環球健康 (UHS) 2014 Q3 法說會逐字稿

Good morning. My name is Tanya, and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Health Services third-quarter 2014 earnings call.

(Operator Instructions)

Thank you. Mr. Filton, you may begin your conference.

Good morning, and welcome to Universal Health Services' third-quarter 2014 earnings call. During this call I 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 those forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2013, and our Form 10-Q for the quarter ended June 30, 2014.

I'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the Company recorded net income attributable to UHS per diluted share of $0.82 for the quarter. After adjusting each quarter's reported results for the items disclosed on the supplemental schedule included with last night's earnings release, adjusted net income attributable to UHS increased approximately 26% to $137.5 million or $1.36 per diluted share during the third quarter of 2014, as compared to $109.5 million or $1.10 per diluted share during the third quarter of last year.

On a same-facility basis in our Acute Care division, revenues during the third quarter of 2014 increased 7.9% over last year's third quarter. The increase resulted primarily from a 4.1% increase in adjusted admissions to our hospitals owned for more than a year, and a 3.6 % increase in revenue per adjusted admission. On a same-facility basis, operating margins for our acute care hospitals increased to 18.3% during the third quarter of 2014, from 14.4% during the third quarter of 2013.

On a same-facility basis, net revenues in our Behavioral Health division increased 6.2% during the third quarter of 2014, as compared to the third quarter of 2013. During this year's third quarter as compared to last year's, adjusted admissions to our behavioral health facilities owned for more than a year increased 5.4%, and adjusted patient days increased 2.1%. Revenue per adjusted patient day rose 2.9% during the third quarter of 2014 over the comparable prior-year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 27.6% during the third quarter of 2014, as compared to 27.3% during the third quarter of 2013. Our cash from operating activities increased approximately 25% to $231 million during the third quarter of 2014, as compared to $185 million in the third quarter of 2013. Our accounts receivable days outstanding decreased to 57 days during the third quarter of 2014, as compared to 59 days during the third quarter of 2013.

At September 30, 2014, our ratio of debt to total capitalization decreased to 48.9%, as compared to 52.9% at September 30, 2013. We spent $123 million on capital expenditures during the third quarter of 2014, and $309 million during the first nine months of this year.

In late September 2014 we acquired the stock of Cygnet Health Care Limited for a purchase price of approximately $327 million. Through this acquisition, we have added a total of 18 facilities located throughout the United Kingdom, including 16 inpatient behavioral health hospitals and 2 nursing homes with a total of 734 beds.

Cygnet has a national footprint and is one of the largest independent providers of behavioral health facilities in the United Kingdom. They are the leading specialist mental health provider in the UK, which includes services for children eating disorders and autism, among others. They have outstanding customer relationships and a well-established reputation for excellence. The Cygnet facilities generated aggregate revenues of approximately $161 million during the 12-month period prior to our acquisition.

During 2014 we have opened a total of 242 new behavioral health beds at some of our busiest facilities. We expect to complete construction and open another 258 beds in the fourth quarter, including the opening of the 102-bed Quail Run Behavioral Health Hospital in North Phoenix.

Near the end of the second quarter of this year, we acquired a commercial health insurer headquartered in Reno, Nevada. Included in our operating results for the third quarter of 2014 is approximately $48 million to $50 million of revenues and other operating expenses recorded in connection with its operations.

During the third quarter of 2014 our Board of Directors authorized a stock repurchase program, whereby from time to time as conditions allow, we may spend up to $400 million to purchase shares of our Class B Common Stock on the open market or in negotiated private transactions. In conjunction with this program, during the third quarter of 2014 we repurchased 227,000 shares at an aggregate cost of $25.2 million. I will be pleased to answer your questions at this time.

(Operator Instructions)

Justin Lake, JPMorgan.

Thanks, good morning. Steve, one question here. Can you give us an update on the benefits of reform in the quarter versus the Q2 run rate? And then maybe some comments on how to think about a framework for 2015 ACA benefits for the Company? Thanks.

Sure, Justin. So I think what we had said in our second-quarter call, and I think we acknowledge that our analysis was limited by a number of factors, and so it was not absolutely precise. But we estimated that of the Acute Care improvement year over year, somewhere around 35%, 40% of it was attributable to the Affordable Care Act and the favorable impacts of that.

Another 35% to 40% attributable to an improved economy in many of our local markets. And then finally, another maybe 15% to 20% attributable to local market factors, market share increases, that sort of thing. I think we felt like for the most part, those percentages held relatively steady in the third quarter as well.

As far as thinking about the impact of reform on next year, obviously I think we're going to wait, as I'm sure most of our peers will, to see what the enrollment data looks like. Obviously this year, open enrollment for exchange products will be completed by the end of the year.

So by the time we give our guidance at the end of February, we should have a pretty decent picture of new enrollment, both from a Medicaid and an exchange perspective. And we'll base our 2015 estimates in part on that data, much as we did this year, although the data was not available until later in the chronology this year. So that's how we'll go about framing our 2015 ACA impact.

I'm sorry -- one clarification, Steve. You said the breakdown of the growth was similar in terms of how much was ACA in the third quarter versus the second quarter. Obviously third-quarter growth was great, but not as significant as the second quarter's growth, especially in the Acute Care business. Should I take that to mean your ACA benefit in your mind declined in terms of absolute dollar benefit sequentially?

I think that's right, Justin. We talked a little bit about the fact that we had expense in the second quarter, because our same-store revenue growth in the second quarter, which was 11.5%, was so significant that there was some aspect of that, that was perhaps sort of one-time-ish in nature. Whether that was because of the sort of bolus of enrollment that occurred in the second quarter, or some pent-up demand that was exercised in the second quarter.

But it certainly appears as if the growth rate that we realized in the third quarter of 7.9%, while still very strong, seems to us to be a more sustainable rate going forward. So yes, I think we felt like that real strong revenue growth that we saw in Q2, whether it was attributable to ACA or an improving economy, decelerated just a little bit in Q3.

Thanks for the color.

Brian Zimmerman, Goldman Sachs.

Hi, thanks and good morning. I was hoping you could give us a little bit more detail on what you're seeing in terms of exchange volumes versus Medicaid expansion. It seems to have done so. Just any more granularity there would be helpful.

Sure, Brian. I think that we continue to believe that in 2014 the larger portion of the ACA impact is from Medicaid expansion. We've seen our Medicaid volumes increase by double-digits, certainly in that 12%, 13% range, year to date. And exchange or commercial volumes increased -- definitely increased by a measurable amount, but by certainly less than that. Again, difficult to be terribly precise about it, but I think we would attribute maybe two-thirds of the ACA benefit to Medicaid expansion in 2014, and maybe a third to exchange expansion or exchange enrollment.

Okay. And then, can you give us a bit more detail on what you're seeing in terms of acuity and payer mix in the quarter?

Again, I think from a payer mix perspective, the trends are similar to what we've seen all year, which is a relatively measurable decline in uninsured volumes. Uninsured volumes are down probably 7% to 8% for the year, and those are offset by an increase in both Medicaid and commercial volumes, as I just noted. And those trends continued into Q3, and I think our expectation is they will continue into Q4 as well.

All right, thanks a lot.

Darren Lehrich, Deutsche Bank.

Okay. Thanks, good morning. I wanted to ask two things here. The first, you mentioned the acquisition of a managed care plan, and I'd just be curious to get a little bit of flavor for what you're doing with that plan, specifically inside this quarter. Can you just talk a little bit about the earnings impact? I know you gave us a revenue number; obviously that's a lower-margin business. Were there any transition costs of any sort? And help us put that into perspective.

Sure. So from a strategic perspective, Darren, the acquisition of the health plan is really part of the broader preparation and foundation that we're building for the more integrated -- or the demands for a more integrated healthcare delivery system that we anticipate -- and I think, frankly, most of our peers anticipate -- is going to be required in the future. And so as we continue to form more integrated relationships with our physicians and some of our long-term care providers, et cetera, and other niche providers, we also wanted to have the option in at least certain markets of being able to offer an insurance product -- in some cases a medicated manage insurance product.

And as we thought about how best to create that infrastructure and capability, we looked at potentially building it on our own from scratch or buying it. And ultimately decided that buying a small insurance company -- and the one we chose was in a market that we already operate in, in Reno, although I don't think there was anything terribly significant about the location itself. Because I think for the most part, we would like to be able to transform that or transmit that capability to other markets. So that was the driver behind the decision.

You know, as I indicated in my remarks, approximately $50 million of revenues and expenses in the quarter are slightly dilutive at the EBITDA line. And I think we anticipate that it will remain that way for the first maybe 18 to 24 months of operation, at which point we think it would become accretive or positive from an EBITDA perspective. But again, the real goal here is not to create an insurance business that's going to on its own become terribly profitable, but really to help us drive some of the results in our markets and alignments that we're really looking for.

Okay. And then, just the EBITDA dilution -- should be thinking -- what, a few million? Or is there something --

Yes, I would say on an annual basis in that $5 million to $8 million range.

Okay, that's helpful. And then I wanted to ask also here about the Cygnet transaction. With regard to the skilled nursing facilities, those two facilities, will you continue to operate them? Or how should we think about that in terms of the enterprise you're buying?

And then, what do you think the EBITDA contribution for Cygnet can be on a run rate basis? And then just specific to guidance, it was not implicitly in the original guidance, so how should we put the annual guide into context?

So trying to work backwards. I think when we announced the Cygnet transaction, we talked about a margin profile for that business that was fairly similar to our own, which I think translates to something like $10 million to $11 million of incremental EBITDA a quarter. And I think also translates to something like $0.10 to $0.15 of EPS accretion in the first year of operation. So to your point, Darren, with a quarter of that to be realized in the fourth quarter, we didn't think those numbers were material enough to change our operating guidance, given any other moving parts that we might have.

And then as to your first question about the two nursing homes that the Company owned, that's a long-standing -- those are long-standing facilities that the Company owned, not necessarily an indication of a business that we're looking to expand, et cetera. I don't know that we're in a rush to divest any the Cygnet facilities, but I don't think we also have any desire to expand the nursing home business.

Great, okay. Thanks a lot.

Kevin Fischbeck, Bank of America.

Okay, thanks. So a couple questions. I want to go back to your comment about how the reform benefit in Q3 might be a little bit less than the reform benefit in Q2. If I remember correctly, your adjusted admission number was better in Q3 versus Q2 on a more difficult comp. So trying to understand -- it sounded to me like you're saying that there's pent-up demand in Q2 that might have inflated the benefit, and that came back to normal. Where would we see that if not in the volume number?

Well, again, Kevin, what I was referring to was the fact that our same-store revenue growth in Q3 was some-360 basis points better than it was -- that our revenue growth in Q2 was 360 basis points better than in Q3. And to your point, if volumes are the same, then obviously it's in the revenue per unit, and that becomes a mix issue.

And again, to be absolutely fair about it, I'm not sure that we can specifically identify why the mix was so good in Q2 and returned, in our minds, to a more normal range in Q3. But I think the things or the dynamics that we speculated on was potentially the impact of utilization occurring as enrollment incurred, whether it was Medicaid or commercial, or the fact that perhaps there was some bolus of pent-up demand among those newly insureds.

Again, whether they were newly insured as a result of an improving economy or of the ACA, we also had a little bit of -- as we had disclosed in Q2 -- some catch-up -- Texas reimbursement that drove those numbers a little bit as well. I think it's just the issue of trying to offer an explanation of why that same-store revenue growth was somewhat higher in Q2 versus Q3.

Okay. In the past, when you've talked about why you think it's 35% to 40% reform, and 35% or 40% economy, you talked a little bit about performance and expansion versus non-expansion states. Can you talk a little bit about what happened maybe in Texas versus Nevada?

Yes, I'm not sure that -- I do think another dynamic that is affecting that slight deceleration in revenue growth is the fact that the Las Vegas market and the economic improvement in the Las Vegas market that drove higher revenues was something that we began to experience in the middle of 2013. So by the third quarter of 2014 we were clearly starting to lap or anniversary that improvement and that comparison. Consequently, it's become a little bit more difficult.

I think we're still clearly ahead in the third quarter of 2014 versus 2013 in Las Vegas. But probably further ahead in some of the other markets like Texas and California, whose improvement started later and really didn't start until 2014.

Okay. This is just from the question before, but did you comment on transaction costs around Cygnet in the quarter?

Oh, I'm sorry. No, I did not, but there were no significant transaction costs in the quarter for Cygnet.

But will you have any in Q4?

We had basically legal fees and some related transaction fees, but no fees for an advisor or anything like that.

Okay, great. Thanks.

Frank Morgan RBC Capital Markets.

Yes, just to follow up on that last question. You were starting to talk a little bit about Texas, given that the recovery in Vegas area lapped. But I was hoping you could go around some of the other markets and maybe comment on those, where they are, and maybe give us some color on how long you think the runway is in the recovery. Is there anything different about how long we should expect the recovery in Texas and some other states? How long should that be sustained compared to what we saw in Vegas?

And then secondly, likelihood of a California provider tax hitting in the fourth quarter? I know it's not in your guidance, but do you still think that's a likelihood? And is that still like a $9 million or $10 million kind of number?

Sure. So again, trying to take it backwards, and at the risk of forgetting something as I work my way back. The California provider tax we did quantify as having a value to us of about $9 million or $10 million annually. As we said when we offered our original guidance early in the year, we did not include it in our original guidance, we did not include it in our revised guidance. And specifically because it was pending CMS approval. And while we ultimately expected that CMS approval to be granted, it was difficult for us to project or predict when that would happen, and et cetera.

And I think that's still the case. So we continue to hope that we get CMS approval and that we get those monies, but I have not projected that in our revised guidance, and I think we'll continue to take that position.

As far as your other question, Frank, about the individual markets. Again, I think that what we've seen -- and we commented on this after the end of our Q2 reporting -- was, we've seen strength in all of our markets. And I think that strength can be attributable to both Medicaid expansion in places like California and Nevada and DC. It can be attributed to an improving economy in a number of states, including and I think notably Texas, as well as exchange enrollment in a number of states, including Texas and California.

I think our sense is that those benefits-- that is the people who have enrolled in insurance plans, whether they be Medicaid or exchanges as a result of the ACA or people who have gotten or maybe even re-entered the insured market because they've returned to the job force, et cetera -- I think we think those benefits definitely continue for the most part into 2015. I think what we're not necessarily sure of is to what degree there will be new enrollment and ACA enrollment in 2015.

I think that was the context to my answer to Justin's question earlier. And I think the other piece that is obvious is, there is initial benefit as these uninsureds re-enter the insured marketplace. And while that benefit is sustained, it doesn't continue to incrementally increase.

So while we're starting to lap the Las Vegas benefit in Q3, and maybe -- and then I think from here on out, we won't lap the other benefits that we started to enjoy in the beginning of 2014, until next year. But there will be some element of that occurring next year.

Okay. One final, and then I'll hop off. Just looking at the implied range for the fourth quarter, given that you're reaffirming guidance -- a pretty wide range there. I think it's something like $127 million to $157 million. Anything we should be mindful of and considering as we look at that wide range and try to hone in on a final number? Just anything we should be aware of? And then I'll hop. Thank you.

I don't think so. Obviously it was an intentional decision on our part not to narrow the range. I think we still continue to believe that there's a decent amount of volatility in the market, et cetera. But generally, are comfortable that we will meet our original range, and I'm not sure that any further commentary was intended or required.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning. Just want to go same-facility side of things. You had sizable improvement in the acute care and a bump up on the behavioral side. But when I look at in aggregate, we didn't see the same level of margin pull-through or improvement. So what outside of the organic is preventing the better margin performance? I know you mentioned the Reno health plan. But is there anything else in terms of corporate overhead or other cost that's impacting the margins?

Yes, Ralph, so we had 7.9% same-store revenue growth in our acute care business and an almost 400-basis point improvement in margins. I realize that the audience can be sometimes pretty tough. But I think we consider that to be pretty strong performance on the behavioral side, where we already have very robust margins. We had a 30-basis point improvement in margins. Again, I think we felt like both of those results were well within our expectations.

I think when you compare the acute business sequentially to last quarter, again, I'll just go back and highlight the fact that the results that we posted in Q2, with an 11.5% increase in same-store revenue, were a little better than what we posted with a 7.9% increase in revenue. That's just the nature of the model. But again, I think the third-quarter results were well within our expectations. And honestly, I don't know that we can do a whole lot better than that.

No, that's fair, Steve. What I was asking more was on an aggregator or consolidated basis, as opposed -- I mean, the same-store numbers were clearly strong from the Q and a behavioral standpoint. The pull-through wasn't there from a total margin perspective. So I'm just trying to reconcile. And I know the Reno piece, the Reno health plan, probably to your point earlier, dragged it down. I was just wondering, are there other corporate overhead or other costs that didn't allow you to show through better on the consolidated margin line? Not on the same-store line.

No, and I don't think there are, Ralph. Nothing of any material amount.

Okay. On the behavioral side, you showed continued momentum and strength in the revenue there, driven by the volume side. Any thoughts on drivers of that? Do you think we're starting to see some parity benefits take hold, or do you still think it's too early on that front? And then, how you expect that to play out in 2015.

I mean, the pace of revenue growth has picked up in behavioral as the year has gone on. I think we were in the 3.5% range of revenue growth in Q1, and then a little under 6% in Q2 and a little over 6% in Q3. And again, in much the same way and maybe even a little bit more so, it's difficult for us to precisely identify either an ACA or a mental health parity impact in the behavioral space. But I think the sense in Q3 was that maybe we started to get a little bit of benefit, not terribly material, but a little bit of benefit from one or both of those dynamics.

Certainly I think we had entered the year with the notion that our behavioral business would grow by about four 4.5%, 5% same-store revenue. So we've done a little bit better than that in the last two quarters, and I think there's a general inclination to believe that a little bit of that is coming from reform/parity.

Okay. And then my last one. Did you have any headwind from Texas Medicaid waiver cuts, or the deferral around that?

Yes, so I think that question is prompted by the ACA announcement that they had two -- I'll call it non-recurring revenue items -- or will have in the quarter. One is, they recognized their RAC settlement in the third quarter. We did not do that. We will recognize it in the fourth quarter when we receive the settlement or sign the settlement. That number is not terribly material. I think it's probably in the $5 million, maybe a little bit lower range.

And then [ACA] announced that it was reversing either some or all of its Texas uncompensated care revenue. We did not do that, in part because we are not in the same counties that CMS targeted with their deferral. We're not in any of those same counties and so we continue to record our Texas uncompensated care revenue at the same rates that we have been.

Okay, that's helpful. Thank you.

Whit Mayo, Robert Baird.

Thanks, good morning. First question was really just on Cygnet. Will that have any meaningful impact on your tax rate looking out over the next year? And how should we think about the growth opportunities in the UK, and what's similar and dissimilar versus the US market?

Sure. So from a tax rate perspective, the UK effective tax rate is much closer to 20% than the high-30%s that we incur here in the US. And we should continue to enjoy that lower tax rate as long as we don't repatriate those monies or affectively bring them back to the US. So I think in the short and intermediate term, the expectation is that on those Cygnet earnings, we will enjoy a lower effective tax rate.

As far as the growth opportunities, I think when we announced the deal, we articulated the notion that one of the things that drove us to enter the UK was the opportunity to grow in ways that may becoming a little bit more difficult in the US. We've got a bunch of facilities now in the UK -- 18 facilities -- that are mostly operating at very high occupancy rates. So we have the same organic capacity expansion opportunities that we have here in the US.

I think we also have the opportunity to acquire other facilities in the UK. And while we have those same opportunities here in the US, the opportunity to do that in the big way in the US is certainly becoming more limited. And also we're restrained because we have such a significant footprint with our behavioral facilities here in the US, that in many markets and with many acquisition opportunities, we are limited by some FTC and similar restrictions that obviously we don't have in the UK.

So we're very excited about the opportunity. Not only as I articulated in my comments, to have acquired this very well-run behavioral business in the UK, but to have also acquired a platform that I think will allow us some of the robust growth in the UK that we've enjoyed here in the US over the last few years.

Is there a range for organic revenue growth and inorganic revenue growth that you think is reasonably achievable out over the next two to three years?

In terms of the inorganic or the M&A activity, we've always been of the mind that we never really try and frame that or guide to it, because we always have the view that we're going to be opportunistic about those opportunities. If there are compelling opportunities to earn an above-market return, then we're going to pursue those aggressively. And frankly, if there are not, then we'll be judicious about it.

As far as the organic growth, I think that our activities here in the US, where we were adding something like 3% to 5% on the incremental bed base here in the US that we've been doing for seven or eight years, I think that's probably not an unrealistic way to think about what we might be able to do in the UK.

Okay. And my math might be off a little bit, but Temecula looks like it's probably off to a pretty good start. Looks like the third-quarter revenues may have in fact doubled over the second quarter, and it does appear to be EBITDA-positive. So just any update on that hospital, how it's trended with your expectations?

Yes, I don't have those numbers right in front of me, Whit, so I'm unable to confirm what you are speculating. But I will say that in general -- which I have said on our previous calls -- our California results have really been very positive this year. We tend to look at the overall -- what I'll will call the overall Riverside County market that Temecula is part of. And certainly that has exceeded our expectations.

Temecula itself is, as we expected, ramping up. And again, I don't have it right in front of me, but I think it might be a little bit short of our internal expectations. Although as I said, I think the overall market is clearly ahead of our expectations.

Got it. And one last one on buybacks, and I know it's less than a formality to extend or increase your authorization. But how do you think we should be thinking about the pace of buybacks over the next 6 to 12 months? Thanks

Well, I want to put it into context. When we announced the buyback in late July, we did so with the notion that we really felt our leverage levels were really as low as we wanted or needed them to be, and certainly didn't intend for them to get much lower than they were at that time. Now, at that time, we were not at all certain that we were going to do the Cygnet deal. Obviously two months after the announcement of the share buyback, we deployed $327 million of capital to acquire Cygnet. So in that sense, I think we had some capital deployment that we were not anticipating.

And so our basic approach to share repurchase will be much like we articulated at the time. And that is, we view share repurchase as another opportunity for us to deploy capital. And we will compare that to the attractiveness of both organic and inorganic opportunities we have, and we'll continue to make that judgment as we move along.

Thanks, Steve.

Josh Raskin, Barclays.

Hi, thanks, good morning. First question, just on the behavioral side. The revenue per adjusted admission trends have obviously been zero-ish numbers for a pretty long time. Are we getting to a point where length-of-stay and some of the other impacts there are going to start turning at some point? Obviously the revenue growth was very strong on the behavioral. But just curious on the revenue per adjusted admission.

Yes, Josh I think that we've been facing this length-of-stay challenge for some time. And while I think it is reasonable and rational to expect that at some point it will level off, we quite frankly -- and I'll say, I personally haven't been very good at predicting when that will be.

So the approach that we took this year is, we're going to assume that length-of-stay continues to decline at this 3% to 4% rate that it has been. Until we really see some evidence over the course of a couple of quarters, at least, that, that's not the case and it really has leveled off. To be fair, I just don't think we're there yet. Although certainly at some point, we think we will see that.

I think you described the behavioral dynamic pretty well, in the sense that we're seeing very steady, reliable revenue growth and volume growth, and we've seen that for a while. I think the real upside, as you suggest, at least to some degree in the behavioral business, occurs when either that length-of-stay levels off -- which we assume will happen at some point -- and/or we start to get a benefit from reform and/or parity.

And as I suggested in some earlier comments, maybe we started to get a little bit of that in Q3. But I think we feel like and have always felt more like we would start to see a more measurable benefit in 2015 and beyond.

That makes sense. And last question. On the fourth quarter, I know you guys are confirming the guidance, which obviously is a wide range. But anything we should think of that's unusual from either a seasonality or a sequential change in the fourth quarter that would be atypical, relative to what we've seen in the past for the fourth quarter?

No. Obviously, the normal seasonality should be present, but other than that, no. I don't think there's anything that we know of that people should be thinking about in terms of their expectations for the fourth quarter.

Okay. Unless California provider or something like that happens?

Right. That would be obviously something we are not anticipating at the moment.

Okay, all right. Thanks, Steve.

A.J. Rice, UBS.

Hi, everyone. Maybe just a couple quick ones here. When you think about looking ahead to 2015 and ongoing reform benefit, obviously there's some discussion about potential states expanding. I don't know if you have any particular view on states, that if they expand, that would be particularly helpful to you -- that are likely to expand. Also though, there's clearly the exchange population, and there'll be some natural growth there.

But I'm also curious -- we've got some new -- some of the managed care guys are going to be more aggressive next year. Is there anything you're doing in terms of new contracting, re-contracting, approaching that business, that's worth noting in terms of 2015 and its potential benefit to you?

Sure, A.J. As far as the expansion -- further Medicaid expansion goes, the two states that are significant to us that have not yet expanded are Florida and Texas. I'm not sure that my commentary on those states is any more valuable than anyone else's. They're big states and people are following the developments there.

I don't think either of those states is about to eminently expand Medicaid, so we'll follow that along with everyone else. But those are clearly the two states that continue to -- or would make a difference for us, if they did expand.

As far as next year goes and exchange enrollment, I don't know that we're seeing a whole lot of new developments. I think we anticipated that maybe we would see a greater move to narrower networks next year. I don't know that we are seeing that.

I think like all other providers, we are having developing conversations with our managed care providers about changes in contracts to move away from fee-for-service reimbursements and to some sort of fee for value proposition. But I think those developments continue to be relatively slow developing. And I don't think our anticipation is that in 2015, we will have a significant amount of our reimbursement that will be new or different from our traditional fee-for-service.

Okay. And then, we talked around some of the growth opportunities in the UK with the Cygnet deal. I think one of the things that's been thrown out is that there are other properties held by the private equity -- held by different private equity groups, and there might be opportunities down the road for bigger transactions as well.

In your thinking about that, would you say we've got to run Cygnet for a while and get comfortable with the market? Or if one of those bigger transactions came along fairly quickly, would you guys be comfortable, feel like you have enough of an understanding of the market to go for that?

Yes, A.J., I think our experience is, opportunities present themselves when they present themselves. So ideally, I would echo the position that you just articulated. We'd certainly like to be able to run Cygnet for a while, get used to the new market. But on the other hand, we're very comfortable with the experienced management team that we have in place there.

And so I will tell you that we're evaluating opportunities as they are rising in the UK, and we'll continue to do so. I don't think we will be limited by an absolute prescription that we have to wait. We're going to try to do what we think is right for that investment there in the UK.

Okay. Thanks a lot.

Ana Gupte, Leerink.

Thanks, good morning. I just want to follow up, Steve, on the comment or the attribution on [peer] mix. I think you said two-thirds is Medicaid, one-third is exchanges. Have you been able to see any difference between the exchange membership that came on board in April and May, which was more late enrollment, probably lower acuity? Any observations there?

I think I would say two things, Ana. My two-thirds/one-third comment was a year-to-date comment. I think that earlier in the year, in the first quarter, it was really more heavily weighted to Medicaid. And then in the second and third quarters, it began to swing with a little bit less weight towards Medicaid and more to commercial, as the commercial enrollment increased. And again, I suspect that dynamic continues into Q4.

As far as acuity -- and I know others have commented a little bit differently -- but I think for the most part, we feel like the acuity of our newly enrolled ACA patients -- whether they be Medicaid or commercial patients -- has been largely reflective of our existing insured population, and not terribly different.

And have you been able to distinguish -- with your systems, can you tell if it's, say, commercial life or if it's an exchange life, at this point?

Ana, I think from the beginning, we've said that in some cases we feel we can do that very precisely, and in others it is not so clear. Which is why whenever we've given ACA impact estimates, we've given a fairly broad range, because it is not always absolutely identifiable and easily and objectively identifiable.

Okay. One last question. It sounds like the exchange rates are looking still pretty good and the contracts are fairly long-term. Have you had any data so far to see whether collectibility of deductibles now might be an issue and put some pressure on the margins?

I think that our accounting has anticipated the idea that the collectibility of [cultures] and deductibles on those exchange plans might be less than what we have experienced historically. I don't know, so I think our accounting has been appropriately conservative in that regard. I don't know that we have enough actual experience to really make that statement definitively, however.

Got it. Thanks, Steve. Appreciate it.

(Operator Instructions)

Chris Rigg, Susquehanna.

Good morning. I got in here a little bit late, so I apologize if this was asked. But I know you talked about Reno in a little more detail, relative to what was in the second-quarter 10-Q. It looks like the capital being allocated there is coming in a little bit more significant than what I would have expected. And so would just love some sort of qualitative -- a better qualitative understanding as to the strategic rationale there.

Is it entirely due to market dynamics capitation or something like that? Or is this a beta test for something that could become more significant in the future?

We did talk about it a little bit, Chris, so I'll be brief. But I think it is really more the latter. First of all, it is not really at all specific to the Reno market; that just happens to be where the plan is located.

I think it's really to give us the capability as we think about this integrated healthcare delivery system of the future, with closer relationships with physicians and other long-term care niche providers. And I think the ability in some markets to be able to offer an insurance product -- maybe a Medicare Advantage insurance product -- we think is just a worthwhile capability to have. That's what really drove the desire to have this -- what I'll call insurance infrastructure or platform.

Okay. And then, just on the comments on leverage. What is the internal target these days? Or what's the level you'd like to be at going forward?

I don't know that we have a very specific target. I think if you look at our history here, we were comfortable levering up to do the PSI deal, to a little bit over 4 times debt to EBITDA. That was obviously an extremely attractive and perhaps a fairly unique deal. On the other hand then, when we levered that down into close to the low-2s, we clearly felt that was about as low as we wanted or needed to go.

So certainly within that range. And I appreciate the fact that it's a fairly broad range, but we're certainly comfortable operating within that range. And again, we'll operate within that range and be responsive to compelling opportunities as they arise.

Okay, thanks a lot.

There are no further questions at this time. Do you have any closing remarks?

No. Just want to thank everybody for their time, and look forward to speaking again next quarter.

This concludes today's conference call. You may now disconnect.