環球健康 (UHS) 2017 Q4 法說會逐字稿

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year-end Conference Call. (Operator Instructions) Mr. Steve Filton, you may begin your conference.

Thank you. Good morning. Alan Miller, our CEO, is also joining us this morning, and we both welcome you to this review of Universal Health Services' results for the full year and fourth quarter, ended December 31, 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, 2017.

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 recorded net income attributable to UHS per diluted share of $7.81 for the year and $2.31 for the quarter. After adjusting each period for the impact of the Tax Cuts and Jobs Act of 2017, the favorable impact from January 1, 2017 adoption of ASU 2016-09, and the depreciation and amortization expense associated with the implementation of electronic health records applications at our acute care hospitals, all as disclosed on the Supplemental Schedule included with last night's earnings release, adjusted net income attributable to UHS increased to $189.6 million or $2 per diluted share for the quarter ended December 31, 2017, as compared to $176 million or $1.80 per diluted share during the fourth quarter of 2016.

On a same facility basis, in our acute care division, net revenues increased 6.5% during the fourth quarter of 2017 due primarily to a 7.3% increase in adjusted admissions. On a same facility basis, net revenues in our behavioral health division increased 1.6% during the fourth quarter of 2017.

Adjusted admissions to our behavioral health facilities owned for more than a year increased 2.5%, while adjusted patient days decreased 0.7% during the fourth quarter of 2017, as compared to the fourth quarter of 2016. Revenue per adjusted patient day rose 2.9% during the fourth quarter of 2017 over the comparable prior year quarter.

Our cash generated from operating activities was $1.183 billion during 2017, as compared to $1.334 billion during 2016. Contributing to the $151 million decrease was an unfavorable change of $144 million in cash flows from foreign currency forward exchange contracts related to our investments in the U.K.

Our accounts receivable days outstanding remained unchanged at 52 days during each of the fourth quarters of 2017 and 2016. At December 31, 2017, our ratio of debt to total capitalization declined to 44.7%, as compared to 47.7% at December 31, 2016.

We spent $139 million on capital expenditures during the fourth quarter of 2017, and $558 million during the full year of 2017. In 2017, we completed and opened 471 new behavioral health beds, including de novo facilities.

During 2018, we expect to spend approximately $600 million to $625 million on capital expenditures, which includes expenditures for capital equipment, renovations, new projects at existing hospitals and construction of new facilities. Also, in January of 2018, we acquired the Gulfport Behavioral Health System, a 109-bed behavioral healthcare facility located in Gulfport, Mississippi.

In conjunction with our share repurchase program that commenced in 2014, during the fourth quarter of 2017, we repurchased approximately 1 million shares of our stock at a cost of approximately $101 million or $100 per share. Since inception of the program through December 31, 2017, we have repurchased approximately 7.35 million shares at an aggregate cost of approximately $836 million or $114 per share.

Our estimated range of earnings before interest, taxes, depreciation and amortization for the year ended December 2017 is 1.17 -- excuse me, $1.758 billion to $1.837 billion, representing an increase of approximately 3% to 7% over the $1.709 billion of EBITDA generated during 2017.

In addition, our 2018 guidance range includes an estimated favorable impact on our provision for income taxes and net income attributable to UHS of approximately $142 million to $152 million, resulting from the Tax Cuts and Jobs Act of 2017, as discussed in last night's press release.

Our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2018, is $9.25 to $9.90 per diluted share. This guidance range also includes the favorable impact of approximately $1.52 per diluted share to $1.63 per diluted share, resulting from the Tax Cuts and Jobs Act of 2017. This adjusted EPS guidance range represents an increase of approximately 23% to 31% over the adjusted net income attributable to UHS of $7.53 per diluted share for the year ended December 31, 2017, as calculated on the supplemental schedule included in last night's press release.

During 2017, our net revenues are estimated to be approximately $10.92 billion to $11.06 billion, representing an increase of approximately 5% to 6% over our 2017 net revenues.

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

(Operator Instructions) Your first question is from Justin Lake with Wolfe Research.

Steve, on the behavioral side, can you give us some color in terms of -- ex the hurricanes and ex some of the regulatory challenges you were facing at a handful of facilities, what was your view of same-store revenue growth and behavioral EBITDA year-over-year?

Sure, Justin. So we discussed in our third quarter conference call 2 nonrecurring items in the third quarter. One, you referenced both of them -- one was the impact of hurricane or various hurricanes in the third quarter. We estimated that to be about $7 million or $8 million in the third quarter, and suggested that impact would continue into the fourth quarter largely in our Puerto Rico facilities, and a lesser degree, in a couple of Houston facilities, and in fact (technical difficulty) $7 million or $8 million drag in Q4. Similarly, we discussed, as you referenced, 3, what we described as regulatory challenged facilities in Q3, that amounted to a drag of $9 million or $10 million in the third quarter, and said that would also persist into Q4. It did, we also said that by the end of the year, we would resolve those issues. We have resolved those 3 facilities in the sense that in Boston and in Dallas, we have decided to close the facilities in question, partly because we have a broad network of hospitals in those 2 markets, where we think we can treat most of the patients who were being treated at those 2 hospitals. And then in Oklahoma, where we had lost a significant Medicaid contract or state contract, we regained that contract as of January 1. So we're back on a more favorable trajectory in our Oklahoma facility. Having said all that, I think when you make the adjustments for those items in Q4, we believe that same-store behavioral health revenue, was about -- grew by about 3.5% over last year's fourth quarter, and EBITDA was generally fairly flat, maybe just down very slightly.

Okay. And then it looked like mix was the key kind of driver of why we didn't see the hoped-for behavioral -- same-store revenue improvement, so on an adjusted basis. Can you give us some color on what you saw there? And then you're 2 months into the first quarter, any update you can give us on both volume and mix on the behavioral side, and how you see things trending through the first 2 months of Q1?

I think, as the metrics suggest, our admission growth, our behavioral admission growth in Q4 was generally within our expectations. Length of stay, which has been a pressure point at various times during 2017 did pressure our volume -- overall volume growth, and therefore, our overall revenue growth in the quarter. And I think Justin, as your question suggests, we believe that most of that pressure was a result of payer mix issues. And when I say that, I really mean just an increase in Medicaid patients and a decline mostly in Medicare patients, and our Medicaid patients generally have a lower length of stay. So to the degree we have more Medicaid and less Medicare patients, our overall length of stay will naturally decline somewhat, and I think we saw that in Q4. Our expectation is that the underlying demand for our behavioral beds and our behavioral services remains rather strong. We're going to continue to market and focus on all of those who are demanding our services, but especially for Medicare and commercial patients for whom we may have seen some slight decline in business, and that will help restore both the length of stay and the revenue trajectory, so that we can get back to this 5% same-store revenue growth target that we have talked about for some time and that we -- our guidance assumes that we'll achieve that some time in the middle of 2018.

Your next question is from Peter Costa with Wells Fargo Securities.

I apologize if I missed this. But your revenue rebound in the acute care space, clearly, some of those is hurricane-related. But the part of it that was not hurricane-related, where was that geographically? Can you talk about that a little bit?

So I mean, again, Peter, when I think when you say some of the rebound, I assume you're talking sequentially from the third quarter.

Yes, correct.

And so I think when you compare to fourth quarter of last year, we are getting several benefits in our acute care revenues and EBITDA. One is, and we talked about this a number of times during 2017, a fairly significant turnaround in our health plan operations. That's really more of an EBITDA issue. But in the fourth quarter, there's probably a $15 million, $16 million turnaround in our health plan results in Q4, largely as a result of a very soft fourth quarter last year. There's also, as much has been written about and talked about, a very significant flu impact in Q4. And while I think we always find it difficult to sort of absolutely precisely define what the benefit is, I think we believe it probably helped our admissions and our revenues by 150, 200 basis points in the quarter, and probably contributed an incremental $9 million or $10 million of EBITDA in the quarter. And then finally, I think, as at least one of our peers, Tenet, has discussed at some length, we did have sort of a catch-up California provider tax revenue in the fourth quarter of $6 million or $7 million. So that's probably $30 million to $33 million of, to some degree, nonrecurring EBITDA. Now, again, I think even if you adjust the fourth quarter results, the fourth quarter acute care results for those nonrecurring items, it was still a very, very strong quarter. But it's helpful to sort of keep that in mind, as you think about what the ongoing earnings power of the segment is.

And then just one more if you don't mind. The additional funding for the opioid crisis, some of that's going to be headed towards behavioral health treatment. Have you thought about how you're positioned to capture some of that and what could you capture of that today? And what do you think it will mean for the company over the next year or 2?

I think it's worth noting, Peter, that we have a well-established addiction treatment business that would include the treatment of patients who are suffering from an opioid addiction. Today, I think we would estimate that somewhere around 10% of our behavioral revenues are addiction treatment related. Again, difficult to make it a terribly precise number because so many patients who have addiction illness also have other diagnoses and these dual diagnosis patients, as they're referred to, are often -- or they're not always characterized as addiction patients. But with 10% of our revenues currently coming from addiction treatment and a comparable number of our beds dedicated to that service, we are I think, in a good position to respond to the needs of every one of the communities that we service to the degree that there are more funds available from the government in particular. A lot of, I think, those funds are being directed towards outpatient treatment, and we've already opened some outpatient -- new outpatient services to specifically respond to that. There are new medical -- medically-assisted treatments for opioid addiction that we've begun to pilot and experiment with those as well. So to your question, I think we are well aware of obviously the focus on the opioid crisis and on the additional monies that may flow from the government. I think we're in the very early stage of this, so it's a little hard to know exactly what those monies are going to be for, exactly how they're going to be allocated, but we're certainly very much on top of it, and prepared to respond to the needs as they arrive.

Your next question is from Sarah James with Piper Jaffray.

So one topic that's been coming up increasingly is a focus on capital allocation for higher acuity on the acute side, and that becoming a competitive environment. Can you talk about how you see UHS positioned? What your plans are for driving acuity mix and how you see revenue per adjusted admission on acute trending, going forward?

Sure, Sarah. So I think that -- and this is not terribly new, but I think for some time now, some of the lower acuity procedures that had historically been done in the hospital setting have been moving out and into different and more ambulatory settings, and the business that remains in hospitals tends to be skewed towards the higher acuity patients. In that regard, I think for several years now, much of our capital spending in our acute care segment has -- particularly within our hospitals, has been dedicated to that -- those higher acuity services. We've expanded a lot of our emergency rooms, where many of these patients are entering the system. We've expanded our operating room capacity and technology and things like cardiac cath labs, et cetera. At the same time, I think we've made an effort to make sure that we're also participating in this trend of moving lower acuity patients to sort of more ambulatory, lower-cost settings. And so we've invested over the last several years in freestanding emergency rooms in a number of our communities and ambulatory surgery settings, outpatient imaging settings, et cetera. We always view healthcare as a very local business, and every community and every market is a little bit different and the needs are different and our responses are different. But effectively, I think we've been trying to target our capital spend to meet sort of those 2 trends of higher acuity patients remaining in the hospital and lower acuity patients being shifted to more ambulatory settings.

So putting that all into perspective, how would you see the revenue per adjusted admissions trending over the intermediate term compared to where they have been historically?

What we have talked about, we're feeling that in our acute care segment, a 5% to 6% same-store revenue growth rate is a reasonable target. Furthermore, I think we've identified an expectation that, that revenue growth rate would be split pretty evenly between price and volume, so you're talking about 2.5% or 3% revenue per unit growth in -- on the acute side. And obviously, embedded in that number is some of this acuity, again, what I'd preface my remarks to you, saying, I don't think that this trend towards higher acuity patients in the acute business is necessarily new. So I think it's embedded in the numbers that we're projecting and are in our guidance for next year.

Your next question is from A.J. Rice with Crédit Suisse.

Just a couple of questions as well. First of all, on the outlook for 2018, you just said, I guess, a 5% to 6% same-store revenue growth in acute. Maybe can you give us a flavor for what's embedded in terms of EBITDA growth on a same-store basis in both sides, and maybe the behavioral segment for the year? And is there any other puts or takes that we should remember as we think about laying out the unusual items? I know the hurricane, hopefully, that won't recur at the same level in the back half of the year, but any other things to highlight?

Sure, A.J. So I think when we talk about the projections for next year, they are kind of same-store recurring projections, as you repeated. On the acute side, I think we're talking from 5% to 6% revenue growth, which in our minds, translates to a 6% or 7% EBITDA growth. On the behavioral side, as I alluded to in my earlier comments, our expectation is that by the middle of 2018, we ought to be able to get that this 5% revenue growth and 6% or 7% EBITDA growth, but that's a ramp-up as the year goes on. So embedded in our guidance is a more blended 3% to 4% revenue growth for the year or maybe 2% to 3% EBITDA growth. There are -- we do get the benefit, I think, of some nonrecurring items. We talked a lot about them already in the answer to the questions about the fourth quarter and in the third quarter. And I think if you go back to the second quarter, we had some additional malpractice expense, and we had some Massachusetts (inaudible) unfavorable adjustments. I think you can presume that all those items don't reoccur, and that's probably in total another $25 million, $30 million of nonrecurring items -- nonrecurring unfavorable items in 2017 that don't reoccur in 2018.

Unfavorable to the EBITDA one?

Yes. And again, I will say that sort of offsetting that, and you can see this in the 10-K that we filed last night, is a $30 million reduction in provider taxes year-over-year. So part of the reason I haven't highlighted the sort of the nonrecurring items, I think they largely cancel out, and the same-store results for the most part is what you see flow through.

Okay. And then maybe conceptually, you guys have the lowest leverage in the sector, strongest balance sheet, I guess. And you also -- as you said in your prepared remarks, you're picking up $150 million of additional cash flow from tax reform. Any thoughts of where we go from here in terms of capital allocation? I know you love to do deals, but it seems like they've been coming pretty slow. You've been active on the buyback. You certainly could be a lot more active if you wanted to, dividends, even some companies are talking about or accelerating capital projects, what's a -- give us some flavor for what you're thinking.

Look, we're extremely pleased that we have as much flexibly as we do with our balance sheet, as you have suggested, and obviously, the benefit from the tax cuts just enhances that position. UHS has a reputation for being very judicious in terms of how we deploy our capital both on an M&A and a CapEx perspective. I think we'll continue to do so. On the other hand, as we've already talked about a little bit in this call, we're very focused on spending dollars and enhancing our market franchises, so that they really can compete across the continuum, whether it's in behavioral or in acute care. We'll continue to do that as we move into next year. We'll continue to explore all the alternatives. And where it makes sense, we'll continue to be an active acquirer of shares and return our capital to our shareholders because we think that, often, that's a compelling deployment of capital for us as well. But we're not going to sort of set targets at the beginning of the year or make any firm commitments because it's something that I think we continue to evaluate all the time based on the opportunities that are presented to us. And I think, as you kind of alluded to in your question, the most variable of all those metrics are the M&A opportunities. At any point in time, we're looking at generally a series of M&A opportunities, some of which seem attractive, some of which seem compelling. And we often pursue them, and to your point, not a ton have wound up being actionable or executable in the last several years, but that doesn't mean that we're not going to continue to spend times on those that seem worthwhile, and have, in our minds, a reasonable chance of action-ability.

A.J.? Steve has covered the waterfront. I don't want to skip the part that -- we like our stock, and we think it's a good value, and we have been buying consistently and we're always looking at it.

Your next question is from Kevin Fischbeck with Bank of America.

I just wanted to dig into length of stay a little bit. It sounds like you're saying that length of stay is under pressure, in part, because of payer mix shift. But I wanted to understand why you're seeing those payer mix shifts. Is it because, fundamentally, the Medicaid business is just seeing more demand growth because of things like IMD, et cetera? Or do you think you're somehow losing market share in commercial and Medicare, just some perspectives on that?

So actually, I think, in some respects, Kevin, you answered your own question. I think that we are seeing more Medicaid patients because the IMD exclusion has been lifted and because in any number of our facilities, we can now be reimbursed for adult Medicaid patients for whom we were unable to reimbursed for many, many years. So that, I think, has contributed to the surge in Medicaid patients to a degree. I think that there's a lot of competition for some of these other payer classes, like Medicare and commercial, both with other freestanding facilities and also with acute care hospitals, who operate behavioral units. One of the things that we have focused a great deal on is the idea that a number or many Medicare behavioral patients also have certain physical or medical-surgical ailments, and payers sometimes and patients and families presume that they can be better treated in an acute care setting. We've focused very much on an ability to treat those kinds of patients, or at least a subset of those kinds of patients in our behavioral freestanding facilities as well. So we're very focused on treating those elderly, behavioral patients who also may be medically compromised. I think that there's been increased competition for those patients. So I think it's a -- it's a function, again, as you suggested, in your question of both just an increased flow of Medicaid patients because of the lifting of the IMD exclusion, and then increased competition for some of those other patients, particularly, Medicare patients, amongst all providers.

In the past, you talked about getting to that 5%, 5.5% range. And then when length of stay saw the pressure, you kind of said, "Well, we can still probably get there. We just to accelerate admissions more." And we really haven't seen admissions really accelerate obviously to close the gap that would be necessary to get to that 5% to 5.5%. So it sounds like you're saying that at least in the short-term, there's some pressure from competition. How do you think about that ramp to 5%, 5.5%? And if length of stay continues to be flat or down a little bit, where is the biggest opportunity to kind of see that acceleration from here in admissions?

Yes. I mean -- and I'm not sure that I wouldn't characterize the trend a little differently than you, Kevin. I think we saw our admissions decline fairly precipitously back in -- right around the middle of 2015. We largely attributed that decline to a labor shortage and a shortage of clinicians, mostly nurses, but to a lesser degree, psychiatrists in some markets. We spent a good year or so addressing that issue, and I think began to really make progress on filling many of those vacancies in the middle of 2016. And I think, if you go back, you will see that, actually, admission growth from about the middle of '16 to the middle of '17 really did increase pretty ratably and steadily. I think -- which I think now, I think, is where your question is more valid. It stalled a little bit in the last couple of quarters because of this length of stay pressure. I think what keeps us or what -- why we remain confident is that when we look at the number of patients that are being presented to our facilities, who sometimes we're unable to treat, either because we don't have all of the clinicians we need or we don't have all the beds we need or because they're medically compromised, as I was recently just alluding to, I think we think the demand is there, and that's why we continue to talk about being able to get to that 5% number. Now again, I'll be the first to acknowledge that this has been a kind of a greater slog, and has taken more time than we originally anticipated. But I think we believe firmly that the underlying demand can remain strong and is sufficient to get us back to that 5% growth.

So this is a still a labor issue in your view? If you had enough staff, you would -- you will be seeing a lot more volume than you're seeing right now?

I think it's a combination of issues. I think it is a payer mix issue as I suggested. It is still in a few -- a handful of places, it's a labor issue. It is in some places, a physical bed and physical capacity issue. And finally, in some cases, it's a sort of the ability to treat certain medically-compromised patients. So I wouldn't say it's a single factor.

Your next question is from Josh Raskin with Nephron Research.

First question is just -- it's been a while since we saw one of the behavioral health acquisitions and we see Gulfport now. And I'm just curious, was -- are you seeing a change in pipeline? I know you sort of -- you mentioned earlier that the M&A is the least certain of the capital deployment areas. But have you seen any change in trends there? Any -- is the pipeline a little bit -- more robust or less robust at this point? I'm just curious on the behavioral side.

So obviously, we can -- again, I think, sometimes, you have to take to a step back. When people say that the acquisition pipeline and activity is really slow. And I mean, we did that Cambian acquisition in the U.K. just a little over a year ago. That was a fairly significant acquisition. In the U.S., we've talked about the fact that we've been very focused on these integration or joint ventures with acute care hospitals and integrating with them and penetrating their behavioral businesses. We have in our 2018 plan and embedded in our guidance is an opening here in Lancaster, Pennsylvania, of a 126-bed hospital that we're building in partnership with a not-for-profit hospital, that will open at the end of the second quarter. We have a hospital in Spokane opening at the end of the third quarter, a 100-bed hospital, in partnership with the Providence System out in the Greater Seattle market. And then the Gulfport deal that I mentioned in my remarks is a similar sort of deal. I mean that's an acute care hospital that we began talking to, and in that case, they simply decided to sell us their behavioral units. So we have a great many of those conversations continuing to occur, and we think that's a fairly lucrative aspect or avenue of growth for the behavioral business, although one that we concede sort of, again, progresses rather slowly, as these are not-for-profit hospitals are fairly deliberate in their decision making. But I think the 3 projects that I outlined are good examples of how this is sort of coming to fruition, and will continue to come to fruition for a number of years to come at this point.

Got you. And that's part of the targeted bed openings thing that you guys have talked about, right?

Correct.

Okay. Got you. And then just lastly, of your -- share buybacks, is there a magnitude in guidance for 2018? Did you put any in there?

Yes. I think in our guidance, we presume that roughly half of our free cash flow will be dedicated to share repurchase, and the other half to sort of undesignated M&A opportunities.

Your next question is from Steve Tanal with Goldman Sachs.

I just wanted to just ask about the Henderson facility that came into the kind of same facility base in the quarter, if you could just sort of break that out and let us know how much that contributed, that would be helpful. And as part of that question, I'm hoping to sort of understand how long that tailwind might last. So what does the ramp period typically look like for a new hospital in your minds? And maybe if you have an estimate for sort of the productivity of that facility today relative to kind of a mature state, and how long, you think, it would take to get there, that kind of thing, that will be helpful for us.

Sure, Steve. So I would say that a typical acute care hospital opening, new opening probably takes close to 24 months to ramp to, I'll call it, maturity. I know, Alan, in particular, has talked about how over the last few quarters, Henderson has ramped beyond our original expectations. I think that's fairly typical of the new hospitals that we've opened in the Las Vegas market over the last 10 years. It's just such a vibrant market and such a strong franchise from our perspective that those hospitals tend to ramp. So Q4 of '17 was the 5th quarter of Henderson's short life, and they're ramping pretty close to, I would say, maturity, which in this case, I think, is measured in comparison to how our other hospitals in the market operate. We don't disclose the profitability of individual hospitals, but I will say that Henderson continued to grow in the fourth quarter. It was probably -- contributed another $6 million or $7 million to our acute care EBITDA growth in the fourth quarter. I think there's another $5 million or $10 million tailwind from Henderson in 2018, as it continues to mature. But because it has ramped up so quickly, I think much of that benefit is already embedded in our results.

Got it, that's helpful. And just one on the guidance, it looks like the EBITDA margin sort of around the midpoint is about flattish. Could you just give us a flavor for kind of the puts and takes in that?

Yes. I mean, I guess, I would need to look at it more carefully. I mean, I think that -- the reality is we're expecting EBITDA for our operations to grow sort of in the low-single-digits, and then we can some benefit from a lower share count. So I think that's how you get to that sort of mid-single-digit EPS growth for us.

I was just thinking about the EBITDA margins just year-on-year kind of...

Oh, EBITDA margin?

Yes.

Yes, and I think that's largely a function of the continued ramp-up of the behavioral business. So if -- as I -- I think in answering A.J.'s question before I talked about behavioral revenues growing at 3% or 4% and EBITDA growing at 2% to 3%, their margins are actually contracting a little bit. The acute margins are expanding a little bit, and that's how, I think, you get those flattish margins. I apologize. I wasn't focused on the margin question.

Your next question is from Ana Gupte with Leerink Partners.

Steve, I'd just like to come back to the -- the question around the interplay of the payer mix, the capacity that you have through the de novo build-out and the staffing and clinical adds versus the competitive intensity. So is this -- what you're saying right now that you are turning away Medicare patients in favor of the Medicaid influx because you don't have capacity? Or is it that the Medicare patients that are going to other freestanding facilities? Or are the acute care facilities almost just keeping the good ones? I don't know, good is relative, but the higher-priced (inaudible) Medicare patients for themselves, while sending your adult Medicaid from ER on a Friday night?

So Ana, I mean, I don't know that it's possible for me to be terribly more precise than what I've said before in the sense that we certainly know a great deal about the patients that are coming to our hospitals. We don't necessarily always know exactly what patients are going elsewhere and what other hospitals or hospital systems in the marketplace are experiencing vis-a-vis market share, et cetera, especially in real time necessarily. So as I tried to sort of answered Kevin's question, I think we're seeing the surge in Medicaid patients because some of the changing dynamics in the regulatory landscape. One of the challenges that we have is that we're a business that receives our patient demand effectively and satisfies it in real time. We're not scheduling patients for admission the way a hotel is or the way an airline is, or even quite frankly, the way an acute care hospital might schedule its elective patients. Most of our patients are being presented to us on an emergency basis day-to-day, and it's a little bit harder to manage demand in those settings. And I mean what I -- again, I'm not sure I can be any clearer than I was with Kevin, but to say we're seeing more Medicaid patients. And because of some challenges, whether that's now the lower length of stay or more competition for those other payer classes, like Medicare, or clinician shortages or capacity shortages or medically compromised patients, all those factors are sort of contributing to the challenge of both managing payer mix and then managing overall volume. But I think we remain confident that the underlying volume remains quite strong in the behavioral business.

Okay. Just asked another way, would the 2.5% adjusted admissions growth ramp up for the 2018 from 1Q on, and are you seeing that ramping up, and any color on 1Q, perhaps, if you -- can give us? With -- as you bring more staffing capacity and capacity on-screen, should we expect the adjusted admissions itself to go higher, and then length of stay and pricing can do whatever it's doing?

Yes. It's difficult to predict and project, particularly this early in the quarter. I know it doesn't necessarily seem so early on March 1. But obviously, all we've seen from February are volume numbers, which quite frankly, look fairly encouraging. Our behavioral volumes look strong in February. I think the year got off to somewhat of a slow start on the behavioral side. I think with severe weather, winter weather in a lot of our markets have curbed some of our demand, particularly on the outpatient side, but February volumes look strong. But to be absolutely candid, I haven't seen any information on February payer mix or service line mix, and so very difficult for me to comment on any sort of outlook for the first quarter beyond that, and obviously, we still have March to go as well.

Okay. Thanks for that color. That's very helpful. Just moving to the U.K. and knowing I know it's small for you, but there has been talk from the peer around the shift to local government, and some of that demand going to the competition and others, perhaps. I don't know whether they're getting treated. Or is this kind of creating a pent-up demand situation? Can you give us any color you're seeing at all in the U.K. on the census?

Well, I think it's worth reinforcing your first comment, which is that our footprint in the U.K. is extremely small in comparison to our public company peer. And therefore, I'm not sure that our experience is necessarily indicative -- or their experience is necessarily indicative of ours. I will say that 2017 was largely a transition year for us, as I mentioned in a previous response. We did the Cambian acquisition at the very end of 2016, and spent most of 2017 working with the CMA in the U.K. on the outcome of that acquisition, and what facilities would have to be sold. We were very pleased with the outcome of that process. We had to sell a single facility with less than $1 million of EBITDA, and so I think we felt like that work and that interaction with the CMA was worthwhile. But part of the outcome of that process is we were not able to combine our 2 businesses, really, until very late in 2017. So we really weren't able to share best practices or achieve any synergies, et cetera. So I think, for us, 2018 will be a much better gauge of what we can do in the U.K. Look, we would acknowledge that, like in the U.S., it's a tight behavioral market. But I think Cambian is, in particular, has had historical success at really minimizing the use of temporary nurses and registry, and we're hoping to use their best practices in our legacy facilities. And I don't know that we've seen the same pressure on our volumes that our public company peer has seen. And again, we're in a much smaller number of markets, and in different markets. But I think we've said pretty consistently, we haven't necessarily experienced those same issues.

Your next question is from Gary Taylor with JPMorgan.

Just a couple quick ones. Steve, when you said 471 behavioral beds, was that a '17 number or an '18 number?

That was a '17 number.

And did you tell us what you're contemplating for '18 adds?

We -- I didn't. I will tell you that I think that number is probably a little bit higher, maybe in that 500 to 700 range.

And what will you spend on that to do that?

Yes, so I think, on average, a new behavioral bed is probably in that $250,000 bed range. Obviously, it's dependent on where they are, et cetera, but I think that's a good average.

And are those all add on to existing facilities, new facilities? Or are any of these in some of the JVs you had talked about?

Yes. So like the 2 facilities that I mentioned before in Lancaster, Pennsylvania and Spokane would be included in that number. And then I think the bulk of the rest would be bed additions at existing facilities.

Okay. Last question, can you talk a little bit about what you're budgeting in terms of labor cost for both segments?

I think we have the view that labor inflation in both businesses is probably in that sort of 3%, 3.5% range. I think the focus, which is a little bit different in each of the business segments, I think on the acute side, their main challenge as a result of the labor shortage has been increased use of what we describe as premium pay, the use of temporary nurses, the use of overtime. We've seen that number come down considerably in 2017, and our projections, I think, presume that it comes down more in 2018. And on the behavioral side, the issue has been not so much labor inflation as much as it's been a difficulty in filling all those vacant positions again. I think, as I've already mentioned, I think we made a lot of progress in '17. I think we presume that we'll continue to make more progress in '18, and that's -- all that's incorporated, I think, in our guidance.

(Operator Instructions) Your next question is from Ralph Giacobbe with Citigroup.

I just want to go back to the pricing side. It remains a little bit soft in the quarter. I know there were some acuity due to the flu. But California provider fee maybe should have helped balance that. So I was just trying to get a sense, is it payer mix pure rate or something else that's kind of causing the drag? And as I look at 2017, it's been flat to down, so just trying to understand kind of the visibility around that 2% to 3% embedded in for '18.

Yes. And again, I think you've addressed some of it yourself, Ralph. I mean, I think that the surge in flu patients tends to really sort of drag down that revenue per unit. I think, as most people understand, flu patients tend to be lower acuity, lower revenue per unit patients. And if we add 150 or 200 basis point of an increase in volume due to those patients, it has a pretty impactful -- impact or effect on that revenue per unit calculation. We've been saying for some time, however, that there's also been pressure on payer mix. I don't think this is terribly new or different in Q4. But for a number of quarters, maybe a couple of years now, I think we've continued to -- really, I think since the ACA was fully implemented, we've continued to see the number of uninsured patients sort of gradually tick up every quarter, the number of Medicaid patients go up, and the number of commercial patients come down. And I think that trend continues into Q4. And then finally, we've talked a fair amount in the last few quarters about the idea that, particularly, in some of our hospitals on the West Coast, which in my mind, includes California and Nevada, we've seen a shift in very aggressive behavior on our -- the part of our payers, who had been very aggressive about categorizing our acute care patients as observation rather than inpatient patients. That behavior has been moderated some, and we're seeing more of those patients being admitted. The cosmetics of that, our admissions go up and revenue per admission goes down, because again, they tend to be the lower acuity patients. So I think all of those factors contribute to sort of the dynamic that you see in the quarter, which is very strong admissions, driven by the flu, driven by this sort of shift back from observation to inpatient, et cetera, but it drives down the revenue per unit. I think in a more normalized sense, and over time, we see revenue per unit and admission growth to be more comparable each, in the 2.5% to 3% range.

Okay, fair enough. And then just -- I just want to talk a little bit about the competitive backdrop in the acute segment within your markets, whether you think that's sort of more just a gauge around growth in the population? Is it -- do you think you're just gaining market share? Are there maybe closures in your markets? Just trying to get a better sense as you sort of look at the results of this sustained and what seems to be pretty outsized volume results, both versus peers and industry, even trying to tease out some of the dynamics that you talked about in terms of observation visits and the like?

Sure. Well, I mean, look, I think it's worth noting that the trends that you're asking about, Ralph, have been in place for quite some time. And we've been outperforming our peers for a number of years now. And quite frankly, I think if you go back to pre-recession periods, we were outperforming our peers generally, and I think it's mostly about the markets that we're in. The markets that we're in tend to be growing faster than the national averages. We've had a long time -- for a long time, we've had a slide in our investor presentation, which has indicated that our markets are projected to grow at often twice the rate of the national average, and so we clearly benefit from that. But then it's that a sort of double whammy, if you will, of enhancing the franchises within those growing markets. So Las Vegas is a perfect example, where the market itself, with the exception of a few years for the recession. But the market itself has been one of the most robust and fastest growing markets in the U.S. for several decades now. We benefited from that, but we've also benefited by building new capacity, by increasing our market share in the markets very considerably, et cetera. And obviously, while Las Vegas is our single-largest market, I think that pattern has been repeated by us in a number of other markets, including Riverside County, California, including in the District of Columbia, including in several of our Florida markets. So again, I think that pattern has repeated itself, and is really what has benefited our acute care performance.

Okay. That's helpful. If I could squeeze one more in, I know you talked about capital deployment, I may have missed it. What about a more meaningful dividend, specifically, any thoughts or comments around that as well?

Yes. I mean, we didn't. I didn't specifically address that in my previous comments, Ralph. But I think that everything is on the table, and the company is open to and willing to look at a lot of different alternatives. As you know, tax reform only passed a couple of months ago, and so a lot of this deliberation and analysis is still ongoing and still in the early stages.

And we have no further questions, sir.

Okay. Well, we thank everybody for their time, and I look forward to speaking to everybody at the end of the first quarter.

This does conclude today's fourth quarter and year-end conference call. You may now disconnect.