiring. But it is a different mix of staff and is more heavily skewed to licensed professionals, particularly RNs.

So we're going to have to change our staffing models in a number of our facilities. We will hire more RNs. We think that there is some sort of upfront investment in doing that, potentially start-up costs, increased recruiting costs, et cetera. There might be, I think, as I indicated in my prepared remarks, in the first couple of months, we may not have all the slots filled, and therefore, we're anticipating potential short-term volume disruption.

But once we are fully staffed, which we think we will be at some point in 2026, then I think the ongoing costs are reduced, and we won't have those start-up and sort of, I'll call, investment and infrastructure investment costs duplicated in 2027 and beyond, which is why the annual impact in 2027 and beyond or the expected annual impact is actually a little bit less than what we're expecting for a partial year of the regulations in 2026.

The next question will be coming from the line of Ben Hendrix of RBC Capital Markets.

We've heard carriers talk a lot about accelerated behavioral trend for a while now, and it sounds like your outpatient development is addressing that. Can you talk a little bit more about where the demand is on the outpatient behavioral side in terms of the types of services and the types of services that are being offered in the development you completed in 2025 and what you expect for 2026? And then how should we think about the optimal behavioral business mix over the long term between the inpatient and outpatient?

Yes, Ben, let me answer that. This is Marc. So our outpatient strategy continues to progress. Right now, outpatient services represent about 10% of our Behavioral segment revenue.

We expect that to continue to grow. As I said in the prepared remarks, we already operate close to 120 outpatient locations where we offer either step-down services or step-in services. So for the step-down location, we have transitional services such as partial hospitalization, intensive outpatient, following an acute care, an acute psychiatric stay. And we typically operate these locations and their satellite clinics under our local brand of our inpatient facilities, and they're often close to those facility campuses.

The step-in services are for patients entering behavioral system on an outpatient basis. So people that we've not even had yet as inpatient. The payers continue to look for in-network providers with scale to offer these types of step-in services as an alternative to inpatient care. So we think our step-in model offers comprehensive outpatient services, which would include things like IOP, counseling, virtual care.

And we think the demand for that is going to only continue to grow in 2026. In a number of markets, we've now branded this under what we're calling 1,000 branches wellness. Thus far, we're in development and we expect to open at least 10 of these branches locations in '26. So I think that we have a good ramp-up already planned, and we expect that there's going to be many more opportunities to expand in all of these areas going forward.

Our next question is coming from the line of Stephen Baxter of Wells Fargo.

Just wanted to follow up on California for a couple of points there. I guess as you're kind of building up to that long-term $30 million run rate impact, does that really just reflect the kind of the changes directly on the incremental staffing side? Are you thinking that there could be any spillover impact to your base wage structure potentially related to maybe your consumer or your competitors trying to maybe hire in the same way that you are? And then as you think about potential reimbursement in California, I know California budgets are not exactly flush at the moment, but is there any prospect for potentially seeing any offset on the reimbursement side anywhere in the near future?

Yes. So Stephen, I think our, again, assumptions were the cost of replacing current staff with staff with a higher license. And we acknowledge certainly as we went through this exercise that all acute behavioral facilities in California would have to be going through the same exercise. So we did our best to project what wage inflation might be and what might be required in terms of recruitment incentives and that sort of thing.

Obviously, this is new to all of us. And so we're making certain guesses and estimates. But we think we've been reasonably conservative in our approach. Again, acknowledging that others will be going through the same process as us.

As far as reimbursement goes, your point is well taken. We will certainly make every effort to work with all of our payers, whether they be government payers, the Medi-Cal program in California or our private commercial payers to get them to acknowledge this increased cost on our part. How that will sort out ultimately, I don't know. We certainly have not forecast or budgeted anything for that, but we will certainly focus our efforts on that.

The next question is coming from the line of Jason Cassorla of Guggenheim Partners.

Maybe just stepping back for behavioral. You're expecting accelerating volumes, but a bit of deceleration in pricing growth. I guess if you look at that 2% to 3% volume and 2% to 3% rate growth as the go-forward status quo, would you still expect that to translate into organic margin expansion? Or has that equation changed in terms of how you think about margin expansion for that business?

Yes. So obviously, those assumptions, 2% to 3% patient day or adjusted patient day growth, 2% to 3% pricing growth result in a 4% to 6% revenue growth projection. We think generally that, that revenue growth level will exceed the level of the increase in operating costs. I mean we made the point in our operating -- excuse me, in our prepared remarks that in 2025, our operating costs were a little bit elevated by kind of an investment in headcount and hiring and filling vacant positions in markets where that has been a headwind or an obstacle to reaching our targeted volume growth.

I think that headcount increase will clearly moderate in 2026 and leave us at a point where I think wage inflation and other operating cost inflation should not necessarily exceed the growth in revenue, which will allow for margin expansion. And then I would just also add, following on to Marc's comments about the growth in outpatient, generally, outpatient margins are better than inpatient margins. So to the degree that we're successful in growing the outpatient business faster than inpatient, that should also help margin expansion in behavioral.

Great. And if I could follow up just quickly, I wanted to ask about the acute length of stay opportunity. You flagged it a little bit in the prepared remarks. It looks like length of stay has been coming down a little bit, still slightly above pre-pandemic levels.

Case mix has been rising, that probably offsets a little bit. But maybe can you just help a little bit more unpack in terms of AI, technology or other efficiencies that could bring that stat lower and drive better throughput? Just anything more on the length of stay would be helpful.

Yes. So a couple of observations, Jason. I mean one is, I think on an acuity-adjusted basis, and I think that's the appropriate way to look at length of stay because the thicker a patient is, the longer they're going to have to be in the hospital. But on an acuity-adjusted basis, LOS is actually below pre-pandemic levels, and I think reflects improvements that we've made.

And you make the point. I mean, there's all kinds of, I think, reporting opportunities, there are technology opportunities, better communication with our physicians. But honestly, I think probably the single biggest obstacle we faced in not reducing length of stay further is the supply of subacute capacity, whether that's in skilled nursing facilities, nursing homes, long-term rehab facilities, et cetera. There's been, I think, a lack or dearth of capacity in many markets in those areas.

And sometimes we're just holding patients waiting for an available bed or an available spot. We think that will improve over time and will continue to improve. So along with our own internal initiatives, we think the marketplace for subacute capacity will also expand.

The next question is coming from the line of Matthew Gillmor of KeyBanc.

I wanted to ask about the Medicaid supplementals. We appreciate the transparency you all provide. For the programs that are not yet approved like Florida and I think maybe California, do you have any sense for where those approval processes stand with CMS? And we were also curious if you had any visibility on the rural health transformation funding and what that opportunity could be?

Sure, Matthew. So our commentary on the Florida program has been pretty consistent, and I think it's been pretty consistent because the commentary from the state of Florida has been pretty consistent. They submitted a program or kind of a program refinement. They're expecting it to be approved.

I think it would be fair to say that it's taken longer to get approved than they expected or maybe than we expected. But they've not changed their view that ultimately the approval will be forthcoming. We've quantified the benefit to us as best as we could to be in that sort of $45 million to $50 million range once approval is obtained. And we haven't recognized it.

We haven't included in our guidance but would do so once that approval is forthcoming. As far as California is concerned, we've been also reasonably consistent in our comments there. We think that the California program faces more hurdles is not nearly as certain and its likelihood to be approved. It may need to be modified in significant ways.

And as a consequence, while we think if it is ultimately approved, it could be measurably beneficial to us, we've in no way tried to quantify that or predict how successful California will be in working with CMS to get their program modified in a way that ultimately would lend itself to CMS approval. As far as the rural program goes, we've lobbied hard and worked hard and the structure of this program is largely up to the states, and we have worked with the states in which we operate. We think that there could be a potential benefit to us. We acknowledge that it's a relatively small percentage of our facilities carry either the rural or rural referral center designation.

So we don't think that the benefit ultimately would be material. But obviously, to the degree that we could obtain any additional reimbursement, it would be positive, but not expecting it to be materially positive.

Our next question is coming from the line of Pito Chickering of Deutsche Bank.

Excluding the cash received during COVID, your leverage ratio is the lowest that I've seen for well over a decade. Is there any leverage ratio where you say enough is enough and you maintain the leverage and put the rest into repo? Or do we end the year with leverage down another 0.10x or more?

So Pito, I mean, I think our ideal leverage is in the 2x to 3x range. And to your point, we've been at the low end of that for a while. We've done so with the idea that we wanted to keep ourselves sort of maximum flexibility to respond to any opportunities that might arise. We still think that's kind of a prudent position.

We've been, as you know, a pretty active acquirer of our own shares and we'll continue, I think, to be so. We think that investing in the repurchase of our own shares is a pretty compelling investment in the current environment. But don't necessarily expect to lever up dramatically in the absence of real compelling M&A opportunities. Don't expect our leverage to go any lower either.

I would certainly make that point.

Okay. Fair enough. If I sort of stay on that point, leverage keeps sort of coming down, except for sort of one large behavioral asset out there, you guys can buy almost anything out there in the marketplace without needing to keep leverage low. I guess, sort of follow-up on the question, I guess, why keep it this low unless there's some large deals that you're looking at?

Yes. I mean part of the issue in terms of being prepared or having the capacity to do M&A is you don't know when those opportunities are going to arise. You don't know how big they're going to be, et cetera. So I'm not suggesting to you that we're keeping our leverage at a current level because of a one specific anticipated potential deal.

But I think there are a lot of interesting assets in the marketplace. And as we think about how those assets could fit into our strategy, again, we'd like to keep that flexibility available to us.

Great. And then sort of a follow-up here on just AI. Look, this has been a huge focus for investors, obviously, in the last 90 days. A lot of people talk about rev cycle management and you talked about streamlining your flow process.

Can you give us like real examples about actual efficiencies in terms of timing in cash collections and efficiencies from cost savings that this stuff can actually achieve for you guys?

Let me jump in here. I mean I think it's hard to pinpoint exact numbers for you on this. I would tell you that over the past several years, we've done a lot to accelerate our pace of technology adoption. We were an early investor with Hippocratic AI.

And we think that they are doing some terrific things in this space. We're one of the primary health systems that they're working with. And so what we get is we get a look at everything they're rolling out. We get an opportunity to pilot different things and give feedback for those different things [Technical Difficulty] will start to pay off in the coming quarters and years.

Some examples, Steve already talked about post-discharge calls and the need ultimately for less staff to do some of these things. And that's certainly already paying off in decreased expenses for us. But I think that as they roll out their various AI solutions, we're going to have a front seat to a lot of those things. And we've just been very impressed with where they're going and what they're doing.

But other things that we're looking at right now, I mean, our entire rounding process that we -- is so important to improving quality, maintaining quality, maintaining safety. We're looking to revamp that with different types of technology that we're testing right now. That could have a significant impact on us going into the future, not just on cost savings, but on our increases in quality. Hopefully, honestly, we would be able to impact positively our issues with malpractice and some things like that.

So patient safety technology is a big part of what we're looking at. And then just other things like post-discharge, bringing people into the facilities versus with our intake process, especially in the behavioral division, so we think a lot of these things have great promise. It's just hard to pinpoint exact dollars at this point.

And our next question is coming from the line of Craig Hettenbach of Morgan Stanley.

Going back to the Behavioral business, as pricing starts to normalize, I know you've done a lot of work on the hiring front, as you've outlined, can you just talk about the confidence in terms of getting back into more of a steady cadence on the volume side of things?

Sure, Craig. So I mean, I think if you look at the cadence in 2025, we find it encouraging. We've seen sequential incremental improvement in behavioral patient or adjusted patient day volume growth in each quarter of 2025. We exit 2025 within what we consider to be shouting distance of this 2% to 3% target growth range that we've set for ourselves for quite some time and have struggled to get there. But feeling confident, particularly when combined with the investments in staff and headcount that we've made in 2025, and I alluded to earlier, I think that's what gives us the confidence that, that 2% to 3% target in 2026 is definitely achievable.

Got it. And then just as a follow-up, from a capital investment perspective, any key highlights or areas for this year?

Yes. I don't think it's anything extraordinary or extraordinarily different, I guess I should say, in the sense that as we said in our prepared remarks, we've got several big new projects opening this year, a brand-new de novo hospital in -- on the East Coast of Florida, a big tower on one of our Florida West Coast hospitals, a replacement facility in Southern California that will open in the next couple of months, a couple of new behavioral joint venture hospitals opening during the year. And then I think otherwise, we're invested, I think, as Marc indicated in his remarks, in building our outpatient footprint in both businesses, but also expanding the things that are very core and central to our acute inpatient business, which is emergency room capacity, surgical capacity, surgical equipment.

None of that, I think, is terribly new or different, but it just continues to be a focus of ours.

Our next question is coming from the line of Scott Fidel of Goldman Sachs.

This is Sam on for Scott. Just curious, could you give us an update on your overall assessment of the health care policy risk, including the Medicaid work requirements and funding cuts, just your latest overall view.

Yes, Sam, I don't think any of the hospital companies have made an effort to -- I shouldn't say they haven't made an effort, but they haven't produced any estimates on what the impact of the Medicaid work requirements will be beginning in 2027 because I think it's difficult to do. We don't exactly know what the specific work requirements are going to wind up in every state. We have a sense that it's likely that the people who are eliminated from the Medicaid roles as a consequence of those requirements are likely to be less heavy utilizers of the system. But all those variables, I think, kind of remain unsolved at this point.

My guess is as the year goes on, the picture will get clarified and we'll all be able to make a better estimate. But at this point, I think it's not an accident that none of the hospital companies have really attempted to quantify with any precision what the impact of the Medicaid work requirements will be.

Our next question is coming from the line of Benjamin Rossi of JPMorgan.

Just following up on your 2026 outlook. How are you thinking about cash flow from operations this year? I know you mentioned some of the drag last year from the increase in AR related to the Medicaid supplemental payment programs. Is that just largely timing related with new programs?

Or is this baseline simply becoming larger as you're receiving more from these programs? I guess just curious if there's anything more discrete we should be considering regarding cash flow generation this year?

Yes, Ben, I mean, I think that if you go back and take a historic approach to this, historically, our cash flow from operations is equal to about 75% to 80% of our operating income less NCI. That, I think, would be our view for 2026. I don't think -- again, there are always sort of timing issues with receivable collection, et cetera. But I think using that measure consistent with the historical outcomes, I think, is a safe way to look at it.

Great. And just as a follow-up on supply trends. You have a nice percentage across supply spend as a percentage of revenue during 4Q. How would you characterize your current supply dynamics during the quarter?

And then for 2026, I know you have a sizable degree of that supply spend under multiyear fixed contracts, but do you see any additional room this year for any cost offsets across supply spend?

Yes. I mean I think as we indicated in our prepared remarks, supply costs were probably the most effectively controlled of all the expense categories in 2025. We're not necessarily anticipating significant pressure points. I think it turned out that tariffs, which were a concern potentially maybe a year ago have not really impacted our industry in a measurable way, and I don't think we anticipate that they will. There's always opportunities for us to continue to be more efficient there.

Most of those opportunities, I would describe as opportunities to work with our clinicians in their supply preference, particularly for the high-cost items. And so we remain focused in the area. But certainly, as we think about any potential areas of cost exposure in 2026, supplies are not high on that list.

And the next question will be coming from the line of Michael Ha of Baird.

On behavioral health, over the past couple of years, you've been very vocal about the benefit of DPPs, how they've made Medicaid volumes and behavioral health much more profitable. And because of that, there's been a strong emphasis on driving more of these volumes. We've seen it materialize through your stellar behavioral health pricing performance. I know today, you mentioned expectations of that to slightly normalize in '26. But that said, these DPP tailwinds are still here.

They don't come down until starting '28. So no immediate shift. So looking forward as we enter '28, can you talk about your thoughts on the durability of long-term pricing? Should we think about '28 as sort of that starting year of more incremental changes lower? Also, how might you plan to potentially shift your Medicaid volume strategy over that time?

Could that impact your long-term 2 to 3 volume target? And would any of those declines maybe be met with and offset by your outpatient business, maybe more commercial mix through that end? Sorry, a lot of questions. Overall, how are you thinking about all these different pieces?

Yes. So it's a very comprehensive question, Michael. And I think in some respects, you answered some of the questions you asked. I will say, as you noted, that while DPP reimbursement is scheduled to begin to be reduced in 2028, we still have several -- a couple of years ahead of us where the reimbursement remains intact.

And as you know, those who follow our disclosures know, it's actually been increasing over the last couple of years as either new programs are being approved or existing programs are expanding or Medicaid utilization is expanding. And so we intend to largely try and take advantage of that benefit while it's out there, while at the same time, thinking about and planning for a scenario in which that Medicaid business is not as profitable as it might be today. And as you suggested, one of the major ways we will do that is on the outpatient side. I mentioned earlier in response to a different question that outpatient margins tend to be better than inpatient margins.

And one of the reasons for that is the outpatient payer mix tends to be much more weighted to commercial than it is to Medicaid. So yes, as we continue to grow and focus on our outpatient initiatives, which both Marc and I have spent some time on describing, I think that will be a natural hedge to some degree against the DPP reduction risk that faces us in a few years.

And our last question will be coming from the line of Ryan Langston of TD Cowen.

Behavioral FTEs grew, I believe, 3.5% to 4% in 2025. You talked in the past about particular job classes being more difficult to fill. I guess how should we think about that 3.5% to 4% growth in some of those more difficult categories of the growth rate and how that translates into the 2% to 3% outlook for behavioral health growth?

Yes. We've made the point in the past, Ryan, that the behavioral staffing challenges are really different in every market. And in some markets, we're challenged with hiring sufficient nurses. In other markets, it could be therapists.

And in other markets, it could be the non-licensed professionals, the people that we call mental health technicians. It really varies. And frankly, in many markets, we're fully staffed and don't face those challenges. So I don't necessarily have a breakdown in front of me at the moment in terms of the headcount increase in 2025, exactly which staffing categories that involved.

My guess is it's sort of across the board because we hired where we needed to in each individual market. But I think the important thing from our perspective is we made a conscious decision in 2025 to really ramp up the hiring in those markets where staffing vacancies were an obstacle to further volume growth. And now having hired and filled not all, but many of those positions, I think it gives us greater confidence in meeting that 2% to 3% patient day volume growth target in 2026.

Thank you. And I would like to turn the call back over to Darren for closing remarks. Please go ahead.

Thanks, Lisa. Thank you, everyone, for participating in today's call and for your interest in UHS. Have a great rest of your day.

This does conclude today's conference call. Thank you so much for joining. You may now disconnect.