環球健康 (UHS) 2015 Q2 法說會逐字稿

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services second-quarter 2015 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Steve Filton. Sir you may begin.

Thank you, Regina. Good morning. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services' results for the second-quarter ended June 30, 2015. During this conference call, Alan and I will be using words such as believes expects, anticipates, estimates, and similar words that represent forecast 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, 2014, and our form 10-Q for the quarter entered March 31, 2015.

We would 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 $1.80 for the quarter. After adjusting each quarter's reported results for the incentive income and expenses recorded in connection with the implementation of electronic health record applications at our acute-care hospitals, as disclosed on the supplemental schedule included with last night's earnings release, adjusted net income attributable to UHS increased approximately 20% to $186.6 million, or $1.85 per diluted share, during the second quarter of 2015, as compared to $155.6 million, or $1.55 per diluted share, during the second quarter of last year. On a same-facility basis in our acute division, revenues during the second quarter of 2015 increased 8.4% over last year's comparable quarter. The increase resulted primarily from a 5.7% increase in adjusted admissions to our hospitals owned for more than a year, and a 3.2% increase in revenue per adjusted admission. On a same-facility basis, operating margins for our acute-care hospitals increased to 19.8% during the second quarter of 2015, from 18.7% during the second quarter of 2014.

On a same-facility basis, net revenues in our behavioral health division increased 5.1% during the second quarter of 2015, as compared to the second quarter of 2014. During this year's second quarter as compared to last year's, adjusted admissions to our behavioral health facilities owned for more than a year increased to 4.2%, and adjusted patient days increased 0.6%. Revenue per adjusted patient day rose 4.1% during the second quarter of 2015 over the comparable prior-year quarter. Operating margins for our behavioral health hospitals owned for more than a year were 28.5%, and 28.4% during the quarters ended June 30, 2015, and 2014, respectively. For the six months ended June 30, 2015, our cash provided by operating activities increased approximately 16% to $532 million, over the $458 million generated during the comparable six-month period of 2014. Our accounts receivable days outstanding increased slightly to 54 days during the second quarter of 2015, as compared to 53 days during the second quarter of 2014. At June 30, 2015, our ratio of debt to total capitalization decreased to 42.8%, as compared to 47% at June 30, 2014. We spent $81 million on capital expenditures during the second quarter of 2015, and $171 million during the first six months of 2015.

Based upon the operating trends and financial results experienced during the first six months of 2015, we are increasing our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2015, to $6.75 to $7.15 per diluted share. This revised guidance, which excludes the expected electronic health records impact for the year, represents an increase of approximately 9% to 10% from the previously provided range of $6.15 to $6.55 per diluted share. This guidance range, which is subject to certain conditions including those set forth in last night's earnings release, also excludes the impact of future items, if applicable, that are non-recurring or non-operational in nature, including items such as, but not limited to, gains on sales of assets and businesses, costs related to extinguishment of debt, reserves for settlements, legal judgments and losses, impairments of long-lived assets, impact of share repurchases, and other material amounts that may be reflected in our financial statements that relate to prior periods.

We would be pleased to answer your questions at this time.

(Operator Instructions)

Matthew Borsch, Goldman Sachs

Yes, good morning. Can you hear me?

Can hear you fine.

Okay. I wanted to ask if you could comment on the factors impacting pricing on the acute care side, and what your outlook is on that front for the second half of the year?

Sure, Matt. The 3%-plus increase in revenue per adjusted admission was somewhat lower than we ran in the first quarter, but still very much within our expectations. I think it continues to be driven mostly by an improved payer mix, less uninsured patients. Clearly, our total uncompensated care declined for the quarter, as it has for the last six quarters now. But we're also -- I think in the second quarter had a pretty difficult comparison with the second quarter of last year. Again, we're pleased with that 3%-plus revenue per unit growth.

A lot of it being driven by increased government business, Medicaid, more Medicaid patients, as a result of the continued Medicaid expansion in those states that are participating. Also, increased Medicare utilization, which we reported as well in the first quarter of last year. Not sure I have a terribly insightful explanation for that, but I know that some of the managed care companies have reported a similar dynamic. But we definitely saw increased Medicare utilization in the quarter, as well. All those factors contributed to the acute-care revenue per unit growth.

Wouldn't the -- I'm sorry, missing something here -- but wouldn't the higher Medicaid volumes displacing charity care uninsured, that make sense how that's going to positively impact the revenue per unit, but on the Medicare side is that the same mix, even though obviously Medicare isn't expressly offsetting uninsured? I mean, Medicare certainly is lower than commercial when you think about the pricing mix?

I think you make the right point, and I probably should have been clear, Matt, so yes. To the degree that we've got increased insured business, whether it's government or commercial, versus uninsured business, clearly that's driving the overall revenue per unit up. To the degree that we've got more Medicare and slightly less commercial, that tempers it some. Yes, that's correct.

Okay. Sorry, I just wanted to make sure I wasn't missing something. One last. In terms of the incremental volume improvement -- and you made the comments on Medicare, which is interesting, but do you still generally see that being two-thirds core economy and one third ACA?

Matt, we talked about this I think in Q1. I think from our perspective, as each quarter passes we view the exercise of trying to parse out where volume growth is being generated, whether it's ACA-related or economy-related becomes more and more difficult, and honestly from our perspective, less and less meaningful. I think in this quarter we effectively stopped doing that analysis, and really are much more interested in things like geographies and service lines and payer mix and that sort of thing, and really have focused a lot less on trying to parse out exactly what's ACA related.

Okay, fair enough. Thank you.

Sarah James, Wedbush Securities.

This is Michael Ha on for Sarah. Following up on --

Please speak up.

Hi, can you hear me?

Yes, that's better.

This is Michael Ha for Sarah. Following up on Matt's question, same-facility acute care adjusted emissions growth grew by 5.7% -- the same growth in both 1Q and 2Q. In 1Q, you mentioned those numbers, especially volume counts would be difficult to sustain moving through the year. How should we be looking at this for the back half of the year?

Look, and I wish we had perfect insight into that dynamic. You're absolutely right. We've run 5.7% adjusted admission growth for the first half of the year. That is a really significant improvement over what we've been running. But I think if you even look at it in the broader context and look at it back over multiple years, and a decade or two, that's at the high end that our business has run at in its best days. I think to some degree we have the view that it's going to be difficult to sustain that level of growth. We obviously will work hard to do so, and are focused on doing it. But I think to be realistic about it -- and I think in the way that we crafted our guidance for the balance of the year, we've presumed that growth slows some.

I was speaking with somebody last night, and made the point that if we think acute-care same-store revenue growth is 3% or 3.5% in the back half of the year, if you had asked us that a year ago, or asked just about anybody observing the acute-care business, they would have been pleased with that sort of growth. I think we're looking for that volume growth to moderate some in the back half of the year, although we will certainly work hard to maintain what we've experienced in the first half.

Thank you. Also, debt-to-EBITDA this quarter was lower sequentially. You guys had mentioned previously that you wouldn't let that leverage continue any lower from current levels. Taking this into account and seeing that your M&A activity has been slower year to date versus peers, how do you see the pipeline compared to last year -- smaller or just as big?

I think it's always hard to judge, but I do think we have a sense that there is an increased level of activity. We seem to be reviewing a number of deals or potential deals in both business segments. It's always hard to predict what might materialize or not materialize, but certainly I think we've been of the mind that it looks to us like there may be more opportunities in the next 12 months than there have been in some time.

Great, thank you. One last question. On the behavioral front, you saw an increase in length of stays sequentially. Is your conversion of residential beds to acute beds completed? Could that be the driver of the increase, or do you believe this is more related to stabilizing trend of length of stay that's starting to pick up?

Yes, I think you have to be careful of what you look at. If you look at length of stay on a same-store basis, it's still down 3.5% or so from last year. If you look at it on a total divisional basis it's up; but I think that's largely because it includes the UK facilities, which clearly have a longer length of stay.

I would echo many of the statements that we made in Q1, which is we still see length of stay declining some, although we also believe that some of that decline is self-imposed or self initiated as we convert more beds from residential to acute -- which I think is reflected in the fact that even though we have lower length of stay and lower patient days, we have a higher revenue per day. The 4%-plus revenue per day growth is I think among the best that we've seen in some time; and again, I think is reflective of our effort to convert from residential to acute beds.

Okay. Thank you very much.

A.J. Rice, UBS.

Hello, everybody. Maybe first I'll ask you to comment a little bit on the geographies. Obviously with the strong results you're probably seeing strength across the board. But is there anything to call out on geographies? In particular, maybe in addition to Vegas and Texas which we always talk about, anything on the new facilities and how they're coming on line that you've -- in the last -- that you added in the last year or so?

Sure, A.J. I think your comment is well taken, in the sense that I think when you have almost 6% same-store adjusted admission growth and over 8% same-store revenue growth in the acute division, you're basically I think have to assume -- and I think it would be correct to assume -- that there's pretty strong performance across the portfolio. It would be difficult if there weren't to post those kind of numbers.

On the other hand, what we did in Q1 was we called out the performance of the Vegas market and the Riverside County market in California. Those two markets again, I would say, out-performed the divisional averages in Q2. That includes, to your question, the Temecula facility, which has been open for about a year and a half, maybe a little bit longer at this point.

I think what's really impressive about that Riverside County market is not only Temecula is doing quite a bit better than it did last year, probably not a surprise since it was just ramping up, but our other hospitals in that market are also doing better, so that's a real strong market -- in addition to the Vegas market, which continues to out-perform.

I think that's also within our expectations in the sense that through several years of the recession, we talked about what a drag the Vegas market was for us. We were so used to it being an out-performing market that the difficulties and the high unemployment in that market were a real struggle for us. But as the market has improved, and as unemployment has dropped in the Las Vegas market to like 6.5%, from the high of 15% at the height of the recession, I think our business has in turn improved both volume wise and payer-mix wise. We see that.

The flip side is I think the Texas market was a little bit slower. Again, I think that's a relative term. It's still up. It still has positive volume growth. But in terms of our different geographies, it's probably performing under the average, whereas Vegas and California are performing over the average.

Okay. Maybe switching gears for a follow-up on the psych business side. Since the first quarter there's been this proposed rule out of CMS mainly related to Medicaid managed care, but it does incorporate some language around at least partially alleviating the IMD exclusion that's impacted your psych business. Can you give us a little flavor for what the impact of that would be if it goes ahead and gets implemented? Any thoughts on timing on when we might see that actually happen?

Sure. Well, as you suggest, that rule was issued I believe at the -- early June, if I'm remembering correctly. As a consequence, CMS can't issue a finalized rule until early August, and then has -- that's the earliest they can do it. They can certainly do it after that.

What the rule would do, and I think it was pressed for quite frankly by the managed Medicaid companies, is it would allow those companies to contract with whoever they chose based on certain conditions, but they would be able to contract for adult Medicaid patients regardless of the IMD exclusion rule.

We certainly believe that if that rule is finalized in anything close to the form that it was proposed, and depending on when it is effective, we will get a -- certainly get a benefit from that. Difficult for us to quantify what that benefit is, because we've never had those patients really before, so it's mostly guesstimate work at this point. But we're certainly looking forward to the final rule being issued, and starting to contract with those managed Medicaid companies for their adult Medicaid patients. We view that as a nice potential tail wind for this business. We're anxiously awaiting the issuance of the rule.

Okay, all right. Thanks a lot.

Good morning, A.J.

Josh Raskin, Berkeley.

Hi, thanks. Good morning. First question on the expense side of things. Overall seeing good control there. I'm just curious, are you seeing anything in terms of wages in your markets, and any market specifically -- any pressures, et cetera, on wage growth?

Look, I think it's always a competitive market, Josh. I don't think that's really changed. But I think if you look at it, one of the reasons why acute-care margins are up is that when revenue increases and when volume increases the way that it does, there is just the nature of the hospital operating model is there is four efficient providers, there's usually a fair amount operating leverage to be exercised. I think our operators deserve credit for doing so. Yes, clearly as a percentage of revenue our salaries are down, and we are exercising some of that leverage, even though I do believe that there is a fair amount of wage pressure in some of our markets.

But it sounded like, Steve, you don't think that's changed

No. I don't think there's been significant developments, no.

Okay. Then on the psych side of the business, have you thought about other lines, ancillary sort of services beyond just the operation of the actual psych facility?

I'm not exactly sure what that implies. Again, we do offer a wide array of behavioral services. We tend to talk about them in terms of acute and residential. But we're one of the largest provider of specialty behavioral services, and have been for a long time, specializing in things like eating disorders and sexual trauma and all kinds of other specialties. We continue to do that, and I think we'll continue to do so. I know that addiction treatment is a hot topic in the industry, but we've been -- we probably have eight or nine facilities that are dedicated to CD and addiction treatment.

We also have for a long time now had a real emphasis on supporting behavioral disorders within the military. We have what we call our patriot support program. That is a program that is fairly widespread throughout the division. In terms of service lines, I think we touch on most of them, and continue to look for ways to expand them. Autism is another one that we've clearly emphasized more in the last few years.

In terms of other behavioral related services, we have outpatient services in a number of our markets. Not really sure what else you might be alluding to, but we're always open to ways, as the largest behavioral inpatient provider in the country, always looking for ways to enhance and make that position more robust. I think we're open to just about everything.

Yes, I was thinking outpatient and addiction treatment, et cetera, so that's very helpful. Thanks, Steve.

Chris Rigg, Susquehanna Financial.

Good morning, thanks. I know at this point you're saying it's a fruitless exercise to try to isolate ACA-driven strength, but at the same time people are still trying to get a sense for how much that could be helping you out in the industry. Is it possible, when you think about the pockets of volume strength, commercial, Medicare, Medicaid, where the relative out-performance was in those buckets, where you saw the most pronounced improvement year-to-year volume trends? Thanks.

Yes. I suspect my answer will still be unsatisfactory for you, Chris, in the sense that I think what we've said for a while is we assume that the growth in our Medicaid patient base and utilization is related, at least in large part, to Medicaid expansion. We see it quite clearly most dramatically in those states -- Nevada, California, the District of Columbia -- that have participated in Medicaid expansion. Although as others have noted, we've seen Medicaid utilization increases in our non-expansion states, as well. I guess most people refer to that as the woodwork effect, and we certainly have seen that as well.

Some of the commercial growth clearly comes from expansion patients. That's the trickiest part for us. It has not always been easy for us to identify exactly who is a commercial exchange patient, and who is just a regular commercial patient. That's where I think we've always felt was the greatest level of imprecision. As I said in the last couple of quarters, we've clearly seen an increase in our Medicare utilization, which is difficult for us, quite frankly, to attribute either to the ACA impact or quite frankly to economic improvement, only because historically our Medicare utilization has been relatively insensitive to that, those sort of factors. That's where we've seen our payer mix go.

Okay. Then one big-picture question. With King pretty well behind us, there's a theory that's a catalyst for additional states to opt into Medicaid -- hello?

Go ahead, Chris.

Sorry. That's a catalyst for states to opt into Medicaid expansion sooner rather than later. Could you give us your take as to whether that really is a game-changer, and that you will see states move to expand Medicaid over the near term, versus just keep delaying it? Thanks.

Yes. Honestly, Chris, I wish I could predict this very accurately. In our case, I think you're really talking about a couple of states that really make the difference. For us, the two states that have not chosen to participate in Medicaid expansion that I think would make a significant difference in our acute-care operations would be Florida and Texas.

I think all sorts of people have speculated on the likelihood that those states might or might not choose to do so in the future. I don't know whether the Supreme Court ruling really makes that more likely are not. I don't think we have a view that in either of the states that Medicaid expansion is going to take place imminently. We continue to work for it, along with the state hospital associations and others in those states. But I wouldn't make a prediction as to how likely that is. Great. Thanks a lot.

Kevin Fischbeck, Bank of America

Good morning, this is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the question here. I want to come back a little bit to the question earlier about the capital deployment. You talk about interest in other areas in psych. Is there anything on the acute care side in terms of the deals that you might be considering, or maybe outside of acute, any outpatient sites you're also looking to add, or any color around the capital deployment here, or whether maybe you're more focused on increasing your CapEx spending?

Joanna, just to be clear about what I said, I was clear about saying that we have seen an increased number of opportunities in both the business segments, both acute and behavioral. I think it's in both cases across the continuum, meaning it's hospitals. It may be outpatient facilities. It may be physician-type practices. We're exploring all those items. I think the landscape of health care is such that it's changing, and that payers and employers are looking for a more comprehensive and coordinated continuum of care, and looking for the ability to go to one or two providers who can really provide that.

We're very focused on that in both of the divisions. It creates I think a universe of opportunities that is broader than what we necessarily have been used to for the last few years. Now again, as I also said before, I think it's always difficult to predict how this is going to sort out, and what will really become actionable and what won't. But I think we're very focused on what those opportunities might be -- again, in both business segments.

All right. On the -- more on the policy side here, can you comment about the proposed mandatory joint replacement demonstration, or the bundle that came out? How do you feel it could impact the industry and your business in particular? Also, maybe briefly on the set of hospital payment reforms that came out from the House Ways and Means Committee just recently? I know it's very early stages, but any color you can give us would be helpful. Thank you.

Joanna, I'm not going to comment on the really specific developments, in part because I don't know that we've had a full opportunity to review them. But I'm going to reiterate a little bit, and maybe expand on the comment I made before. We certainly have a view that the reimbursement mechanisms that have been the historic ones for the industry are changing. They're changing I think incrementally, and I think that change will continue to be incremental. We are doing a great many things to prepare for that, to prepare for things like accepting bundled payments and accepting capitated payments in some very limited instances, et cetera. We do think that's at least part of the future of the industry, and so we're very focused on that.

Now exactly what form that's going to take, to what degree the government is going to initiate that, or the initiation will really come from the private sector, hard for us to predict at this moment. But I will tell you, and there's probably not enough time in the context of this call to discuss it meaningfully, but we've got a number of initiatives under way to make sure that we are absolutely prepared for that.

Great, thank you.

Jason Gurda, KeyBanc.

Good morning, thank you. Steve, I saw in the news that the Doctors Hospital of Renaissance had filed to expand or double the size of the number of beds. But they have to get approval from CMS? Do you have any sense for how likely that is?

We don't. As you might imagine, there are others in the market I think who are questioning the appropriateness of that. CMS will have to weigh, I think, a number of different factors as they think about that. But for those who followed us for a long time know that the physician-owned hospital in the McAllen market is a formidable competitor of ours. When they first opened, we had a fairly significant diminishing in our earnings in that market.

We've regained a lot of that over the years, and done a number of things to strengthen our position in the market, including a number of physician integration strategies, a number of physical strategies, physical improvements. Again, I think we feel like we're well-positioned in the market regardless of what the physician hospital ultimately is able to do.

Okay. I'm not sure if you're going to want to comment on this or not, but I'd be interested in hearing maybe an update on your relationship of working with MCare?

Yes, MCare is the emergency room provider in probably the majority of our acute-care hospitals, and they provide some other physician contract services in some of our hospitals, as well. As with any contract service vendor, we work closely with them to try and provide services that are both satisfactory to our patients and to our other physicians, as well as from our perspective cost efficient. I think MCare is a good solid company. We'll continue to work with them. But as always, we will continue to explore all the alternatives to increase patient satisfaction and increase our cost efficiency at the same time.

Okay, thank you.

Paula Torch, Avondale Partners.

Great, good morning. Thanks for taking my question. I wanted to focus on the UK for a second. Just wondering how that business is progressing in the behavioral side. Are you happy with it? How much is that business contributing to your overall behavioral revenue, and what are some of the growth plans there for the next 12 months?

Yes, Paula. We talked a little bit in Q1, and I'll largely repeat those comments, in the sense that when we bought Signet in the UK in late in the third quarter of 2014, they were already operating at what we consider to be high occupancy levels, probably around 80%, maybe the low 80%s.

We've been extremely pleased, because I they're now operating at close to 90%. While we didn't think there was a tremendous opportunity for improvement, we've -- based on our short period of ownership, have already experienced some fairly significant incremental improvement that has been very beneficial.

I will say that -- look, at the end of the day we acquired a company that had roughly $170 million, $180 million of revenues and $40 million of EBITDA, something like that. It's not a terribly material part of our behavioral business, or certainly of our consolidated results at the moment. But we also viewed it as a platform for growth. We've already, in the short time we've owned them, announced a small acquisition and a number of bed-expansion opportunities, both de novo facilities, as well as incremental bed expansions in existing facilities.

I think it is turning out to be everything we expected it would be, and maybe more. The hope is it continues to be a platform for growth in the future, and that we will continue to expand both the existing facilities, as well as find other opportunities to acquire streams of EBITDA in that market.

As a follow-up to that, 90% occupancy is certainly high. I know you mentioned de novos and bed expansion, so that should help fill in some of that demand. Wondering on the acquisition front, are there some larger players still in that market that you could think about acquiring, and what are some of your thoughts there, I guess, in terms of how big you want to actually take this business?

The challenge, when asked anywhere, whether it's in the UK or in the US, about acquiring other consolidated players is unfortunately that decision is largely up to those other players. There are other consolidated players in the UK. We certainly are doing our best to stay in touch with those players.

To the degree that any of those players decide they are looking to pursue some other strategy, whether it's an exit strategy or a joint venture strategy, or some sort of partnership to develop new facilities, we'd be interested in all those opportunities. The difficulty of pegging a likelihood of that is again largely dependent on what somebody else wants to do or chooses to do. For the most part, although we try and stay on top of it, we have to be reactive to that.

Okay, great. Thanks for the color there. One last one, maybe, for me. Certainly a very strong first half. You raised guidance, and it seems like the second half we're still taking a little bit more of a prudent approach. Just wondering what type of metrics do we need to see on the revenue side to maybe hit the high mark in that EPS guidance?

I would say to get to the high end of the EPS guidance, Paula, we would have to sustain most of the metrics that you've seen in the first quarter, including the volume growth, which I think is probably the most aggressive piece of it, as I mentioned before. I think realistically we've assumed there will be some tempering of that volume growth. I would suggest that the mid-point of our guidance would suggest that there is at least a bit of tempering of that growth. I think the high end would be more of a continuation of all the trends that we've seen in the first half.

Okay, thank you. That's very helpful.

Ana Gupte, Leerink Partners

Thanks, good morning. I wanted to tease out some of the elements of what were the drivers of the guidance raise. Some of this might be, Steve, a repetition or at least a follow-up of what others have already asked. But in February you were pretty conservative. The pull-through to EBITDA was weaker than the street had expected. Firstly, when you raised guidance this time, is this because the exchange enrollment that you had factored in was lower than what eventually manifested itself, or are you more confident at this point in the mid-point of the year on the economic recovery as a driver of the volumes?

Again, Ana, a little bit of your question is based on this idea of what's driving the improvement. Not to be repetitive, but I think we struggle ourselves with exactly what is driving the improvement. I would say again what makes us confident about raising guidance after the first half of the year is simply the acute-care performance, which clearly was an out-performance in the first half.

It's really based on the strong revenue growth. I think that strong revenue growth is really driven by this 5.7% increase in adjusted admissions, which honestly is well above what we were guiding to and what we were budgeting for when the year began. As I suggested in my answer to Paula, I think that's the trickiest variable from our perspective as we think about the back half of the year.

We certainly believe that our acute-care demand will continue. It will be strong. Whether it will be quite as strong as the 5.7%, which again, I'm going to make the point is really at the very high end of our historical trends -- not just us as a Company, but us as an industry. Whether that can continue, I'm not clear. Again, we've tempered a little bit in our guidance. But I think that's really what's driving the confidence here, is that strong very consistent performance in the first half of the year, and especially in Q2, when I think the comparisons were far more difficult.

Then on the Medicaid utilization that you alluded to that's accelerating. I know the payer mix is not that clear at all times, but any color on whether this is from the Medicare advantage side of it, versus the government Medicare that's up? Any color on the types of the acuity and the types of procedures and services that you're seeing in Medicare?

Sure. We always look at our Medicare and Medicaid blocks of business in total. We look at them as both the managed portion and the traditional portion, in part because there's certainly a continuing shift of patients from the traditional Medicaid and Medicare programs to the managed Medicare and Medicaid programs. If I were to answer the question directly like that, I would say no, clearly the increase in Medicare utilization is coming from an increase in Medicare advantage patients. But I don't know that's all that meaningful, because clearly there are just more Medicare advantage patients today than there were a year ago or two years ago, whatever.

But the overall, we've seen more total Medicare and total Medicaid patients. That to me is the meaningful dynamic. In terms of who those patients are, and what's driving them, as we review our service lines, as we review our surgical lines, et cetera, we see strength really across the board -- orthopedics, cardiology, oncology -- all the service lines that are traditional Medicare-intensive service lines. I wouldn't point to a particular procedure or diagnosis, et cetera, that's really driving this strength. I think it's pretty much across the board.

That's very helpful. Thanks, Steve. On the Texas economy and the Medicaid concerned that you had in February, it seems like the oil and gas -- and I know you're not fully levered to those geographies, but just broadly speaking -- the layoffs haven't abated. If anything, they're accelerating. Are you comfortable at this point that there will not be any Medicaid funding pressures, or might we see that further down the line?

Yes. I think the answer's a little bit of both. I think that -- we don't think there's any immediate threats to our reimbursement funding in the state of Texas. I think that's always over the longer term you look out, the more uncertainty there might be. We have seen in an earlier question, or in response to an earlier question, I said that our Texas markets have performed a little bit more modestly than some of our other markets like Vegas and California. I don't know if that's the economic impact of a slightly slowing economy.

Honestly, Texas is a big state, and we're only in a handful of markets in the state. I don't know whether our performance or our experience is necessarily reflective of what's going on more broadly. But for us, at least, Texas has slowed a little bit. Again, I made the point earlier that's a relative term. Our Texas markets are ahead of last year, both volume-wise and earnings-wise; but not quite as much ahead as some of our other markets like California and Vegas.

One final one, if I may. On the consolidation that's now been announced in managed care, out of the two deals, the two mega-deals, would you see both as potentially impacting the pricing dynamic? One is more of a complementary rather than an overlapping commercial-only story. The other one is commercial. Any thoughts on that, and what might be the strategic response from the hospital industry?

It's difficult to respond. I think first of all, the industry, the provider industry broadly will I think raise questions about the lack of competitiveness, or diminution in competitiveness that these transactions might drive. I think one of the things the industry will point out is it may not necessarily -- the most appropriate way to look at this may not simply be on a service-line business that when an insurer in a market gets increased commercial lives and increased Medicare lives at the same time, that increases their market power in the market, even though they might be two different service lines. I think the industry as a whole will make those points as the government reviews these transactions. I certainly am not smart enough to know how that's going to play out.

I think for us individually, we tend to look at these things very much in a market-by-market basis. We have spent and are focused a lot of our internal efforts over the last decade or two at enhancing and increasing our market positions in all of our markets, both acute and behavioral care. Not that we necessarily had a view that this is the way the insurance industry would sort out, but we had a view that look, we would need as much market power as possible to deal with payers of every stripe, both government and private payers.

I think in general we're fairly comfortable with the market positions and market share percentages that we have in most of our markets. In a very specific UHS sense, I don't know that we have any grave concerns about this payer consolidation dynamic, but I think as a provider generally, we think that payer consolidation will provide some limits and some restrictions on consumer choice and consumer costs, et cetera.

That's very helpful. Thanks, Steve.

Gary Lieberman, Wells Fargo.

Good morning. Thanks for taking the questions. I think most of the good ones have been taken. You were waiting for some California provider fees, I think, at the last quarter. Any update on those?

Yes, those were approved and we did record them in the quarter, Gary. It's a relatively small number for us -- probably $3 million or $4 million in the quarter. For us, it was really just an acceleration of an item that we had guided to, or assumed would occur in the second half of the year. It doesn't really affect our full-year guidance or full-year expectations.

Got it. Then Alan, maybe I'd be interested in your thoughts on the current GOP field of candidates for President?

Well, we have a very exciting 17th candidate, so you've heard about that, I'm sure.

Yes.

There will be a debate on August 6. We'll see. It's too early to really say much of anything. We'll see.

Great, thanks.

Sorry.

Dana Nentin, Deutsche Bank.

Good morning. Thanks for taking the call. I know you touched on this briefly, but is there any color you could provide on how surgical trends performed in the quarter, maybe inpatient versus out patient?

Sure, Dana. We made the point, and I think we've made it actually in the last two quarters, that the most interesting development from a surgical trend perspective is that inpatient surgeries are growing faster than outpatient really for the first time in a very long time. Honestly, that trend continued into Q2, as well. That to me is the most interesting trend. Then the only other thing I'd emphasize or point out is what I said to Ana. As we look at those surgical procedures, there's not a particular service line or diagnosis that's really driving the growth. It tends to be fairly widespread, both geographically and service-line wise.

Great, thanks.

Whit Mayo, Robert Baird.

Hi, good morning. Steve, I know you don't give quarterly guidance, but generally you tend to earn about 21% to 23% of your full-year acute-care EBITDA within the third quarter. I think sometimes we forget about the seasonal earnings progression. Any reason as you look at your internal budgets that would be materially different this time around?

No, I think the historical trend of the third quarter being the softest quarter for the hospital industry in general and certainly for us, I don't think we would see any reason why that wouldn't hold up in 2015, as well.

Okay. We tend to -- the street sometimes tends to get a little ahead of you sometimes in the third quarter, so appreciate that. Can you comment on employment strategy? This hasn't really been a focus internally at UHS as perhaps others. That's perhaps a cultural dynamic in some of your markets. But where do you think you are in the industry as within that particular cycle?

Whit, I always think -- a couple of things. I don't think UHS emphasizes it as we talk about the business as much of some of our peers. It doesn't mean that we have not employed physicians. I think we view physician employment the way we view a lot of our market strategies and market development and business development strategies, and that they are very market specific. There are some markets in which we have a significant amount of physician employment. McAllen is one, Texoma is another. There are other markets like Las Vegas where in general the market has not seen a lot of physician employment for a variety of reasons. We'll see.

We continue to do what we think is the most appropriate competitive thing in every market. We definitely have a view that physician integration is going to be more and more important as time goes on. We certainly are doing what we can in that regard -- in some cases employing physicians, in many cases working with physicians to integrate our information technologies. We think that's a very important strategy. We'll continue to do that. But we'll also continue to be judicious about it, because at the end of the day we think that most hospitals lose money on owned physician practices. Obviously that's an end result that if we can avoid, we prefer to avoid it.

Okay. Maybe my last one, just to follow up on Gary's question around the California provider fee. Did you actually receive any payments from the state in the quarter? Can you comment on Texas DSRIP. I can't remember if you have any AR tied up there, and whether or not you've received any cash, as well?

As far as California goes, Whit, I don't believe that we received the monies that I referenced in my response to Gary. I think the program has just been approved. We recognized it, although again, those are not big numbers. Texas DSRIP, we definitely have received some Texas DSRIP numbers. When we file the queue next week you'll be able to see that. We'll spell that out.

Okay. Thanks a lot.

John Ransom, Raymond James.

It's really hard to be clever after all these good questions, but I was -- as one final -- you guys hired John Rizzo recently. I was just curious about the rationale behind that hire, and what different perspectives you may or may not be looking for? Thanks.

He's a -- we think an exceptionally fine, experienced talent. We're always looking to improve and add to our talent base, our executives. We have high expectations for him. He's a development guy, basically. Strategy and development.

Okay, thank you.

Jennifer Lynch, BMO Capital Markets.

Good morning, thanks for fitting me in here. One quick follow-up on the UK. Can you guys give us any color on UK rates for the behavioral business, and how those are acting directionally? Then maybe what you're including in your outlook for those rates through the back half of the year? Thanks very much.

Jen, when we bought Signet, I think we had a view that as we modeled that acquisition that rates from the NHS, which 95%-plus of our patients are NHS patients, would be relatively flat to maybe up 1% for the foreseeable future on an annual basis. I don't think any of our current experience in our nine months of ownership or so has really made us think any differently about that. I think our actual performance has fit into that. As we continue to think about the next few years, we still think that's the right way of thinking about the business. Any growth from that business is much more likely to come from volume growth than it is from rate growth.

Great. That's helpful. Thanks very much.

At this time there are no further questions.

Okay. Well, we thank everybody for their time, and look forward to speaking with everyone again next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you all for joining. You may now disconnect.