Good morning, my name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Steve Filton, you may begin your conference..

Good morning. Alan Miller, our CEO, is also joining us this morning. We welcome you to this review of Universal Health Services results for the first quarter ended March 31, 2019.

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, 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, the Company reported net income attributable to UHS per diluted share of $2.57 for the quarter.

After adjusting for the favorable impact from our adoption of ASU 2016-09 as discussed in our press release, our adjusted net income attributable to UHS per diluted share was $2.45 for the quarter ended March 31, 2019. On a same facility basis in our acute care division revenues increased 4.7% during the first quarter of 2019.

The increase resulted primarily from a 4.9% increase in adjusted admissions and a 0.4% decrease in revenue per adjusted admission. On a same facility basis, revenues in our behavioral health division increased 3% during the first quarter of 2019.

Adjusted admissions to our behavioral health facilities owned for more than a year increased 2.9% and adjusted patient days increased 0.9% over the prior year first quarter. Revenue per adjusted patient day rose 2.5% during the first quarter of 2019 over the comparable prior-year quarter.

Our cash provided by operating activities was approximately $391 million during the first quarter of 2019. Our accounts receivable days outstanding decreased to 51 days during the first quarter of 2019 as compared to 53 days during the first quarter of last year.

Our ratio of debt to total capitalization declined to 41.5% at March 31, 2019 as compared to 42.9% at March 31, 2018. We spent $170 million on capital expenditures during the first quarter of 2019.

We completed and opened 52 new behavioral health beds and expect to open another 350 new beds at our busiest behavioral health hospitals before the end of the year.

We also completed and opened two new freestanding emergency departments in the first quarter, one in South Texas; and the other in Wellington, Florida, bringing our total number of FEDs to 10 with several more expected to open over the course of the year. In conjunction with our share repurchase program that commenced in 2014.

During the first quarter of 2019, we repurchased approximately 841,000 shares of our stock at a cost of approximately $106 million or approximately $126 per share. One final note included with our press release last night was a schedule of selected hospitals statistics, to the three months ended March 31, 2019 and 2018.

Certain statistical information on that schedule related solely to be as reported behavioral health facilities for the three months ended March 31, 2019 was inaccurate.

The corrected as reported, behavioral health, statistical information for the three months ended March 31, 2018 was included as Exhibit 99.1 to the Form 8-Ka as filed this morning with the Securities and Exchange Commission.

Other than the as reported behavioral health statistical data as just discussed, no other changes are required to any of the financial or statistical data including all same facility statistical data as originally included in last night's press release and related Form 8-K as filed last evening.

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

[Operator Instructions] Your first question comes from the line of Justin Lake with Wolfe Research. Please go ahead..

Thanks, good morning, Steve. First on the acute side. EBITDA was below expectations there. It looked like it was pricing. Can you walk us through a few things, one, why was pricing so weak in the quarter.

How did you see a kind of flow through the quarter and how far off was acute EBITDA from your internal estimate? And kind of how far was the quarter off. Thanks..

Sure, Justin. So first of all, let me say that I think similar to last year first quarter results, we were a little bit short of our own internal expectation, a couple of pennies short. I know we were measurably shorter than the consensus estimates however.

Internally, I think as you suggested our acute care results were probably $10 million or $15 million short of where we expected to be. And conversely, our behavioral results were made up about half of that. So, we were ultimately, as I said a couple of pennies short from an EPS perspective.

The main driver of this shortfall again, I think as you suggested on the acute side was, pricing or revenue per adjusted admission weakness.

What we saw in the quarter was a measurable shift of higher margin, higher revenue, surgical patients to lower margin, lower revenue, medical patients, which is not really that sort of typical pattern particularly early in the year. We did see that pattern abate, as the quarter went on.

So, in other words, surgical volumes were extremely weak in January, they got better in February, they got better in March. And it looks like they're continuing to get better into the early stages of the second quarter..

And.

So are you saying March and April were pretty much in line from an acuity perspective and therefore from a profitability perspective in the acute business or the miss was in January, February?.

Yes. I certainly will say that about March, obviously April is sort of an incomplete picture at this point. But at least from a statistical and service mix perspective, it appears those trends continue to improve in April.

Obviously at this point we haven't closed April, we haven't seen payer mix information, all that kind of stuff, so I'm not going to make any broader comments about April's profitability. But in terms of the service mix dynamic that I talked about, it did seem to again and continue to improve into April..

Okay, thanks for all the color..

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

Hi, thanks. Good morning, Steve. Two questions, kind of related. I guess, first is just any overall thoughts of the IPPS proposal this week, and anything we should be thinking about. And then second, I guess related to that as I think about the impact coming in 4Q.

Medicare advantage versus Medicare fee-for-service, in terms of the payments to your facilities. I just wanted to see where we were on that, if anything has changed in recent years or does the M&A payment typically reset directly with the fee-for-service changes come October 1. Thanks..

Yes, so as far as the IPPS rule, we had in our 2019 guidance beginning in October. I believe an assumption that the IPPS would increase on sort of an all-in basis by something like 2.6% or 2.7%.

I think when we calculated the impact of the final rule that's out now, again all in with the effect of DSH and with the effect of wage and exchanges, we were coming very close to our estimates. So I think from our perspective, and certainly has an impact our 2019 guidance, is largely a push.

As far as your second question, I think that generally we find Medicare Advantage rates tend to follow and contractually sort of – I think described them as being reset with the overall traditional Medicare rate. So I think we generally find them to be strongly connected..

Perfect, thank you..

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

Thanks, good morning. In terms of the surgical softness, can you just give us a sense of magnitude at all of the decline in the early part of the quarter versus recent recovery? And then maybe which surgical line saw the greatest impact..

Yeah, I mean. So for the quarter, Ralph inpatient surgical volumes were flat with last year, outpatient volumes were up maybe 2%. Historically, I think what we have found generally is that surgical volumes and admissions tend to move in relative lockstep, so that if admissions are up 4%, then usually surgical volumes are up 3% to 5%.

So the level of disconnect in the quarter was certainly greater than what we're accustomed to seeing. In terms of sort of the monthly cadence or progression.

I don't necessarily have that in front of me, but as you can think about it, I mean in terms of – if inpatient surgeries were flat for the quarter, they were down early in the quarter and then got better and we're a little bit up in the quarter towards the end..

Okay.

And anything on surgical line?.

Yes. And in terms of what I was saying before, what we saw is a decline in those higher margin, higher revenue surgeries, those would include orthopedics, hips and knees and spine. They would include cardiology, stent and open hearts and pacemakers.

So, I think all the sort of traditional areas that you would think of as high-acuity, high revenue, higher margin procedures. For the most part, were down across the board, across the portfolio. And as I said, we began to recover and did recover as the quarter progressed..

Okay and then just to just to clarify, was it loss of surgical volume, altogether, or was it more of a shift to those procedures from inpatient to outpatient. So you sort of still kept it, which is why maybe the overall volumes got looked okay, but the pricing and margins got hit or is that not the dynamic..

Well, again I mean I'll just sort of repeat the overarching metrics. Our adjusted admissions were up 5%, inpatient surgeries were flat, outpatient surgeries were up 2%.

So it leads you to believe there is a little bit of shift from inpatient to outpatient, but the biggest shift I believe is, less surgical patients and more medical patients and again those medical patients are lower revenue, lower margin patients..

Okay, fair enough. I leave with that, thank you..

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

Thanks. On the psych side, I guess, you said that the numbers were better than you were expecting in the quarter.

What was – what exactly came in better was it a revenue beat or was it on the cost side?.

Yeah. So, if you recall, Kevin at our year-end call, just a couple of months ago, we talked about the basic premise of our same-store guidance on the behavioral side was roughly, how we ended last year, which was kind of 3% revenue growth.

We had 3% admission growth in Q1 we had 2.5% pricing growth, those numbers fell pretty robust as unfortunately we continued to see pressure on length of stay.

Although again that was largely as expected we said at the end of the year, we were embedding in our guidance an assumption that length of stay would continue to decline 1% or 2% in 2019, and it declined 2% at least in the first quarter of 2019. So in many respects, the underlying metrics played out as we expected.

I think we just saw a little bit more efficiency, we saw as – we predicted or our guidance presumed relatively flattish EBIT on a same store basis. I think we had more of a 4% EBITDA growth, or something on a same store basis.

And I think that's a little bit of efficiency, and it's a little bit of the anniversarying of some of this, the wage and salary pressure that we've been talking about for the last couple of years..

Okay. And then I guess as far as the length of stay pressures. The quarter was better, I guess in some of the more recent quarters. There, are you seeing anything around there to kind of give you visibility and that continuing to decline or a pressure continued to abate.

Or is the right assumption to be that it's still going to be in that kind of 2% range, as far as length of stay pressure?.

Yes. So look, we've been I think reluctant in the more recent quarters to make real definitive predictions about the direction of length of stay and behavioral.

We've talked, I think about the biggest variable and the biggest volatility there being, the continued migration of traditional Medicaid patients into managed Medicaid plans, where they tend to have a lower length of stay. And while, we're certainly aware of the states in which that migration occurs, the pace and the cadence at which it occurs.

The level of, sort of aggressive behavior of the particular managed care payers in a particular geography or state varies. And as a consequence, it has not been easy for us to historically predict how length of stay is going to go.

So, I think we're going to stick with the idea that, over the course of the next 12 or 24 months, we'd expect length of stay to decline 1% or 2%.

We're certainly doing a number of things internally to try and do our best to make sure those numbers reflect a fair length of stay from the payers that is consistent with their clinical diagnoses et cetera, and proper treatment and outcomes.

So, we continue to work on it but from a financial perspective, I think the expectation is still 1% or 2% decline for the near term..

And then maybe this last question, the accrual for the DOJ settlement I guess was flat sequentially.

So, I'm not sure how to read into that, is that a sign that you're getting close to the end and the two sides are not very far apart at this point or is it more a sign that there's still a ways to go and there was not a lot of progress made this past quarter in the settlement discussions?.

What we had talked about in our year-end call a couple of months ago was the idea that we felt like we were nearing an agreement on a monetary settlement with the government, but that there were several non-monetary issues to be negotiated and discussed.

And I think over the last couple of months, the focus of our interaction with the government has sort of shifted to those non-monetary items, things like terms of a release and the periods of a release and the conclusion of related investigations, criminal and otherwise.

And so I think what's to be read in that is that we continue to negotiate rather vigorously with the government, and I think both sides are committed to bringing this matter to a conclusion. We as always hope it will go faster but are dedicating our resources to make sure that happens..

Great, thanks..

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

Hi, everybody. Two questions. First of all just drilling down a little further on the strength and certain medical relevance to surgical.

When you as you rattled off some of those surgical case categories, hips and knees back some of that and my mind maybe has some aspects of postponable nature to it or even an elective I guess, whereas obviously open hearts doesn't.

But as you talk to the operators is there any indication that maybe what we're seeing is sort of a flattening out of seasonality because of the proliferation of high-deductible health plans.

Is that a factor here in what we're seeing?.

So A.J., I think that the dynamic that you just described is certainly real and has quite frankly existed for many years, so I honestly we have long seen late in the year in November and December, an uptick in elective procedures as people have satisfied their deductibles and look to have those procedures and those treatments done at that time.

And then we see kind of a slow start in January. February as the clock resets on their deductibles, et cetera. What people have speculated over the last several years is that that dynamic would be exacerbated as more and more plans became high deductible and the deductibles themselves became bigger et cetera.

So, I think it's not an unreasonable sort of postulation that that's some of what we see happening. In an objective way that's very difficult for us to prove, we just don't have enough information about you know sort of our patients. You know insurance sort of position this year versus last year to really make those kind of broad sort of conclusions.

I think the payers would probably be in a better position than we are to make those sort of judgments. But there is certainly has been speculation on the part of our operators that that may be a dynamic in what's happening.

I'll also make the point that, I know it doesn't necessarily answer it, but last year, in the first couple of quarters, UHS and other acute operators were generally reporting stronger revenue per unit, stronger acuity. And in some cases sort of struggling to explain that fully.

So, I do think we're working off of pretty high comparison historically and I think that's playing into this a little bit as well..

Okay. And maybe the other question I was going to ask is drilling down on capital deployment. I wonder if you could give some color as to, it seemed like maybe your discussions with the government were causing you to be a little conservative relative to capital deployment.

I know you're down to debt-to-EBITDAR rather 2.3 times, which is very low for the industry. Any thoughts on the cadence of buyback activity over the course of the year. And then I guess, there's also been some deal activity in the last 18 months and markets you might have an interest in.

And there's also been discussion about possibly physician deals being out there.

Any update on both sides buyback and deal activity pipeline from your perspective?.

So, I think we made the point A.J. that over the last I think three years we've averaged pretty consistently low $400 million of share repurchase annually. Embedded in our guidance for 2019 as a similar $400 million to $500 million number.

I think based on our first quarter performance and the buying that we've done under a 10b-5 into the second quarter, we're comfortably on track to get to those numbers.

I think what we've said is that likely until we settle with the government, the cadence and the pace of those repurchases probably doesn't change all that dramatically, although we're certainly trying to take advantage of what we believe sort of unjustified weaknesses et cetera in the stock. In terms of deal opportunities.

I think that's always difficult to comment on, with any level of specificity. Obviously, you've made the point and we certainly concur that our conservative capital structure leaves us a lot of flexibility.

So, we certainly feel like we're in a position to respond to opportunities as they arise and opportunities are presented to us all the time and we're evaluating them, but we're not going to comment on any specifically..

Okay, thanks a lot..

Your next question comes from the line Ana Gupte with BBB Leerink. Please go ahead..

Hey, thanks, good morning Steve, good morning Alan. Just one last one, perhaps from me, on the mix shifting that you've seen from surgical to medical.

Is there anything you're able to tell from the various geographies that you're playing in? Is anything incrementally, different? Also, do you see any differences by payer mix, which would kind of then play to A.J.’s question about seasonality and high deductibles? And any delayed mix shifting to ambulatory sites of service perhaps that you hadn't seen before?.

No. I mean, I think, and I mentioned in my prepared remarks, that we've been fairly active in certain markets in developing and opening freestanding emergency rooms and certainly in those markets, we've seen some shift of emergency room business out of our hospitals into the freestanding entities.

But more importantly, I think we feel like we're seeing, we're capturing business that some of our competitors would have otherwise seen in those FEDs. So generally, I think our ER business remains rather robust.

And in fact, I think one of the dynamics we see in the quarter is we are seeing more of a higher percentage of capture of ER patients in admissions. We did look at this dynamic of the shift from surgical to medical. We certainly looked at across the portfolio, and we saw this dynamic present in many of our markets, not just one or two.

So it didn't seem to be geographically specific for us and couldn't really determine any patterns in that regard..

Okay. And it's not got to do anything with observation stays, which your pattern used to be more on higher volume, lower pricing growth. I think that's probably 2017 and then it sort of slipped a bit..

Yes. I mean, I think that maybe related to the comments I was trying to make to A.J.

before, which is we explained some of the strong acuity and revenue per admission that we were experiencing early last year to the idea that we’ve had success with some of our payers, particularly out West, in getting more of what I – we sort of describe as those bubble cases categorized as in-patients rather than observation.

So it's possible that some of the revenue weakness in Q1 is an anniversary-ing of that dynamic, although again I think that the bigger issue is the shift of surgical patients to medical patients. But that could have at least some incremental impact..

Okay, great. Thanks. On behavioral – switching to behavioral. So you talked about in 12 to 18 months, you'll get back to 5% and clinical staffing was driving volumes up, offset by the, hopefully, last of the length of stay pressure from Medicaid to managed Medicaid.

Do you feel it's kind of maxed out on the staffing dynamic here on the volumes and then on the length of stay, this payer mix shift, which I think you're like two-thirds managed Medicaid, one-third Medicaid? Correct me if I'm wrong.

Are you kind of seeing the same dynamic in the timing to return on that 5%?.

Yes. So look, we talked about the pressures that labor shortages were really causing for us and impacting us back in late 2015 and early 2016, I think, is when that problem really kind of reached its height. Since then, I think we've made a great deal of progress.

Now we certainly still remain in a pretty tight labor environment as does the rest of the country. And so we still have pockets where either we have a shortage of a psychiatrist or multiple psychiatrists and nurses or even in some cases, nonclinical or nonprofessional clinicians.

But I think we've made a significant amount of progress and the amount and occurrence of those sort of shortages are much more infrequent today than they were a number of years ago. So that's much less of a barrier to revenue growth and admission growth.

The length of stay issue, which we talked about before a little bit, remains I think probably the biggest barrier to or getting to that sort of 5% target that we've talked about before. We continue to work on that and I think also have a point of view that at some point over the course of the next year or two, we'll largely begin to anniversary that.

But we're not quite there yet..

Okay. And then one final one. You've always pointed out your commitment for the company on a diversified model. And usually, you have one business somewhat offsetting the other.

Looking at the first quarter, and it sounds like it's beginning to get better on the surgical side, how do you feel relative to plan in acute, behavioral and then more broadly relative to guidance?.

Well, I mean, I'll just make the comment, which I think you made, I'm going to sort of reiterate. And I think we feel like our two-segment strategy, which we've been committed to for well over three decades, has served us well over that time in many respects.

But one is it's been a good business diversification strategy that as one business was under some pressure, the other tended not to be. And this last quarter seems to be another example of that.

As far as how we sort of view the cadence or the trajectory of the businesses, I will say that this year's first quarter at least feels to me a little bit like last year's first quarter, where we missed our internal projections by a couple of pennies but missed The Street consensus by a measurably greater amount. We made that point on the call.

And I will say the one difference last year was the miss last year was behavioral related. The miss this year is more acute related. But I think we had a point of view that we were still on track to get where we projected we'd be and in fact, wound up the year within 0.5% of the midpoint of our original guidance.

So obviously, we can't guarantee that, that will be the same result this year, but we certainly feel, given that we only missed our internal projections by a couple of pennies and given that the trends in acute care that seem to have driven the miss in Q1, seem to be reversing themselves, we feel pretty good about our ability to land safely within our original guidance..

Thanks Steve. Appreciate the color..

Your next question comes from the line of Peter Costa with Wells Fargo Securities. Please go ahead..

Thanks for all the color on the surgical volumes. I won't press that anymore but it sounds like that's mostly resolved at this point. Can you talk about the Medicaid DSH cuts that are coming in the fourth quarter? I know there's a letter running around Washington trying to build up support to delay those cuts.

How exposed are you to that? I know it's more of a nonprofit item. But for you guys, it's probably still a little bit.

Can you talk about that a little bit?.

Yes. I mean, Peter, we do disclose. I don't have the numbers in front of me. But now in our 10-K, we disclose our DSH reimbursement, and we project our DSH reimbursement into 2019. There was some decline that is embedded in our 2019 guidance. Obviously, we would be pleased if Congress was to step in and sort of either abate or reverse that.

Hard to know what the likelihood is of that at this point, but I will say that I think all that is embedded in our 2019 guidance already..

So if it is delayed, it will be an upside to you guys as opposed to if it comes through, it's a negative?.

That’s correct. That’s correct..

Okay, thank you..

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

Thanks. Good morning, guys. So really, I guess, for us a little more time has passed now since the elevated noise level over a month ago around the push by the current administration for greater transparency in managed care or commercial hospital pricing.

Just curious if you have any updated thoughts on whether this is either gaining momentum or maybe just losing steam since that conjecture came out last month?.

Look, I think there is a lot a focus on transparency in pricing. Although I think, to some degree, it's a little bit misdirected. I mean it is largely focused on a very small group of patients who really don't have health insurance either from the government through Medicare or Medicaid or commercial insurance.

And the reality, even though there are sort of the anecdotal stories that can be rather sort of lurid, is that most patients like that really don't wind up paying what I would sort of call retailer sticker prices. So there's a lot a focus on it. I don't know that it's – we certainly have complied.

We post our prices, as you're supposed to now, on our website. But I don't know that it really addresses a significant problem. I think it's one of the solutions in search of a problem.

I do think that there are other kind of initiatives in what I'll call the billing and collection area that I think do – will get more traction and will put more pressure on some providers. That includes what – sort of under the umbrella this kind of broad surprise billing, which is generally sort of an out-of-network billing dynamic.

These are for what I think are generally hospital-based physicians, ER physicians, anesthesiologists, et cetera, who may be not in-network when a hospital is in-network. We have very few of those cases. We really require our hospital-based physicians to be generally in any networks that we're in. So we don't think that's much of an issue.

I think in a broader sense, that's a bigger issue than the transparency pricing that's gotten some amount of traction..

Okay. Appreciate the color. Thanks..

Your next question comes from the line of Whit Mayo with UBS. Please go ahead..

Hey, thanks. Good morning. Can you maybe just remind us for a second what the headwinds were in the first quarter of last year for the behavioral segment? I had $8 million or $9 million penciled in but wasn't sure if that's right. Just trying to figure out what the real underlying growth is this quarter..

Yes. So I think with – the items that you're referring to were $5 million or $6 million of headwinds from the three regulatory-challenged facilities. Those facilities have improved this year by maybe $3 million. I will note that the activity from those facilities has been moved into the non-same-store segment of behavioral health.

The other issues were the relatively slow start of the Gulfport, Mississippi facility as we got our Medicare and Medicaid numbers. That facility has also probably improved something like $3 million in the quarter.

But that I think has been largely been offset by probably $3 million or $4 million of drag from our Panama City facility that was impacted by a hurricane late last year and remained closed during the first quarter this year. They since reopened in early in the second quarter.

And then I think the last drag that you're referring to was a $1 million or $2 million drag from the slow hurricane recovery in Puerto Rico. And unfortunately, that market remains relatively – or the recovery remains relatively slow. So I'm not sure we have a big turnaround there..

Okay.

So maybe to keep it as simplistic as possible, as you normalize internally for headwinds and tailwinds, on a same-store basis, how much do you think EBITDA increased or decreased in the first quarter?.

Yes. So on a same-store basis, I think it's largely a push with the Gulfport improvement being offset by the Panama City loss..

Got it. Okay, that’s helpful. And I know you had some supplemental headwinds that you cited and included in your 10-K.

And any way to size maybe what the first quarter impact was, at least optically, on the revenue per adjusted admission statistic for the first quarter?.

So I think on the acute side of the business, there's probably a $6 million to $8 million drag from the projected DSH declines as well as these managed Medicaid pay-for-performance payments that we get in California. We don't actually include them in our sort of special reimbursement tables in the Qs and Ks and we record them largely on a cash basis.

But we recorded about $4 million in last year's first quarter and nothing this year. So there's probably, like I said, about a $6 million or $8 million drag on the acute revenues that contribute to some of the weakness in their pricing in the first quarter..

Okay. Okay. And then maybe just one last one. Case mix, I don't know if you actually gave a case mix number. I was just curious if it was actually down year-over-year..

Case mix is down year-over-year, but I don't have the exact numbers in front of me, Whit..

Okay, I’ll follow up with you. Thanks..

Your next question comes from the line of Gary Taylor with JPMorgan. Please go ahead..

Hi, good morning. Just the one numbers question I had, Steve, was on other operating expense in the acute business was up on a dollar basis almost 8% year-over-year. And on a per adjusted day basis, about 2.3%, which, given the strong volume growth on acute, is a little higher than we'd probably anticipate out of what's mostly a fixed cost bucket.

So anything unique on other operating expense to call out this quarter?.

I don't think so. Gary, I think, as you point out, I think the way to look at it is on an adjusted – per adjusted admission basis. And I think all of our expenses in acute care are up in that sort of low single-digit range on that basis, which is generally where we'd expect.

I understand the point you're making that I think is people model often that other operating expense model is usually just going up by kind of an inflation rate. I will say the one functional area that's included in that, that has seen some pressure is that's where we record our locums or temporary physician costs.

It's where we record a lot of our contract service physician costs for things like ER subsidies or if there are appropriately anesthesia or hospital subsidies. Those expenses get recorded in that other operating expense line. And we've seen more than just kind of inflationary pressure in those functional areas in the last few quarters..

Got it. Also, I think at least in my universe, you're one of the first providers to report under the new accounting rules on the capitalized leases. We see that on the balance sheet, both sides of the balance sheet.

Is that all just excluded from all your current debt covenants or no amendments or anything, it's just not included?.

That’s correct..

And last question is, is there any update on behavioral leadership external, internal search?.

Yes. I mean that search continues quite vigorously. We've been pleased with the quality of candidates that we've been able to see and hope to be able to make an announcement about that soon..

Okay, that’s it. Thank you..

[Operator Instructions] And your next question comes from the line of Matthew Gillmor with Robert Baird. Please go ahead..

Hey, thanks for the question. I'm following up on the acute performance. I think Ana asked about payer mix trends within the acute business, but I'm not sure I heard the direct answer.

So Steve, can you maybe provide some color on how payer mix trended during the quarter?.

Yes. I think payer mix has been relatively stable, Matt. I think we've done – or we had a focus on our process of trying to qualify the uninsured for Medicaid. And so I think we've seen an uptick in Medicaid utilization to a degree. But I think that's actually kind of a favorable shift out of uninsured into Medicaid.

But just generally, again, as we sort of evaluated our revenue changes for the quarter, I think we found that they were not really driven by payer mix as much as they were by the service mix that we talked about at fairly great length already..

Got it. And then one on the behavioral business, and I guess it was sort of in the context of some of the Medicare for All proposal that have come out. And there's obviously been a lot of effort to try to understand sort of how that impacts the acute business because there are large differences between rates between different payer classes.

And my sense was on behavioral, that those differences were pretty minimal, but I was hoping you could confirm that and maybe talk a little bit about the different rates within the behavioral segment..

I mean, I think we've always had the point of view that the general relationship of payers and their rates is similar in both acute and behavioral, meaning Medicare is sort of in the middle in terms of the level of reimbursement. Medicaid is the lowest payer reimbursable-wise, and then commercial is higher than Medicare.

I would say on the acute side, the spread between those three is larger, but the overall relationship is similar on the behavioral side..

Got it. Thank you..

And your next question comes from the line of Pito Chickering with Deutsche Bank. Please go ahead..

Good morning, guys. Thanks for taking my questions. One quick question on the surgeries.

Can you sort of talk about market share and if you guys lost any market share within surgeries from competitors? Or this is widespread across not only in your hospitals but also against your competitors?.

So Pito, we do track and get market share information in virtually all of our markets. Unfortunately, none of it is as real-time as in the quarter that we're talking about. So we're probably, depending on the market, still a couple of quarters or three away from really seeing market share shifts.

But we have – as you might imagine, there's a lot of sort of informal communication that takes place within markets between facilities, but especially between clinicians, doctors especially but nurses who practice at multiple facilities. And so we have, I think, a reasonable sense in most of our markets as to how we're doing on a real-time basis.

And there was very little concern in the quarter that the decline in surgeries was some sort of significant market share shift. There was just sort of no evidence, even anecdotal evidence that, that was happening..

Okay. Fair enough. A few more quick questions here. You also disclosed that 35% to 40% of all behavioral admissions came from hospital ERs.

Has that changed at all in the last year or so?.

No, I don't think so, Pito. I think that, that number has been pretty stable for a while..

Okay. Fair enough. And then on McAllen. Tracking employment in McAllen markets, it looks as though the economy is sort of growing there for the first time in almost a decade.

Are you seeing any growth there? Any green shoots of trends within that market?.

I mean again, as we've discussed quite a bit over the last several years, that South Texas market has been one of our softer markets economically and as a consequence, from a payer mix and a volume perspective for us. And yes, they've been encouraged, I think, by some of the changes recently.

I think sometimes, it takes a while for those underlying market-specific changes to sort of filter their way into the local health care economy. So I don't know that we're seeing a huge change in that market, but I think they're a bit more bullish than they've been..

All right. And then last question on this one is looking at the managed Medicaid business length of stays versus the states that have no managed Medicaid, you're obviously going to see low – much lower length of stays in the managed businesses.

Do you see any different readmission rates for states that have heavily managed Medicaid versus the ones that don't, i.e., do the lower length of stays impact readmission rates?.

That's a great question and one that we are greatly focused on. The challenge that we have is the availability of data. As you might imagine, when a patient is seen in our hospital and then is readmitted, it's not always to one of our hospitals. So we don't always I think have complete or perfect information on readmissions.

Sometimes, the state will have that. Sometimes, the payers will share that. Sometimes we can – there are other ways that we can get it.

But we do make the argument, in many cases, to the payers that we think that some of this pressure on length of stay is really not suitable or not appropriate for the long-run care of the patient because we think that – and we can at least prove, in some of our cases, where we have the information that patients who were discharged earlier are being readmitted more frequently.

So I assume the payers look at that same information and draw their own conclusions. But a part of the challenge we have is we don't have all that information..

Great, thanks a lot, guys..

And there are no further questions in the queue. I turn the call back over to the presenters..

Okay. Thank you, Heidi. We appreciate everybody's time and look forward to speaking with everyone again next quarter..

And this concludes today's conference call. You may now disconnect..