環球健康 (UHS) 2018 Q3 法說會逐字稿

Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the UHS Third Quarter 2018 Conference Call. (Operator Instructions)

Mr. Steve Filton, you may begin your conference.

Thank you, Jessa. Good morning. Alan Miller, our CEO, is also joining us this morning. We welcome you to our -- this review of Universal Health Services' results for the third quarter ended September 30, 2018.

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, and our Form 10-Q for the quarter ended June 30, 2018.

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, our reported net income attributable to UHS during the third quarter of 2018 was $171.7 million or $1.84 per diluted share as compared to $141.2 million or $1.47 per diluted share during the third quarter of 2017. As calculated on the Supplemental Schedule, our adjusted net income attributable to UHS during the third quarter of 2018 was $200.8 million or $2.23 per diluted share as compared to $143.4 million or $1.49 per diluted share during the third quarter of last year.

Excluded from our adjusted net income during the third quarter of 2018 was an unfavorable after-tax impact of $37.1 million or $0.39 per diluted share, substantially all of which related to an increase in the reserve recorded in connection with our ongoing discussions with the Department of Justice, as discussed in our press release.

On a same-facility basis, in our acute division, revenues during the third quarter of 2018 increased 6.7% over last year's comparable quarter. Excluding the health plan, same-facility revenues increased 8.1%. The increased revenues resulted primarily from a 1.5% increase in adjusted admissions and a 6.6% increase in revenue per adjusted admission.

On a same-facility basis, net revenues in our behavioral health division increased 2.5% during the third quarter of 2018 as compared to the third quarter of 2017. 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 4.7%, and adjusted patient days increased 0.6%. Revenue per adjusted admission decreased 1.9%, and revenue per adjusted patient day increased 2.1% during the third quarter of 2018 as compared to the comparable prior year quarter.

Based upon the operating trends and financial results experienced during the first 9 months of 2018, we are narrowing our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2018, to $9.25 to $9.60 per diluted share from the previously provided range of $9.25 to $9.90 per diluted share. This revised estimated guidance range, which excludes the favorable impact of the reserve established in -- the unfavorable impact of the reserve established in connection with the civil aspects of the government's investigation of certain of our behavioral facilities and also excludes the impact of ASU 2016-09, decreases the upper end of the previously provided range by approximately 3%, while the lower end of the range remains unchanged.

For the 9 months ended September 30, 2018, our net cash provided by operating activities increased to $975 million from $879 million generated during the comparable 9-month period of 2017. Our accounts receivable days outstanding increased slightly to 54 days during the third quarter of 2018 as compared to 53 days during the third quarter of 2017. At September 30, 2018, our ratio of debt-to-total capitalization declined to 42.9% as compared to 45.4% at September 30, 2017.

We spent $151 million on capital expenditures during the third quarter of 2018 and $521 million during the first 9 months of 2018. Year-to-date, we have added 76 new acute care beds and 330 new beds to our busiest behavioral health hospitals. In addition, earlier this month, we opened the 100-bed Inland Northwest Behavioral Health Hospital, a joint venture with Providence Health in Spokane, Washington; and next week plan to open the 80-bed Palm Point Behavioral Health Hospital in Titusville, Florida. Our behavioral health integrations joint venture pipeline is very strong and robust with over 30 active discussions.

In conjunction with our stock repurchase program during the third quarter of 2018, we repurchased approximately 940,000 shares of our stock at an aggregate cost of approximately $118 million or approximately $125 per share. Since inception of the program, through September 30, 2018, we've repurchased approximately 9.45 million shares at an aggregate cost of $1.09 billion or approximately $115 per share.

We are pleased to answer your questions at this time.

(Operator Instructions) Your first question comes from the line of Matthew Borsch from BMO Capital Markets.

Yes. I wanted to just ask on the behavioral side of the business. If you could talk a little bit about the rates that -- it looked like there was a little rate pressure or at least maybe the rates to the rate mix that you were getting was a little lower than we had modeled.

Yes. So Matt, I'm not exactly sure what metric you're focusing on to arrive at that conclusion. Obviously, our revenue per adjusted admission was down 2% in the quarter. But that, I think, is a function of the reduced length of stay rather than any sort of rate pressure. Yes, our rate -- our revenue per adjusted patient day is up about 2%, and honestly, that's kind of at the higher range of our expectations. So again, that -- revenue per adjusted admission, I think, is a function of length of stay. And honestly, that was what, I think, prevented us from having

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the quarter because our overall same-store adjusted admissions on the behavioral side in Q3 were quite robust, almost 5%. We were pretty encouraged by that number, but unfortunately, a lot of that benefit was mitigated by the length of stay pressure. And I think that pressure is largely related to the dynamic that we've been discussing for any number of quarters now, which is the continued shift of patients from traditional Medicare and Medicaid programs to managed Medicare and Medicaid programs, mostly on the Medicaid side.

Okay. What do you do about that? I mean, is that -- so that's going to be a continuing dynamic, obviously.

Yes, I think that's a fair observation. Obviously, there's not much we can do about that overall shift of patients that's taking place outside of sort of our ability to impact. What we are doing, I think, is -- and have been doing is trying to develop as much non-Medicaid business as we can and also, within all of our payer groups, working hard to have the appropriate clinical documentation and appropriate processes so that we're getting the appropriate length of stay as is clinically justified for all of our patients.

Your next question comes from the line of Steve Tanal from Goldman Sachs.

I guess, just following up on that, thinking about the behavioral segment. Obviously, we were sort of hoping you guys would get back to the 5%-type same-store revenue number for the segment, and it didn't obviously occur. But the compare does get a little easier in Q4. But I guess, just bigger picture, I'd like to know how you're thinking about that revenue target now and what that would mean for the sort of growth algorithm or the EBITDA algorithm, as you guys have framed it in the past.

Sure, Steve. I mean, look, I'm sure, as you understand, I mean, from our internal perspective, we continue to work in a terribly focused and disciplined way on improving that behavioral same-store revenue growth dynamic in all the ways that we've discussed over the last several quarters. But I think we also acknowledge that we've created this sort of 5% target and now disappointed a couple of times, both sort of internally and externally. So I think what we've assumed for our fourth quarter guidance is, I think, largely a repeat of Q3 and relatively flattish behavioral EBITDA in Q4.

And in terms of when we give our 2019 guidance at the end of February, we'll give considerable thought to how we're thinking about the trajectory of that revenue growth in the behavioral business. I think our long-term point of view has not changed at all. I think we think that 5% is a reasonable goal. I think we believe that the underlying demand remains robust. I think we believe that the same-store admission growth metrics in Q3 support that view of the world. But how quickly we're able to get to that 5% and over what period of time and what the trajectory is, I think, at the moment, we're going to take a step back and think about how we establish those targets going forward.

Got it. Understood. And just one on the acute side as well. The bigger -- the biggest surprise, I think, for us, certainly, was the 6.6% jump in same-store revenue per adjusted admission. And I'm trying to think about all the different puts and takes a line like that would capture. One of the ones I wanted to ask you that we don't see as much anymore is just on the bad debt front. What are you seeing there? Was that materially better year-on-year? And could that have possibly helped?

So to your point, I mean, honestly I do think there are a number of kinds of puts and takes and dynamics that are pushing that number upward in Q3. The comparison to last year's third quarter was pretty easy for the acute segment in large part because we had a hurricane impact in Q3 of last year, particularly in our Florida facilities. So that was helpful in the year-over-year comparison. The continued ramp-up of our newer hospital in Las Vegas, the Henderson facility, was quite strong in Q3. So that was helpful.

And then we had $10 million or $12 million of California UPL, all related to 2018, that we recorded in the third quarter that, had we known everything we knew in Q3, we could have and, probably appropriately, would have recorded more ratably over the first 3 quarters of '18. So that made the first 2 quarters look a little softer and the third quarter look a little stronger.

I think even after you account for all sort of those dynamics, it was still a very strong acute care quarter, and we were pleased. The question that you asked specifically about bad debt and sort of the amount of uninsured patients, I don't think that's having a big impact. I think we've found that over the last several quarters, our payer mix, including the amount of uninsured patients, has remained pretty stable. So I don't know that that's having a material impact on the revenue growth one way or the other.

Perfect. And maybe just one follow-up on that, and then I'll yield. When we started the year, you were in the 3 range. It's pretty strong. And if I remember correctly, you kind of thought that you weren't sure that that sort of level was sustainable or that it looked a little bit high. Obviously, your peers were doing similar-type numbers. How should we think about the sustainability now? Do you feel like there's a better trend here that could carry into '19?

Yes, and I'm guessing, Steve, that you're asking about the acute business.

Yes.

Yes. So we've said for some time that kind of post-ACA benefit and post economic recovery, we think a reasonable and sustainable model for our acute care business segment is 5% or 6% revenue growth and 6% or 7% EBITDA growth. I think we find that our acute care results can be a little bit choppier and more volatile. But I think, over time, if you look at the 9 months, for instance, for the 9-month results for 2018, I think we're largely hitting those kinds of numbers. And I think that that's our expectation going forward. Q3 was a real solid quarter. We're very pleased with it. But I think the idea that we can sustain that sort of growth going forward, I think, is a bit unrealistic.

Your next question comes from the line of A.J. Rice from Credit Suisse.

A couple of questions. First, just to follow up on that comment about the California UPL. So if you had $10 million to $12 million that you incurred in the third quarter and some of that related to the first 2 quarters, is it fair to say that roughly $8 million to $10 million was related to the first 2 quarters? And then second, I guess, on that, I'm assuming that was in your thinking about your original guidance, and you just -- it wasn't clear which quarter it would come in. Is that the way to think about it?

Yes, I think that's fair, A.J. And yes, I think you're right. I mean, basically, 2/3 of the amount related to the first half of the year.

Okay. Let me go back to the length-of-stay question and maybe drill down a little bit more on that in behavioral. There's a couple of factors, I think, that are having an impact here. Obviously, we had the easing of the IMD exclusions as it relates to Medicaid managed care that went effective the summer of 2016. I know not every state accepted that time frame to start, and then some, it seemed like there was a little bit of a lag into how that rolled out. But I think that's affected length of stay because that's driven more Medicaid managed care people your way.

Then you've had some states that really were on a managed Medicaid but didn't include behavioral now decide in the last year or 2 to include behavioral. I'm assuming that's part of what's going on here. And then the third thing would be that the same managed care plans might pressure you more on length of stay this year than last year, and you might not have a stable number even with the same plan on a year-to-year basis. Of those 3 buckets, can you sort of walk us through where you're at? Because it seems like, at least the first 2, you ought to anniversary those at some point in the next few quarters, and I wonder if that's your opinion. Any color on that would be helpful.

Yes. I think most of what you said, A.J., we would agree with. The IMD -- the lifting of the IMD exclusion created a kind of bolus and an incremental increase in managed Medicaid patients. But there's just naturally as well a continued shift in various states from traditional Medicaid programs to managed Medicaid programs. And we have said consistently that our managed Medicaid -- and it's equally true, honestly, of our managed Medicare population tends to have a shorter length of stay than the traditional corresponding population. Not surprisingly, the managed payers just tend to manage utilization, and particularly length of stay, more aggressively than the traditional programs did.

And I think I would also agree with your comment that there's a natural sort of floor to the length of stay as a result of those issues, and we would argue that for, I think, 2 reasons. One is simply because, at this point, a majority of our patients on the Medicaid side, somewhere around 65% or 70% of our patients, are already in managed programs. So at some point, that will anniversary, and there will be no further shift. Obviously, it has to max at 100%. It may max before then. Not all patients may ultimately shift. But I think what our current results reflect is we're not at that point yet, where that there are still no further patients to shift.

The one sort of statement that you made that I would -- object is probably too strong a word, but just correct somewhat, is to say that within our payer classes, we're not really seeing dramatic changes in payer mix. So within managed Medicaid, our length of stay remains relatively stable within traditional Medicaid, within managed Medicare and within traditional Medicare. And within commercial, our length of stay remains relatively fixed. So -- and stable. So we're not seeing changes. It's really this shifting population that's creating the length of stay pressure.

Okay. And my final real quick would be just on the cash flow. Good, solid cash flow again this quarter. Are you -- you've got some development projects in the development pipeline. You've got, obviously, your leverage. You could almost argue you still have some room to take that up even. And then you've got the share repurchase, which looks consistent with what you did last quarter. Any update on what your thinking is around capital deployment and priorities?

Again, I think, I would say and echo what we've probably said in the past. I think we feel like we have a lot of internal organic opportunities, building new beds in our behavioral segment, both kind of de novo developments like the Palm Point project that I mentioned in my remarks or the Spokane development, reflective of our joint venture integration efforts. On the acute side, we've been extremely successful with our capacity expansion, not only the new Henderson Hospital in Las Vegas, but just new beds and new surgical and ER capacity, which we built in almost all of our facilities in Las Vegas and in a number of other markets.

So our CapEx number has been ramping up and I think will continue to probably ramp up some as we continue to identify these projects that are yielding solid returns. We look at other inorganic opportunities. Those are a little bit harder to predict. We also find our own stock to be a compelling value at the moment. And we bought what we believe to be a decent number of shares in the third quarter, and I think that activity will continue as well. So I think that it's more of the same, and I think we view more of the same as a good thing in the sense that these are all good opportunities for us. And we like the potential returns that they're going to yield us.

Your next question comes from the line of Frank Morgan from RBC Capital Markets.

On the topic of development activity, just curious, are you seeing more development activity from competitors out in the local market in terms of de novo developments? What's your assessment of the competitive environment for new capacity? And this is in behavioral.

Okay, I was going to ask that. Yes. So look, I think we've said in the last few quarters in response to similar questions, Frank, definitely, in many of our markets, we have seen new behavioral capacity, new beds, new facilities, new outpatient facilities, et cetera. At the end of the day, I think we have said that I don't know that we feel like it's diminished the overall demand. And again, I think the admission growth that we experienced in the quarter is reflective of the fact that the underlying demand is still strong. But it definitely affects our ability to recruit qualified clinicians, nurses, psychiatrists, nonprofessionals, et cetera. So it is certainly a more competitive environment with more capacity out there. I don't think, in our minds, it has changed or really diminished the underlying -- or our underlying ability to create the sort of traditional level of demand. But definitely, there is more capacity out there.

Got you. One more, and I'll hop back in the queue. Just noticed that, obviously, the charge -- incremental charge on the DOJ -- for the DOJ investigation, just curious if you could give us any more color on how close you may -- you think we might be here. And how did we come up with this number that we took in the quarter?

I mean, I think we've, again, said fairly consistently that our reserve is reflective of our most recent offer to the government. That remains the case. I think, obviously, those who are following this, and I know many are carefully, the increases to our reserves are coming more frequently and in bigger chunks, and we view that as a good thing. I think it's reflective of the fact that this -- our settlement negotiations with the government are meaningful.

The pace of them has picked up. The gap between where our offers and the government demands are has narrowed. And we're optimistic or hopeful that, that means that we can reach a resolution of this relatively soon. But as we've said, I think, every quarter, it's difficult to predict that endgame with precision because we do largely proceed at the pace that the government sets. So -- and I think that pace has picked up, and we're encouraged by that and are hopeful for a resolution soon. But difficult to predict exactly how and when and the amount of that will be with precision, at least at the moment.

Your next question comes from the line of the Kevin Fischbeck from Bank of America.

I want to go back to an earlier question about pricing because, I guess, your 2% pricing on a patient-day basis is, I guess, not a bad number. But if it is below the 2.5% to 3.5% number you've been seeing the last 4 quarters or so, so I guess, as you think about it going forward, 2% is kind of the right number to think about going forward there?

Yes, so it's a fair question, Kevin. I mean, if you think about it, when we gave our original guidance for the year and that 5% revenue growth, we actually imagined that that would consist of 3% to 4% volume and 1% to 2% price. You've made the point accurately that we've been on the high end, if not, frankly, over the high end of the pricing range, maybe closer to 2.5%. I think we have a point of view that that number will moderate a little bit. As we've discussed, some of that impact is a result of our transitioning residential beds to acute beds that have a higher level of revenue. And there is a cap to that because we don't have that many, or our percentage of residential beds is getting to be relatively small.

So yes, I think, you know, now as we think about it, we think that's an ultimate model, and again I'm not going to say when we're going to get there, but that ultimate model of 5% revenue growth is probably, now we think about it more as like 2.5% to 3.5% volume and 1.5% to 2.5% price.

Okay, that's helpful. And then you've mentioned that in Q4, you kind of expect a relatively similar performance in the behavioral business as far as sounds like same-store revenue growth and then you said relatively flat EBITDA, which is kind of what you did. It was down a little bit from a margin perspective. But I was surprised that with the same-store revenue growth decelerating, only being 2.5%, you actually saw some of the best margin performance you've seen over the last year. So is there anything going on on the cost side that you are now able to keep margins relatively flat even if you're only growing same-store revenue 2.5% to 3%? I think, in the past, you've talked about a higher same-store revenue growth number that you needed to maintain margins.

Yes. So I think it's a couple of things, Kevin. Good -- it's a good question. I think, to some degree, as you know, we've been talking about labor and wage pressure for several years now, I think, sooner and maybe more frequently than many of our peers. And I think, to a degree, we're seeing some of that impact start to level out and anniversary out, where maybe others are just starting to feel that a bit more acutely. That's, I think, a piece of it.

The other piece, I think, is just a credit to our operators, and I certainly had made this comment on previous calls. I think in a tough revenue environment where revenues are not growing as much as we would have liked and maybe would have expected, I think our operators have managed the business generally very efficiently and with great care. And I think that the EBITDA results and the EBITDA growth is reflective of that. So I think it's a combination of those 2 items.

Is that something that's sustainable? Or is that something where you kind of come through and you identify, whatever the number is, $10 million, $20 million of savings? But then do you anniversary that at some point, and you need to be growing 4% plus?

Yes, look, the model's not perfect. So I would say that at around 3%, 3.5% same-store revenue growth on the behavioral side, EBITDA should be flattish. And again, I think there'll be quarters where we do a little better than that and quarters where we do a little bit worse than that. And then as we get above that, I think you start to see some EBITDA growth and some EBITDA -- some margin expansion rather. So again, I think the levels that we are producing, the level of growth correlated to the revenue that we're producing right now, it's about the best we can do. I don't know that we can sustain that, but I don't know that's going to vary dramatically from where we are today.

Okay. Then, I guess, last question. When you think about getting to that 5% number on the behavioral side, how much of it is stuff that might be within your control, whether it's adding new beds, recruiting labor or doing better documentation, as you described? And how much of it is just kind of getting to the point where you anniversary some of these more structural headwinds in the business?

So I think that the element or the dynamic that is most out of our control is that sort of continued shift of patients out of traditional Medicare and Medicaid programs into the managed Medicare and Medicaid programs. That -- those decisions are being made by the states, et cetera, and we really have little impact on that. Having said that, I think there are a bunch of other dynamics, and I think you ticked through a few them, that are within our control. We can try and alter our patient mix. We can build new capacity to find sources of new patients and, in some cases, to sort of reconfigure our patient mix.

We can work hard to justify longer lengths of stay where it's clinically appropriate with a number of our payers. We can explore accepting more, both medically and psychiatrically, acute patients. We can do all those things. But again, the point that you raised, I think, is a valid one. I mean, the one thing we can't do is sort of hold back the tide of these patients who are moving from traditional programs to managed programs. That will continue, although, obviously, as I noted before, there's sort of a natural limit to that as well. No more than 100% of our Medicare patients can be managed. No more than 100% of our Medicaid patients can be managed. And in both cases, we're well past the 50% mark.

But I guess, like, when we look at Acadia who's growing above that 5% rate in the U.S., they're obviously doing something operationally that's allowing them to overcome some of the structural headwinds. Do you kind of look at that and say, "Yes, there's no reason why, at some point in time, we can't achieve 5% even if these headwinds remain where they are"? Or is part of it just getting to a better comp?

Yes, it's -- so it's always a hard question to answer when I'm asked for real specifics of the comparisons with a peer since, obviously, I have little detail and little insight into their detail. I guess, my reaction has been one of the challenges -- or a couple of the challenges that we have faced over the last several years in our behavioral division from a labor shortage perspective is very geographically specific. And when we talk about the markets where our labor challenges have been the greatest, we know that Acadia does not have as nearly a significant footprint, in some cases, no presence in those markets.

And the same thing with some of the managed Medicaid issues that we've faced. When we talk about some of the states that have been most problematic for us, and then we look an Acadia map, we see that they have an -- don't necessarily have a significant presence in those locations. So I think that's an aspect of it. So again, I think all -- we're really -- what we are really focused on is what we can do in our markets and in our hospitals and don't spend a ton of time analyzing what others are doing because, again, the one thing we can't really change is the location of our hospitals. So to the degree that issues are geographically centric, we're just going to try and deal with those issues where we have them.

Your next question comes from the line of Ralph Giacobbe from Citi.

Wanted to go back to the behavioral side, Steve. The admission number did accelerate. Is there anything you can point to, whether it be the [full] channel, IMD, opioid epidemic, the alleviation of staffing challenges? Just trying to get a better sense of sort of the pickup there.

And then the other side of it, I do want to go back to length of stay. I think the challenge is the much steeper deceleration this quarter. That's sort of hard to grasp. The shift from traditional to managed isn't anything new? So I don't know if there's anything you can call out that's maybe disproportionate impact by state. If you can call out any states that just sort of would make it worse for the pressure in third quarter than what we've already been seeing as sort of a continued pressure.

Yes. I'm going to answer the second question first and then maybe come back and ask you to repeat the first question. Yes, I mean, we would agree that the shift of patients from traditional to managed programs is nothing terribly new. I do think that in some of the states in which we operate, we've seen the pace of that pick up. We've talked about Florida, Illinois, Kentucky being among those sort of geographies where that's been more of a concern. So -- and I apologize, Ralph, but can you just repeat the first part of your question?

Yes. It was actually sort of the positive side of the equation. The admission number did accelerate. So anything to point to there?

Okay, I got it. I got it. Yes. So 2 things. I mean, to be fair, the comparisons, and I think we knew this going into the quarter, were relatively easy compared to last year's third quarter. We had a hurricane impact in a number of our behavioral facilities in the third quarter of last year. So there's a little bit of built-in improvement there. But I think the other piece of it, and we've been talking for any number of quarters, I think the other big piece is I do think we've made a lot of progress on the labor front. We don't have nearly as many what we'd describe as capped beds or closed units because of a lack of qualified staff. So I think that's the -- the real underlying improvement is the strides we've made in the labor shortage area.

Okay. And then just a follow-up. The implied 4Q guidance suggests EBITDA down, I think, low to probably mid-single digits. Maybe help us with the decline there. I think you mentioned the behavioral side sort of flat. So it would sort of imply a steeper decline within acute and, obviously, you're coming off of a strong acute print. So anything there? And then last piece of that question is just the -- your all-in Medicare rate, could you just remind us what that shook out for for fiscal '19 and how that compares to '18?

Yes. So I think that our view of the fourth quarter and what's embedded in our guidance is a relatively flattish view of EBITDA. So on the behavioral side, I think that's kind of just the continuation of where we've been. On the acute side, I think it is premised on the idea that the fourth quarter of last year was extremely strong. And we called out a number of -- I'll sort of call them nonrecurring items. We called out an $11 million or $12 million flu impact from a very strong flu season last year. We called out $6 million or $7 million of California UPL in the fourth quarter of last year. So we start out, I think, in Q4, if you eliminate those items, I'll call it, $16 million or $17 million in the hole, I think we presume we'll make that up, and that's probably kind of 4% or 5% growth in our acute care EBITDA because I still think the comparison's pretty tough even without those items. But cosmetically, I think it'll be flattish EBITDA in the acute business and in the behavioral business, and I think that was sort of the core of our presumptions about Q4 guidance.

Your next question comes from the line of Josh Raskin from Nephron.

First question is on the acute care side as well. I'm just curious if you can give us an update on sort of outpatient facility growth, I guess, both from the UHS perspective but from the competitive perspective as well and maybe projects that you guys are working on and if that's having any impact on the acute care strength this year.

Yes. Look, I think anybody who follows the acute care industry knows that the trend of outpatient and alternative site delivery has really accelerated over the last several years. We see our competitors doing that in our markets, and we've responded in kind. So I think we've talked about on previous calls, we've developed probably a dozen freestanding emergency rooms, most of which are open. And we probably have another sort of like amount that are sort of on the drawing board. We have a smaller number of urgent care centers. We have a bunch of primary care physician locations and specialist locations in our markets, imaging centers. And our strategy, quite frankly, in every market is really meant to be tailored to the specific market needs and competition.

So yes, we see all those dynamics. And they're reflected, I think, or manifested in different ways in our results. So for instance, we've clearly seen our emergency room activity decline, our visit numbers decline over the last several years. But we have seen our emergency -- or the admissions from our emergency room continue to be quite strong and increase, which, I think, reflects the fact that what's happening is those less-acute, less-intensive emergency room visits are effectively migrating out of the traditional acute care emergency room into these urgent care centers and clinics and retail pharmacy clinics, et cetera. And honestly, I think we view that as a positive development for everybody. It's a better location of the care where it belongs. So -- but we're participating in that outpatient development in our markets in a very vigorous way.

I guess, Steve, more specifically, is that contributing to the strong growth in acute? Or is this more sort of we're keeping up with what the market's doing in your view?

Yes. Look, I think it's -- I don't know that I have kind of a single answer to that, Josh. I mean, I do think, number one, it is a competitive response. To some degree, we have to do that to keep up. But I also believe that sort of the strong continuum that we establish in markets like Las Vegas, like Riverside County, California, really allows us to put up the sorts of growth numbers. I don't think we could have the acute care revenue growth numbers and the acute care volume growth numbers that we've put up for the last several years if we hadn't developed this fairly aggressive outpatient and alternative care delivery strategy. I think we'd be losing business and losing market share if we weren't doing that.

Got you. Got you. And then just a second question on a separate topic. Obviously, a lot of focus on drug pricing and a lot more news yesterday. And we're hearing about potential changes for Part B drugs and the hospital companies coming together for generic manufacturing, et cetera. I'm curious, are you -- just from your perspective, is that accelerating from a drug price perspective? And how do you think -- what's your best method to sort of combat some of that growth?

So we, for the most part, I think, rely on our group purchasing organization to -- from a pricing perspective, to negotiate the best contracts and the best pricing for us. But certainly, we have a significant focus on the operational side of that within our pharmacies, managing to the most efficient formulary and the most efficient use of high-cost drugs, and whether they're oncology drugs or whatever it may be. So it is a big focus of ours. I don't know that -- I think we have a point of view that it's had a big impact on our acute care results one way or the other, meaning, I think, we believe that our drug pricing has generally risen sort of consistently with our overall cost inflation. But it certainly is -- obviously, it's a big chunk of the -- of our hospital costs and something that we focus on a great deal.

Your next question comes from the line of Ann Hynes from Mizuho Securities.

So for 2009 (sic) [2019], when we think about the outlook, I know you're not giving guidance, but is there any out-of-the-ordinary headwinds or tailwinds we should consider for either business? Like, for example, I know in acute care, you're going to get an IPPS benefit. Can you remind us what that should be in 2019?

And on the behavioral, I know we've talked a lot on this call about the length of stay pressures and the state -- your state exposure. Is there any state that you have exposure in now that maybe hasn't got managed Medicaid and that maybe it will in 2019, that's on your radar?

So Ann, I think as far as sort of the puts and takes for '19, and again, I'm certainly not prepared to give kind of a comprehensive list, but obviously, to the degree that we had any nonrecurring items this year, I'm sure people are sort of thinking about that going forward. You made the point, I mean, I think we have -- and I don't think I fully answered the -- I think it was Ralph who asked this question before. We have, I think, a Medicare increase in the sort of 1.5% to 2% range for next year as well as an increase in our Medicare DSH payments.

I think some people sort of throw the Medicare DSH payments into the underlying rate, which makes it more a 2%, 2.5% rate increase. If you want to look at the DSH benefit separately, I think it's kind of a $15 million to $20 million benefit. So that's a tailwind, I think, into '19 that actually starts in the fourth quarter of '18. Other than that, there's nothing, I think, that we haven't previously talked about that, at the moment, we would call out or highlight.

As far as the length-of-stay pressure goes, I mean, it is something that is tough for us to have a great deal of visibility on because a lot of times, it doesn't take place necessarily when the state moves from managed -- or traditional to managed, whether it's Medicare or Medicaid. A lot of times, behavioral is sort of a separate carve-out, and the timing is different than it is for the rest of the book of, I'll call it, medical business. So it's a little bit hard to say. I mean, we'll make our best effort when we give our 2019 guidance to call out particular states that we're concerned about or have focused on. But at the moment, I don't have any that I would specifically identify.

Your next question comes from the line of Sarah James from Piper Jaffray.

I wanted to go back to the comments on wage pressure. So the behavioral salaries, wages and benefits ratio is about -- up about 100 basis points year-over-year or 190 from 1Q '17. How much of that is targeted increases to reach staffing goals? How do you think about balancing the revenue opportunity of having more staff with the margin pressure of higher wages? And how far along in the process are you in moving wages to the ideal rate on the psych side?

Yes, I'd say I don't think it's a finite process. So it's not like, I think, we have a point of view that we're 50% of the way there or 80% of the way there. I think we have a point of view that this is a constantly changing market dynamic that we are monitoring all the time. The wages are the result of a competitive tension in a market. And so we're always evaluating and reevaluating base wages. We're always evaluating and reevaluating what others are doing regarding incentives, sign-on bonuses, retention bonuses, all kinds of nuanced ways to approach labor recruitment. And they vary, quite frankly, by market.

So your -- the point that you raised is certainly one that we've conceded before, which is wage inflation is certainly higher today, for both our behavioral business and our acute business, than it was 3 or 4 years ago. And that's why we say that our underlying business model has changed. So if 4 years ago, we might have said that 5% behavioral growth would yield 7% or 8% or 9% EBITDA growth, and today, I think we suggest that it would yield 6% or 7% EBITDA growth, and I think the reason or the main variable there is the wage inflation. But again, this idea of sort of kind of looking at it as sort of a linear issue that we're 60% of the way there or 80% of the way there or 100% of the way there, I think, is the wrong way of looking at it because, particularly in this very tight labor environment, I think it's going to be an ever-changing dynamic.

Okay, that's helpful. Can you also update us on the JVs that you have on the psych side, where you manage the behavioral units for non-UHS hospitals and speak to whether or not the Baylor merger with Memorial Hermann could present any opportunity for you to expand the Baylor JV?

Yes. So I'm got not going to comment on any specific opportunity. But as I mentioned in my prepared remarks, we have somewhere between 2 and 3 dozen active, I think, we think, fairly serious conversations ongoing with a number of acute care hospitals and some bigger acute care hospital systems. And honestly, in most of our big markets, and both Dallas and Houston are big markets for us, we have conversations ongoing.

So we have, I think, a very good relationship with Baylor. So I -- from our perspective, we would view Baylor as a very positive kind of sort of referral source for us, et cetera. Whether that extends towards Memorial Hermann in Houston, I don't know. But I think the mere fact that we've had some already successful joint ventures with Baylor is something that other not-for-profits around the country view as sort of favorable. Same thing with our Providence joint ventures in Washington state. The fact that we've been able to do these projects with very large and well-respected acute care hospital systems, I think, is a real positive for us.

And can you just remind us again on the economics of how those JVs work?

Yes. Again, difficult question to answer sort of in a generic or blanket way. Every conversation is different. I've sort of described, we have these conversations with acute care hospitals, and in some instances, our Gulfport acquisition from last year is an example of one where the acute care system just agrees to sell us their hospital, their behavioral facility. They don't really want a joint venture, et cetera. We've done a few of those. We have others where we've just leased a unit. A couple of our Baylor JVs are just a leased unit from them. One of our Providence JVs is just a leased unit from them.

And in other cases, we've entered into an actual joint venture where we've built new capacity. We've done that with Providence. We've done that with the University of Pennsylvania here in the Greater Philadelphia market. The ownership percentage that the acute care hospital takes varies in each one. So it's very difficult to sort of say, "Here is the model. Here is what we would expect to earn from a margin or EBITDA perspective." But I think the bottom line from our perspective is that because more than 50% of the behavioral beds in the U.S. are run at the moment by acute care hospitals, the business development opportunity and revenue growth opportunity over the next several years is quite significant for us.

Your next question comes from the line of Steven Valiquette from Barclays.

So my question's also on the behavioral side. And it seems like the large-scale M&A chatter has seemingly heated up again a little bit in the marketplace. So I guess, I'm just curious if you're able to provide any high-level color just on your current appetite for larger-scale M&A on the behavioral side, given that, historically, you've been successful completing some larger deals.

Yes. So look, we're not going to comment on any specific deal or specific opportunity or news flow. I think we say all the time, and we say it because it's true, that we will explore and evaluate any opportunities that are presented to us, and we're going to look for the highest returns. And as I said in, I think, response to A.J.'s question earlier, we view -- we think we have a lot of opportunities to do that. Whether it's organic capital investment; whether it's share repurchase, which we think is pretty compelling; or whether it's inorganic M&A, we're going to pursue all those opportunities or at least from an evaluation perspective.

Okay. Maybe one just real quick confirmation question. Just quickly on this discussion on your strong acute same-store revenue growth in 3Q. And there was obviously a lot of industry discussion earlier this year around, perhaps, some acceleration of this greater acuity trend within the inpatient setting. You guys have somewhat dismissed that notion earlier this year for yourselves as far as anything out of the ordinary, and it sounds like, for 3Q '18, that might be the case again. I'm just wondering if you can just give any quick color on that topic and just confirm that one way or the other.

Yes. I don't know that we dismissed that notion. I mean, I think what I have said in the past is, actually, it seems to be -- it seems to make intellectual sense that what we're seeing is a rise in acuity in the acute care business. Getting back to the question before about seeing more ambulatory and alternative site competition, it makes sense that the business that remains in the acute care hospital is higher-acuity business and that the level of acuity would therefore sort of be rising naturally in the acute care industry just generally. So I think we sign on to that.

I think we believe also that acute care hospitals, in general, and UHS specifically, has been focused in the last several years on more disciplined documentation, clinical -- efforts to improve clinical documentation on the part of physicians and the hospital itself. So I think that's having an impact as well. So I think there is that element -- or those elements are contributing to the increase in acuity. And so I don't know that we'd discount that.

Your next question comes from the line of Ana Gupte from Leerink Partners.

Steve, so on the acute side, as you point out, it's a little more unpredictable, can be choppy. As you look at your portfolio of hospitals across various markets and you look at the macro labor trends and the cyclical trends, any color you can offer us on market specific, on a same-store basis, what the volumes are looking like and if certain markets are beginning to top out? I guess, ACA seems to be seeing at least some tailwinds on their markets. And what kind of read-across are you seeing from yours?

Well, I guess, I'd answer the question in 2 ways, Ana. One is, I think, geographically, we've been pretty consistent for several years now about sort of what our geographic trends look like, that the strongest markets, the strongest-performing markets have been Las Vegas and Riverside County, California; North Dallas; the District of Columbia. The weaker markets on the acute side have been South Texas and Amarillo. Again, those trends really have not varied much in the last several years.

I think, more broadly, I would say that those markets, those really strong-performing markets, from a UHS perspective, really saw some very extraordinary growth over the last several years as we benefited from the ACA and Medicaid expansion and economic improvement again in those markets that I ticked off. And I think, from our perspective, we were likely to see some moderation in our acute care performance, which, I think, we saw a little bit in '18. I think some of our peers, who are now seeing some strength in their markets, are just sort of maybe a little bit behind that cyclical curve from where we were. But I think they're sort of experiencing what we might have experienced a year or 2 in terms of really extraordinary growth. But I think we continue to put up very solid numbers in our acute care segment.

Yes, that's super helpful. On the payer mix again, on acute, is there any acceleration in commercial? And then there was a point in time where Medicare seemed to be a huge source of growth and what is that looking like right now? And what might that look like over the next 1 to 3 years if we see a whole lot of privatization to Medicare Advantage? And will the managed MA plans be a little bit more -- push back more on admissions, et cetera?

Yes. So I think that, again, the payer mix trends that we've described over the last several years have remained pretty consistent, at least for us, and that is Medicare is probably our fastest-growing payer population. Commercial probably grows a little bit slower than our overall. Uninsured has been fairly stable. And again, I think those trends have largely continued. I don't think -- I think that the Medicare Advantage penetration of the acute industry is sort of more mature than the managed Medicaid penetration on the behavioral side. So I don't know that we view it as nearly as impactful on the acute side as we do on the behavioral side. I just think we're so much more -- this has been going on for so long on the acute side. It's just so much more ingrained in our business.

Okay, that's helpful, too. So on the managed Medicaid, just one more follow-up to what others have asked. Is this kind of one managed Medicaid player you had suggested, maybe Florida with Magellan, and earlier, I think you saw the Pennsylvania pressure? So is it widespread? Or is it kind of one player that's being the source of the length-of-stay pressure here on behavioral?

I think what we -- yes, I think what we find, Ana, is that it really varies by geography. So there's no single payer who we find is most aggressive nationally. In every market, there may be a payer who's more aggressive, but it seems to me it's sort of more localized than what I would characterize as really national behavior on the part of any particular payer.

Great. One final one then on the inorganic side. It sounds like you've been at the table for some of the deal activity on the acute side. And can you talk about the pipeline here? You certainly have the balance sheet strength to do it.

Yes, I mean, look, we're encouraged. We've been looking for attractive, not-for-profit acute care opportunities for many years now. And to be fair, I think they've been relatively scarce. We're encouraged that in the last, I don't know, 6 or 12 months, HCA's announced a couple of deals that, I think, are relatively new to them. They're sort of the first kinds of those deals they've probably done in over a decade. And we're hopeful that, that's reflective of maybe an uptick in activity in that area.

But I'll just go back to what I said before. We'll evaluate those opportunities as they arise. They're difficult to predict. We're not -- we don't feel obligated to sort of grow for growth's sake. So we'll invest in those opportunities, organic, inorganic, share repurchase, et cetera, as they arise and as they make sense. And we'll just continue to do that.

Your next question comes from the line of Justin Lake from Wolfe Research.

I'll keep it to one question. Can you just tell us, in the behavioral business specifically, you had some negative hurricane impact last quarter -- or last year in the fourth quarter, I should say. I think it was in Puerto Rico. So one would think that would be an easier comp. Can you just -- can you tell us whether there was any negative impact in the fourth quarter already from the hurricanes we've seen this year that offsets that?

Sure. So -- and thanks for bringing that up, Justin, because I probably should have mentioned that before. So I did, I think, say in response to a question about the strong behavioral admissions earlier on the call that some of that strong performance in this year's Q3 is because of the comparison to last year where we had a hurricane impact, by the way, not just in Puerto Rico, but we had -- I think it was Hurricane Harvey in Houston and, I think, Irma in the southeast. And then we had a little bit of an impact from Hurricane Florence this year, but I think, for the most part, it was fairly minimal. But in Q4, we had Hurricane Michael. Hard to keep track of all the names. We had Hurricane Michael, which did, unfortunately, do significant damage to our facility in Panama City, Florida, which is now closed and probably will remain closed for 4 to 6 months. So the good news is all patients and employees were safe, and nobody was injured. But that'll probably be a $5 million, $6 million, $7 million drag in Q4. So as I was talking about the guidance for the fourth quarter, I should have made the point that where we originally thought that we'd have a pickup because we had a drag in Q3 of last year -- or Q4 of last year rather, where we will probably have a relatively comparable drag in Q4 of this year from our Panama City facility.

And Steve, that must have been a pretty big facility to be that big a drag. Is that -- so you expect that in Q4 into Q1 as well, we should think about a similar $5 million, $6 million drag?

Yes. I mean, the reason it becomes a drag of that magnitude, Justin, is sort of it's one of these betwixt and between things, a facility that is going to be sort of off-line for that period of time. We're going to continue to keep everybody on the payroll and effectively maintain our cost structure while we're generating essentially no revenue. So that's what creates a drag even in a facility that may not be the largest facility we have, et cetera. I will say it's a bit of a timing issue and that, I think, ultimately, most of this loss will be covered by insurance, but we tend to account for our insurance proceeds on a cash basis. So it will be a drag in Q4. I think it's a little bit too early to say how much of a drag it'll be in Q1. Ultimately, I think we'll recover most of the loss sometime next year.

Your last question comes from the line of Gary Taylor from JPMorgan.

Just a couple quick ones. On the -- going back to topic of the day, I guess, the length-of-stay pressure on the behavioral side. Are you seeing that primarily on the IPF? Or is it also the RTC? And can you give us kind of a latest, updated, either bed or revenue split between IPF and RTC?

So I think, from a revenue perspective, Gary, and I'm doing this off the top of my head, I can provide better clarity later, but I think about 75% of our revenues now come from acute behavioral revenues; maybe 12% or 13% from residential; and the remaining from what we would describe as specialty, which would include addiction services, outpatient, our management contract business, et cetera. And most of the length-of-stay pressure, I think, is clearly from the acute business. We see a couple of residential facilities, which have experienced some length-of-stay pressure, but I think it's mostly an acute issue.

Great. My last question. On the administration's announcement around Part B yesterday, I mean, hospitals do separately bill under OPPS about 1/3 of the total Part B drugs. I think that would equate to about 1% of the hospital industry's revenue. So the question is, do you contemplate any measurable impact from the announcement yesterday and the other policy is just the site-neutral impact? Do you contemplate any measurable impact from that proposal?

I don't believe so. And I think -- and I don't have them in front of me, so again, I'm doing this off the top my head, Gary. But I would guess that UHS' outpatient percentages of revenue are much lower than the industry standard, as you said. I mean, I think that those are really sort of inflated by hospitals that have, for instance, big outpatient oncology programs, et cetera, that, for the most part, I think, we have not really participated in. So my sense is that the impact on us is relatively minimal.

There are no further questions at this time. I turn the call back over to the presenters for closing remarks.

We'd just like to thank everybody for their time and look forward to speaking with everybody next quarter.

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