Steve Filton - Executive Vice President and Chief Financial Officer Alan Miller - Chairman and Chief Executive Officer.

Matthew Borsch - BMO Capital Markets Stephen Tanal - Goldman Sachs A.J.

Rice - Credit Suisse Frank Morgan - RBC Capital Markets Kevin Fischbeck - Bank of America Merrill Lynch Ralph Giacobbe - Citigroup Josh Raskin - Nephron Ann Hynes - Mizuho Securities Sarah James - Piper Jaffray Steven Valiquette - Barclays Ana Gupte - Leerink Partners Justin Lake - Wolfe Research Gary Taylor - JP Morgan.

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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 walk 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 forecast, 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 would like to highlight just a couple of developments and business trends before opening the call up to questions.

As discussed in our press release last night, 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 was 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 nine 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 provides 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 nine months ended September 30, 2018, our net cash provided by operating activities increased to $975 million from $879 million generated during the comparable nine-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 nine months of 2018. Year-to-date, we have added 76 new acute care beds and 313 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 Provident 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. Please go ahead..

Hi, yes, I want to just ask on the behavioral side of the business. If you could talk a little bit about the rates that it looks like there was a little rate pressure or at least maybe the rate due to the rate mix that you are getting was a little over than what we had modeled..

Yes, so, Matt, I am not exactly sure what metrics you are 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 reduced length of stay rather than any sort of rate pressure..

Okay..

Yes, our revenue per adjusted patient day is up about 2% and honestly that’s kind of at the higher range of our expectation.

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 – [Inaudible] the quarter because our overall same-store adjusted admissions on the Behavioral side in Q3 were quite robust, almost 5% and we were pretty encouraged by that number.

But unfortunately, lot of that benefit was mitigated by the length of stay pressure and I think that pressure is largely related to the dynamics that we’ve been discussing for any number of quarters now which is the continued shift of patients from – for additional 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 it, does that’s going to be a continuing dynamic obviously?.

Yes, I think that’s a fair observation. Obviously, there is 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 are getting that the appropriate length of stay as we’ve clinically justified for all of our patients.

.

Okay. Thank you. .

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

Good morning guys. Thanks for taking the question. I guess, just following up on that, thinking about the Behavioral segment, obviously, we were sort of hoping you guys will get back to a 5% type same-store revenue number for the segment and it didn’t obviously occur. But the compare did a little easier in Q4.

But I guess, just bigger picture, I’d like to know how you are 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 in the past?.

Sure, Steve, I mean, look at it, I am sure as you understand, I mean, from our internal perspective, we continue to working 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 have 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 will give considerable thought to how we are 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 are able to get to that 5% and over what period of time and what the trajectory is, I think at the moment, we are 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 biggest surprise I think for us certainly was the 6x jump in same-store revenue per adjusted admission and I am trying to think about all the different puts and takes a limelight that would capture.

One of the ones I wanted to ask, we don’t see as much anymore, it’s just in the bad debt front now.

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 kind 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 to $12 million of California UPL, all related to 2018 that we recorded in the third quarter that had we know and everything we knew in Q3, we could have and probably, appropriately would have recorded more ratably over the first three quarters of 2018.

So that made, the first two 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 ask 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 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 – when we started the year, you were in the three ranges, pretty strong and I’d say I remember correctly you kind of saw at that, you weren’t sure that that sort of level was sustainable or that it looked a little bit high obviously and your peers are doing similar type numbers.

How should we think about the sustainability now? Do you feel like there is a better trend here that could carry into 2019?.

Yes, and I am guessing Steve, that you are asking about the acute business..

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 nine months for instance for the nine month results for 2018, I think we are largely hitting those kinds of numbers and I think that that’s our expectation going forward. Q3 was a real solid quarter. We are very pleased with it.

But, I think the idea that we can just stay in that sort of growth going forward I think is a bit unrealistic. .

Got it. Okay, thank you. .

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

Hello everyone. Couple questions. First is a follow-up on that comment about the California UPL. So if you had $10 million to $12 million that you accrued in the third quarter, and some of that related to the first two quarters, is it fair to say that roughly $10 million was related to the first two quarters.

And then second, I guess on that, I am assuming that was in your thinking about your original guidance and you just 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 are right, I mean, basically two-thirds of the amount related to the first half of the year. .

Okay. Let me go back to the length of stay question, maybe drill down a little bit on that in Behavioral. There is a couple factors I think that are having an impact here.

Obviously, we have the easing of the IMD exclusions related to Medicaid, managed care that went effective to summer of 2016, I know not every state, accepted that timeframe 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 going away. Then you add some states that really were on a managed Medicaid, but didn’t include Behavioral now decide in the last year or two to include Behavioral, I am 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, but you might not have a stable number even with the same plan on a year-to-year basis.

Of those three buckets, can you sort of walk us through where you are at and it seems like at least the first to you ought to anniversary this at some point in the next few quarters. And I wonder if that’s your opinion. Any color on that would be helpful..

I think most of what you said A.J., we would agree with. The IMD, the listing of the IMD exclusion created a kind of bolus and an incremental increase in managed Medicaid patients. But there is just naturally as well as 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 is a natural sort of floor to the length of stay as a result of those issues and we would argue that for I think two 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 a 100%, it may max before or not all patients may ultimately shift. But, I think what our current results reflect is we are not at that point yet. We are that – there are still no further patients to shift.

The one sort of statement that you may have had that I would object, that’s probably too strong a word. But just correct somewhat is to say that, within our payer classes, we are not really seeing dramatic changes in payer mix.

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 are not seeing changes. It’s really this shifting population that’s creating the length of stay pressure. .

Okay. And my final real quick will be just on the cash flow. Good solid cash flow again this quarter.

Are you – you got some development projects in the development pipeline, you’ve got obviously your leverage, you get almost, are you still having some room to take that off even and then you 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?.

No, 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 in 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, the New York capacity which we’ve 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 we’ll 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 a sense that these are all good opportunities for us and we like the potential returns that they are going to yield on. .

Okay, great. Thanks a lot. .

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

Good morning.

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 niches in Behavioral?.

Okay, I was going to ask that. Yes, so, look, I think we’ve said in over 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 building and recruit qualified clinicians, nurses, psychiatrists, non-professionals, 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 now, and I will hop back in the queue. Just noticed that obviously the charge – the incremental charge on the DOJ, for the DOJ investigation, just curious if you could give us any more color on how close you may – do you think we might be here and how did we come up with this number that we took in the quarter? Thanks. .

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 then I know many are carefully, the increases to our reserves are coming more frequently and in bigger chunks and view it as a good thing.

I think it’s reflective of the fact that this – our settlement and negotiations with the government are meaningful that pace of them has picked up. The gap between where our offers and the government demands are has narrowed and we are optimistic or hopeful that that means that we can reach a resolution that this is relatively soon.

But as we’ve said, I think every quarter it’s difficult to predict that end game with precision because we do largely proceed at the pace of the government said. So, I think that pace has picked up and we are encouraged by that and are hopeful for a resolution soon.

But difficult to predict exactly how and when and the amount of that would be with precision at least at the moment. .

Okay, thank you. .

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

Okay, thanks. Want to go back to an earlier question about pricing. I guess, your 2% pricing on a patient care basis is I guess not a bad number.

But if this below the 2.5% to 3.5% number you’ve been seeing in the last four quarters or so? So, I guess, when you think about it going forward, 2% is kind of the right number to think about going forward there?.

Yes, and 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 imagine that that would consist of 3% to 4% volume and 1% to 2% price.

You made the point accurately that we’ve been on the high-end and if not frankly over the high end of the pricing range or 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, now that as we think about it, we think that sort of ultimate model and again I am not going to going to say when we are going to get there, but that ultimate model of 5% revenue growth is probably now, we think about more as like 2.5% to 3.5% volume and 1.5% to 2.5% price..

Okay, that’s helpful. And then, do you sense that in Q4 you kind of expect a relatively similar performance in the behavioral business as far as it sounds like same-store revenue growth and then relatively flat EBITDA which was kind of you did that sound a little bit from a larger perspective.

But I was surprised that with the same-store revenue growth decelerating being 2.5%, you actually saw some of the best margin performance you’ve seen over the last year. So is there anything coming on in the cost side that you are now able to achieve margins relatively flat even if you only growing same-store revenue 2.5% to 3%.

I think, you, 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. 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 are 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 thing is, I think it’s just a credit to our operators and I have certainly have 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 two items. .

Is that something that’s sustainable or is that something where you kind of compare when you identified whatever the number is $10 million, $20 million of savings, but then, do you anniversary that at some point and you’ll need to be growing?.

The model is 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 will 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 are producing right now is 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. And then I guess a 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 tying new beds, recruiting labor, or doing better documentation as you described.

How much of it is just kind of getting to the point where you anniversary some of the more structural headwind to the business?.

So, I think that the elements 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. 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 picked through a few of 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 the 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 raise I think is a valid one.

I mean, the one thing we can 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 is sort of a natural limit to that as well.

No more than a 100% of our Medicare patients can be managed, no more than a 100% of our Medicaid patients can be managed. And in both cases, we are well past the 50% mark. .

And I guess, when we look at Acadia who is growing above that 5% rate in the U.S. they are obviously doing something operationally that’s allowing them to overcome some of these structural headwinds. Do you kind of look at the items.

Do you guess there is 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 a little hard question to answer when I am asked for real specific sort of comparisons with our peers, since obviously, I have little detail and little insight into their detail.

I guess, my reaction has been one of the challenges or 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 a footprint in some cases no presence in those markets. And the same thing with some of the managed Medicaid issues that we faced.

We talked about some of the states that have been most problematic for us and then we look at an Acadia map, we see that they haven’t necessarily have a significant presence in those locations. So, I think that’s an aspect of it.

So, again, I think all – 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 hospital.

So to the degree that issues are geographically centric, we are just going to try and deal with those issues where we have them. .

Great, thanks. .

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

Thanks, good morning. I 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 pick up 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 deeper deceleration in this quarter, that’s sort of hard to grasp. The shift from traditional to manage, isn’t anything new.

So, are there anything to callout that’s maybe disproportionate impact by stay, if you can call out any states that just sort of would make it worse for the pressure in the third quarter than what we’ve already been seeing as sort of a continued pressure. Thanks. .

Yes, I am going to answer the second question first. And then maybe come back and ask 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….

Got it, I got it. Yes, so, two 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 is a little bit of built-in improvement there.

But I think the other piece of that and we’ve been talking for any number of quarters, I think the other big piece is, I do think we made a lot of progress on the labor front. We don’t have nearly as many – what we describe as cap edge or closed units because of the – a lack of qualified staff.

So, I think that’s 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 come off of a strong acute front.

So anything there? And then the last piece of that question is just, your all-in Medicare rate, could you just remind us what that shook out for fiscal 2019 and how it compares to 2018? Thanks. .

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 a continuation of where we’ve been and 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 – sort of call it a non-recurring items, we called out the $11 million to $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 started out, I think in Q4 if you eliminate those items I’ll call it $16 million or $17 million in the whole. I think we presume, we will make that up and that’s probably kind of 4% or 5% growth in our acute care EBITDA. Because I still think the comparison is pretty tough even without those items.

But cosmetically, I think it will 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. .

Okay. Thank you. .

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

Thanks, hi, good morning, Steve. First question is, on the acute care side, as well. I am 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’s 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, we see all those dynamics and they are reflected I think or manifested in different ways in our results.

So for instance, we’ve clearly seen our emergency room activity decline or visit numbers decline over the last several years.

But we have seen our emergency, or the admission 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 are participating in that outpatient development in our markets in a very rigorous way. .

I guess, more specifically, is that contributing to the strong growth in acute or is this more sort of we are keeping up with the markets dealing in your view?.

Yes, look, I think, I don’t know that I have a 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 the 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 out for the last several years if we hadn’t developed this fairly aggressive outpatient in alternative care delivery strategy. I think we’d be losing business, I am losing market share if we weren’t doing that. .

Gotcha, gotcha. And then, just a second question, a separate topic. Obviously, a lot of focus on drug pricing and what more news yesterday and we are hearing about potential changes for Part B drugs and the hospital companies come together for generic manufacturing et cetera.

I am 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 had 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 are oncology drugs or whatever it maybe. So, it is a big focus of ours.

I don’t know that I think we have a point of view that a kind of 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 overall hospital cost and something that we focus on a great deal. .

Okay, perfect. Thanks. .

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

Hi, thanks. So, for 2009, when we think about the outlook. I know you are 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 are going to get an IPPS benefit.

Can you remind us what that should be in 2019? And on the Behavioral, I know you talked a lot on this call about the length of stay pressures and the state – your state exposure. But 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? Thanks. .

So, Ann, I think as far as sort of the puts and takes for 2019 and again, I am certainly not prepared to give a kind of a comprehensive list, but obviously to the degree that we had any non-recurring items this year. I am 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 – I think it was Ralph who asked this question before.

We have I think our Medicare increase in the sort of 1.5% to 2% range for next year, as well as an increase in our Medicare dish payments, I think some people sort of throw the Medicare dish payments into the underlying rate which makes it more 2%, 2.5% rate increase.

If you want to look at the dish benefits separately, I think it’s kind of a $15 million to $20 million benefit. So that’s the tailwind I think into 2019 that actually starts in the fourth quarter of 2018. Other than that, there is nothing I think that we haven’t previously talked about. But at the moment, we would call out our highlights.

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 time it doesn’t takes 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 will make our best efforts when we give our 2019 guidance to call out particularly for states that were concerned about or have focused on, but at the moment, I don’t have any of that I would specifically identify. .

All right. Thanks. .

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

Thank you. I wanted to go back to the comments on wage pressure. So, the behavioral salary wages and benefits ratio is up about a 100 basis points year-over-year or 190 from 1Q, 2017. 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? Thanks. .

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 where 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 are always evaluating and reevaluating base wages where always evaluating and reevaluating what others are doing regarding incentives, sign-on bonuses, retention bonuses, all kinds of nuance ways to approach labor recruitment and it may vary quite frankly by markets.

So, the point that you raised is certainly one that we can see that before which is, wage inflation is certainly higher today for both our behavioral business and our acute business than it was three or four years ago and that’s why we say that our underlying business model has changed.

So, it’s four 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 at sort of a linear issue that where 60% of the way there, 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 JV 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 Herman could present any opportunity for you to expand the Baylor JV?.

Yes, so, I am not going to comment on any specific opportunity.

But, as I mentioned in my prepared remarks, we have somewhere between two and three 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 in 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, from our perspective, we would view Baylor as a very positive kind of sort of referral source for us et cetera whether that makes sense towards Memorial Herman in Houston, I don’t know.

But I think, if you know 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 a blanket way. Every conversation is different.

I have 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. Some or couple of our Baylor JVs are just a leased unit from them one of our Providence JVs is just a leased unit from then. And in other cases, we’ve entered into a natural 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 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. .

Thank you. .

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

Great, thanks. Good morning. So my question is also on the behavioral side. And it seems like the large-scale M&A chatter is seemingly heated up again a little bit in the marketplace.

So, I guess, I am just curious if you are 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. Thanks..

Yes, so, look, we are 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 are going to look for the highest returns and as I said, in I think response to A.J.’s question earlier, 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 are 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 in-patient setting.

You guys have somewhat dismissed that notion earlier this year for yourselves as far anything out of the ordinary and it sounds like for 3Q 2018, that might be the case again. So one of you can just give any quick color on that topic and just confirm that one way or the other. Thanks. .

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 are seeing is a rise in acuity in the acute care business.

Getting back to the question before that 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 in 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 hospital itself. So, I think that’s having an impact as well.

So, I think there is to that element where those elements are contributing to the increase in acuity. And so, I don’t know that we discount that. .

Okay. Okay, that’s helpful, thanks. .

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

Hey, thanks for squeezing me in. Hello, Steve. So, on the acute side, as you point out, it’s a little more unpredictable, can be choppy. And 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 two ways on it. 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 and 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 2018, 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 are sort of experiencing what we might have experienced a year or two 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, it was a point in time where Medicare seem to be a huge source of growth and what is that looking like right now and what might that look like as the next one to three years we see a whole lot of privatization to Medicare advantage and build us the managed MA plans B a little bit more pushback more on the machines, et cetera?.

Yes, so, I think that, again the payer mix trends that we’ve described over the last several years has 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 go that we view it as nearly as impactful on the acute side as we do on the behavioral side.

I just think we are so much more – this has been going on for so long on the acute side. It’s just some much more engrained in our business. .

Got it. Okay, that’s helpful too. So, on the managed Medicaid, just one more follow-up to it, 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?.

Yes, I think what we find, Ana, is that, it really varies by geography. So there is no single payer who we find is most aggressive nationally. In every market, there may be a payer who is more aggressive. But it seems to me sort of more a localized than what I would characterize as really national behavioral 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 are 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 are encouraged that in the last – I don’t know, six or 12 months ACA has announced, but couple of deals that I think are relatively new to them.

That it’s sort of the first time to those deals. They’ve probably done it over a decade. And we are 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 will evaluate those opportunities as they arise. They are difficult to predict.

We are not - we don’t feel obligated to sort of grow for growth sake. So, we will invest in those opportunities organic, inorganic share repurchase, et cetera as they arise and as they make sense. And we will just continue to do that. .

Okay. Thanks so much, Steve. .

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

Right. Good morning, Steve. I’ll keep it to one question. Can you just say how was, in the Behavioral business specifically, you had some negative hurricane impact last quarter or last year in the fourth quarter I should say, 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 you see in 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, 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 four to six months. The good news is, all patients and employees were safe and nobody was injured, but that will 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 pick up, 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 and 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 that you put tweaks in between things, a facility that is going to be sort of offline for that period of time.

We are going to continue to keep everybody on the payroll and effectively maintain our cost structure while we are generating essentially no revenue. So that’s what creates the 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 in 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 too early to say how much of a drag it will be in Q1. Ultimately, I think we will recover most of the loss sometime next year. .

Got it. Thank you very much. .

Your last question comes from the line of Gary Taylor from JP Morgan. Please go ahead. .

Hi, good morning. Just a couple quick ones.

On the – going back topic of the day, I guess, the length of stay pressure on the behavioral side, are you seeing that primarily on IPF or is it also the RTC? And can give us kind of the latest updated either bed or revenue split between IPF and RTC?.

So, I think from a revenue perspective, Gary, and I am 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 or 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 has 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 a third 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 policies just the site-neutral impact 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 am doing this off the top of my head, Gary.

But I would guess, that UHS’s outpatient percentages or revenue are much lower than the industry’s standards that 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. .

Okay, thank you very much. .

There are no more questions. At this time, I turn the call back over to the presenters for closing remarks..

We 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..