Universal Health Services, Inc. (UHS) Q4 2018 Earnings Report, Transcript and Summary

Good morning, my name is Emily. And I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Steve Filton Chief Financial Officer, you may begin your conference.

Thank you, Emily. Good morning Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the full year and fourth quarter ended December 31, 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, 2018. We would like to highlight just a couple of developments and business trends before opening the call up to your questions. As discussed in our press release last night, the company recorded net income attributable to UHS per diluted share of $8.31 for the year and $1.70 for the quarter. After adjusting each period as indicated on the supplemental schedule included with last night's earnings release, adjusted net income attributable to UHS increased to $220.1 million or $2.37 per diluted share for the quarter ended December 31, 2018, as compared to a $189.6 million or $2 per diluted share during the fourth quarter of 2017. As reflected on the supplemental schedule, our adjusted net income attributable to UHS during the fourth quarter of 2018 excluded a pre-tax increase of $31.9 million in the Department of Justice Reserve and a pre-tax provision for asset impairment of $49.3 million, which reduced the carrying value of the trade name intangible asset recorded in connection with our 2015 acquisition of Foundations Recovery Network. On a same facility basis in our Acute Care division, net revenues increased 4.7% during the fourth quarter of 2018. Excluding our health plan, same facility revenues increased 6.1%. The increased revenues resulted primarily from a 2.2% increase in adjusted admissions and a 4.2% increase in revenue per adjusted admission. On a same facility basis, net revenues in our Behavioral Health division increased 2% during the fourth quarter of 2018. Adjusted admissions to our Behavioral Health facilities owned for more than a year increased 4.5%, while adjusted patient days increased 1.2% during the fourth quarter of 2018, as compared to the fourth quarter of 2017. Revenue per adjusted patient day rose 1.1% during the fourth quarter of 2018 over the comparable prior-year quarter. Our cash generated from operating activities was $1.341 billion during 2018, as compared to $1.183 billion during 2017. Our accounts receivable days declined to 50 days during the fourth quarter of 2018, as compared to 52 days in 2017. At December 31, 2018 our ratio of debt to total capitalization declined to 42.6% as compared to 44.7% at December 31, 2017. We spent $144 million in capital expenditures during the fourth quarter of 2018 and $665 million during the full year of 2018. In 2018, we completed and opened 234 new Acute Care beds and 734 New Behavioral Health beds, including de novo facilities. Our Behavioral Health integrations joint venture pipeline continues to be very strong. Today, we are announcing our latest joint venture, a partnership with Southeast Health to build a new 102-bed Behavioral Health Hospital in Southeast Missouri. During 2019, we expect to spend approximately $675 million to $725 million on capital expenditures, which includes expenditures for capital equipment, renovations, new projects at existing hospitals and construction of new facilities. In conjunction with our share repurchase program that commenced in 2014, during the fourth quarter of 2018, we repurchased approximately 1.22 million shares of our stock at a cost of approximately $149 million or $122 per share. During the 12 months ended December 31, 2018, we have repurchased approximately 3.32 million shares at an aggregate cost of approximately $401 million or $121 per share. Last night's press release included our 2019 operating results forecast. For the year ended December 31, 2019, our estimated range of earnings before interest, taxes, depreciation and amortization, net of controlling interest is $1.826 billion to $1.909 billion. Our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2019 is $9.70 to $10.40 per diluted share. The adjusted EPS guidance range represents an increase of approximately 2% to 9% over the adjusted net income attributable to UHS at $9.53 per diluted share for the year ended December 31, 2018, as calculated on the supplemental schedule. During 2019, our net revenues are estimated to be approximately $11.21 billion to $11.36 billion, representing an increase of 4.1% to 5.5% over our 2018 net revenues. Alan and I will be pleased to answer your questions at this time. Emily?

My apologies at this time. [Operator Instructions] Your first question comes from the line of Matt Borsch from BMO Capital Markets. Your line is open.

So I was hoping that maybe you could touch on two things. Just helping us understand how much the outlook in 2019 is going to be driven by the acute side versus the behavioral side? And then maybe just in the quarter, if you could comment on the, the metrics were good, were strong that the revenue per adjusted net on the behavioral side was hoping you could just comment on that one?

Okay. I mean, I think generally, Matt, the approach that we took for our 2019 guidance was that the business trends in each segment would for the most part continue as they have been. So I think on the acute side, we took the position that the guidance or at least the midpoint of the guidance is based on something close to 5% to 6% revenue growth and 6% to 7% EBITDA growth. On the behavioral side, much more modest revenue growth are generally more like 2% to 3% and just sort of flattish EBITDA. Although, particularly on the behavioral side, there are a number of headwinds that we face in 2018 that will reverse themselves in 2019. Those include the start-up facilities that we had opened in 2018. It includes the regulatory sort of challenge facilities that we had in the beginning of the year that continue to be a drag for part of the year. It includes the end of the year challenges we had from Florida Hurricanes and the California fires, et cetera. So I think from an EBITDA perspective, I think I'll call it from a core. On a core behavioral basis, we expect EBITDA to be sort of flattish to maybe up 1% on a kind of all in total basis, I think we are expecting EBITDA growth of sort of 3%, 3.5% at the midpoint. As far as your question about revenue per admission, I'm not sure if that was an acute question or a behavioral question…

Behavioral.

Okay.

It was on behavioral because that was the only one that was, the others were strong and just that one that sort of stuck out is because it was a decline.

Sure. So what we always traditionally encourage people to do on the behavioral side is really look at revenue per patient day rather than revenue per admission because the revenue per admission is distorted by the length of stay change and in fact, in Q4, we had a relatively measurable decline in length of stay, a little over 3%.

Right.

Even on a patient day basis and adjusted patient day basis, our revenue per adjusted patient day was only up a little over 1% which is certainly less than it's been. I think it's a function of a couple of things. One is the continued growth in our managed Medicaid business, which tends to have a lower revenue per day and reimbursement and than our Medicare and commercial business and also the challenges we were facing in our addiction treatment business, where we continue to move from out of network rates to in network rates and that had a bit of a dampening effect. I think over time we think that, that revenue per behavioral day should grow in the 2%, 2.5% range and for the most part over the last year or so it has gravitated even to that range or slightly above it.

That makes sense. Thank you, Steve.

Your next question comes from Justin Lake with Wolfe Research. Your line is open.

Thanks, good morning. First question just on behavioral length of stay. Steve, can you give us an update on what's going on with this continued shift from Medicaid fee for service to Medicaid managed care? the magnitude of it and how much of the decline, do you think is coming from this?

Sure Justin. I mean, we've said for some time. I think certainly since about the beginning of 2017. So really for the last two years that the reduction in length of stay during this period has been driven primarily by a continued shift traditional Medicaid patients to manage Medicaid patients and that remains the case, you know, the majority of our total Medicaid patients are now in managed programs. In Q4, I believe 65% to 70% of our Medicaid patient days were represented by managed Medicaid days and that number has grown from I would say 50% within the last 18 months or so. So it's been a fairly dramatic shift. The number of large states or states that are large from our perspective in terms of behavioral presence have more recently gone to a managed system states like, Florida and Kentucky and Illinois and we felt the impact of that and I think that continues to be the major driver of the length of stay contraction. Going forward, and I think we talked about this last quarter. I certainly have talked about it over the last quarter at conferences et cetera. I think our point of view is that over the intermediate term, the next 12 or 24 months. We're still presuming that that process has to play itself out. And as a consequence, I think our guidance and our projections for the next couple of years presumed that length of stay continues to decline by 1% or 2%, a year those numbers can bounce around each quarter, but I think that's our point of view over the longer term.

So Steve. That's really helpful. So, 50% goes to 65% to 70%, has that been a steady sloping line? Has it leveled out at all?

It really has not leveled out in the last couple of years, I mean it's been an increasing trend in the last couple of years, it's not an absolute sort of straight line if you will, Justin. So I think length of stay decline bounces around, but if you kind of plotted it as points on the regression graph. I think you'd see a fairly steady decline over the last couple of years that on an average is around the 1% to 2% decline. And again, that's the trend that we would project would continue for another year or two.

And Steve, just last question the, yes, I guess what I was asking is more just the last couple of quarters. All right. Obviously this would annualize at some point once it steadies for the last couple of quarters. And then if you're at 65% to 70% now, can you run us off of a list of stance or maybe we could follow-up just there are 2 or 3 or 4 states that kind of the bolus of where they still haven't gone Medicaid managed care and on behavioral that we should be kind of looking at, that's kind of the key last dates that would be transferring over to this.

Yes, I mean you know it's a perfectly reasonable question, Justin. And as you might imagine, I get asked all the time and I think we've been fairly candid in conceding that it's been difficult for us to predict with great precision, how this shift was going to take place over the last couple of years and how it will take place over the next couple. We certainly know the states that are, you know, moving to a more managed sort of approach, although I will make the point that in many states the changeover for behavioral care is not always done at the same time as the rest of the medical services population.

Right.

So we can always tie those together and we don't, I think, have the same sort of insight and kind of real-time data that the payers have quite frankly. So the best that we can do like I said it's sort of largely kind of track where we are, obviously we know that with that no more than 100% of the population can shift, although I'm not sure we are convinced that it will be that high and presume that will continue to occur at about the same rate, but we can see it, and we wish these were not the case then we were better able to predict with greater precision and the trajectory of how that will go.

Thanks for all the color.

Your next question comes from AJ Rice with Credit Suisse. Your line is open.

Hi everybody. First, just to clean up a couple of things on the guidance, do you have a bed growth number on the psych side? And would you highlight on the acute side any unusual items that are beyond just sort of the expectations for same-store revenue and EBITDA growth, maybe a supplemental payment changes or I know the health plan has been a drag, do you continue to expect that to be a drag above and beyond with the acute business does anything that's unusual that we might want to factor into our modeling on the acute side.

Sure AJ. So I think your question surrounded mostly the acute care business. As I said, same-store revenue growth on the acute side is sort of 5% or 6% in the model. We acknowledge that kind of on the high end of what seems to be sort of industry averages, although there is not a great many good public company comparisons for our acute care business any longer. I will say that most of that number is based on our historical trends over the last couple of years, we've, while I think that's a strong number. It's reflective of the sorts of experience we've had over the last few years and the strong performance particularly in a number of our better kind of stronger franchise markets like Las Vegas, Southern California DC et cetera. I will also say, however, that I think that number is inflated particularly in 2019 by some of the increased capital spending that we've seen over the last few years, I mean, our overall capital spend has gone from roughly $350 million three or four years ago to closer to $700 million in '18 and again in '19 some of that has been real big ticket items like the new hospital in Henderson, but a lot of that is just continuing to enhance our franchises. We've added beds to our Spring Valley Hospital in Las Vegas. We've added beds to Henderson, even though it's only a couple of years old. We've added beds to Summerlin in Las Vegas. We've added very large new emergency room project to our hospital in Manatee, Florida or Bradenton, Florida, we've added emergency room capacity and beds to our hospital in Denison, which is in the North Dallas market. So, I do think that some of that acute care revenue growth is embedded in our guidance as well as far as the health plan goes, as we've talked about over the last several years, the health plan has been steadily improving the guidance for next year continues to expect it to improve. I would say it's a kind of smaller incremental improvement next year maybe in the $8 to $10 million range. And then the offset to all that as you mentioned is the supplemental payments and we've got a schedule in the 10-K that projects this or lays out the supplemental payments over the last several years and projects the 2019 number. And in 2019, we're expecting a measurable decline in supplemental payments. All that of course is included in the guidance.

Okay. And you have a bed growth of target for the site business?

Yes, I mean we've been talking about for the last several years bed growth in the kind of 600 to 800 range a year which includes I think as I said in my prepared remarks additions to existing facilities as well as de novos, it's sometimes a tough number to really get again down precisely because there's always a lot of it depends on local zoning and regulatory clearance and those sorts of things, but I think our point of view is that we ought to be and we were at the high end of that range in 2018 and we certainly ought to be in that range again in 2019.

Okay. Maybe just one last one on the capital structure, you're down to like 2.3x debt to EBITDA that's low for the industry, it's low for you guys. Historically, even though you tend to be more conservative than the industry. I know you got the DOJ settlement sounds like that's getting close, you took another accrual for that. So that's a cash outflow, but any thoughts on share repurchase. I know you've been at sort of $400 million. It sounds like for the last couple of years or so. Any thought about stepping that up.

Yes. So I think you've almost asked and answered your question. That is correct that our share repurchase has averaged about in that $400 million range pretty consistently for the last several years. It's what we have embedded in our guidance for 2019. I think it's possible that number accelerates either as a result of a settlement of the DOJ case and/or how we think about other external opportunities that there may be out there outside of CapEx from an M&A perspective, those are often more difficult to predict but at least, sort of what we have in our guidance is fairly similar to what we've run the last few years.

Your next question comes from the line of Stephen Tanal with Goldman Sachs. Your line is open.

Thanks, good morning. Just looking in the queue on the Medicaid addition supplemental benefits. I know it's not, I don't know you guys typically guide to, but the Q had, if I sort of implies $50 million for Q4. It looks like it came in sort of $67 million. Is it fair to sort of say that was upside versus the plan without it? You might have been below the line of the guidance or how should we think about the timing there as well? The Q is filed in November. Was that a really late in the quarter sort of surprise or?

Yes, so if it's good question. Steve, to be fair, I know you, this morning, we've been looking at it. As I responded to you and I will tell everyone that increased supplemental payments in Q4 were in our guidance, they are about $15 million or $16 million in Texas and in our minds, I think largely an offset to the non-recurring benefits we had in last year's Q4, the blue impact and the California UPL. I'm not exactly sure why the schedule didn't seem to reflect that in Q3. We're taking a look at that and we'll let people know, sometimes like that.

All right, that's helpful. And then just thinking about that sort of program holistically, for the full year net supplemental payments stepped up $22 million. Is it fair to assume that was driven primarily by a mix shift toward Medicaid or is there other sort of discrete factors that would be overlooking?

Yes, I mean I think it's not appropriate to just sort of make that assumption. Although, it seems somewhat intuitive or logical, the states themselves in Texas in particular, I think tweaks and retweaks and changes their supplemental programs quite a bit to respond to sort of various needs and various constituencies. So oftentimes, it's the underlying formula itself rather than changes in sort of the nature of our business per se. And I think in the case of Texas over the last several years, it's been much more of that, that they've been changing the formula that it has been changes in our underlying business.

Got it. And is that kind of similar sort of story for '19 in the K you spell out you expect that to step down $30 million. So that's not really a reflection of how you're modeling payer mix shift I guess or is it?

No, no and that's a good question and a good example of the fact that the reduction in particularly thanks to UPL, which is probably about two-thirds of the overall reduction is again absolutely related to a change they have made in there. I'll call it their formula or their approach rather than any change in our businesses.

Got it. Okay, that's helpful. And then I guess just bigger picture on the behavioral segment. Just would love to check in on kind of the long-run thought process or the algorithm. Are you still kind of thinking that 5% same-store revenue growth is achievable? So, when and how are you guys thinking about kind of same-store EBITDA growth that's achievable longer term in the business?

So, I think our view of the fundamentals in the behavioral business have really changed very little over the last several years. Although, certainly we understand and concede that the business itself has been under more significant operating pressures than we've seen in some time. And I think our point of view is that the behavioral business and same-store revenue growth had been averaging for many years, that's sort of 5% to 7%. Certainly, it has been averaging that in the first half of this decade, the 2010 decade and then that growth slowed pretty considerably around 2000 to late '15 early '16. A lot of that slowdown was we believe attributable to a labor shortage. We still concede that we're in a pretty tight labor market, but we've made some improvements there and I think solved some of those issues. We've also struggled with a length of stay issue that I discussed with Justin before, but I think we ultimately believe and I think are heartened by for instance the 4.5% same store adjusted admission growth in the quarter, we're heartened by the idea that and have, I think maintain this all along that the underlying demand for behavioral services continues to be strong throughout our portfolio, throughout our service lines et cetera. And that continues to be our view and our whole focus is just on doing the things we have to do to be able to sort of solve the issues whether they are labor shortages or length of stay issues that will allow us to get to those levels of historical benefit from that underlying demand. I think the one change we've made in our guidance for 2019 that is different than what we did in '17 and '18 is we're sort of no longer projecting or predicting an exact timeframe in which we will get back and restore that's 5% growth. I think we, as I said in my remarks earlier are projecting that in our guidance, at least the behavioral business continues at about the same pace, it's running right now and at whatever point and we're working quite on a very focused basis to get there, but on whatever point it improves, we'll adjust our guidance we'll revise our going-forward sort of projections, but we're not going to kind of play this game projecting and then we projecting at the moment because we think that's too difficult to do.

Got it. Maybe just last question on behavioral than or in general for me. The writedown or impairment charge of Foundations Recovery Network. There's three sort of pieces to that. One was the wildfire impact on the facility, honestly not sure how large that was relative to the total write down, but you did call out kind of tougher expectations for reimbursement and perhaps the competitive dynamics indicating fewer de novos. Is that a localized issue or is your outlook on, sort of changing a bit in that, help us think about that.

Sure. So we've talked, certainly for the last few quarters about changes in the addiction treatment business model that certainly the Foundations Recovery Network represented, that wasn't addiction treatment model that really relied heavily on direct to consumer marketing, either through the media, television and radio or through the Internet, there has been a number of changes in that sort of marketing, particularly in the Internet and some of the search engine logic that's made patient capture more difficult for providers over the last several years. Also, and I think many providers have acknowledged this that business has moved over the last several years from an out-of-network model to more of an in-network model and that certainly results in lower reimbursement. Foundations also relied more heavily on a travel-to-treatment model in which patients would often travel longer distances sort of outside of their home markets to get what they consider to be sort of the best treatment available. I think payers are, have been more restrictive about those kinds of decisions, et cetera. So all those things have, I think affected the growth trajectory of that business. And then as you pointed out, and certainly we've acknowledged that and talked about that for some time. And then in the fourth quarter, I think our most profitable facility in the foundations portfolio, our addiction treatment facility in Malibu, California was closed as a result of the wildfires there. And there doesn't seem to be any path to reopening that anytime in either the near intermediate future. So that was sort of the triggering event although certainly not the primary one to do the write down.

Awesome. Alright. Maybe just an update on behavioral leadership changes well, how did the search go? And then sorry for all the questions, I'll yield there. Appreciate it.

Yes, I mean, as we, or as I've sort of discussed in the conferences that I've attended since Debbie left the company. We've talked about the fact that we would undergo an aggressive and comprehensive search to replace her and we've done that, we've, it's still relatively early in the process, but we've been pleased at how the search is going, we think there are a number of good solid viable candidates who we're exploring and will continue to do so, but we're quite pleased with the way that our behavioral team has sort of stepped up in the interim, lots of people, kind of filling in and taking on additional responsibilities in the interim and feeling very comfortable that how the business is being run at the moment. And so when we obviously have an announcement of a new person will make that but a very comfortable in the interim that things are progressing as we would have hoped and expected in the interim.

Very helpful.

I've mentioned also that Mark has now taken them very active role replacing Debbie and it's working out very well.

Great, thank you, Alan. Thank you Steve. I appreciate it.

Your next question comes from the line of Josh Raskin with Nephron Research. Your line is open.

Hi, thanks. Good morning. Steve, a quick. I guess the first one, just a clarification on the DOJ settlement accrual, would you characterize that as any change in progress or is that just sort of latest proposal from UHS at this point?

Well, I think it's both Josh, I mean, as we've said for a while now. We've adjusted our reserves periodically pretty much lately every quarter to reflect whatever our latest offer is. So that's certainly what the reserve reflects or something very close to our latest offer. But I also think it's worth noting that the gap between our offer and the government's demand has narrowed quite considerably. And I think we view ourselves certainly on the monetary issue to be close to agreement on a final number with the government. There obviously are other issues to be negotiated along with that including release terms and a compliance agreement and the end of kind of all the spectrum of investigations. But we would hope that the monetary piece of this is sort of the most difficult and that once we can agree on that the other items will fall into place in short order, although that's always difficult to predict with the government. So, I think it's difficult for us to project any sort of precise time frame here. But we are certainly optimistic that on the core monetary issue, we are close to a settlement with the government.

Got you. Definitely a change in tone then, I guess. And then just on the acute care side. I'm curious, are you seeing any changes in trend around CapEx spending by competitors in any of your, let's call it the larger markets either new capacity whether that's inpatient or outpatient, are you seeing other sort of step up their spending as well?

That is sometimes hard to say. I do believe you know particularly in our markets, that I think have shown relatively robust economic growth markets, again as I mentioned earlier, like Las Vegas, like Riverside County California, like the District of Columbia, some of our Florida markets, the North Dallas market, because I think they're growing markets, because we've done well in those markets. I think that for the most part, we're seeing our peers in those markets. Investing as well, but I think one of the reasons why we tend to be focused on making sure that we're maintaining our franchises in those markets and hopefully enhancing our market share positions is the idea that we want to make sure that we're not overtaken by our peers. So I don't know, obviously we don't really have access to a lot of objective data about exactly how much is being spent in each of these markets. But my anecdotal sort of notion is that many of our peers, at least, those that can afford to are investing in the better markets. But I think we feel that we are maintaining our competitive position at least in every one of these markets.

Okay, perfect that's what I was looking for. Thanks Steve.

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

Thank you. You've talked about the behavioral model yielding flat EBITDA in years for top line growth, 2% to 3.5% and more like 6% to 7% EBITDA achievable and a 5% top line year. I'm wondering if there are things that you can do on the supply side or other areas that would allow you to achieve EBITDA growth, even if top line is growing less than type person, thanks.

So, I mean as a CFO, I always sort of have the position that we can always drive more efficiencies. Then we have, and that's certainly the message I deliver to operators. But the reality is, if you look at our behavioral business over the last several years is that even on relatively modest growth. We've maintained margins in the mid '20s, I think it would be unrealistic to expect quite candidly that until we can engineer or restore that and that sort of historical level of revenue growth at around the 5%, that add 2% or 3% growth. It's possible to really have any sort of measurable either margin expansion or EBITDA growth et cetera. We certainly strive for that and we strive to be as efficient as possible, but the nature of the operating model is that most of our costs are fixed and semi-fixed. So where you really generate the leverage in this model is through at least modest revenue growth, and until you get that it's hard. Again, I'm going to always say there, there are pockets of opportunity for greater efficiency. But I wouldn't say that there are, there is any low hanging fruit out there in terms of driving greater efficiencies.

Got it. That's understandable. What about on the acute side, are there initiatives under way with supply costs or scheduling that you could look to drive some improved leverage there or margin expansion on the acute side?

Yes, I think the acute side is a different question. I think that there is an acknowledgment on our part and on the part of our operators as well as on I think observers in the industry, that there is a fair amount of duplication and some excess cost broadly in the acute industry and this is not specific to UHS. I think that the general view is that the real way to drive improvement there is through changes in the payment model, and those are certainly occurring slowly and we move, we're moving again incrementally away from the traditional fee-for-service reimbursement model to more of a what's called fee-for-value model. But, I think I would describe as more of a risk-based model. We disclosed in our 10-K for instance that we've agreed to participate in a number of additional bundled payment projects for Medicare. I think those will drive incentives and encourage sort of throughout the continuum more effective behavior and sort of a ringing out of costs and we are very focused on that. And I've talked about it for a number of years. So as the payment model changes, I do think that there is an opportunity on the acute side to drive more efficiencies and less variability in the system and that should be helpful and there'll be some card growing profitability in EBITDA and margins.

Thank you. Your next question comes from the line of Kevin Fischbeck with BOA. Your line is open.

Great, thanks. Wanted to ask about the site revenue per patient day. It sounds like one of the factors is the Medicaid mix shift, which is likely to continue. It sounds like the next year or two, but at the other factor you mentioned was going back in network with some of the addiction centers. I guess, I don't ever really hearing a lot about that in the past, that's something that just happening now. When do that anniversary or is that going to be a longer-term headwind to pricing.

We certainly have talked about that dynamic last couple of quarters, I don't know honestly that it has had a measurable impact on pricing before the fourth quarter. And so my sense and mostly because of the foundations' contribution to our overall behavioral performance is still relatively small, I don't know that over time, it will have a real dampening effect on our revenue per day, which is why I said earlier, Kevin that I think our longer-term view is that the behavioral pricing should be in that kind of 2% to 2.5% a day range and the reality is over most of the last couple years, we've been hitting that range, if not somewhat exceeding it, and I think as we looked at some of the factors affecting Q4, they were a bit anomalous and don't really expect them to continue at the same level of magnitude.

So would you say that, so the 2019 is going to be below that number in your guidance?

Below...

2% to 2.5%

No no. I think that effectively, what we are really projecting, when we're projecting 2% to 3% revenue growth in 2019. We're essentially saying that that will largely come from pricing and volumes are projected to be relatively flat in our guidance. Our hope would be we can exceed that, but that's what our guidance implies.

Okay, great. And then just circling back on the labor cost issues and we have a business you talked about making progress there and where do you think you are in that progress, are you halfway through 2/3 of the way through, how is that shaping up?

It's always a difficult question to answer, when posed that way, Kevin, in the sense that it sort of suggest sort of a linear process that we have X amount of openings at a point in time. And then, we were able to fill 50% of them or 75% or whatever. And the reality of it is, that we fill openings and we hire and we train people and then people leave and et cetera. It's a very fluid kind of a dynamic and particularly in a tight labor market, which I think the current labor market is appropriately characterized as. So I think we've made a lot of progress since we began to talk about this issue in late 2015 or early 2016. But we also acknowledge that it remains a tight labor market, and there are still facilities where we have vacancies and in some cases, this is sort of a chronic problem, but certainly we don't have the level of closed beds and closed units that we had two or three years ago, you know and that tends to occur now on a much more sort of one-off basis, but again I think that providers in general and behavioral providers in particular are going to be facing and the issue of the labor shortage at both the nursing and the psychiatrist level will continue to be an issue for the foreseeable future as long as the labor market remains as tight as it is right now.

Okay and then just last question. The new head of the sector is when you bring, whoever that is and, is there any change in direction or emphasis that you would expect the new person to bring in and does having a new head of that business in anyway help DOJ resolution? Thanks.

Yes, I think we have a point of view that we and I think folks who listen to our conference call et cetera, certainly have a good appreciation of this over the last several years, have faced some difficult operating challenges in the business and we've touched on those already in the call. The labor shortage is the pressure from our managed Medicaid payers increased competition, et cetera. And I think it's been difficult for all of our operators, including the head of the business segment to kind of taken a step back and think about how to grow this business over the kind of longer term, we believe very firmly that there isn't a very significant role for behavioral care in the future healthcare landscape. We also believe there is a growing demand for behavioral care. And I think all that is validated by much of the literature et cetera, that's being written about how to effectively deliver healthcare and in the future, et cetera and so I think we're hoping that with a new person sitting in that lead chair, that they'll have a bit more time to reflect on some of those longer-term issues and the longer-term growth opportunities in the business and in the meantime we remain and I think Alan's comment is, we remain at every level of the organization, both he, and I and Mark as well as a very capable staff senior and mid management behavioral leaders are very focused on sort of making the trains run on time and solving and addressing all those operating issues. But we would hope that a new person would really be able to do some things from a longer-term perspective, maybe we've neglected for the last year or two.

Okay. And is there any implications for the settlement? Is having a new person in there clear the air at all or may change the timing in your view?

No, I don't think that personnel change has anything to do with the DOJ investigation or settlement.

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

Great, thanks, good morning. So, on this whole behavioral managed Medicaid issue regarding the shorter length of stay and the leverage you can maybe pull to try to offset this or mitigate the impact. I'm just curious about on the revenue side. Perhaps renegotiating contractual terms and diving a little bit deeper, is there any color around the notion where under value based care you could receive either bonus payments or just some sort of better compensation for having shorter length of stay, whether it's versus peers or some other metric. And shouldn't that kind of be the end goal to some degree, but just curious to get your thoughts on this concept of being rewarded for having shorter length of stay in behavioral. Thanks.

So it's a good question. Steve, I think that there are payers who would make that argument. I think unfortunately, we have a point of view that length of stay has been viewed on the behavioral side of the business as a proxy for some sort of quality of care metric. And I think we feel that's a fundamentally flawed approach. At the end of the day, we have a point of view that length of stay is really a clinical determination that should be made by clinicians based on the clinical needs of a patient rather than the financial outcomes. And so, I think we're reluctant to sort of promote a system that encourages anybody providers et cetera to really drive lower length of stay just to achieve a better financial result because at the end of the day, I think, we're concerned that sure changes the clinical needs of the patient. So, while I think there would be payers that would welcome that. I think that fundamentally, we prefer other measures of quality that we believe exist and we believe perfectly appropriate in terms of quality rewards and quality bonus payments, we think length of stay is the wrong measure for that.

Your next question comes from the line of Ralph Giacobbe with Citibank. Your line is open.

Thanks. Morning, you mentioned a strong JV pipeline and the new build. I guess, can you just help frame the opportunity to Steve there and whether sort of contribution there is sort of an accelerant to growth or just sort of needed to get back to sort of the baseline that you talked about in that mid-single digit. And then you had the write-down on the addiction treatment center. Is that still an area of focus or opportunity or what's your interest maybe more broadly and generally around expanding service lines at this point. Thanks.

Yes. So I'm sorry, can you just remind me what the first half of your question was.

I'm sure just the JV pipe...

Yes. The JV pipeline. I'm sorry. We've talked about this a lot, I mean, I think, we think that the broadly the JV opportunity is a very significant opportunity somewhere around 50% or 55% of all the inpatient behavioral beds in the U.S. are today operated by acute care hospitals. And so to the degree that we can penetrate that market in some way by helping them manage those businesses by leasing those beds, by partnering with those acute care hospitals, by building new facilities with those acute care hospitals, as we've done in many of these instances, that's probably the single biggest domestic growth opportunity we have in the behavioral business. We've also acknowledge that you know despite our focused efforts, it's a relatively slow developing opportunity and will continue to be so. Now, we'll continue to focus on it and we'll continue to do those transactions that make economic sense, but it's hard sometimes to make the acute hospitals want to go or need to go faster than they're going at the current time. In the short run, then I think I kind of touched on this before the some of those projects can be a little bit of a drag. So in 2018, we opened joint venture with Lancaster new beds, we opened a new hospital win in Washington State with Providence Health Care. That's a bit of a drag and in 2019 actually some of the improvement in Behavioral will come from the continued ramp up and growth in those facilities and there's not a lot of brand new facilities coming on in '19. So, there's not much of a drag, but ultimately over time And again, when I say over time in this case, I'm really talking about a timeframe of four, five, seven years, I think, we think it's a very significant growth opportunity and one that positions us, I think even more importantly as a partner with not for profit acute care hospitals around the country in a way that we may be able to lever in other service areas. As far as you're, question about the addiction treatment business, I mean in general, I think we are taking a pause on expanding again what I'll sort of call this a new style model that characterize Foundations Recovery Network of direct-to-consumer marketing, travel-for-treatment, that sort of issue. In general, we acknowledge that addiction illness particularly opioid addiction, but quite frankly addiction elements of all sorts, continues to be a growing phenomenon in the country and needs to be treated. It can be treated in many ways in our old model, which is sort of not a direct-to-consumer marketing, but a referral source marketing kind of an aspect. So, we'll continue to take advantage of that in terms of other service lines as best as I can tell, Ralph. We have probably the broadest service line offerings of any inpatient behavioral provider in the country that spans general psychiatric treatment, geropsych treatment for the elderly for diseases like Alzheimer's and Dementia, autism, eating disorders, all kinds of sort of niche behavioral treatment. So we're certainly open to expansion, but there aren't a whole lot of behavioral illness is that we don't already treat somewhere in our portfolio.

Yes, that makes sense. I was asking more about sort of if that gave you a pause on any of that, but it doesn't sound like it does. And then just a follow-up question you typically breakout the performance. Some of your bigger markets on the acute care side, I know behavioral isn't as concentrated, but can you give us a sense, you even by market or maybe even as you look at the broad portfolio in terms of what percentage is really underperforming. I guess I'm really just trying to get a sense of whether it's a small percentage of facilities really driving the softness or if it really is sort of a broader pressure that you're seeing across all your markets? Thanks.

Yes, I mean the math is such Ralph that, you know the reality is our two business segments are about the same size from a revenue perspective, but obviously we have a much smaller number of acute care facilities and those facilities tend to be more concentrated than they are on the behavioral side. So we certainly talk always about the Las Vegas market and it's hard, I don't know that there's another, I'm certain that there isn't another public acute care company, that has sort of a market presence comparable or market contribution comparable to that. But on the behavioral side, we generate roughly the same amount of revenue, but with a much larger number of 200 plus domestic facilities. It's really impossible for any one facility or really even any one market to have the same sort of measurable and material impact that allows Vegas does on the acute side which is why we really never talk about kind of individual markets for the most part on the behavioral side, I think you sort of your question about sort of what percentage of the hospitals are underperforming et cetera, my general sense is that in a portfolio of 200 plus hospitals, it's always going to be sort of like a bell curve, where there's going to be a small number of outperformers and a small number of underperformers and the vast majority of hospitals are going to be in that large, middle and in that large middle. I think we have a point of view that the issues that we've discussed over the last few years, labor shortages, managed Medicaid, length of stay pressure, increased competition, there are issues that are being felt by a relatively wide array of facilities and are not particularly focused on a specific market.

Your next question comes from the line of Peter [indiscernible] with Deutsche Bank. Your line is open.

Good morning, guys, thanks for taking my questions. A few quick ones here. Following up on AJs acute bed question, you grew beds in the fourth quarter by 3.4% and what percentage of your 5% to 6% revenue guide in the acute business [indiscernible] and as you look at the supply versus demand in your markets, how confident are you that these bed additions can continue over the next few years?

So, I tend to think about the capital investment in the Acute business, not so much on a bed basis. I think that's a relatively kind of dated way of looking at the business, which is not to say again, we certainly have added beds and I think that's a reflection of our ability to want to meet demand, but we've also are spending a lot of money to increase emergency room capacity and to increase surgical capacity at many of our hospitals and other service lines as well, particularly in what I would describe as sort of the high-end service lines like Cardiology and Orthopedics and Neurosurgery. At the end of the day, and again, to be fair, Peter. I don't know that I have a precise number because I think it's difficult to really parse it to that level, but you know what I was trying to say earlier is that of our 5% or 6% Acute Care revenue growth some of it may be 1% or 2%. I do believe is really being driven by this increased capital spending, not just on beds, but again on the other items that I talked about, but it's very difficult to say, when you add a bed or you add five more ER days or you add another operating room, exactly what the contribution of the incremental investment is because this capacity effectively becomes fungible.

Okay, fair enough. On the behavioral side of the business, you guys did a great job with the mission is to offset length of stay pressures. How sustainable do you think that 5% admission growth is? And is there any margin impact from having more patients stay for shorter period of time?

Yes, look, I think we've conceded that a shorter length of stay is a bit more of an operational challenge, which I think is probably intuitive to people who think about it that turning over patients more quickly requires a bit more of an effort, etcetera. But we also acknowledge that to some degree, that's the way the business is headed. And so we will deal with that, I think we have a point of view it again sort of harkening back to an earlier exchange I had that 5% revenue growth at some point is and restoring that number is not unrealistic continues to be in our minds, very achievable. We think of that as sort of, you know 2.5% to 3% volume growth and 2.5% to 3% admission, pricing growth rather depending on what happens to length of stay that will drive sort of what the required admission growth will have to be to get to that level, but again I think we have a point of view that in the relatively near or intermediate term 2% or 2.5% patient day growth should not be unrealistic and would be consistent with what we've run for an extended period of time historically.

All right. And then last question on the behavioral leadership. Have you had any increased turnover at the divisional or other management levels since Debbie left?

We've lost a couple of people to Acadia since Debbie left, I'll make the point that in the normal course with UHS and Acadia being the largest certainly for profit behavioral providers in the country, there is always a flow of personnel at various levels of hospital and regional levels back and forth between the two companies. So, it's always, it's hard for me to say that that's terribly unusual, but it's only been a couple of people.

Thanks so much.

We just hired somebody from Acadia yesterday.

Great, thanks.

Your next question comes from the line of Whit Mayo from UBS. Please go ahead, your line is open.

Hi, thanks. I wanted to go back to the supplemental program question and just rip in the headwinds that you've called out in your 10-K. Just to be clear, there are also some tailwinds that you have coming with federal dish, a much favorable IPPS update that should more than offset those headwinds. Correct. And is there a number that you could size for what you think your Medicare dishes this year?

Yes, I mean, the impact of the Medicare decision and thanks for reminding me Whit and others. I think we've talked about on previous calls, but it's probably in that $18 million to $20 million annual range for us, it begins in October of '18, but over the federal fiscal year it's about an $18 million to $20 million benefit. Obviously that's embedded in our guidance as well.

Right. And then you've got an incremental pickup with your IPPS update that could be another what? Another $10 million or $15 million or so?

Correct.

Yes. And coming into 2018, when I go back and look at your 10-K, you predicted that you would see a $30 million headwind to all of these state programs, and it actually came in much higher. I think you said $156 million, you recorded over $200 million. Before that you expected $145 million coming into 2017 became came $40 million higher than your 10-K disclosure. So I guess I wanted to understand how you come up with this forecast? Because it almost always has an upward bias. And I don't think investors probably appreciate how fluid some of the calculations are inside these programs.

Yes, and it's a reasonable point where and I think it gets back to what I think it was the conversation that I was having with Steve Tanal earlier in the call. What we're able to do at the time we gave our guidance is based on what states current model is we project what we think are our impact or benefit is going to be. But often that model changes, often they sort of have interpretive changes or whatever and there are some underlying changes to our or some changes to our underlying business that are difficult to project. But, yes, I think it's much more of this sort of states changing their models that we often cannot predict. And so I do think we take a little bit of a conservative approach when we project that at the beginning of the year.

Yes, now I agree. And can we go back to some of the 2018 behavioral headwinds? I just want to make sure that we're all in the same page with the numbers for the hurricane, regulatory challenges, wildfires. Is there any way to maybe size each individual bucket, so that we're all thinking the same numbers?

Yes, I mean the things that I would call out and at least I called them out sort of by item earlier, I mean the continued improvement at the Lancaster and Spokane, de novos, the Gulfport acquisition that was done at the very end of last year. The turnaround in those three facilities is probably $8 million or $9 million benefit going into '19 having a full year of the Danshell acquisition in the UK is probably another $4 million or $5 million in '19. The Hurricane, Florida Hurricane and California fire impact is probably $7 million to $9 million drag in the second half of '18 and then the regulatory facility challenges that we had early in '18 would probably another $5 million or $6 million. And I think all those things have been clearly discussed and delineated people want to go back and check the numbers, but that's kind of my recounting of it, at least Whit.

No, that's perfect. That's all I got. Thanks.

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

Good morning. Most of mine have been asked, but just, Steve, you mentioned CapEx in your guidance. Could you tell us what your implied cash flow from ops would be on that guidance for 2019?

I think our free cash flow in '18, Frank was sort of close to $800 million and basically I think the free cash flow guidance for '19 is sort of, it came to that with a slight growth in EBITDA.

Okay. And then finally, just any color around the surgical volumes, inpatient, outpatient as well as ED business and I'll hop. Thank you.

As it is in most periods, I think surgical volumes have grown pretty consistently with that 2% or with whatever the admission growth is. So, and in Q4, that 2% admission growth sort of would imply and I think is what we ran kind of 2% to 3% surgical volume growth, both on the in and outpatient side. And we, I think we have time, maybe for one more question.

Certainly, your next question comes from the line of Gary Taylor from JP Morgan. Please go ahead. Your line is open.

Hi, thank you. Mine will be really quick, because I think you've answered everything. I just wanted to go back and clarify one thing. Stephen, just make sure I understand it. So when you were talking about how you built guidance for the year and you talked about behavioral and I think you're suggesting that you still kind of view that business is running 2% to 3% top line with flattish EBITDA, but because of a number of idiosyncratic factors the number which you were just discussing with Whit, the actual behavioral EBITDA growth guidance is plus 3% to 3.5% for 2019. Is that all correct?

I think that is all correct, Gary.

Okay, perfect. That's all I have. Thank you.

Okay. We like to thank everybody for your time and look forward to talking to everybody again after the first quarter.

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