Universal Health Services, Inc. (UHS) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Sarah and I will your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 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. Mr. Filton, you may begin your conference.

Thank you, Sarah. Good morning. We are expecting Alan Miller to join us by telephone and hopefully we’ll make that happen before we begin the Q&A. I’d like to welcome everyone to this review of Universal Health Services results for the third quarter ended September 30, 2017. During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates and similar words that represent 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, 2016, and our Form 10-Q for the quarter ended June 30, 2017. We would like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company recorded net income attributable to UHS per diluted share of $1.47 for the quarter. After adjusting for the favorable impact from our January 1, 2017 adoption of ASU 2016-09, as discussed in our press release, and the depreciation and amortization expense recorded in connection with the implementation of electronic health record applications in our acute care hospitals, as disclosed on the supplemental schedule included with last night's earnings release, adjusted net income attributable to UHS was $143.4 million or $1.49 per diluted share during the third quarter of 2017, as compared to $157.2 million or $1.60 per diluted share during the third quarter of last year. As mentioned in our press release, our financial results for the three and nine month period ended September 30, 2017 were unfavorably impacted by an after-tax aggregate of approximately $14 million to $15 million or 14 - resulting from the following, an unfavorable after-tax impact of approximately $8 million to $9 million or $0.09 to $0.10 per diluted share, related to the hurricane expenses and estimated business interruption impact incurred by 28 of our behavioral health facilities located in Texas, Florida, South Carolina, Georgia, Puerto Rico and the US Virgin Islands, and our three acute care hospitals located in Florida, and an after tax charge of approximately $5 million or $0.05 per diluted share recorded in connection with a court order in Texas related to certain litigation. Generally, our facilities impacted by hurricanes Harvey, Irma and Maria, did not sustain extensive property damage, and the vast majority have resume normal operations. However, a portion of the beds at our 124 bed behavioral health facility located in Houston, Texas, remain closed. And although our three behavioral health facilities located in Puerto Rico are operational, these facilities which have 240 beds in the aggregate, continue to operate on auxiliary power in areas that have suffered extensive damage to surrounding infrastructure and properties. It’s difficult to predict the impact that the hurricanes may have on the future operating results of these four facilities. On a same facility basis in our acute care division, revenues during the third quarter of 2017 increased 2.2% over last year's comparable quarter. The increase resulted primarily from a 3.5% increase in adjusted admissions to our hospitals owned for more than a year. On a same facility basis, net revenues in our behavioral health division increased 1.8% during the third quarter of 2017, as compared to the third quarter of 2016. During this year's third quarter, as compared to last year's, adjusted admissions to our behavioral health facilities owned for more than a year increased 1.1%, while adjusted patient days decreased slightly. Revenue per adjusted admission increased 1.3% and revenue per adjusted patient day increased 2.6% during the third quarter of 2017, over the comparable prior year quarter. Based upon the operating trends and financial results experienced during the first nine months of 2017, we are revising our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2017 to $7.25 to $7.50 per diluted share from the previously provided range of $7.50 to $8 per diluted share. This revised guidance, which excludes the effect of electronic health records impact for the year, as well as the impact of the adoption of ASU 2016-09, decreases the lower end of the previously provided range by approximately 3.3%, and decreases the upper end of the previously provided range by approximately 6.3%. For the nine months ended September 30, 2017, our cash provided by operating activities decreased to $878 million from $1.4 billion generated during the comparable nine month period of 2016. The $258 million decrease was caused primarily by a $128 million unfavorable change in cash flows from foreign currency forward exchange contracts related to our investments in the UK, and a $101 million unfavorable change in the other working capital accounts, resulting primarily from changes in accounts payable and accrued expenses due to timing of disbursements. Our accounts receivable days outstanding increased to 53 days during the third quarter of 2017 as compared to 50 days during the third quarter of 2016. At September 30, 2017, our ratio of debt to total capitalization declined to 45.4%, as compared to 47.4% at December 31, 2016. We spent $156 million on capital expenditures during the third quarter of 2017 and $419 million during the first nine months of 2017. During the quarter, we completed and opened 27 new acute care beds and 135 new behavioral health beds at existing facilities. In conjunction with our $800 million stock repurchase program during the third quarter of 2017, we have repurchased 870,000 shares of our stock at an aggregate cost of $94 million. Since inception of the program, through September 30, 2017, we have repurchased approximately 6.34 million shares at an aggregate cost of $736 million. Earlier this month, the Competition and Markets Authority provided the final ruling regarding the phase two investigation of our acquisition of Cambian Group PLC’s Adult Services Division in the UK. The final ruling requires us to divest one 18 bed facility which generates less than $1 million of annual earnings before interest, taxes, depreciation and amortization. The final ruling represents a reduction in the number of divestment sites identified in the phase one decision. We’d be pleased to answer your questions at this time.

[Operator instructions]. Your first question comes from Justin Lake. Mr. Lake, your line is open.

So Steve, first question is, your guidance appears to imply a pretty steep ramp in the core EBITDA of the company in the fourth quarter versus the third quarter. And I'm assuming there's about $15 million of drag still in the business from the two psych facilities and the continued hurricane impact to Puerto Rico. So if I look at that, can you tell us, how do you bridge down from 3Q to 4Q? Is t - do you expect a big ramp in the behavioral business? Is the acute going to get better? Help us understand that sequential improvement.

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

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

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

Great. Thanks for all the color, Steve.

Your next question comes from Josh Raskin. Mr. Raskin, your line is open.

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

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

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

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

Perfect. Thanks.

Your next question comes from Kevin Fishbeck. Mr. Fishbeck, your line is open.

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

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

Okay. And I guess one of the things that is still interesting to me, I guess in response to my earlier question, is that you're still looking at the same kind of rebound and reacceleration in the business. I guess one of the metrics that you wouldn’t expect the hurricanes to impact would be length of stay on the behavioral side. So I just want to make sure that that's right because that seemed to still be a pressure because now the third quarter in a row where that's a pressure. Can you talk a little bit about what you're seeing there and why you think that that's not going to be continue to be a pressure on site?

Yes. I mean so I think that in Q3 we did actually see the length of stay decline, diminish from the rate at which it was declining in Q2. So I think sequentially we made some progress. I think our point of view that we articulated last quarter was we certainly feel like there are some things that we may be able to do to impact length of stay where that's clinically appropriate. But then if we couldn’t, that we had a point of view that the underlying demand was strong enough and the reservoir of unmet demand of patients looking to be admitted to behavioral hospitals, was strong enough that we just needed to improve the efficiency of our throughput, so that if beds were being vacated earlier because of length of stay pressure, we just needed to increase the throughput and fill those beds sooner, again always where clinically appropriate. And I think that's our point of view and why I think we had the perspective that this 5% same store revenue growth target that we've essentially set for the behavioral division, because that's what we were running back in 2000 when we started to see some diminution in that number, is achievable. It’s really the confidence that allows us to say that is this the metrics that we continue to see internally that demonstrate a there's a significant reservoir of unmet demand.

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

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

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

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

Okay, great. Thank you.

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

Thank you.

You’re welcome. And your next question comes from Ralph Giacobbe. Mr. Giacobbe, your line is open.

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

Sure. So I think there's a least several questions embedded in what you've asked. So I'll try to cover them all. I mean one is, in terms of the overall acute care revenue growth, I will just remind everyone that the comparison that we're facing in the third quarter to last year's third quarter, is quite robust. We had 9% revenue growth in last year's third quarter, really an extraordinary number. So it was always going to be a tough comparison, I think on the revenue side. And as a consequence, I think where we landed in Q3 was not far off from where we thought. Obviously, I think you need to adjust the 2.2% revenue growth on the acute side for the hurricanes by 100 basis points or 110 basis points. You’re in the sort of low threes there. I think the only other thing worth noting, and I sort of alluded to it before in response to, I think somebody else’s question was that a little bit of it is sort of the pace at which capacity comes on the acute side. So we opened our Spring Valley tower in Las Vegas last year in the second quarter of 2017. So that anniversaried or that impact was anniversaried in the third - the second quarter of 2017. We opened in ’16. We anniversaried in ’17. Just as an example, I think Spring Valley’s revenues for the first six months of the year grew by like 15%. In Q3 they were sort of flattish. Now, that trend will I think kind of reverse itself in Q4 when, as I mentioned, I think to Justin before, Henderson will come into our same store numbers. And I think that will make the same store numbers look a lot better. If you want to sort of normalize all that, you can just look at our total numbers and not the same store numbers. But I think we continue to make pressure. In terms of the specific pricing question that you asked, we talked about this a little bit on the Q2 call. I think one of the dynamics that we're seeing that is cosmetically affecting our metrics is that out West in particular in Nevada, in California, we're doing I think a better job of qualifying those short stay patients as in patients rather than observation patients. And the result of that is a higher level of admissions, but a lower level of revenue per admission. Now, I think we have a point of view that over time, our acute care revenue should grow by roughly 5%, 5.5% and it should be split pretty evenly between price and volume. But in the current climate, as I think we're making those changes on the observation status, it's skewed more towards admissions than it is, or more towards volume than it is to revenue. But I think the ultimate dynamic is the same and ultimately will settle in at that roughly 5%, 5.5% growth rate that will be split pretty evenly between price and volume.

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

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

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

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

Okay. Thank you.

Your next question comes from Matt Borsch. Mr. Borsch, your line is open.

Maybe I can just pick up on the UK topic and just ask you what you're seeing in the UK market, if you’ve seen any pressures on volumes. And get you had alluded last quarter to that occupancy is actually your challenge there. And wonder if you just update us on that as well.

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

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

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

All right, sounds good. Thank you.

Your next question comes from Frank Morgan. Mr. Morgan, your line is open.

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

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

And then I think your bed expansion question, which was your first question, we will - it's not always the most ratable sort of thing, but I think we've been adding beds at a pace of about six or 800 beds a year on the behavioral side. That’s certainly been our target, and I think that has not changed for us, and we would expect something along those lines in 2018 as well.

Okay. Thank you.

Your next question comes from Ana Gupte. Miss Gupte, your line is open.

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

Yes. I don't think that's really changed, Ana. I mean again, I think from the original guidance back at the beginning of the year, the original guidance sort of was premised on the idea that we could get to that sort of 5% targeted same store revenue growth rate in behavioral by the end of 2017. And I think we really changed that view at the end of the second quarter to say now this was now more of a first half 2018 issue, either Q1 or Q2. Again, I think given some of the challenges in Q3, I guess I would conservatively say it's probably now more a Q2 of ‘18 issue. But I think it's all really from our perspective, just elongating the timeframe on an incremental basis rather than changing any sort of fundamental view we have about what the real underlying metrics of the business are.

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

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

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

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

And a final question. Can you give us an update on the regulatory settlement that you’re seeking with the federal and state agencies, and the magnitude of that and timing?

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

Great. Thanks so much, Steve.

Your next question comes from Gary Taylor. Mr. Taylor, your line is open.

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

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

So you could actually run a loss near term?

Correct. That's exactly the issue.

Okay. Thank you.

Your next question comes from Whit Mayo. Mr. Mayo, your line is open.

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

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

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

Somewhere in that $8 million range.

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

I think that's fair.

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

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

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

And I think all the comments that you made which were meant to articulate I think our position remain the same. We do - we are more than comfortable with our current leverage levels. We don't want them to be any lower. We’ll continue to be I think an active acquirer of our shares at these levels. We do try and balance that and manage that against any other external opportunities that may arise. There are not always easy to forecast or predict in a precise way. So there is a bit of a struggle to manage that, but I think otherwise everything else you said about leverage and about the attractiveness of repurchasing our own shares remains true.

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

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

Yes. Okay. Thanks.

Your next question comes from John Ransom. Mr. Ransom, your line is open.

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

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

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

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

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

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

Okay. Thanks a lot.

Your next question comes from Sarah James. Miss. James, your line is open.

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

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

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

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

Thank you.

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

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

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