Good morning. My name is Kristy and I will be your conference operator today. At this time I would like to welcome everyone to the Second Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Steve Filton, you may begin your conference.

Good morning. Thank you, Kristy. Alan Miller, our CEO, is also joining us this morning. We welcome you to this review of Universal Health Services' results for the second quarter ended June 30, 2018. During this conference call Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on Risk Factors and Forward-Looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2017 and our Form 10-Q for the quarter ended March 31, 2018. We would like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company recorded net income attributable to UHS per diluted share of $2.39 for the quarter. After adjusting for the unfavorable $7.2 million after-tax impact from the increase in our reserve related to the Department of Justice discussions as discussed in our press release and calculated on the Supplemental Schedule, adjusted net income attributable to UHS was $233.3 million or $2.47 per diluted share during the second quarter of 2018. This compares to $188.1 million or $1.94 per diluted share of adjusted net income attributable to UHS during the second quarter of last year as calculated on the Supplemental Schedule. On a same-facility basis, in our Acute division revenues during the second quarter of 2018 increased 3.3% over last year's comparable quarter. Excluding our health plan, same-facility revenues increased 5.1%. The increase resulted primarily from a 1.9% increase in adjusted admissions and a 3.1% increase in revenue per adjusted admission. On a same-facility basis, net revenues in our…

Your first question comes from the line of A.J. Rice with Credit Suisse. Please go ahead. A.J. Rice - Credit Suisse Securities (USA) LLC: Thanks. Hi, everybody. Maybe just a detailed question first. You have this $15.3 million other income item now. You haven't had that line before and I think some of it's related to accounting change. How should we think about those items in there in trying to compare your operating income with prior periods and what you've talked about in terms of guidance and so forth?

Okay, A.J. So I think there's really two kinds of items on that line. The first as we disclosed in the third paragraph of the press release is an unrealized gain on the change in market value of certain marketable securities; essentially our investment in our group purchasing organization, Premier, and the shares that we own in Premier. We would presume that – because I think it's impossible for us to predict that change in those marketable securities – we'll never include that number in our own guidance. And to the degree that it's material, we'll call it out so that people can exclude it whether positive or negative. Obviously it was positive this particular quarter. The rest of what's in that line are income from unconsolidated subsidiaries, miscellaneous gains and losses from the sale of assets, et cetera. We believe they're sort of the normal non-recurring source of things that in the past would've been included in our EBITDA and suggest that that's the appropriate way to continue to think about that moving forward. A.J. Rice - Credit Suisse Securities (USA) LLC: Okay. And then let me just ask you about where you feel you are on the rebound in the Behavioral Health business. I know over time you have highlighted I guess over the last couple of years labor challenges, obviously dealing with managed Medicaid and the fact that they've become a bigger chunk of the payor mix in Behavioral, and then there was a couple of isolated situations that you've addressed in the first quarter. Where are we at? I know the goal is to get back – I think the goal is to get back to 4% to 6% sort of same-store revenue growth on a steady basis. Can you just sort of update us on those areas and what's your confidence level to getting back to that in the back half of the year?

Sure. And to some degree, A.J., I think that the metrics that I mentioned in my opening comments provide a reasonable sort of overview to where we are with this. The encouraging development from our perspective in the Behavioral Health division is over the last couple of quarters our revenue per patient day has been higher than we anticipated. We, originally in our initial guidance for the year, talked about that number being in the 1% to 2% range and it's been in the 3% to 4% range over the last couple of quarters. And I think that's reflective of the success that we've had in a number of initiatives, including continuing the shift of patients out of our residential beds and into our acute behavioral beds which are a higher paying and higher revenue service. I think that that higher revenue per day growth reflects progress that we've made with our managed care and insurance companies in things like reducing denials, et cetera, which has the impact of raising that revenue growth number. So that's a plus for us. We're sort of exceeding our expectations there. Obviously the negative for us is that patient days are relatively flat in the quarter compared to last year. Even though admissions are growing, we continue to see length of stay pressure. The length of stay pressure as I think we've discussed for any number of quarters now mostly comes from the continued shift of Medicaid patients, traditional fee-for-service Medicaid patients, into some sort of managed Medicaid program where we generally find the payors are more aggressive about utilization review, et cetera. We continue to, where it's appropriate clinically, to pushback on our managed care payors. But to be fair, I think as long as that shift from traditional Medicaid to managed Medicaid…

Yeah. I mean I think our original guidance contemplated that our Behavioral Health revenue would continue to grow in the back half of the year, and we're not adjusting our guidance so we continue to believe that that is correct. And we are aided by the fact as you articulated that the comparisons, particularly for our behavioral health facilities, will get easier in the back half of the year, and also we had a number of unfavorable non-recurring items in the back half of 2017 which, by definition, we presume will not reoccur in 2018. A.J. Rice - Credit Suisse Securities (USA) LLC: All right. Great. Thanks a lot.

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

Thanks. Steve, maybe just to follow-up on that last question. It sounds like you guys are confirming guidance here, but obviously there's a decent ramp embedded in that guidance now that you've reported the first half of the year. And I heard easier comps but maybe if you could just give us a little bit more color on what gives you the confidence that the trends will improve. And maybe you could spike out a couple of those unfavorable second half 2017 items just so we get a perspective on magnitude.

Sure, Josh. I think it's worth noting we talked a little bit about this in Q1. In Q1 we talked about the fact that UHS's own internal budget or guidance was somewhat lower than the Street, and that later in the year that would turn around because for the full year our internal budget seem to be pretty consistent with the Street consensus numbers. I think for the first six months our results are pretty much in line with expectations. So while I acknowledge your observation that the guidance includes a relatively significant ramp in earnings particularly for the Behavioral business in the second half of the year, I will say that was what we originally contemplated and that really hasn't changed. And I will reconfirm, again, what you're suggesting which is that we are not changing our guidance at all this quarter. As far as those non-recurring items, again, those were all in our press releases and publicly discussed last year so you can go back and see them in detail. But I believe that for the most part they centered around negative headwinds from hurricanes in the third quarter last year that affected both our Acute and Behavioral businesses, and then what we've described or I described as sort of regulatory-challenged facilities in the Behavioral division that ultimately there were three facilities that we talked about, two of them have ultimately closed and one has been downsized. So the significant decline in revenues and profitability that we experienced in the back half of last year obviously will not reoccur in the back half of this year.

Got you. So those were non-recurring but those were actually included in your adjusted earnings. You just spiked them out, you're saying. Got you. And then just a last question. It sounds like there's – I don't know if there's a little more progress or not on the settlement. Obviously the reserve changed there so probably indicative of at least some conversations. But more importantly, is the settlement an overhang in any way? From a capital deployment perspective, do you think about share buybacks or even M&A differently as you're waiting for some further guidance from the government and/or a final settlement?

So just to make some further commentary which I think is largely consistent with what we've said about the process, we've said for now several quarters that we certainly feel like we're in a settlement phase with the government. We're discussing the settlement terms, we're making offers and counter-offers, and they're making demands and counter-demands. Having said that, I think I've acknowledged every time I speak about this that it is a relatively slow pace, probably slower than certainly than we would like, and there's not a whole lot we can do about that. We move largely at the government's pace but the process of offers and counter-offers and demands and counter-demands continues. We still hope that there's a relatively near-term resolution to this, and hopefully by the end of this year, but that's certainly not a certainty. And again, I think we're doing everything we can to keep this moving along apace. I think your second question about to what degree it's an overhang, I don't think – and particularly I think as the discussions continue and obviously the potential magnitude of the settlement tends to narrow, I don't think it's had much effect, if any, on our willingness to invest, whether that's internal capital or external uses of capital, acquisitions or share buybacks.

Perfect. Thanks, Steve.

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

Thanks. I'd like to move to the Acute Care side of the business. Looks like the seasonal drop off was a little bit worse this quarter coming from 1Q down to 2Q with margins deteriorating a little more than we've seen in the past. Would you say that was more pressure on admissions and your staffing levels were too high or do you think there was something else going on in that?

So I think, Peter, in both Q1 and Q2 we talked about not only in our 2018 guidance but sort of ours (17:28) kind of sustainable growth rate for the Acute division over the next several years would yield kind of 5% to 6% revenue growth and comparable maybe 6% to 7% EBITDA growth. The 5% to 6% revenue growth numbers we've hit in Q1 and Q2. I think what you're alluding to is that EBITDA growth and profitability was a little bit lighter than we expected although I think, again, our own internal expectations seem to be lower than the Street's and then think in part we were acknowledging that particularly in Q2 we had a pretty tough comparison not only to last year but I think to a couple years of very robust growth, both revenue-wise and profitability-wise in the Acute business, and some slowing. I think we've also found over the last several years even though the trajectory of the Acute business has generally been rather positive and pretty robust, there's a little more volatility in that business I think than we have found in the Behavioral business. And so I think we largely attribute the second quarter lightness and the margin contraction sequentially to just some of that intra-quarter volatility in that. I think our point of view is still that over time if we can grow that business 5% to 6% at the revenue line that EBITDA growth in the 6% to 7% range should follow. Even though we didn't hit those numbers exactly in Q2, I think we think that over time, and I think if you go back and you look at our performance over time you'll see that that's true.

Okay. And then do you have any comments on the M&A environment right now in the acute care space?

We continue to look at acute care opportunities really that span the gamut of whole hospital and whole system acquisitions, the expansion of ambulatory care capabilities. We have a pretty aggressive program of our own development of freestanding emergency departments in some geographies, et cetera. I think what we're finding on the acute side is that there have been a fair amount of not-for-profits and not-for-profit transactions. I hesitate to describe them as acquisitions because I think a lot of them are just kind of merged assets, but I think that has limited some of the opportunity. But we continue to find not-for-profit hospital systems which I think are, from our perspective, the most sort of target-rich assets that we look at. Yeah, there are a number in the pipeline and we continue to evaluate them. And in the meantime, I think as we've stressed a lot over the last several years, we continue to invest very heavily in our own facilities. We tend to talk on this call about the new hospitals that we've opened in Las Vegas and Henderson and in Riverside County, California. But in the back half of this year we're opening quite a bit of new capacity, not quite at the same levels of magnitude, but new beds, new emergency room capacity, new surgical capacity in Las Vegas and several of our hospitals in California, in the North Dallas market in Texas. So while there hasn't been as much of an opportunity for external M&A, we still are finding quite a bit of opportunity to enhance and expand our own franchises through organic CapEx.

Thank you.

Your next question comes from Steve Tanal with Goldman Sachs. Please go ahead. Stephen Tanal - Goldman Sachs & Co. LLC: Good morning, guys. Thanks for taking the question. Steve, I think you mentioned looking for sort of an acceleration in the Behavioral same-store revenue growth number in 2Q to instill confidence in that 5% target, and I think the timeline there most recently was sort of 3Q. I'm sort of curious how you're thinking about that level now as well as when you think it's reasonable to underwrite a return there.

Yeah. Look, I mean I think one of the challenges that we've had, Steve, is that we saw this slowdown in our Behavioral revenue growth really begin in the back half of 2015, and we attributed most of that slowdown to a labor shortage of particularly nurses but, to a lesser degree, psychiatrists. And I would say for about a year we focused on that and really kind of redid a lot of our infrastructure to be able to better address the shortage. And I think beginning in the back half of 2016 we began to make measurable progress and both our volumes and our revenues began to increase. As we sort of projected how that would continue to play out, we tended to project that as sort of a ratable increase. The reality is the business doesn't necessarily work that way and the recovery has been somewhat choppier and, to be fair, somewhat slower than we originally imagined as well. We still think that that 5% target is reasonable, that 5% revenue growth target is reasonable. We still have it out there for the back half of the year. It's part of our guidance and I think we presume that we can get there or get pretty close. But we acknowledge that it's a bit choppy. And again, I think as I sort of commented on in responding to A.J.'s original question, we find that we're making progress in some areas like the shift of services from residential to acute and reduction in denials, but in others and solving the labor shortages is a bit more problematic than we thought. But we think we're continuing to make progress and feel like that 5% target is still reasonable. Stephen Tanal - Goldman Sachs & Co. LLC: Got it. And I guess just thinking about the Behavioral business overall, can you remind us what percent of admissions come from acute referrals? And I know you said the mix of Medicaid has been rising in that, but what about the pace of growth and the total number of referrals system-wide?

So I think our Acute Behavioral business which is about 75% of our revenues in that space, historically somewhere in the 35 to 40% range of our admissions tend to come from acute care hospital emergency rooms. It's still probably our single largest source of behavioral patient referrals that can vary by geography, it can vary by hospital, it can vary by program. But order of magnitude, that's I think a good indicator. Stephen Tanal - Goldman Sachs & Co. LLC: And the pace of growth, is it changing? Do you think the DOJ investigation is affecting the referrals at all on any level or no?

Look, I think that's always difficult to determine with absolute precision. But over the last several years we, the management team here, I think talks to our operators in the field quite a bit. And as they describe challenges to us, things like the nursing shortage, et cetera, and potentially other challenges that we've talked about in various of our calls, the government investigation really never comes up. I'm of a mind that the people who are aware of our government investigation are people who read our 10-Qs and 10-Ks. And while we spend a lot of time preparing those and writing those, there's a pretty small audience for them. And I think in the sort of broad behavioral operational landscape, there's not a whole lot of people who are terribly familiar with that. Stephen Tanal - Goldman Sachs & Co. LLC: Understood, and maybe just a last maintenance one, a follow-up on A.J.'s question on the add backs. If I think about that $15.3 million, it seems like the marketable securities, just the changes in the value there, $8 million in that third paragraph that you referenced which implies there's about $7.3 million of items that you suggested would normally have been I guess in the reported adjusted EBITDA less NCI number, is that the right way to think about that? And maybe if you'd give us some more color on the nature of the $7.3 million of earnings, what exactly those are and how that amount compares to the prior year, that would be helpful. And then I'll yield. Thanks a lot. Stephen Tanal - Goldman Sachs & Co. LLC: Yeah. So what I said I think before, Steve, was I think what's in that number is quite frankly a bunch of small miscellaneous items that include income from unconsolidated subsidiaries, gains and losses on small asset sales, et cetera. We didn't go back quite frankly to recapture the prior year number in part because the accounting sort of perspective was we were not going to restate the prior year for that. But I think as we looked at those various items that are included in the balance of I'll call the non-Premier items on that other income line, our general view was that those are items that will kind of normally be there, they'd be largely recurring, and they historically have been part of our reported EBITDA. Stephen Tanal - Goldman Sachs & Co. LLC: Got it. Thanks a lot.

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

Thanks. Good morning. First question just obviously, Steve, a lot of focus on guidance. Can you tell us if the Behavioral business stays in that 3% to 4% range in same-store? What I'm mathing to is if Acute does 5% then the one-timers reverse themselves, which they should, you end up at about in the range of the low-end of EBITDA. Is that the right way to think about it? And then anything above the low end would be driven by Behavioral getting better?

Yeah, I think that's generally fair. I mean I will say that the Behavioral I think EBITDA performance in Q2 was probably better than expected in part because a larger component of that revenue growth came from the pricing side of things, and sort of by definition the pricing side of things doesn't have an associated sort of incremental cost to it. So if we can continue to make progress on that front, I think that's helpful, et cetera. But I think if I get the question that you're asking, Justin, is if we can't get the Behavioral revenues to grow in the way that we expected in our original guidance, it certainly would be tough to get to the high end of our guidance in the back half of the year. We're not certainly conceding that at this point, but I think it's a fair statement.

Got it. And then, Steve, your depreciation number was a little bit lower than I expected. Was there any kind of change in accounting there or anything driving that?

I can't think of anything material, Justin. I will certainly go back and look at the detail.

Great. Thanks, Steve.

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

Great. Thanks. Can you remind us maybe just the math behind some of those one-time items and comp issues were in the back half of last year? So if you don't actually show any improvement but just the one-time issues abate, how much should that be a tailwind to volumes in the second half of the year?

Yeah, Kevin. I mean I'm going to do this a little bit from memory. I don't have them in front of me and all those items were very publicly reported so they're available to everybody. But I think in the third and fourth quarters of last year we had a drag from the hurricane in the two divisions that I think probably totaled in the kind of $15 million to $18 million range, and then the losses and additional expenses from the three regulatory-challenged facilities in the Behavioral business which I think were another sort of $10 million to $15 million, so I think somewhere in that $25 million to $30 million range in total. But again, I make the point that those items were all disclosed and very publicly discussed so they're all out there for people to see.

I'm sorry. I guess I was actually kind of more interested from like a same-store revenue perspective I guess when you think about achieving that 5% number because people seem to be focused on that as much as the EBITDA number itself. Is it 100 basis points to same-store revenue growth or is there a ballpark number for that?

Yeah. So I think when we talk about getting back to that same-store growth level, we're really viewing those items as discreet from that.

Okay, so it's not a situation. So those were one-time headwinds last year, so the fact that there's an easy comp you still think 5% on a run rate basis, not just from an easy comp is the right way to think about it?

Yeah. So when I say there's an easy comp, I'm just referring to sort of the core business, not to those non-recurring items.

Okay, all right. That's helpful. And then you mentioned that the challenge has been to kind of make sure that your beds are staffed and that you're adding beds in the places where there's capacity issues. Can you give a little commentary on kind of where we are in that process? How much of a challenge is that still? How close are you to kind of fully getting over that hump?

Yeah. I think, look, the challenge in describing it – and look, I understand when people question and try and get a sense of this issue, they tend to view it in sort of a linear fashion that it's kind of an issue that we have X number of vacancies and that represents Y percentage of our total labor slots, and we filled so many of them and so we've made this much progress. But the reality is particularly in an industry like ours that has such high turnover rates, I think nursing turnover nationally in the U.S. is in the 30% range, the issue is we hire nurses, nurses leave; we hire psychiatrists, psychiatrists leave. We sort of solve the labor problem in a hospital and we don't have any sort of restriction on bed capacity in that hospital, and then the issue arises at another hospital in another market. It has always remained throughout this I think a relatively small number of markets and small number of hospitals that have been affected. But to be fair, part of the challenge is we'll solve the problem at two hospitals and it'll arise at another hospital, et cetera. So that's part of the reason it's been sort of a slower recovery. But I find it difficult to sort of be able to quantify kind of in a percentage way or something like that how much progress we've made and how much is left to go. I guess what I always point to – and by the way, I do this internally as well – is I just focus people on the level of revenue growth because in my mind ultimately that's how the progress is measured. A problem manifested itself in a slowdown in our revenue growth, and in my mind it will be completely fixed when we recover that level of revenue growth. So while I think there are metrics and measurements that you can use to sort of help define your progress – number of vacancies, turnover rate, number of people in orientation; all those sorts of things which we get internally – I think ultimately our main focus continues to be on that revenue growth metric.

Yeah. No, I think that it wasn't fair for us to judge you on that as whether you're making progress. But I guess from a forward-looking perspective, it seems like staffing is a potentially gating factor so progress on that would be a leading indicator towards achieving that revenue number. I think maybe just last question on this topic would just be that I think people think that the labor market is getting tighter and that staffing is getting more difficult. Do you just feel I guess anecdotally or directionally that staffing is actually normalizing or stabilizing in some way for you versus where it's been in the last couple of years? Is it the same? Is it getting worse? I guess anecdotally, what does that look like?

Yeah. Look, I think, Kevin, we have a point of view. As I said, I think the labor challenges really started to manifest themselves, by the way, in both divisions in kind of the back half of 2015, and we've been very focused again in both divisions on addressing them. I think our sense is they have generally stabilized now that we're a couple years into it. But having said that, I think we acknowledge we're in a very tight labor market. As a nation, we're at the lowest unemployment rates we've seen in 20 or 30 years depending on exactly who is quoting that. So I think it's going to continue to be a challenge but certainly I think we feel like it's stabilized, not getting worse, and we continue to make progress although it's incremental.

Okay, that's helpful. Thanks.

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

Thanks. Good morning. Just wanted to jump to the Acute Care side. Your organic revenue slowed a little bit. Still the 5% top line number that you talked about I think is still a good number. But the EBITDA up only sort of low single digits. Is there anything to sort of call out on why you didn't see better pull-through? I think you've been seeing pretty hefty EBITDA growth on pretty stable sort of top line. So just any color there, Steve.

Yeah. I mean, I think, Ralph, this is largely the question that Peter Costa asked earlier. As I said then, and so I'll just quickly repeat, I think that the Acute, the pull-through of EBITDA is a little bit more sort of volatile and erratic than it is on the Behavioral side. There was nothing I think extraordinary in Q2. I think our point of view is that over time that 5 or 6% revenue growth will yield 6 or 7% EBITDA growth. I think our historical performance supports that, but in my mind there was nothing extraordinary in the quarter.

Okay. All right, fair enough. I mean a part of it is just I mean the pricing number did look pretty good and better than what you had in the past that I thought would just pull it through. But on that topic a little bit, on the acuity side that's been a sort of topic of focus. Can you just give us maybe acuity mix in the quarter, maybe how much that helped the pricing stat?

Yeah. I mean I think that obviously the entire acute public company sort of universe was strong in Q1 and it seemed to be strong for at least HCA in Q2 and continues be strong for us. Now I will say that our revenue per unit has been relatively strong, although I think we've talked a lot about in 2017 that I think some of that was due to more inpatient admissions and fewer observation patients, and I think we still are benefiting from that to a degree. I think generally the industry is also benefiting from kind of a stabilization. We've all been focused on this sort of trend of moving the lower acuity outpatient procedures out of the inpatient setting and into other outpatient settings, either in the hospital or out of the hospital, and I think that's hurt acuity over the last several years. But I think we've seen kind of a stabilization and a bottoming out of that trend, so I think that's helping acuity as well. So I think we're benefiting from that. It's difficult for me to say that our peers are benefiting in the same way, but it just seems like the numbers across the industry are reasonably consistent, so I would guess that we're all benefiting in the same way.

Yeah. And then just last one from me. Can you just give us a sense of payor mix in the quarter and specific focus on the managed care side?

Yeah. Our payor mix has actually been – and again, I'm answering this question. I think for the Acute business, Ralph...

Yeah.

...our payor mix in the Acute business has been relatively stable over the last several quarters, meaning probably Medicare is growing faster than any of our other payor mixes. Medicaid is growing but at a slower rate. Commercial is still positive but at a lower rate than our overall admissions. And uncompensated admissions have remained pretty flat for the last few quarters.

Okay. Thank you.

Your next question comes from the line of Frank Morgan with RBC Capital Markets. Please go ahead. Frank, your line is open.

Okay, sorry about that. Actually I wanted to talk a little bit on the Acute side. I don't know if you discussed this yet, but I wanted to talk about or get some updates on looking at surgical volumes both inpatient and outpatient and then also ED. Thanks.

Frank, I didn't hear the very last thing you said. Surgical volumes and what?

Yeah, surgical volumes both in and outpatient as well as ED volumes or emergency department volumes. Thanks.

Okay, sure. So I think on the ED volume side, and again the trends that I'm about to describe I think have been in place for several quarters, I don't think there was anything kind of terribly new or different in Q2. ED volumes have slowed down a little bit. They're actually I think rising slower than our overall admission growth. They've been pretty flat actually I think in the last couple of quarters. So I think it's reflective of the fact that we're seeing a little bit what I was describing to Ralph in the previous question. More of those lower acuity emergency room patients are being shifted into other settings, whether that's urgent care or freestanding EDs or doctor's offices, whatever it may be. And so we see our emergency room visits have kind of flattened out, although our admissions and the amount of business that we're getting in terms of inpatient admissions from the emergency room has not really changed which I think is reflective of the fact that those more acute ER visits remain at the same level. Surgical volumes are fairly consistent with our overall admissions. I think in Q2 both in and outpatient volumes for us were up 3% or 4% which also, sort of in reference to Ralph's previous question, are keeping that acuity number and revenue per unit number strong. So I think we continue to see relatively strong surgical volumes throughout the portfolio.

Okay. Thanks.

Your next question comes from Ana Gupte with Leerink Partners. Please go ahead.

Hey, thanks. Good morning. Yeah, just sticking with the Acute side of it. Looking at what HCA was saying yesterday about the Department of Labor survey and how in their markets they're beginning to see accelerating commercial volumes probably because there's a higher rate of insurance even on the smaller employers. As you kind of look at your markets, and Vegas has been a very good market for you for a while, I mean do you think that that's impacting somewhat of a slowdown on admissions because it's more late cycle perhaps and the recovery was sooner than in the other parts of the southwest and southeast?

So I'll try and answer your question and I will sort of provide one caveat which is the day before we announce earnings we don't get to spend a lot of time looking at our peers' earnings releases and analyzing their numbers. So you referenced their Department of Labor comments. I'm sort of at a loss. I don't know what they said so it's difficult.

No. All they said was, and you don't need to – I haven't gone in detail through that survey either. Just all it said was I believe that unemployment going down in their view might be finally driving some of the, as I understood, some of the commercial volume pickup, payor mix pickup. And they talked a lot about Texas and Florida and I was just trying to compare that to the timing of the cycle in Vegas versus their markets.

Yeah, and I think you make an important point. By the way, we were pleased by the HCA results. We like to see our peers doing well. I think it's reflective of the underlying strength of the acute care business particularly for companies that have strong franchises in robust markets. But I will say one of the challenges for us is those kinds of numbers that were in the HCA second quarter release were numbers that our Acute Care division has been putting up in a number of quarters over the last several years. And one of the challenges that we face is those comparisons have become more and more difficult for us. So when we started to put up really strong numbers Las Vegas and California and to a lesser degree Florida, but at the end of 2013 and into 2014 and 2015 we're into sort of the fourth or fifth year of that recovery in our end markets. And so I just think that comparison is a little more challenging for us. But again, I think to the degree that any of our peers are experiencing those underlying strong metrics, that's a good sign for us.

No, fair enough. Your comps are definitely getting more challenging. The other driver I think that's being mentioned just more broadly is about mix shifting to lower cost sites of service, and that's what's driving potentially the higher pricing growth in the inpatient setting and so on. So are you observing that and is that part of the higher 3% to 4% kind of pricing growth at this point?

Sure. I mean I think you make the right point, and that is if we acknowledge – which I think we all do – that lower acuity business has been shifted out of the acute care hospitals into a whole variety of other lower cost and lower care settings, whether they're ambulatory surgery centers or freestanding EDs or urgent care centers, then by definition what's left in the acute hospital is the more acute, the more severely ill patient. And I think you would expect that acuity measures or revenue per unit measures would be going up which I think is what we've seen certainly in the first six months of 2018.

And then just following up on that with CMS. And you may not have – obviously with your earnings today – they put out the rule yesterday around site neutrality and they seem to be trying to, it feels like, foster, serve clinical care in lower cost sites of service, physician clinics, and away from outpatient. I mean is that impactful broadly for the hospital industry? They also did a small change on new drugs for AWP plus 6% going to AWP plus 3% to maybe discourage physicians from adopting drugs outside of clinical efficacy and safety.

Yeah. So I mean I'm going to make a little bit of a repeat comment as before. So when CMS releases a several hundred page new rule on the night we're releasing earnings, we don't get to study it a whole lot. My sense, in looking at it very quickly, is that we're largely unaffected by the sort of site changes. We'll say more about that as we have a chance to look at it.

And then one final one on Behavioral, if I could. The IMD exclusion at one time was viewed as a fairly big tailwind to behavioral, the talk about acute JVs. And then the contracts haven't fully materialized and/or the acute hospitals may be preferentially driving less attractive payor mix, Medicaid or the like into freestanding. Any comments on that and is that likely to at some point become the premise is going to be realized?

I think that the original premise of the IMD exclusion being lifted and that being a significant benefit to the freestanding behavioral industry was valid and I think still is valid. I think that the practical challenge that we didn't necessarily anticipate at the time was that exclusion got lifted at a time when we were already having difficulty satisfying the existing demand that we had for our beds largely because we didn't necessarily in some markets have a sufficient number of clinical staff. And so all of a sudden we got an uptick and an upsurge in adult Medicaid business that we had never had before, but the difference was in this interim period this incremental adult Medicaid business proved to be not really incremental but it wound up squeezing out or pushing out other better paying, better revenue business, Medicare or commercial. I think over time as we continue to solve the labor problem that incremental business will truly become that incremental business and it will be as profitable as we once originally imagined. And then secondly which I think is a different issue, as you point out we couldn't be having these dozens of discussions about potential joint venture arrangements and integration arrangements with acute care hospitals unless the exclusion had been lifted because there would be this sort of awkward disconnect of a good chunk of their patients were adult Medicaid and we couldn't treat them. So having the IMD exclusion being lifted was I think a significant tailwind to these integration conversations which I think over time over the next several years will wind up being a very significant development opportunity for our Behavioral business.

Yeah, makes sense. All right, thank you.

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

Hi. Good morning. I feel like I'm really beating a dead horse at this point so I'll be really quick. Just going back to, and I'm sorry, the other income, the $15.3 million Steve, just to be clear. So the $7.3 million that you said was kind of normal recurring noise, miscellaneous items, given the new accounting treatment and the way you're breaking out this line now, I mean you're basically saying you would expect to have a few million, several million positive gain on a go-forward basis as you're reporting on that line, right?

Yeah. I mean, again, I think to the degree that some of the items are truly recurring, income from unconsolidated subs, and I think honestly the way we'll address this issue next year, Gary, is we'll just create an income from unconsolidated subs line to make that a little bit more straightforward. But yeah, I mean, again, the incremental gains and losses could bounce around. But again, I don't think that they're going to have a material impact. We wouldn't expect that. I mean that's the nature on sort of these miscellaneous items.

Okay. And then just going back to seasonality for one moment in the second half on Acute. I want to make sure we're on the same page because you've made a few comments about seasonality. So if we think about Acute EBITDA for the third quarter, obviously you had the hurricane impact that was modest and the year-to-year EBITDA growth comp is easier. So as we see and hear today, we would think perhaps the year-to-year growth might accelerate. But then as you go into the fourth quarter, it was a really big EBITDA quarter in Acute. You had California provider tax, you had some health plans improving, you had the flu incident, et cetera, that would seem to be a more challenging quarter for Acute EBITDA growth. Am I just thinking about the Acute seasonality correctly?

Yeah. I think all those comments, Gary, are perfectly valid. I think my comments about the easier comparisons in the back half of the year earlier in the call was really – or I meant it to be specific to the Behavioral business, not to the Acute business. So again, and I think the way you described it is correct. I think the third quarter comparison for the Acute business is not too bad but the fourth quarter was a real bang-up quarter largely because of the real busy flu season and some other issues. And again, I think we've incorporated that into our own guidance.

Thank you.

Your next question comes from Ann Hynes with Mizuho Securities. Please go ahead.

Hi. I just want to follow-up on your comments about IMD and the JV opportunity. I know for the past couple of years we've been talking about it, and in your prepared remarks you talked about you have some things in the hopper. But I guess when will we see these coming to fruition again? Do you think that maybe the DOJ overhang, does that impact some negotiations at all or it really doesn't?

No. I mean, again, because, Ann, these negotiations tend to be with large not-for-profit hospitals or not-for-profit hospital systems, and to be fair these negotiations about joint venturing their behavioral business are not necessarily their top priority. They tend to be slow, they tend to move at kind of a slower pace than I think we're accustomed in the for-profit industry. I don't know that any of our peers are closing these kinds of transactions any faster than we are. But what we are encouraged by is the general enthusiasm of the acute hospitals that we're talking to about pursuing these sort of arrangements. And as I did say in my comments, we just opened a hospital in Lancaster, Pennsylvania last month. We're going to open one in a few months in Spokane, Washington. Obviously where we're building new capacity that takes some time, so there is a bit of a ramp-up here. But I think from our perspective – and again, I think these are two different issues – the original premise of the IMD exclusion being lifted was there would be this surge of adult Medicaid patients, and that would be an immediate benefit. And I think to some degree we've clearly seen that surge of patients, although as I said I think in some cases they've been more replacement patients than new and until we solve that problem we won't really get the benefit. But I think those acute joint venture conversations we always perceived was a longer-term development opportunity and something that I think we feel like we'll be seeing the benefit of not just in 2019 but over the course of the next three, five, seven years as more and more of these transactions or arrangements are brought to fruition and new capacity is built and these arrangements are finalized.

Okay, thanks. And then just on Behavioral, I know the Boston market has been a very tough market for you guys and has weighed on the overall growth. Is that still the case? I know you closed a hospital. But regardless of that hospital, is it a market that still weighs on the overall growth and maybe the rest of the portfolio is growing more than the consolidated?

I mean generally the Behavioral portfolio is more diffused and sort of geographically disparate than the Acute portfolio, so it is almost impossible for one single market in the Behavioral portfolio to really have the influence that the obvious example of Las Vegas does on the Acute side. Having said that, I mean I think your commentary about the Boston market is fair. We run hospitals in the Boston market that are very highly occupied. We run it at very high occupancy rates, but there's a big chunk of managed Medicaid and we've had managed Medicaid business in the Boston market for years and years and years. It's a pretty low Medicaid rate so the profitability is going to be challenged in that market, et cetera. It's a big market for us. It's one of our bigger markets. It's not by any means our most profitable market, but I don't think the change in that market, as I would say the change in any of our markets, really drives the portfolio results in a meaningful way.

Okay, great. Thank you.

There are no more questions at this time.

Kristy, I just want to go back to one question we had earlier. Justin Lake had asked me a question about the decline in depreciation. And as I have a chance to look at it, I can see that I think the dynamic that he's referring to is we had depreciation and amortization associated with our electronic health records deal in the second quarter of last year. Several million dollars that has now become fully depreciated so we don't have it this year. So I just wanted to close the loop on that one question. Otherwise, we thank everybody for their time and look forward to speaking again next quarter.

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