環球健康 (UHS) 2016 Q1 法說會逐字稿

Good morning, my name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services' first-quarter earnings call.

(Operator Instructions)

Mr. Steve Filton, you may begin your conference.

Thank you, Jennifer.

Good morning. Alan Miller, our CEO, is also joining us this morning. We welcome you to this review of Universal Health Services' results for the first quarter ended March 31, 2016.

During the 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 these forward-looking statements, I recommend the 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, 2015.

We'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 reported net income attributable to UHS per diluted share of $1.93 for the quarter. After adjusting for the depreciation and amortization expense associated with the implementation of electronic health records applications at our acute care hospitals, our adjusted net income attributable to UHS per diluted share was $1.98 for the quarter ended March 31, 2016.

On a same-facility basis in our acute division, revenues increased 12% during the first quarter of 2016. The increase resulted primarily from a 7.8% increase in adjusted admissions and a 3% increase in revenue per adjusted admission. On a same-facility basis, operating margins for our acute care hospitals increased to 21.1% during the first quarter of 2016 from 20.5% during the first quarter of 2015.

On a same-facility basis, revenues in our behavioral health division increased 3.5% during the first quarter of 2016. Adjusted admissions to our behavioral health facilities owned for more than a year increased 1.4% and adjusted patient days increased 1% over the prior-year first quarter. Revenue per adjusted patient day rose 2.2% during the first quarter of 2016 over the comparable prior-year quarter. On a same-facility basis, operating margins for our behavioral health division decreased to 27.8% during the quarter ended March 31, 2016, as compared to 28.4% during the comparable prior-year period.

Our cash provided by operating activities increased 71% to approximately $464 million during the first quarter of 2016, as compared to $271 million in the first quarter of 2015. Our accounts receivable days outstanding declined to 51 days during the first quarter of 2016, and our ratio of debt to total capitalization decreased to 43.3% at March 31, 2016, as compared to 44.6% at March 31, 2015.

We spent $127 million on capital expenditures during the first quarter of 2016. Included in our capital expenditures were the construction costs related to the ongoing construction of a new 142-bed hospital in Henderson, Nevada, which is scheduled to open in the fourth quarter of this year.

During the first quarter, we opened a total of 182 new behavioral health beds, including 57 beds opened at a new de novo hospital located in Oklahoma and 125 beds opened at some of our busiest facilities. Many behavioral health construction projects are under way, including six new de novo hospitals totaling 562 beds.

In February of 2016, our Board of Directors authorized a $400 million increase to our stock repurchase program, which increased the aggregate authorization to $800 million. In conjunction with this program, during the first quarter of 2016 we repurchased approximately 1.3 million shares of our stock at an aggregate cost of $152 million or approximately $113 per share. Since inception of the program, through March 31, 2016, we have repurchased approximately 3.2 million shares at an aggregate cost of $377 million or approximately $117 per share.

Alan and I would be pleased to answer questions at this time.

(Operator Instructions)

Matthew Borsch, Goldman Sachs.

Hi, this is Tejus Ujjani on for Matt, thanks for taking the question. Regarding behavioral, you'd mentioned a shortage of psychiatrists last quarter that led you to turn away patients. Can you provide any update on that? As well as any increase in expense to attract and retain these doctors?

Sure. So if you look at the behavioral revenue growth for the quarter of about 3.5% it's pretty consistent of what we were running in the back half of 2015. I think many of the same dynamics are in place.

We had a pretty tough comparison in the first quarter of 2016 so we were not really disappointed with those numbers. They met our expectations and our behavioral results in general were very much in line with our budget for the quarter.

But we continue to face both psychiatrist, nursing, other clinician shortages in some of our markets. In some cases that is muting or depressing what would otherwise, we think, would be higher demand and higher volumes.

We have a number initiatives in place to try and rectify those dynamics and those situations. We believe, as we said at the end of the year, that our behavioral revenue growth should increase as the year goes on as those comparisons become easier and as some of those initiatives begin to get more traction.

Great, thanks very much.

Chris Rigg, Susquehanna Financial.

Hi, this is Frank Lee on for Chris, thanks for taking my question. Same-store revenue in the acute care business was very strong in the quarter. Do you have a sense for how much of the growth was attributable to economic improvements in your market or increasing market share? Are you able to size the impact of the leap year for the quarter?

I think it is always difficult to precisely size the impact of leap year. I think on an admissions basis the extra day mathematically gives you about 3% more admissions. But in terms of overall revenue it's a little bit harder to do. Obviously however you slice it, the revenue growth in the acute care division for the quarter was extremely strong and well in excess of the 6% revenue growth that we anticipated in our guidance and in our budget for the year.

Again, I think it's difficult to parse that growth out into individual pieces. We still continue to get some benefit from the ACA and expanded Medicaid enrollment and new commercial exchange enrollment, although certainly that benefit is diminishing now that we are into its third year. We continue to benefit as our markets improve economically and that certainly continues as well.

I think one of the most encouraging aspects of the quarter from our perspective is the single admission growth for us was in our Medicare payer class. In theory Medicare patients are probably largely unimpacted by both the ACA dynamics and by an improving economy. So I think what that's reflective of is just general strength of the franchises that we are operating in our local markets. And the initiatives that our operators have put in place for sometime now to create more and more physician integration in our markets, to focus on the really important service lines to us like orthopedics and cardiology and to really focus on business development.

I think that we have had, for four or five quarters, among the industry-leading admissions from an acute care perspective. And while I know the other companies have yet to report, my guess is we'll certainly be in that position again this quarter.

Okay, thanks. Then the bad debt ratio was pretty flat year over year after a few quarters of volatility. Do you think that the bad debt has stabilized at this point? Do you have a view on where that will go for the rest of the year?

It is always difficult, as Yogi Berra would say, to predict the future. But for us I think again, very strong payer mix in the first quarter. Medicare admission growth growing faster than our overall admissions. Medicaid growing about the same pace as our overall admissions. Commercial admissions growing slightly lower. But uninsured admissions flat to actually slightly down. Obviously that is an extremely favorable payer mix.

Again, hard to say exactly how sustainable that is but I think we generally feel like the acute care business is running very strongly at the moment. Certainly makes our sense of what was possible in our guidance and in our budget as seeming extremely achievable at this point.

Okay, thanks on lot.

Kevin Fischbeck, Bank of America Merrill Lynch.

Good morning, this is Joanna Gajuk filling in for Kevin today. Thanks for taking the questions. Coming back to the previous comment here around trends in the volumes in the acute care business. That was helpful but also can you talk about the markets because it seems like Vegas was intimated that things are going well there.

Anything that changed maybe in other markets? Or should we think about small trends in 2015 in terms of strong Nevada and probably Florida and Texas not that strong? Any color you can give on market performance on the acute care side? Thanks.

Sure, Joanna. I think that the practical reality is when you post revenue numbers as strong as we did in Q1, the strength by definition, has to be pretty pervasive. It is almost impossible for a single market to drive those kinds of overall strong numbers.

Generally however, I would comment that many of the trends that we have remarked on in recent quarters have remained in place. You alluded to the fact that our Vegas market has been performing quite well and that continued into Q1. Our Southern California market has also performed very well. Our Temecula hospital which is now in its third year of operation is performing particularly well. That is driving some very strong numbers out of Riverside county, California.

Washington, DC has been a strong market for us and was in Q1. We see some weakness in the South Texas markets which we remarked on previously. Although even their volume numbers were certainly improved in Q1 as well.

Great. Then turning the topic a little bit on the behavioral side, in terms of the recent circulation, or rather the final vet from CMS around managed Medicaid and allowing plans to pay for behavioral health in free-standing facilities. When we think about it, how are you going to think about these changes taking effect in reality for you specifically? How long it will take for referral patterns really to change? Should we think about this will take a year or longer in terms of how it would actually be reflective in your operations?

Well, again, I think, Joanna, our commentary on the lifting of the IMD exclusion has been, I think, reasonably consistent over time. That is we, I think, like the others in the free-standing behavioral industry view lifting of the IMD exclusion certainly as a positive development, albeit one that will show its impact or reflect its impact gradually over time.

It will require some effort to get access to this patient population. I think we have always said it is difficult to quantify what the potential benefit will be at the outset. But we, I think, share what is generally a consensus view that the benefit, and the potential benefit, is significant.

I will also make the point, and I know we have talked about this a number of times previously, that we view the lifting of the IMD exclusion and our ability to take these patients that have previously been seen in acute care hospitals with behavioral units, in a broader context of trying to integrate with the behavioral units in acute care hospitals in our markets for all their patients. We have opened, over the course of the last few years, a number of leased behavioral units that we are leasing from some big not-for-profit acute care hospital systems around the country. We have a number of other similar conversations underway to accomplish the same thing.

While the lifting of the IMD exclusion might help accelerate and expedite those conversations, because now we can treat adult Medicaid patients as well, most of those conversations are even broader than that and include Medicare patients, they include commercial patients. Frankly, we view that overall as one of the most significant business development opportunities for our behavioral hospitals over the course of the next few years. It's an important development but I think one that fits into really an overall strategy that we are extremely enthusiastic about.

We agree that those changes will time to be very positive. But then on the flip side, the commentary around the continued shortage of clinicians on the behavioral side, with those changes and potential for additional volumes coming away, would the shortage make things more difficult when this is really happening? Where you have the IMD exclusion but then this would actually create more pressure on labor. Is that the way you think about it? Or do you think that there are some prospects in terms of the shortage to moderate or rather be able to offset that?

I am going to answer the question quickly because I want to give others on the call a chance. They have their questions as well. But I think the issue to keep in mind is that this adult Medicaid population that's affected by IMD, for the most part is currently being treated. They're being treated in acute care hospitals with behavioral units. There is staff, there are nurses, there are psychiatrists in place today treating those patients.

If we can reach agreement with acute care hospitals in our markets to get access to those patients, whether we lease the beds or manage the units or joint venture the units or they close their units, the presumption, I think, on our part and what has played out, at least in initial conversations, is we will have access not only to the patients but also to the clinicians who are treating those patients. It's not as if we will have an incremental need to hire staff to treat those patients. Can we move on to the next?

Thanks a lot.

Paula Torch, Avondale Partners.

Thank you, good morning. I would like to start my first question on the strong acute care metrics. I wonder, Steve, can you talk about the pace of volumes throughout the quarter? If we saw pick-up through to March and has that momentum included into 2Q?

I think, Paula, our experience, what seems to me, was the shared industry experience based on commentary I've heard from others and some of the surveys I saw during the quarter. The quarter got off to a relatively slow start, I think probably as a result of a very late flu season. Volumes picked up in maybe later January and then February and then, at least for us, March was a very strong month. Again, we do get the benefit of the leap year day and some of the calendar timing with Easter and Good Friday, et cetera.

I think it's early in the second quarter but you know most of the trends seemed to be holding up reasonably well. Again, I am not about to predict that we can sustain that really remarkable acute care growth we saw in Q1. But we feel good generally about how things are going in our markets and how strong the underlying business is.

Okay, great, thank you. Then on behavioral, certainly a nice up-tick year over year in the net revenue per patient or adjusted admission, but maybe not as much as we were expecting given these year compares. So can you give us some color on what drove that? It seems like the results met your expectations but wondering what gives you the confidence to be able to reach your 5% same-store revenue growth in 2016 which would certainly imply a ramp-up from here. Thank you.

Sure. So you are absolutely right, Paula, it implies a ramp. For those who remember, we specifically talked about that in our year-end call, saying that we believe that the 5% behavioral growth was achievable but would likely be somewhat lower in the first half of the year when comparisons were more difficult than while we were implementing and trying to gain tractions on some of our recruitment strategies and strategies to fill those nurse and psychiatrist vacancies. And then the second half of the year would become easier to achieve the 5% and probably exceed it as the comparisons became easier and those initiatives got traction.

So again, from our own perspective, the Q1 behavioral performance was almost precisely in line. Obviously that provides us with a challenge to improve as the year goes on. But that was our expectation of the way the year would play out.

Okay, thanks. Can I squeeze one more in? If not, I will move on.

Quickly.

Okay, sure. Your occupancy in behavioral, I think it was about 76%. So it still shows some room there with the beds you currently have and you are adding another 500 beds throughout the rest of the year. So wondering how we

should think about filling those beds. Is that potential to fill them with Medicaid Advantage lives? Or is the mix really going to be more towards doing some of these JV partnerships with not-for-profits. Wondering how you can leverage your current bed occupancy versus having to add new beds for this new volume that's going to be coming into the system.

If you go back and look, you will see that our occupancy percentage in the behavioral business, in that high 70%s, 76%, 77% range, has really been very consistent, I would say, for the last seven or eight years. What that means is that during that period we have been adding beds fairly aggressively. Obviously the implication is we are filling those beds as quickly as we are adding them and maintaining our occupancy percentage.

The reason we are adding beds with a 76% occupancy level is because in markets and in situations we are clearly turning away patients because of volume constraints. The economics of it are such that after you turn away more than just a handful of patients, it almost always makes sense to add beds. So we continue to do that.

I will say that, in my remarks where I talked about, for instance the de novo development projects, those projects were undertaken really without regard to the IMD exclusion. Obviously these have been under development for some time. So those projects are all, in our minds, justified by the demand in those markets, regardless of whether or not there is incremental demand associated with the IMD.

As I said, in some ways I think those are discrete activities. We think that overall demand for behavioral has been strong, continues to be strong. We are going to add beds to meet that. At the same time, we are going to continue these conversations with acute care hospitals in our market to get access to their behavioral patients, and all their behavioral patients not just adult Medicare patients, but their commercial and their Medicare and any other patients as well.

Thank you so much.

Ralph Giacobbe, Citigroup.

Thanks, good morning. Steve, is it your sense that market growth within your geographic regions are just experiencing similar levels of growth? Or can you share any market dynamics you can point to on why you may be growing disproportionately faster than others? Whether it be struggles of other not-for-profits, maybe hospital closures. Anything along those lines you that can point to above and beyond, obviously, your own initiatives?

Sure, Ralph. I think it's a combination of both. We have talked about this certainly before, that obviously we are in some markets that were hit fairly hard during the recession three or four years ago. Las Vegas, Southern California, South Florida had disproportionately higher unemployment rates in those markets than the national average, et cetera. As those markets have recovered, I think we have benefited economically, disproportionately perhaps, than some of our peers.

I think at the same time, and I think the strong start to 2016 really belies this idea that as the ACA benefit has really largely anniversaried itself, as the economic improvement has largely anniversaried itself, what you are seeing in the beginning of 2016 is the strengthening of our franchises in those now very healthy markets, et cetera. We've been working a lot over the last few years to shore up our physician relationships and our physician integration arrangements, acquiring practices and integrating in other ways, focusing on certain service lines. I think that's all really starting to pay dividends.

Again, I will highlight what I did earlier in an earlier response which is when that growth is in Medicare, I think it is a reflection of the fact that we are probably gaining market share. Since that's not a patient population that is inherently growing or seeing more demand, et cetera. We have not historically really tried to parse out market by market, market share data. But we generally feel that in most of these markets that are performing well, not only are markets doing well, but that we're gaining market share in those markets as well.

Okay, that's fair. That brings up what you see on the acquisition opportunity side, to the extent that you are seeing struggles. You haven't done an acute care in a while. Do you think those opportunities are going to present? Or do you think that maybe people aren't growing as much as you? Or others may not be growing as much as you are now? But they're still showing healthy growth and so you think there is still a reluctance to have willing sellers out there?

I think we have said, and you have heard me say for the last several quarters, that the pace of activity, particularly on the acute care M&A side, has picked up. That means conversations and processes, et cetera. And our experience is on the acute side, that takes time. These are largely not-for-profits that are being sold and their decision-making process tends to be somewhat elongated.

We have said for some time we're confident that there will be opportunities. There will be compelling opportunities. As I sit here today, I will say with even greater confidence that I think we will definitely have opportunities in 2016 to deploy capital in the acute care space that we will find compelling and I believe others will as well.

Okay, that's helpful. Last quick one to clarify. Did you say you that you thought the leap day impact was a 3% benefit to volume? Or was there other factors that maybe drove 3% growth?

Basically all I am saying is if you have 90 days in the quarter and there is an extra day it is a little over 3% just natural admission growth that you are likely to see. But it's also a little bit hard to then parse that into a revenue piece because obviously not all of our revenue reimbursement is on a per-day basis. So the comment that I was making before was mostly about admission growth and the metrics, the cosmetics of those metrics.

Okay, maybe we could follow up offline. I think we typically think of it as just one over 90, just 1%, maybe 2%. So it seemed a little bit high. We can maybe follow up offline. Thank you.

Whit Mayo, Robert Baird.

Hey, thanks, good morning. Steve, van you talk a little bit about surgery, any particular strength and any service lines in the quarter, including ER? And then touch on behavioral and how your acute site versus RTC volumes have been trending?

On the acute side with -- generally I would say that besides the payer mix commentary that I have offered before, we have seen extreme strength in our surgical volumes. I think that in-patient surgeries were up something like 4% in the quarter. Out-patient surgeries were up like 7% which is, again, some of the strongest surgical growth we have seen.

Our Medicare case mix index was among the highest we have ever seen. I think that's reflective, obviously, of the surgical volume and continued a trend that we saw in Q4. Obviously, I think, beyond the volume strength which we have already commented on, we are seeing a lot of high-quality revenue and high-acuity revenue strength as well.

On the behavioral side, I will say the one issue between the acute and the residential business is the residential business is not subject nearly as much to this whole psychiatrist shortage issue. So the residential admissions have probably held in a little bit stronger than the acute admissions. Frankly, I think at least from a cosmetic perspective, that tends to hurt us because, at least of the public companies, we tend to have a behavioral revenue profile that is weighted more to the acute rather than to the residential business.

And ER trends in the quarter?

I think ER trends -- I'm sorry, Whit --are pretty consistent with the overall volume trends in the markets where we are seeing significant admission growth, we are seeing generally some fairly high ER growth. I will say that in a couple of markets where we are seeing more of a proliferation of urgent care and FED-type development, free-standing ED development, we have seen our ED visits go down a little bit. But honestly, our admissions in most of those markets are unimpacted as we continue to get those admissions through our hospitals.

And on medical admission, short stay, observational, any change in the trend line there?

I think those trends have remained fairly constant.

Got it. My last question is back on the IMD. My understanding is that the rule is effective this July, allowing health plans to contract with providers. Is that your understanding as well? And from a practical standpoint, when do you think you can actually take admissions of this patient population?

I think your interpretation is correct, Whit, in the sense that I believe what the rule provides for is that states have the option of lifting the IMD exclusion and effectively allowing free-standing facilities to begin to take these patients as early as July. It's at the state's option and we are not sure exactly what each state will do. We are anticipating that, at least in some geographies, we will be able to begin to have access those patients as early as July.

Great, thanks a lot.

A.J. Rice, UBS.

Hi, everybody, thanks for the question. First of all, I will ask on the cost trends on the acute side. I know sometimes when you have strong volume you get the leverage of your existing SWB base as well as supplies, et cetera, flowing through on the margin side. And then sometimes the growth in volume is strong for an extended period and you start having to add staff or scramble even to get staff. Where are you at on that spectrum? How would you put that other quarter in context for that a little bit?

In the back half of 2015, A.J., we talked about the idea that there was certainly some pressure on salary and wages within the acute division. Not so much in terms of head count or numbers of employees but in, what we describe as premium pay, which would include things like the use of temporary nurses and overtime for our own staff, et cetera.

I think, while we have made some improvement in that regard, we continue with the revenue growth that we saw in Q1 and with the admission growth and demand, we have continued to see pressure on those wage rates and on that premium pay. As a consequence, I think that when we file the Q and you will be able to drill down, you can see it in consolidated results that most of the leverage we are getting on this strong revenue growth is on the supply and other operating expense line. And less of it is on the salary wage line because we are still seeing a fair amount of pricing pressure, if you will, on that line.

Okay, all right. Then you guys nicely upgraded the buy-back authorization, doubled it. I know if I remember right, maybe my memory's not serving me well, but typically UHS waits until you are closer to running through your prior authorization to adding another one of your magnitude. Are you indicating anything there about maybe being more active on the buy-back front? You have been pretty steady the last year. Give us some thoughts on that.

Well, just to be clear, the Board increased authorization back in February and in large part did so because we were on the verge of exhausting our previous authorization. I think what you described as historical practice is exactly what we did back in February.

Okay, all right, I'm sorry about that. Maybe one last question on the IMD you haven't been asked yet. Do you have contracts in place with the managed care guys? Or is that something that will take some time to put in place? Or how quick can you put those in place?

I think in some cases we already have contracts in place. We have been taking adolescent Medicaid patients for many years. And so in a number of geographies and a number of instances we already have existing managed care contracts for the adolescent Medicaid population. We can either extend those contracts to the adult population or just modify them, et cetera.

It varies a little bit, I think, in every geography. But I actually do not believe that the contracting piece of this whole IMD exercise is really the more difficult piece. I think, again, it is those conversations and hopefully those collaborative agreements with the acute care hospitals that are really at the crux of this.

Okay, great, thanks a lot.

Ana Gupte, Leerink Partners.

Thanks, good morning. My question was about to go a little deeper into the sources and the drivers of this Medicare-based volume that you are seeing on the acute side. Trying to understand, if you can see from your payer mix or any anecdotal evidence, whether that this is just new members that are aging into Medicare that perhaps were under insured or uninsured during their pre-Medicare days. Or is it existing patients and you are marketing more aggressively to them as a hospital chain? Is there any difference between fee-for-service Medicare and Medicare Advantage?

So, Ana, a few different comments I will make. We continue to see over time, a shift out of traditional Medicare into Medicare Advantage, and that continues and I expect will continue for some time. What I was trying to allude to before, maybe I was too nuanced, is the idea that our Medicare population and admission is growing as quickly as it is, almost by definition has to mean we are taking market share.

Because while I think overall Medicare population could be expanding somewhat, it is certainly not expanding at the pace that our admissions are expanding. Almost by definition, the fact that our Medicare population is growing as much as it is, is suggesting that in many of our markets we are taking market share from our competitors. I think it is because of all the focus et cetera, that our operators are bringing to service lines and to physician relationships. I think all of that is paying dividends.

Okay, so it is about market share. Then the two changes that then these things take forever sometimes. We have the Two-Midnight rule lapse and then recently I think CMS is backing off of that rule all together. Simultaneously these value-based 25,000 primary care pilots, physician pilots, that they've put in place. The one's sort of a positive and a tailwind, it feels like one's a bit of a headwind, but maybe more long-term. How is this going to play out through 2016 and then into 2017 in terms of the timing that you anticipate, either positive or negative on a net basis?

I think, Ana, as your question suggests, I think it's difficult to predict for some of these things how they're going to affect macro trends. I think to the degree that they affect macro trends, it will be over a longer period of time. So I think from our perspective it is not likely to have significant short- or even intermediate-term impacts. Over the longer term we will see.

Okay, not even on the Two-Midnight rule? If they took it out altogether --

I think that the effect of the Two-Midnight rule probably lapped or anniversaried several quarters ago. So I don't think that's having a big impact. My response to Whit's question earlier about changes in observation days or short stays, et cetera, was that we are really not seeing big changes in those dynamics. I think again, that impact was probably several quarters ago.

Okay. Then separate question on the bad debt which continues to trend favorably and now you are back to what you had about a year ago, at least in second quarter. Was this an idiosyncratic blip up in the third quarter as you continue to see more data with your revenue cycle management practices and all? Any more color on the drivers?

Ana, we conceded on several occasions that the increase in uncompensated volumes back in the third quarter of 2015 which we experienced, and quite frankly many of our peers seemed to experience as well, was something that we really couldn't explain with any great confidence. People suggested at the time that maybe it was some level of disenrollment in commercial exchanges as premiums were going up or as people had gotten the care that they were seeking. We could never prove that in any pervasive way. But I think what our experience in Q4 and Q1 would suggest to us is it was a bit of an anomaly and bit of a blip, in that the uncompensated trends which have been more stable in the last couple quarters, seemed to be more reflective of the environment that we are really in.

Got it. Thanks, Steve, appreciate the color.

Gary Lieberman, Wells Fargo.

Good morning, thanks for taking the question. Maybe some comments your priorities for use of capital at this point. It seems like the average repurchase price for your share is a little bit south of where the stock is now which I guess is a good thing. And then how do you feel about the opportunities on behavioral in the UK at this point?

You know, Gary, I think we always say and we say it because I think we mean it, that we are relatively agnostic about where we deploy our capital. Meaning that we will likely deploy our capital wherever we think we can earn the best returns. I think that we were an active share repurchaser in the first quarter and continued to some degree into the second quarter because we thought our shares, particularly given the strength of our business, were an attractive investment. I think we'll continue to consider that as we move forward.

But I think we've also said that we see a number of compelling M&A opportunities in both the behavioral and acute space and we have the financial flexibility to pursue those and we will. I think we have a long-standing and well-earned reputation, however, as a judicious acquirer and a judicious evaluator of these opportunities and a judicious steward of capital. I think we will continue to preserve that reputation in the future. We're going to look at all these opportunities. We never really prioritize because in our minds the priorities are as we see the specific opportunities and as we evaluate the specific opportunities.

What about in the US on the acute care side? I think you might have said at some point that you were seeing more not-for-profit or potential not-for-profit deals that were out there.

I think we are. I think I said before, we continue to be actively involved in a number of conversations in that regard. We just find that those processes and those conversations tend to be a bit elongated and they take some time. But we believe, as I said before with some high degree of confidence, that we will deploy capital into the acute care business in 2016 at levels that we probably have not in a while.

Okay, great, thanks very much.

Sarah James, Wedbush Securities.

Thank you. Can you talk about the growth that you are seeing so far this year on your UK behavioral health business? And then in the past you've talked about occupancy rates in the 90% range, so maybe you could update us on any near-term plans to add beds in that market.

Sure. I think everything you said remains true. We are running occupancy rates in the UK. It's still a relatively new business for us but in the Cygnet business that we bought at this point a year and a half ago and in the Alpha business that we bought maybe six months ago, we are seeing those very high occupancy rates.

As a result, we are really taking all the actions in the UK that we have been taking in the US for many years. And that is we are adding beds to existing facilities where the demand justifies that. We are building some de novo facilities in the UK where the demand justifies that. We have done some tuck-in acquisitions in the UK. We did a larger acquisition with the Alpha deal six months ago, as I said.

And we continue to look at all those kinds of opportunities, future opportunities, in the UK as well with all the same caveats and dynamics I described here in the US. So we'll deploy capitol in the UK behavioral space if it makes compelling sense to us. We are looking aggressively to do that.

Got it. Could you size for us how many beds that you know that you are adding so far with the growth within existing facilities and the de novo start-up plans for this year? What is the overall bed growth in the UK going to look like?

Actually I do not have the UK numbers in front of me. We have talked broadly about 600 to 800 new beds in our behavioral division overall and those would include new UK beds.

Okay, thank you.

Gary Taylor, JPMorgan.

Good morning. Sorry, I jumped on a little late so if I ask something that's been asked just tell me to read the transcript and I will. First of all, Steve, did you comment specifically on emergency room volumes? I know you had talked a little earlier about geographically some of the volumes strengthened by payer. But on ER?

We did, so I will suggest that you go back and read the transcript.

Okay, let me do that. My last one, going through the concept of the new IMD regulation, do you have a sense of where your presumably newly-negotiated Medicaid adult per diem might shake out versus general acute care hospitals? Or maybe for your current child and adolescent Medicaid per diems shake out versus hospitals?

What I am trying to get at is, do we think, given presumably a lower cost structure on free-standing that from a rate perspective, we might get to the point where Medicaid HMOs have a compelling financial incentive to attempt to steer volume in your direction as opposed to just picking up initially probably the ER-diverted patients that they can't find a bed for?

It's really a thoughtful question, Gary. Again, we are approaching this in a two-phase process. The one, as I stressed, is we would like to reach collaborative agreements with many of the acute care hospitals in our markets that are providing in-patient behavioral services.

We think, generally -- and this is certainly truly not true of every single acute care hospital -- but we think generally acute care hospitals are not very good providers, they're not efficient providers of behavioral services. They have so many other things that they're doing that it's just not a top priority of theirs and we generally feel we can do it better, we can do it higher quality, we can do it with better efficiency.

We are trying to make that argument to our acute care colleagues, if you will, in our markets around the country. I think in our minds that's the first step in getting access to these adult Medicaid patients.

The second is more along the lines of what you are suggesting, which is as a free-standing industry -- and certainly UHS has a reputation of being able to provide these services more efficiently and at both high quality and lower cost -- we are certainly prepared to make those arguments to our managed care payers. But quite frankly are as aware of that dynamic as we are, with the rest of their patient population. So that, to us, is more of a secondary argument. We would like to get the acute hospitals to partner with us first and then we will make our pitch to the MCOs.

Okay, that's helpful. Thank you.

We have no further questions in queue at this time.

Okay, we would like to thank everybody and look forward to talking with everybody next quarter.

Thank you for your participation. This does conclude today's conference call, and you may now disconnect.