環球健康 (UHS) 2017 Q3 法說會逐字稿

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings conference call. (Operator Instructions) Thank you. Mr. Filton, you may begin your conference.

Thank you, Sarah. Good morning. We are expecting Alan Miller to join us by telephone, and hopefully, we'll make that happen before we begin the Q&A.

I'd like to welcome everyone to this review of Universal Health Services results for the third quarter, ended September 30, 2017. During this conference call, Alan and 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 these 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, 2016, and our Form 10-Q for the quarter ended June 30, 2017.

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 $1.47 for the quarter. After adjusting for the favorable impact from our January 1, 2017 adoption of ASU 2016-09, as discussed in our press release, and the depreciation and amortization expense 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 was $143.4 million or $1.49 per diluted share during the third quarter of 2017, as compared to $157.2 million or $1.60 per diluted share during the third quarter of last year.

As mentioned in our press release, our financial results for 3- and 9-month period, ended September 30, 2017, were unfavorably impacted by an after-tax aggregate of approximately $14 million to $15 million or 14 -- resulting from the following: an unfavorable after-tax impact of approximately $8 million to $9 million or $0.09 to $0.10 per diluted share related to the hurricane expenses and estimated business interruption impact incurred by 28 of our behavioral health facilities, located in Texas, Florida, South Carolina, Georgia, Puerto Rico and the U.S. Virgin Islands; and our 3 acute care hospitals located in Florida; and an after tax charge of approximately $5 million or $0.05 per diluted share recorded in connection with a court order in Texas related to certain litigation.

Generally, our facilities impacted by Hurricanes Harvey, Irma and Maria did not sustain extensive property damage, and the vast majority have resumed normal operations. However, a portion of the beds at our 124-bed behavioral health facility located in Houston, Texas remain closed. And although our 3 behavioral health facilities located in Puerto Rico are operational, these facilities, which have 240 beds in the aggregate, continue to operate on auxiliary power in areas that have suffered extensive damage to surrounding infrastructure and properties. It's difficult to predict the impact that the hurricanes may have on the future operating results of these 4 facilities.

On a same-facility basis in our acute care division, revenues during the third quarter of 2017 increased 2.2% over last year's comparable quarter. The increase resulted primarily from a 3.5% increase in adjusted admissions to our hospitals owned for more than a year. On a same-facility basis, net revenues in our behavioral health division increased 1.8% during the third quarter of 2017, as compared to the third quarter of 2016. 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 1.1%, while adjusted patient days decreased slightly. Revenue per adjusted admission increased 1.3%, and revenue per adjusted patient day increased 2.6% during the third quarter of 2017 over the comparable prior year quarter.

Based upon the operating trends and financial results experienced during the first 9 months of 2017, we are revising our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2017, to $7.25 to $7.50 per diluted share from the previously provided range of $7.50 to $8 per diluted share. This revised guidance, which excludes the expected electronic health records impact for the year, as well as the impact of the adoption of ASU 2016-09, decreases the lower end of the previously provided range by approximately 3.3%, and decreases the upper end of the previously provided range by approximately 6.3%.

For the 9 months ended September 30, 2017, our cash provided by operating activities decreased to $878 million from $1.14 billion generated during the comparable 9-month period of 2016. The $258 million decrease was caused primarily by a $128 million unfavorable change in cash flows from foreign currency forward exchange contracts related to our investments in the U.K. and a $101 million unfavorable change in the other working capital accounts, resulting primarily from changes in accounts payable and accrued expenses due to timing of disbursements. Our accounts receivable days outstanding increased to 53 days during the third quarter of 2017, as compared to 50 days during the third quarter of 2016.

At September 30, 2017, our ratio of debt-to-total capitalization declined to 45.4%, as compared to 47.7% at December 31, 2016. We spent $156 million on capital expenditures during the third quarter of 2017 and $419 million during the first 9 months of 2017.

During the quarter, we completed and opened 27 new acute care beds and 135 new behavioral health beds at existing facilities. In conjunction with our $800 million stock repurchase program during the third quarter of 2017, we have repurchased 870,000 shares of our stock at an aggregate cost of $94 million. Since inception of the program through September 30, 2017, we have repurchased approximately 6.34 million shares at an aggregate cost of $736 million.

Earlier this month, the Competition and Markets Authority provided the final ruling regarding the Phase 2 investigation of our acquisition of Cambian Group, PLC's adult services division in the U.K. The final ruling requires us to divest 1 18-bed facility, which generates less than $1 million of annual earnings before interest, taxes, depreciation and amortization. The final ruling represents a reduction in the number of divestment sites identified in the Phase 1 decision.

We'll be pleased to answer your questions at this time.

(Operator Instructions) Your first question comes from Justin Lake.

Just Steve, first question is your guidance appears to imply a pretty steep ramp in the core EBITDA of the company in the fourth quarter versus the third quarter. And I'm assuming there's about $15 million of drag still in the business from the 2 site facilities and the continued hurricane impact to Puerto Rico. So if I look at that, can you tell us, how do you bridge that from 3Q to 4Q? Is it -- do you expect a big ramp in the behavioral business? Is the acute business going to get better? So help us understand that sequential improvement.

Sure, Justin. So I think that with the way we approach the guidance for the balance of the year was to suggest that the miss that we had in the third quarter and the issues that generally caused that miss, which were, I think, largely transitory would, however, continue into Q4. So to the degree that there was a continuing impact from the hurricane on the 4 facilities that I mentioned in my opening remarks, that would persist into the fourth quarter to the extent that we continue to suffer lower-than-expected results at a handful of behavioral facilities with regulatory challenges. Those challenges will continue into the fourth quarter as well. In terms of the ramp in the fourth quarter, I think that we -- that was embedded in our original guidance for the year and our original notions of the trajectory of earnings for the year, and that was the sense that the back half of the year would continue to get stronger, both from a behavioral volume perspective as well as from a relief on the labor pressures and wage pressures on both sides of the business. So I think it's a combination of those sort of 2 dynamics that really informed the way that we came up with the guidance for the balance of the year.

So just a follow-up, you're expecting a meaningful ramp from 3Q to 4Q, both in volumes and in some relief in wage pressure similar to what you expected before despite the fact that it didn't look like it happened in Q3?

I think that's correct. And I think the other issue, which I should have mentioned, is the sort of continued improvement at the Henderson facility, our new facility in Las Vegas, which, at least from a cosmetic standpoint, will be included in the Q4 -- excuse me, in Q4 in same-store results, which will make the same-store results look stronger. And the other point that I'll mention, Justin, which I think is just an annually recurring point is there's, I think, normally a step-up from Q3 to Q4 due to just the seasonality of the business.

Your next question comes from Josh Raskin.

Steve, maybe just not germane specifically to the quarter, but I'm just curious where you stand as you guys are coming in towards the end of the year with line extension. Maybe on the acute care side, is there any change in appetite around ASCs or maybe freestanding EDs or even urgent care centers? And on the behavioral, is there any more focus on substance abuse or maybe other types of clinics in that segment?

Sure. So I think on the acute care side, and I think, honestly, Josh, the answer to these questions, while I think there are some sort of global generic answers I can give, I think that, in many cases, or most cases, we really do look at these questions on a market-by-market issue. On the acute side, we certainly acknowledge, as have most of our peers, that there is a continuing trend, I think, driven mostly by payers to move patients into what they perceive to be the lowest-cost setting of care for patients, whether that's ASCs or freestanding imaging centers or urgent care centers or freestanding EDs, et cetera. We have certainly entered in -- any and all of those businesses to some degree in certain markets. We have ASCs in a number of markets. We are building FEDs in several markets and have had, I think, some relatively notable success in the early stages of that. We've got freestanding imaging centers, et cetera. We've got physician operator urgent care centers again. And I think we really view it on a market-by-market basis. But certainly, it's informed by, as I said, this global view that payers will continue to look to shift patients to the lowest-cost care setting that they can. I think on the behavioral side, it's a similar sort of notion. I mean, we have a very large behavioral health presence. We're the largest freestanding operator in the country. And I think our continuum of care, both here in the U.S. and in the U.K., really spans the continuum of services and includes acute services, residential services, specialty services, addiction treatment services, et cetera. And I think in every market, we continue to look for where there are gaps in service lines in that particular market. So I don't know that on a global basis we're necessarily sort of looking to expand in any of those businesses, but within individual markets, we are certainly doing our best to fill in the service gaps, so that in most of our larger markets, we're providing a pretty, I think, extensive continuum of services.

Okay, great. And then just a second question on the acute care side. It feels like it's becoming a little bit of a buyers’ market. There seems to be a lot more facilities for sale than necessarily buyers out there. So I'm curious, you guys have always been so opportunistic. It seems as though UHS has had a really good sort of timing historically around movement of assets. Is the acute care segment more attractive? Are there new markets that you're actually looking at, at this point?

Josh, I think we have been looking at potential acute care opportunities for some time. We like the acute care business, and feel like if you can be in an attractive, growing market with a good market position, you can be successful. We believe that, certainly, we've demonstrated that with our own acute care results. Obviously, I think this has become, as you described it, kind of a sellers’ market. To some degree because we've got a number of distressed operators who are looking to deleverage, et cetera, I think our general impression is that the assets that they are selling, at least, in these early phases of their divestiture plans, are the less attractive assets. And unless they really provide sort of some in-market synergies for somebody, they're not necessarily all that attractive. And I think most of these sales have been going to other in-market providers. Should that change and should either these distressed sellers or other sellers, other not-for-profit sellers begin to sell assets that we think fit or a better fit for our profile of strong market positions in growing markets, we certainly would be interested because we feel like we've got a proven track record of being able to operate and earn outstanding returns in those kinds of markets. And in the interim, we continue to invest in the acute care business within our own markets, building new facilities and adding capacity where that's appropriate as well.

Your next question comes from Kevin Fischbeck.

I was wondering if you could parse out the EBITDA impact from the hurricanes among the 2 divisions, either, I guess, maybe both on an EBITDA basis, but then also maybe from a volume basis.

Sure, Kevin. So I think on the volume revenue side, we feel like the hurricane impact, coincidentally, I don't think -- is about the same on both sides of the business. And it's probably in that 100 to 110 basis points of both volume and revenue because obviously, there's no sort of pricing dynamic associated with the hurricane impact. In terms of the EBITDA, we talked about a $12 million to $13 million -- I'm sorry, EBITDA impact. I think you're talking about probably 8 or so on the behavioral side and 4 to 5 on the acute side.

Okay. And I guess, one of the things that you -- it's still interesting to me, I guess, I was talking about the earlier questions that you're still looking at the same kind of rebound and reacceleration of the business. I guess, one of the metrics that you wouldn't expect the hurricanes to impact for the length of stay on the behavioral side. So I just want to make sure that that's right because that seem to still be a pressure. I guess, on the third quarter in a row, that's a pressure. Can you talk a little bit about what you're seeing there, and why you think that that's not going to be -- continue to be a pressure on psych?

Yes. I mean -- so I think that in Q3, we did actually see the length of stay decline -- diminish from the rate at which it was declining in Q2. So I think, sequentially, we made some progress. I think our point of view that we articulated last quarter was we certainly feel like there are some things that we may be able to do to impact length of stay, where that's clinically appropriate. But then if we couldn't that we had a point of view that the underlying demand was strong enough and the reservoir of unmet demand of patients looking to be admitted to behavioral hospitals was strong enough that we just needed to improve the efficiency of our throughput. So that if beds were being vacated earlier because of length of stay pressure, we just needed to increase the throughput and fill those beds sooner, again, always where clinically appropriate. And I think that's our point of view and why, I think, we had the perspective that this 5% same-store revenue growth target that we've essentially set for the behavioral division because that's where we were running back in 2015 when we started to see some diminution in that number is achievable. It's really the confidence that allows us to say that is this -- the metrics that we continue to see internally that demonstrate there's a significant reservoir of unmet demand.

Okay. And then just to follow up on another comment you made before about that the labor pressure is going to improve. I guess, what gives you -- is there any data points that you're seeing right now that actually indicate that? Because again, in general, we're hearing companies talk more about labor pressure rather than less about it, but you seem to be thinking that this is something that's going to get better over the next few quarters. So any color or comfort you can give us that's taking place?

Yes. I mean -- so I think and maybe -- look, I think these trends tend to be relatively market-specific. And while I think more companies are talking about it today, I think we were probably one of the earliest companies to really highlight this issue back in the middle of 2015. And honestly, it may be a function of being in markets that are faster growing than the national average and that recovered, at least, at a disproportionately more aggressive pace than the national metrics would suggest, places like Vegas and Southern California and South Florida, et cetera. So I think we have a point of view that's informed by our previous experience with labor shortages that 2 things happened during labor shortages: One, on a macro basis, the market tends to adjust for the labor shortages. More nurses enroll in nursing school. Part-time nurses take on more hours, retired nurses come back and work extra shifts because wage rates are going up, and there's an attractive sort of economic equation for them. So I think we see that happening at a macro level in our markets. But the other issue, I think, is that because we've been facing this issue now for, I think, almost 2 years, and we've been focused on it, and we've been addressing it, I think we're finding that we're making internal improvements in our own markets, both at the rate that we're recruiting, mostly nurses, but other clinicians as well. And also, the impact that we're having on the retention of those that we recruit by implementing aggressive mentoring programs and career development programs and providing incentives for employees, again, most notably nurses who come to work for us to really want to stay in our organization and build their careers with us.

Okay. And then my last question is to follow-up on that last point. The company-specific side of it, because I think for the last year or 2, you've kind of talked mostly about how things normally work out over time, and there hasn't been as many clear-cut things. Do you have any more specifics around either how many nurses you're bringing on? Or what's your turnover rate has been as you made progress on retention?

Yes. I mean, so I guess, a couple of things. I mean, I think, again, on the acute side of the business, I think that the way that the labor shortage was manifested primarily was through margin pressures that even though our revenues and volumes were quite robust and have been quite robust for the last few years, I think our acute care margins haven't always been where we would have expected them to be, given those revenue growth rates. And I think it's because of those wage pressures. I think that the acute margins have been improving, and that's the ultimate. I can give you other statistics about the things you asked about, retention and recruitment rates, et cetera. But in my mind, the proof is in the pudding, and it's the margin improvement over time that's really demonstrating our improvement there. On the behavioral side, I think the labor shortage manifested itself in weaker volumes. And for the most part, I think volumes have been, particularly admissions, have been increasing for the last year. So now Q3 was a bit of a hiccup, but I think that was impacted by a bunch of different things, including the hurricanes, et cetera. But I think, generally, we feel like we've continued on this trajectory for the last 4 or 5 quarters of improving our volumes on the behavioral side. And again, in my mind, that's the proof in the pudding that we're improving that labor situation and filling the vacancies.

And Mr. Filton, just to let you know that Mr. Miller has joined.

Thank you.

And your next question comes from Ralph Giacobbe.

Just want to start on the acute care side, Steve, even if we add back the hurricane impact, it looks like trend slowed a little bit from the mid- and even high-single-digit revenue you've been posting. I think you mentioned some other things to kind of consider. Can you sort of call anything out? And then along those lines, just the acute care pricing down 0.6, a little bit worse than what we've seen of late from you. Maybe just walk through the dynamics there just around peer price versus payer mix versus acuity mix in terms of where there's disproportionate pressures.

Sure. So I think there's, at least, several questions embedded in what you've asked, so I'll try to cover them all. I mean, one is in terms of the overall acute care revenue growth, I will just remind everyone that the comparison that we're facing in the third quarter to last year's third quarter is quite robust. We had 9% revenue growth in last year's third quarter, really, an extraordinary number. So it was always going to be a tough comparison, I think, on the revenue side. And as a consequence, I think where we landed in Q3 was not far off from where we thought. Obviously, I think if you -- you need to adjust the 2% revenue growth on the acute side for the hurricanes by 100 basis points or 110 basis points here in the sort of low-3s there. I think the only other thing worth noting, and I sort of alluded to it before in response to, I think somebody else's question, was that a little bit of it is sort of the pace at which capacity comes on the acute side. So we opened our Spring Valley Tower in Las Vegas last year in the second quarter of 2017. So that anniversary-ed or that impact was anniversary-ed in the third -- the second quarter of 2017. We opened in '16. We anniversary-ed in '17. Just as an example, I think Spring Valley's revenues for the first 6 months of the year grew by like 15%. In Q3, they were sort of flattish. Now that trend will, I think, kind of reverse itself in Q4, when as I mentioned, I think to Justin before, Henderson will come into our same-store numbers, and I think that'll make the same-store numbers look a lot better. If you want to sort of normalize all that, you can just look at our total numbers and not the same-store numbers. But I think we continue to make pressure. In terms of the specific pricing question that you asked, we talked about this a little bit on the Q2 call. I think one of the dynamics that we're seeing, that is cosmetically affecting our metrics, is that out West, in particular in Nevada, in California, we're doing, I think, a better job of qualifying those short-stay patients as inpatients rather than observation patients. The result of that is a higher level of admissions, but a lower level of revenue per admission. Now I think we have a point of view that, over time, our acute care revenue should grow by roughly 5%, 5.5%, and it should be split pretty evenly between price and volume. But in the current climate, as I think we're making those changes on the observation status, it's skewed more towards admissions than it is or more towards volume than it is to revenue. But I think the ultimate dynamic is the same. And ultimately, we'll settle in at that roughly 5%, 5.5% growth rate that will be split pretty evenly between price and volume.

Okay, okay. That's very helpful. And then you mentioned working capital drag in the U.K., and DSOs are up a little bit. Can you maybe just flesh that out for us? And as you think about next year, any thoughts or expectations around operating cash flow and CapEx at this point?

So we have hedged our balance sheet investment in the U.K. from the initial investment several years ago. And generally, the way that has worked is as the currency translation rate has declined, we had a cash flow benefit. And as it has strengthened a little bit in the recent quarter, the settlement of those foreign currency exchange contracts have a negative impact. So that's what you're seeing in the cash flow statement. In terms of the DSOs, I think that's largely a mechanical issue we have in the U.K. when we bought the Cambian assets. They had a practice of billing the NHS in advance. And because we converted them to our system and our practices to billing arrears, we made that change to be consistent. That created a sort of a short-term working capital crunch in the U.K., but not something that is a, in my mind, a significant issue, going forward.

Okay. And then just the cash flow and CapEx at this point, any thoughts around that for next year?

I mean, we'll give specifics when we give our guidance at the end of the year. But I mean, I think our cash flows generally should grow at the rate at which our EBITDA grows. I don't see any sort of significant cash flow pluses or minuses going into next year. And CapEx also I think ought to continue at roughly the same rate that we're running in 2017.

Your next question comes from Matt Borsch.

Maybe I can just pick up on the U.K. topic, and just ask you what you're seeing in the U.K. market if you've seen any pressures on volumes. And I think that you had alluded last quarter too, that occupancy, that's actually your challenge there. And I wonder if you'd just update us on that as well.

Sure. I mean, I know that the topic of the U.K. was particularly intense yesterday, given the release of one of our peers. I think it's worth noting, I think everybody knows this. But I'll just remind everybody that our geographic footprint and presence in the U.K. is dramatically smaller than our peers who was addressing the issue yesterday. Having said that, I think we have said that our U.K. facilities operated at fairly high occupancy rates. They continue to do so. Other than specific facility issues, I don't think we have seen any particular pressures or issues with volumes in the U.K. nor on the labor side. I mean, we acknowledge that the labor market is a tight one in the U.K., much as it is here in the U.S. But labor issues tend to be market-specific, just I think as they are here in the U.S. And we really haven't been experiencing those sorts of accelerating issues in the last few quarters. I will note, and I made the comments about the final CMA report in my opening comments that we're now prepared and are actively integrating the 2 companies now that we'll be beyond the CMA process. Cambian has always had a history of having great success in the temporary nursing area and the user registry. They use very little of it. We think they have some real best practices that we'd like to migrate to our legacy Cygnet facilities in the U.K.. So now that we are going to be able to integrate the 2 companies, we're looking forward to hopefully even making further improvements in that regard. And if anything, reducing the amount of temporary nurses and registry that we use in the U.K., following along the historic success that Cambian has had.

And Steve, if I could just on a different topic, as you're looking at the -- all the headlines on the ACA exchange enrollment and in light of Anthem's announcement yesterday of pretty broad, not complete, but pretty broad exit from exchanges, how are you thinking about that directionally in terms of impact on your plan for 2018? And is there anything that you can do as it relates to participation in different payer networks that might make any difference there?

Yes. Look, it's difficult for us, Matt, to be terribly proactive in this regard in the sense that we really don't know in our individual markets what the level of enrollment is in the exchanges or disenrollment, et cetera. So it's a little hard for us to react in advance. Generally, we have the view that in virtually all of our markets, there remain a viable commercial exchange choices for those who want to enroll. And so that has helped in terms of network participation, again. And with very rare exceptions, we are network providers in virtually every network in every one of our markets. So I think we're already well positioned if there is movement amongst products or amongst companies to be able to benefit from that. So I think at one level, we're just going to have to wait and see on -- from a macro basis what level of disenrollment there is in the exchanges, come next year. But I mean, in terms of being in all the networks, I don't think we could really do that anymore extensively than we currently do.

Your next question comes from Frank Morgan.

Steve, I was hoping you could give us some detail on the bed expansion schedule over there. What will come along in the fourth quarter, and what's your spending for next year? And then secondly, in terms of any other drags on the business, and on the behavioral side of the business, I know there were some issues at a couple of facilities. But any assumption about that continued drag as it relates to guidance in the -- for the fourth quarter? And then finally, any details on this court order payment? I was going back looking through the filings, and I didn't know which one it related to, but maybe any color there would be great.

Sure. So I think I'll do it in reverse order. The court-ordered issue is old litigation in one of our South Texas facilities. Literally, that goes back 15 or 16 years. A court order came through in the last few months, requiring us to make the payment that we disclosed in the quarterly release. We're appealing that payment, and hope to either have it reversed or substantially reduced. But because it was so old and didn't seem terribly relevant to our current operations, we recorded that in the other segment, not in either of the 2 operating segments. As far as -- I think, you were alluding to the behavioral drags specifically, I think I mentioned this again in an answer maybe to Justin's original question on the call. I mean, we definitely saw a drag in 2 or 3 facilities on the behavioral side that are experiencing regulatory challenges. I think they've been relatively well publicized in Oklahoma and in Massachusetts. As we try and work out our issues with the regulators in those states, rectify what they believe are the corrections we have to make, et cetera, it's a bit of a double whammy because in the current environment, in the current quarter, and quite frankly, into next quarter, we expect we'll have a lower than sort of ordinary referral stream and lower-than-expected volumes. But we're generally keeping our expense structure in place in the hopes that we're going to rectify this relatively soon, and we'll be able to get back to relatively normal operations. So I think what I was saying in response to Justin earlier was that we assume that the drag from those facilities that we experienced in quarter 3 would be fairly similar in Q4, but that as we entered into 2018, we would either rectify the revenue side of this, and essentially get back to where we were or we would have to rightsize the facilities and adjust our expenses to a lower, a more permanent sort of revenue reduction. So we'll deal with that. But at least, in Q4, the assumption was, as we continue to work with the regulators in the states in those markets, it'll be the same magnitude of result. And then I think your bed expansion question, which was your first question, we will -- it's not always the most ratable sort of thing, but I think we've been adding beds at a pace of about 600 or 800 beds a year on the behavioral side. That's certainly been our target. And I think that has not changed for us, and we would expect something along those lines in 2018 as well.

Your next question comes from Ana Gupta.

Steve, I wanted to follow up on the behavioral side. So as you pointed out, it's encouraging that your length of stay pressure hasn't gotten worse sequentially. I wasn't sure when we met with all of you in September. Given that, and I think your commentary about volumes being largely impacted by, sounds like transient issues on hurricanes, maybe more seasonality or whatever, what is the timing, do you think, now of you getting back to that normalized revenue growth rate? You've given us an update in the second quarter at being in mid-2018.

Yes. I don't think that's really changed, Ana. I mean, again, I think, from the original guidance back at the beginning of the year, the original guidance sort of was premised on the idea that we could get to that sort of 5% targeted same-store revenue growth rate in behavioral by the end of 2017. And I think we really changed that view at the end of the second quarter to say, "No, this was now more of a first half 2018 issue, either Q1 or Q2." Again, I think given some of the challenges in Q3, I guess I would conservatively say it's probably now more a Q2 of '18 issue. But I think it's all, really, from our perspective, just elongating the time frame on an incremental basis rather than changing any sort of fundamental view we have about what the real underlying metrics of the business are.

And on the length of stay, can you tell us in any more color on why it's stabilizing now? It sounds like from all your comments, this is coming mainly from mix shifting to managed Medicaid and managed Medicaid payers putting a lot of pressure. Has this been kind of a one-time thing because of the IMD exclusion? And it then subsides and you kind of -- your comps get easier? So next year, you have a flattish number. Is that a fair assessment?

Generally, yes. I mean, I think there is -- we're talking about a relatively short length of stay for these Medicaid patients to begin with. So I think there is, quite frankly, almost by definition, a limited amount of downside in terms of how much the length of stay can be reduced without really impacting the clinical outcomes and the quality of care for these patients. That's number one. Number two is, I think because we're now focused on this issue, I think we're just doing a better job of really documenting the clinical needs of these patients and the need, where appropriate, for them to stay longer where that's clinically appropriate, et cetera. So I think it's a combination of kind of a natural floor on this issue, as well as our just doing a better job, representing the interest of our patients and our clinicians.

And as far as -- so given that you're seeing it's a natural floor, do you think you would still need to invoke mental health parity? Or any other kind of legal bouts to pressure them, I mean, not necessarily in court? Or is this pretty much something that's behind you at this point?

No. I think -- and I think we've said this before, I mean, I think we have sort of a menu of options available to us that just range from day-to-day interactions with the payers, and providing them proper documentation, et cetera, and extend all the way up, as you suggest, to ultimately having to take a payer to court. And obviously, that's the last sort of resort that we would try and avoid. But again, I think that we're going to pursue what we think is best for our patients and what our clinicians advise us is best for our patients to whatever degree we have to. And again, I think we would hope that in most cases, that can be mutually agreed upon with the payer. But if we need to be more aggressive, we'll do that as well.

And then final question, can you give us an update on the regulatory settlement that you're seeking with the federal and state agencies, and on the magnitude of that and timing?

Yes, that's a slow-moving process. It has always been a slow-moving process. I mean, I think we have expressed a more positive view, I guess, on our part in the last quarter or 2 that the government seems more engaged and more interested in bringing this investigation to conclusion than they have been for a while. But to be, I think, realistic about it, I think we're still well into the middle of next year at the earliest before we could realistically bring this to conclusion. We feel like we're working as -- on as focused a basis and as aggressively as we can on our end to provide the government everything they've asked for and to keep moving this along. And we hope that they'll respond in a sort of similarly interested way, and have every reason to believe at this point and hope that they will.

Your next question comes from Gary Taylor.

You've answered almost everything I had. Just last one, on the 4 Puerto Rico behavioral facilities, do you have annual revenue and EBITDA contribution from those combined facilities fairly?

Sure. So just to clarify, Gary, I mean, I think that it's 3 facilities in Puerto Rico and 1 in Houston that has beds closed. But the fundamental question, I think, probably, on a combined basis, those facilities have annual EBITDA of maybe $10 million or $12 million. So it doesn't seem all that material. But I just want to make the point that, in the short run, because I think of a dynamic that I described before, where effectively, we've reduced substantially the amount of revenue we have. We may have increased the expense, but we certainly haven't reduced the expense, as we sort of wait for the markets to get back to normal, and we try and do right by our employees. The drag that those facilities, I think, could provide over the next quarter is, I think, far greater than their actual EBITDA. So I think we have the sense that it could be another $5 million or $6 million drag in the quarter because we've got reduced revenue and not reduced expense. So they're not all that large facilities, but that's why in the short run, I think they have an outsized or potentially an outsized impact.

Right. You can actually run a lot near term.

Correct, that's exactly the issue.

Your next question comes from Whit Mayo.

Back to the 2 behavioral hospitals that you referenced that were a drag in the quarter from regulatory issues, did you actually get the dollar amount that it impacted the quarter?

Yes. So -- well, I'm not sure that I did, Whit, but I think that number is probably in the $7 million, $8 million, $9 million range at the 2 or 3 facilities that I think are facing sort of current regulatory challenges. That was the drag in the quarter.

Got it. And just, sorry, I had a couple of numbers written down here that maybe a little inconsistent. But the hurricane drag on a EBITDA basis, that was how much for the behavioral business in the quarter?

Somewhere in that $8 million range.

Okay. So it looks like adjusting for those 2 items, EBITDA would have increased 1.5% or so year-over-year, so a little bit better trajectory, I guess, on the underlying business. Is that how you would characterize it?

I think that's fair.

Yes. And then in terms of same-store revenue or adjusted admissions volumes patient days, how did the hurricanes impact the top line for the behavioral segment?

So I think we said that we believe that the impact was about 100, 110 basis points on both volumes and revenue.

Okay. So that would get you to close to 3% same-store revenue. Looks like maybe the highest year-over-year increase in 5 or 6 quarters. So just want to make sure we're looking at this correctly. Maybe my next question, just on capital deployment, you bought back some stock. You continued to pay down debt. Leverage is in the low-2s at this point, and I know the message has sort of been doesn't make a whole lot of sense to pay down a lot of debt here, and we're going to get more aggressive on buybacks, but it doesn't seem like you're getting terribly more aggressive. So just anything to read into this? Just curious on any updated thoughts as you think about the balance sheet and leverage, going forward.

And I think all the comments that you made, which were meant to articulate, I think, our position remain the same. We do -- we are more than comfortable with our current leverage levels that we don't want them to be any lower. We'll continue to be, I think, an active acquirer of our shares at these levels. We do try and balance that and manage that against any other external

(technical difficulty)

always easy to forecast or predict in a precise way. So there is a bit of a struggle to manage that. But I think, otherwise, everything else you said about leverage and about the attractiveness of repurchasing our own shares remains true.

Okay. Maybe one last one, and I'll get back in the queue. I know you're not giving guidance for 2018 at this point. I mean, presumably, you're in the midst of the planning process. And I just didn't know if you're looking at Street numbers, and you see any discrete headwinds or tailwinds that you'd like to call out at this point. Just I don't know, maybe just to frame up how you're thinking about the businesses generically next year just to give us a little bit of help in framing up where we should be for 2018.

Yes. So we certainly are not giving guidance today, and we'll not give 2018 guidance until most likely the end of February, which is our normal practice. But I think I have mentioned already previously in this call as well as at other times our general sense of the trajectory of the 2 businesses. We kind of believe that the behavioral business will sort of get back to -- we would sort of describe as kind of a normalized 5% same-store revenue growth rate sometime in the middle of 2018. We think that the acutes, which have been running pretty consistently, at least, at the 5% to 6% range, will continue to do so into '18. So you can sort of, I think, presume the EBITDA growth that goes along with that. In terms of some of the pushes and pulls that go along with that, some of the special reimbursement items are still difficult to project. We'll certainly be able to give more precise guidance on that sort of -- on those sort of issues as we get closer and as we give our formal guidance. But again, I think we've talked about how we see the fundamental trajectory of the 2 businesses pretty candidly, and frankly, pretty consistently for a while now.

Your next question comes from John Ransom.

Most of my questions were asked, but just a more philosophical question. Hospitals have been moving into the outpatient business for a decade-plus. It's not new, but I just see more rhetoric, and I think, more awareness from consumers that just because it's outpatient, if it's owned by the hospital, there's a premium that's paid versus, say, a physician-owned surgery center. A, do you think that's a legitimate criticism; and B, is that something that the industry can address by becoming a bit more sensitive to the elasticity of demand? Because it looks to me like they are emerging with the freestanding urgent care clinics with physician owned surgery centers that there are lower-cost options out there than what hospitals can do even though they call it outpatient. Is that something you guys think about at all? And is that a legitimate issue to be focused on?

John, I think it's a legitimate issue. I'm not sure, and certainly, a lot has been written about consumerism and from our perspective, this still largely remains a payer-driven issue. And to your point, I mean, at the end of the day, payers have a clear line of sight, I think most of the time, about where the most efficient and cheapest care is being provided. And we have to be competitive, as hospitals, to compete with the niche providers who are providing that same care. So I think this is more of an issue with -- between the providers and the payers than necessarily between the providers and directly with the consumers. I also believe that as the reimbursement landscape continues to evolve and we move to more bundled payments or ACO payments, or even ultimately, decapitated payments, the leverage will swing back to the providers to the hospitals and the physicians who will control more of that health care dollar. And when they control the health care dollar, I think they'll be able to steer that business back to where they're providing it, as opposed to where these niche providers are providing it. So again, this is a slowly evolving and slowly developing dynamic, but I think that's the direction we'll continue to move in.

So is it also fair to say that maybe relative to expectations, in the early days of the ACA, have the new-age payment structures with managed care, they've been slower to evolve for you than you might have expected? And if so, if that's true, then why do you think that is other than it's just really complicated and payers are bureaucratic and slow to move?

Yes, so I think the first part is absolutely true. And again, as I've said in an answer to a number of questions already today, look, health care, I think is very much a local market business, and a lot of these trends move at different paces in different markets. We tend to be in kind of smaller, probably not a great description, but less developed, less mature, I'll call them, managed care markets. So I think some of the trends don't develop as quickly in our markets as they do maybe in some others. But yes, I mean, look, we've cited, for instance, the development of narrow networks as something that we generally look forward to, and felt like we would benefit from, and we've seen some of that and we've helped to engineer some of that in our markets, but it's been slower than we expected. And look, I think your point, John, about us being complicated is not something that should be overlooked or taken too lightly. I think one of the reasons why payers are slow to move on these things, and quite frankly, providers are slow to move is because it is complicated, and you do need a lot of analysis and information to make sure that everybody can continue to sort of be viable and prosper, and when you change the reimbursement landscape in a terribly significant way. So I think it'll continue to evolve, but it'll be at a measured pace.

Yes. And just one more on this topic. As you know, of course, CMS took a step back on CJR, and it's voluntary versus mandatory. How is -- at UHS, do you have a uniform approach to this, where you might do it in some markets and not in others? Or is it more of a market-by-market decision? And just kind of where are you on the post-acute bundling of, in particular, hips and knees?

Yes, I mean, so I think we may have talked about this publicly before, but UHS was actually, I think, a pretty aggressive early adopter of the bundled payment initiatives and volunteered in many of our markets, if not, most of our markets, for the initiatives. I think we felt like we were well-positioned, particularly in partnership with our physicians, to benefit. And I think for a lot of the reasons that CMS have stepped back in terms of timeliness of information and the sort of fulsomeness of the information available to allow providers to manage through these issues. We -- I think we became a little bit disillusioned and sort of disenrolled from a lot of these programs. But I think we've spent a lot of time and focus being prepared for these. And when I think the payers, both the government and the private payers, are ready to move forward with them, I think we feel like we'll be well-positioned and prepared to move forward with them.

Your next question comes from Sarah James.

I wanted to go back to the comment involving the nurse shortage on the behavioral side of the business. So in the past, you've talked about bed closures because of the nursing shortage. Can you just remind us what percentage beds were closed or kind of the headwinds experienced on admissions from these bed closures? And then the resolution that's coming in 4Q, should we think about that as the -- all of the beds reopening, which I think was the goal you had stated in the past? Or is it a step towards that, but not quite reaching a full reopening of all the beds?

Sure, Sarah. So I mean, I think what we said when this -- we first started discussing this problem, which as I mentioned earlier, was probably a good 2 years ago. We're careful to note that this was really a market-specific issue that there were 6 markets that were particularly difficult for us, maybe 20-some-odd facilities. The reason that we don't necessarily sort of give these closed bed numbers or percentages of beds that are closed, et cetera, is because I think those who follow the industry like to think of this as sort of a static issue that there's kind of a number of closed beds at the outset, and then you just continue to work that number down. I mean, the reality, as you might imagine, is it's a fluid sort of issue. And a facility that had a problem is able to solve its problem, but then another facility comes into it. The -- what I said, I think, in response to an earlier question is, ultimately, the way we measured our progress, particularly on the behavioral side of this, is the continued growth in admissions over the last year or so. The labor shortage was a problem that manifested itself on the behavioral side, ultimately and originally through a pretty dramatic decline in admission growth. And I think in our minds, the way that we're able to convince ourselves that we're ultimately solving that problem is through the recovery of admission growth and the rebound in admission growth. And even though, as somebody asked before, we certainly track a lot of other metrics, like vacancies and turnover and number of nurses in training and orientation. Ultimately, the proof in the pudding is are we able to open these beds and are we able to increase admissions? And we feel like for the most part, we've been able to do that, albeit, at an incremental way. The progress has been slow, but we've been able to do it pretty slowly and steadily for the last year or so.

And will you reach the full benefit of the additional admissions in the fourth quarter? Or should we still think of this as a work in progress?

Yes. So I think, again, what we've said is for a variety of reasons, I think it will take us to the first half of 2018 to get back to the 5% targeted behavioral growth. One of the issues that continues -- we'll continue to work on will be the labor shortage. So I don't think that will be -- and by the way, I don't think even when we get to the 5% growth that it'll absolutely mean that we've solved, if you will, the labor shortage. It'll just mean that we've kind of returned to at least sort of a status quo that we were at back in the middle of '15 when the problem really began to accelerate.

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

I do not, other than to thank everybody for their time, and we look forward to speaking with them at the end of the year. Thank you.

This does conclude today's conference call. You may now disconnect.