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Edited Transcript of UHS earnings conference call or presentation 25-Oct-19 1:00pm GMT

Q3 2019 Universal Health Services Inc Earnings Call

KING OF PRUSSIA Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Health Services Inc earnings conference call or presentation Friday, October 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan B. Miller

Universal Health Services, Inc. - Executive Chairman & CEO

* Steve G. Filton

Universal Health Services, Inc. - Executive VP, CFO & Secretary

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Andrew Mok

Barclays Bank PLC, Research Division - Research Analyst

* Ann Kathleen Hynes

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Joshua Richard Raskin

Nephron Research LLC - Research Analyst

* Justin Lake

Wolfe Research, LLC - MD & Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Peter Heinz Costa

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

* Sarah Elizabeth James

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Scott J. Fidel

Stephens Inc., Research Division - MD & Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the third quarter earnings call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, CFO, Steve Filton. Thank you. Please go ahead.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [2]

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Good morning. Alan Miller, our CEO, is also joining us this morning. And we welcome you to this review of Universal Health Services' results for the third quarter ended September 30, 2019.

During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, 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, and our Form 10-Q for the quarter ended June 30, 2019.

We'd like to highlight just a couple of developments and business trends before opening the call up to questions.

As discussed in our press release last night, our reported net income attributable to UHS during the third quarter of 2019 was $97.2 million or $1.10 per diluted share. As calculated on the supplemental schedule, our adjusted net income attributable to UHS during the third quarter of 2019 was $176.3 million or $1.99 per diluted share. Excluded from our adjusted net income during the third quarter of 2019 was an aggregate unfavorable after-tax impact of $79.1 million or $0.89 per diluted share, most of which related to a provision for asset impairment recorded in connection with our Foundations Recovery Network business.

On a same-facility basis in our acute care division, revenues during the third quarter of 2019 increased 9.3% over last year's comparable quarter. The increased revenues resulted primarily from a 7.4% increase in adjusted admissions and a 1.6% increase in revenue per adjusted admission.

On a same-facility basis, net revenues in our behavioral health division increased 2.1% during the third quarter of 2019 as compared to the third quarter of 2018. During this year's third quarter as compared to last year's, adjusted admissions to our behavioral health facilities owned for more than a year increased 0.5% and adjusted patient days increased 0.4%. Revenue per adjusted admission increased 2% and revenue per adjusted patient day increased 2.2% during the third quarter of 2019 as compared to the comparable prior year quarter.

Based upon the operating trends and financial results experienced during the first 9 months of 2019, we are revising our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2019, to $9.60 to $9.90 per diluted share from the previously provided range of $9.70 to $10.40 per diluted share.

This revised estimated guidance range, which excludes the unfavorable impact of the Foundations asset impairment, the unfavorable impact of the current year increase in the Department of Justice reserve and related provision for income taxes and the favorable impact of ASU 2016-09, increases the midpoint of the previously provided range by 3%.

Contributing to and included in the revised estimated earnings guidance range for the year ended December 31, 2019, is an annualized loss of $0.11 per diluted share recorded during the first 9 months of 2019, resulting from a decrease in the market value of certain marketable securities held for investment and classified as available for sale. The revised estimated earnings guidance range for the full year of 2019 assumes no change in the market value of these marketable securities during the fourth quarter of 2019.

For the 9 months ended September 30, 2019, our net cash provided by operating activities increased to $1.049 billion from $949 million generated during the comparable 9-month period of 2018. Our accounts receivable days outstanding decreased to 50 days during the third quarter of 2019 as compared to 54 days during the third quarter of 2018.

At September 30, 2019, our ratio of debt to total capitalization declined to 42.3% as compared to 42.9% at September 30, 2018. We spent $156 million on capital expenditures during the third quarter of 2019 and $480 million during the first 9 months of 2019. During the first 9 months of 2019, we completed and opened 183 new beds at some of our busiest acute care and behavioral health hospitals. Just this week, we broke ground on a new acute care hospital in Reno, Nevada, which will house 200 private patient rooms and is expected to open in 2022. We also broke ground on a new 5-story bed tower at our Centennial Hills Hospital in Las Vegas, Nevada, which will add 56 patient beds and increase capacity in the neonatal intensive care unit, the intensive care unit and intermediate and medical surgical units.

Our behavioral health joint venture pipeline continues to be very robust. In September, we announced a partnership with Valley Children's Healthcare, in which we will build a new 128-bed behavioral health facility in Madera, California, which is expected to open in 2022. And earlier this week, we announced a partnership with HonorHealth, in which we will build a 120-bed behavioral health hospital in Scottsdale, Arizona, which is estimated to open in 2021.

In conjunction with our stock repurchase program during the third quarter of 2019, we have repurchased approximately 551,000 shares at an aggregate cost of $79.5 million, an average of approximately $144 per share.

During the first 9 months of 2019, we have repurchased approximately 4.11 million shares at an aggregate cost of $525 million, an average of approximately $128 per share. And since the inception of the program in 2014 through September 30, 2019, we have repurchased approximately 14.78 million shares at an aggregate cost of approximately $1.76 billion, an average of approximately $119 per share.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Steve Valiquette with Barclays.

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Andrew Mok, Barclays Bank PLC, Research Division - Research Analyst [2]

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This is Andrew Mok on for Steve. Just wanted to follow up on the strong acute volumes in the quarter. How much visibility did you have on the elevated volumes? And what steps can you take going forward to better capture earnings associated with those volumes?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [3]

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Sure. So obviously, our acute care volumes have been strong all year long and, frankly, have been strong for the last several years, I think reflecting the underlying strength of the end markets in which we're located as well as our continued trends of increased market share.

Having said that, volumes increased even more in the third quarter. You'll recall that earlier in the year we talked about an expectation that that could likely happen as we were bringing some new capital projects on in late 2018 and early '19, and I think we're seeing the impact of that as well.

But as your question suggests, that increased volume did create some challenges for us in the quarter as we tried to satisfy that volume, we found ourselves in a position of having use more premium pay, that is, temporary nurses, registry nurses, overtimes, shift differential, et cetera as well as other nonlabor costs, locums physicians and contract services, et cetera, as the volumes increased.

While we had some anticipation that we were going to have to deal with those issues, we acknowledge that we're operating in most of our markets with pretty tight labor conditions. And even where we're anxious to fill vacancies on a permanent basis, we're not always able to do so immediately. So that, I think, was the challenge in the quarter and why we were unable to bring as much of that revenue and volume growth, pull it through to the EBITDA line. But I think we have a point of view that our operators, historically, have responded to these sort of challenges and will, in short order, drive greater efficiencies as they adjust for these higher level of volumes.

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Andrew Mok, Barclays Bank PLC, Research Division - Research Analyst [4]

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Great. As a follow-up, is it fair to say that underlying wage growth remains within expectations in the low single-digit percent range?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [5]

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I think that is fair.

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Operator [6]

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Your next question comes from Kevin Fischbeck.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [7]

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Great. Just wanted to maybe understand the guidance adjustment a little bit. I guess you cut it by about $0.30, and it looks like in the quarter, $0.13 was due to the marketable securities dynamics. So if you compare this guidance versus the last guidance, $0.17, I guess, is operational. Is there anything else besides EBITDA that changed in your view between previously and today?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [8]

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No. I don't think so, Kevin. I think, effectively, we were adjusting our guidance, as you suggest, for the miss in the third quarter and for the negative adjustment for the marketable securities that, as you might expect, we really have no way of projecting.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [9]

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And when I think about how you changed the guidance, you changed the low end basically for the change in marketable securities but you changed the high end by a whole lot more. So can you talk a little bit about kind of, I guess, maybe what the hope was, your expectation was and I guess maybe what the implication is for Q4. I guess you kind of seemed optimistic that the labor costs on this, at least on the acute side, could be fixed relatively quickly. Is that not going to be a Q4 dynamic?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [10]

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Yes. I mean I think it's just a mechanical sort of exercise, Kevin. There's one quarter left in the year in order for us to get to the high end of that original guidance. The performance, quite frankly, of both segments would have to have improved rather markedly. I think, while we're -- we have an expectation that we can improve both -- the underlying trends in both business segments, in the next quarter there's, by definition, sort of almost a limited amount that we can do.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [11]

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Okay. And then just maybe the last question. On the psych side, I guess we saw a slowdown in growth sequentially. Is there anything that you would point to there? And I guess, how do you feel about the pace and timing of ramping that back up to what you talked about as a normalized growth rate?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [12]

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Sure. I mean the revenue needle is not moving a great deal in the behavioral segment, but I understand that people are very focused on it. And I think for the first 3 months of the year, same-store revenue grew by about 3%; in the second quarter, it grew by about 2%, so it was a slight step-down.

There was really nothing terribly extraordinary in the third quarter. Some minor items. We had a currency headwind in the U.K. that was probably worth about $3 million headwind to EBITDA. We had a couple of million dollar headwind to EBITDA from the continued ramp-up and reopening of our behavioral facility in Panama City, Florida, that had been closed by the hurricane a year ago. And we have a continued drag from our addiction treatment business, which was probably a $3 million or $4 million negative EBITDA drag in the quarter.

Other than that, I wouldn't have called out anything sort of extraordinary. I think we continue to be challenged in selected markets and hospitals with labor shortage issues where we're having to cap census and turn away patients. But I think, over time, we think that we can correct those situations and that volume and revenue growth can be restored in the behavioral segment.

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Operator [13]

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Your next question comes from Justin Lake.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [14]

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Can we talk a little bit about acute care pricing, Steve? About 1.5% this quarter. I know you looked for closer to 2.5%, and that might have been one of the headwinds to acute here in 3Q. So can you walk us through what the issues were here in the quarter and kind of highlight mix, both on the commercial mix and acuity while you're doing that?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [15]

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Sure. Just to sort of reframe things for everyone, we went into the year with an expectation that acute care revenues would grow in the 5% to 6% range, and we presumed that that would be split pretty evenly between price and volume, 2.5% to 3% increase in both. Obviously, from a volume perspective, we've been exceeding those numbers by a very significant amount all year long. And as I said before, even increasing some in the third quarter.

On the pricing side, it's been a little volatile. But for the year and for the third quarter, pricing, as you know, Justin, is sort of in that 1.5% range, which is 100 or 125 basis points kind of short of our expectation. I think in the third quarter that's probably a function of maybe 3 discrete trends. One is with the extremely high ER volumes. ER visits were up 6% to 7% in the quarter. We've seen an increase in uninsured. We've seen our uninsured volumes tick up for the quarter. We've also seen -- even though we had relatively strong surgical volumes in the quarter, I think overall surgeries are up 5% or 6% in the quarter with overall admissions up 7.5%. It implies that we are seeing a slight skew to more medical cases rather than surgical cases. That also sort of tends to mute acuity a little bit and drive down pricing.

And finally, I think we're seeing some more aggressive behavior on the part of our payers, and we saw an elevated level of denials in the quarter. So I think those 3 items: elevated denials, slightly higher uncompensated care and slightly lower acuity as the 3 items driving that, what I'll call, 100 to 125 basis points shortfall in pricing for the quarter.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [16]

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Okay. And then if I could just follow up, looking ahead to 2020, Steve. I know your typical framework is mid- to high-single-digit acute, and you were pretty conservative coming into the year, and I think rightly so, on behavioral kind of probably in the flattish range with some share repurchases. Is that how we should think about the framework for 2020? Or anything around that that could kind of move the needle we should be considering?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [17]

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Yes. I mean we will not formally give our guidance until our fourth quarter earnings at the end of February, but I think the way that you've framed the underlying assumptions for the 2 business segments, kind of the way we framed it in 2019, is I don't know that we'll feel terribly differently. But we certainly would like the benefit of the ensuing 4 or 5 months to give us a better perspective on how the 2 businesses are trending.

Again, my overall comments are we're pleased with the acute care volumes, and they're really sort of at extraordinary levels. And again, I think that reflects the underlying strength of our franchises, but we also expect that we'll be able to drive more efficiencies and better margins out of those -- out of that level of volume and revenue growth over time.

And on the behavioral side, we continue to work in a very focused way to restore the volume and revenue growth. And I will point out one encouraging trend in that quarter in behavioral is we've seen some stabilization in length of stay, which has really been kind of a troubling dynamic for us for several years. So if length of stay can stabilize and remain stabilized, I think we've got a bunch of strategies in place to drive higher volumes. But when we give our guidance in 4 or 5 months, we'll be more explicit about that for 2020.

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Operator [18]

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Your next question comes from Ann Hynes.

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Ann Kathleen Hynes, Mizuho Securities USA LLC, Research Division - MD of Americas Research [19]

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Can you give admission trends per payer class, like the uninsured, commercial, Medicare and Medicaid? I know you had an uptick in uninsured. Are there any specific states that are more troubling than other states?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [20]

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So Ann, I'll just sort of broadly try and give some color. Our overall admissions are growing by 7.5%, thanks to our adjusted admissions. I think Medicare admissions are growing the fastest, then Medicaid, then uninsured admissions. And I think commercial admissions continue to be positive, but are probably growing in sort of the low single digits, maybe 3%, 4%. And uninsured admissions, which had been growing maybe 5%, 6% in previous quarters are maybe up 8% or 9%, just given again, I think, it's really driven by that increased level of ER activity.

In terms of sort of the geographic kind of dispersion of that, I think we've long sort of disclosed that our biggest uninsured markets tend to be in South Texas and in Amarillo. That hasn't changed, but I think the increase in uncompensated volumes in the quarter is pretty widespread because, again, the strength in our ER volumes are pretty widespread in the quarter.

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Ann Kathleen Hynes, Mizuho Securities USA LLC, Research Division - MD of Americas Research [21]

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All right. And one last question. I'm surprised you didn't buy back more shares in the quarter given your increased authorization last quarter. What goes into making that type of decision on a quarterly basis? And in general, can you talk about the acquisition market going forward?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [22]

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Yes. We continue to pursue a great many acquisition -- potential acquisition opportunities in both the acute and behavioral space as well as organic capital investments. And I described a few of those in my opening comments. And again, particularly I think on the acute side, I think that the extraordinary volume growth that we're experiencing is a function of, at least in part, some of these really well-placed capacity additions in our growing markets. So we feel good about that strategy.

The problem with potential acquisitions is we look at a lot. It's always hard to tell what will pay off and what won't, and we'll see that happening. I mean I think from a share repurchase perspective, we talked about buying back something like $700 million or $800 million worth of shares for the year, and I think we're sort of on that -- on pace to do that. I think we respond to what we consider to be buying opportunities as they arise. Certainly, in the earlier in the year, I think we responded to some softness in the stock price that we thought was driven by, I'll sort of call, exogenous sorts of factors like concern over Medicare for All or some of these sort of regulatory concerns or legislative concerns that we thought were sort of not very well played.

So we continue to do that. And again, I think if you look back, I think the metrics that I described in my opening remarks are reflective of the fact that over the last 4 or 5 years, we've been a very steady buyer of our shares, and I think we'll continue to do so and accelerate that activity where it seems like there's an opportunity in the market for us to do so.

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Operator [23]

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Your next question comes from Josh Raskin.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [24]

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So Steve, I know -- I'll admit it's probably a little bit of an unfair question. So I'm not sure there's a great answer. But just the volatility in the acute segment earnings, it seems like volumes have been relatively strong the whole time. Your revenue -- all year, your revenues, but sort of in and outs of the quarters. I guess I'm just curious what's creating that sort of EBITDA fluctuation. I don't know if there's been big benefit design changes or flu or seasonality or if there's something else in the market? Or is it just it's a relatively small number of hospitals and quarters are short periods? Any thoughts on that would be helpful.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [25]

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I don't think it's an unfair question, Josh. I mean there has been certainly more volatility particularly in the acute care business this year than I think we've been accustomed to historically.

In the first half of the year, we talked a lot about sort of the service line mix that the year started with really rather soft surgical volumes and that rebounded late in the first quarter and continued into the second quarter. And that sort of skewing of medical procedures in the first quarter and surgical procedures in the second quarter created that level of volatility.

In the third quarter, I just described what I thought were the main metrics affecting kind of slightly lower-than-expected pricing or revenue per unit. I don't really know what to say. I mean it's -- volatility is sort of what it is. To the degree that these sorts of things occur, I think that the business will be a little bit lumpier than we expect. Again, I think what we view as most encouraging, particularly in the acute care business, is how strong the volumes are and sort of how relatively consistently strong they've been.

And I think we have a point of view that, as time goes on, our operators will be in a position, regardless of some of the volatility in expenses and some of the volatility in pricing, there's a real advantage to be able to deal with those strong volumes and there are real efficiencies that can be garnered from that. And I think over time, and over more than a single quarter, we'll be able to do that.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [26]

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Okay. That makes a lot of sense. And then just within the psych side. Foundations, obviously, hasn't worked out as expected. Could you sort of just give us an update on thoughts around the addiction treatment segment overall? Was this kind of more Foundations-specific? Or do you think this is sort of industry trends -- more consistent with the industry trends? I'd just be curious to get your perspectives on that segment specifically.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [27]

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Sure. Well, we made it a point, when we acquired Foundations back in 2015, that this was not a new entrée for us into the addiction treatment business. For as long as we've been in the behavioral health segment, we've been in the addiction treatment business. We've had dedicated, I'll call them, legacy facilities, dedicated addiction treatment facilities. We offer addiction treatment services and units in many of our general psychiatric hospitals. So we were really just increasing our investment in the addiction treatment business and really acquiring a company that had a different model than what had been sort of our legacy model.

So the Foundations model was really premised on a few different things. One was kind of direct-to-consumer marketing. They had a very sophisticated infrastructure in which they advertised and -- on the Internet and on media and would get patients to call and contact them directly and then they would process those patients for medical necessity and appropriate treatment locations, et cetera. So yes, with direct-to-consumer marketing, there was kind of a blend of in- and out-of-network pricing and there was a fair amount of travel for treatment for patients.

And I think what has really changed in terms of, I'll call that that sort of new style Foundations model, is that all of those metrics have really been challenged by the payers over the last several years. So there is much less out-of-network. It has really been almost now a turn to largely in-network model. There is much less travel for treatment. And there is also just, I think, more and more control by the payers and less and less by the consumers themselves about where treatment can be rendered. So -- and it just made, in the last 3 to 4 years, that underlying kind of new style model more challenging.

I will make the point that many of our legacy addiction treatment facilities and the units within our general psychiatric hospitals have continued to function very well and respond to what, I think we all recognize, is a growing addiction illness issue in the U.S. and demand. So the challenge that we've had and we are responding to is how do we adjust that Foundations model. And we are very focused on doing that and doing it quickly, reducing the drag on our earnings. And I think, in short order, we'll either revise the model or we'll envelop the Foundations facilities more in sort of -- into our legacy model. But one way or the other, I think we are committed to reducing the drag on our earnings in very short order.

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Alan B. Miller, Universal Health Services, Inc. - Executive Chairman & CEO [28]

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I'd add that, for the first few years after the acquisition, we did very well in the business. But then the nature of the business changed, as Steve pointed out, of how patients were contacted, did contact, travel, and we are making adjustments to the change in the business.

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Operator [29]

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Your next question comes from Scott Fidel.

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Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [30]

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First question. Just might be helpful, just given some of the different moving pieces in each of the segments. Just how in the third quarter the shortfall broke down relative to the internal plan between the acute care and behavioral business, if you have sort of like a percentage breakdown of that.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [31]

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Sure, Scott. So sometimes, we'll point out differences between our internal budget and the Street consensus. But on an overall basis, our internal plan this quarter was pretty close to the Street consensus. And so obviously, we were short of plan. I would say that shortfall was probably predominantly in the behavioral segment, maybe 2/3 of the shortfall in behavioral and 1/3 in acute.

On the acute side, I think we were closer to our internal plan, although the sort of components of how you get there were a little bit different. Obviously, our volumes are a lot higher than we expected. And as we discussed earlier, our operating efficiencies and our pricing were a little bit lower than we expected.

On the behavioral side, as we talked about, volumes and revenue took a slight modest step back in the quarter. But I think we're operating at pretty high efficiency levels there. So even with the slight decline in revenues and volumes, it just makes it tough to wring any further operating efficiencies out of the business. And obviously, our prominent concern is the quality of care to our patients. So we're not going to compromise that in any way to put some pressure on the margin.

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Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [32]

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Got it. That's helpful. And then just as my follow-up, Steve. I know there were some recent changes in Texas on the uncompensated care pool, but I know that there are some puts and takes around how that sort of translates to net. Can you maybe just sort of walk us through how that increase will flow through and then what some of the offsets are and how you're thinking about that on a net basis?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [33]

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Yes. So -- and I'm doing this -- a little bit of this from memory, Scott, but I believe that sort of the headline news was that Texas was increasing their pool of uncompensated care funds for the next fiscal year by about 25%. But when we sort of ran through the calculations and the allocations, I think our perspective was that our uncompensated care reimbursement would increase by about 8% or 9% in Texas in the coming year.

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Operator [34]

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Your next question comes from Steve Tanal.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

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I thought maybe I would just ask a couple of quick ones, maintenance things and then maybe one on strategy. I guess on acute, could you give us a sense for what you think the impact of those new capital projects were, Steve, that you had called out on adjusted admissions? And then maybe just the extra business day, do you think that had any impact? Or is there any way to think through that one?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [36]

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So I'll take the second one first, Steve. I know that lots of companies talk about it, et cetera. We tend to ignore these calendar impacts. I think not because they're not real or they might not have a short-term impact, but I think our point of view is that, over an extended period of time, extra weekday in a quarter or an extra holiday in a quarter, whatever it is, really doesn't make a difference and doesn't enter into the way we're managing the business.

As far as -- it's difficult to say sometimes precisely the impact of -- we're adding capacity, we're adding ER capacity, exactly how many of our incremental ER patients are related to the new capacity or new beds or new cath labs or new ORs. But I think we definitely have a perspective, and I think we talked about it earlier in the year, I think in the first and second quarter, people looked at the ramp-up that we had in the back half of the year and questioned a little bit of the logic of why we were expecting stronger growth, particularly on the acute side in the back half of the year. And I think we responded at the time that we had a number of kind of, what I'll call, the medium-sized $25 million, $35 million projects coming on, things like an expanded emergency room in our Manatee, Florida, hospital or an expanded emergency room and in-patient capacity at our Texoma facility in Denison, Texas.

And again, I think that the uptick in admissions for the quarter is reflective of some of that. But in terms of being able to precisely identify sort of exactly how much of the incremental admissions in the quarter are related to the capital add, it's a little hard to do.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [37]

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Fair enough. And then just DSH payments. Where did those come in, in Q3 in total? And how did that compare to a year ago? Is there a swing there?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [38]

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Yes. So -- I know you're among those most focused on the schedule that we have in the 10-Q and 10-K that describes our supplemental payments. And so this will be more clear to see when we file our Q in a couple of weeks. But I think that our supplemental payments increased by about $24 million in the third quarter of 2019, a combination of Texas uncompensated care and California UPL. That compares, I think, to about a $19 million increase in the third quarter of last year. So the net tailwind was about $5 million in this year's third quarter versus last year's.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [39]

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Perfect. And then one more maintenance and then maybe one question on strategy, sorry. But the guidance, just to confirm, are you maintaining guidance for revenue and adjusted EBITDA? Or that you're suspending? Or what's the view there?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [40]

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No. Yes. I think, mechanically, it's always been -- it's just been our practice to kind of midyear, we revise our EPS guidance and we just sort of assume that people will revise revenue and EBITDA guidance proportionately.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [41]

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Fair enough. Okay. And then finally, just the last one here, sorry for the length here. But just with the overall trends in behavioral and kind of the reasons you cited in the release for the impairment charge and obviously just stellar results in acute continuing, how are you guys thinking about capital allocation and expansion kind of between the businesses? Is there a reason to start prioritizing acute expansion? Or do you think it's early to make such a determination? Just more strategically, I would appreciate that view.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [42]

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Yes. Look, I've been doing this for a long time, and Alan's been doing it a lot longer than I have, and I think we are sometimes amused because over the years, the tone of questions change.

We've gotten questions for years, why would we ever invest in the acute care business? The behavioral business is doing so much better. And in recent years, maybe the tone of that has changed a little bit. I think we tend to view our 2 business segments on a much longer-term basis. I think we believe that they are both very sound, growth-oriented businesses that each have faced challenges in the short term.

But -- and look, I think that when you think about the behavioral business and you think about our integration or joint venture strategy, it's reflective of the fact, when we started this process of talking to acute care hospitals about taking over their behavioral businesses, we kind of assumed that many of these not-for-profit acute care hospitals would just sort of turn over their acute care businesses -- I mean, their behavioral businesses to us, lease their beds to us, sell their facilities to us. And I think we found that they remain extremely bullish about these businesses. Even though they haven't done a great job of managing them and they haven't been terribly efficient, they acknowledge that the demand for behavioral services is doing nothing but growing. And they are seeing more and more behavioral patients in their acute care ERs.

And so instead of just leasing beds and taking over these units, so many of these projects have turned into new joint capital projects, building new hospitals and building new beds with our acute care hospital partners to build new behavioral beds. And I think it's just a reflection of their and our bullishness about the idea that this business is just -- the demand for it is just going to continue to grow for the foreseeable future.

So we have no desire to, in any way, sort of reduce our exposure to this business, which certainly doesn't mean that we're not going to make selective decisions to reduce our exposure to businesses. This model may not be working like Foundations and increase in other areas. But overall, we remain very bullish about the behavioral business.

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Alan B. Miller, Universal Health Services, Inc. - Executive Chairman & CEO [43]

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Yes. Let me just add that we make our investments basically for longer run, and the nonprofit sector and ourselves are looking long term for population health. And I think that's created a great need on their part for ability in the behavioral health sector, which they haven't had. So we have a number of opportunities for joint ventures. And Steve has enumerated a few in his opening remarks, and I just see that continuing.

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Operator [44]

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Your next question comes from A.J. Rice.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [45]

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Just a couple of things, still sort of getting into some of the areas that have been already talked about. But in acute care, obviously, the top line was strong, but there was sort of these negative expense leverage that hit the earnings from the division. So if I think about the reasons that you get that kind of leverage, I mean, obviously, could be expenses are growing more rapidly just in and of themselves; doesn't sound like you're pointing to that. It sounds like you may be pointing a little bit to price and mix as an issue there, but then there's also this adjusting for the increased volumes.

And I don't know if there's any way to break out or give a little more color as to how much might be pricing mix versus the adjusting to the volumes. But I'd also be interested whether when you look at that adjusting, staffing and et cetera to the volumes, do you think that is just the way it goes in a volatile period, where the numbers are bouncing around from quarter-to-quarter? Or do you look and say, "Hey, maybe we don't have the timely data coming up to our operators that we need, and we need to do some investments there or maybe our operators are a little flat-footed responding." I guess I'd be interested in your perspective on how you assess that. Is that just something you just got to live with? Or are there things you can do to adjust for it?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [46]

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So I think, fundamentally, A.J., the reason that the hospital business has always been one where there's a decent amount of operating leverage as volumes and revenues increase is because, ultimately, and I think it's particularly true in the acute business, a good chunk of our expenses and cost structure is fixed and semi-fixed.

So when a new patient, an incremental patient comes to the hospital, in theory, the only really variable and incremental cost is the nurse at the bedside and whatever specific supplies and drugs that that patient consumes. And so as a consequence, in theory, there's a great deal of operating leverage that should be available as you get more and more incremental business. And we've gotten a lot of incremental business in the last quarter and, frankly, over the last year.

The challenge has been we're getting that business in a pretty robust economy with very low unemployment, basically full employment. And I think, in our markets, maybe even more robust employment than the national average. And as a consequence, we're filling a lot of that variable costs with much more expensive variable costs, with overtime, with temporary nurses, registry nurse pay, et cetera, and even locums physicians and all that sort of stuff. And so you're, I think, mitigating a lot of what would be the traditional benefit.

Over time, and I don't think it's over an extended period of time, but over time, we'll solve that problem by filling vacancies more permanently, by negotiating with vendors more effectively, et cetera. But that's the challenge. That's -- the short-term challenge is that we're reducing what would otherwise be the traditional operating leverage with a lot of premium pay and sort of related expenses. But over time, we should be able to solve that problem, and I think our operators have demonstrated the ability to do that over long periods of time, a great many times.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [47]

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Okay. And then on the behavioral side, obviously, it's not a huge swing from approaching 3% comparable growth, same-store growth to 2%. But obviously, it had a meaningful impact on the trajectory of the profits of the business. So I guess I'm wondering there, we heard about things like Medicaid dis-enrollment, that the Medicaid numbers are down. And I know behavioral gets a decent amount from state programs. I know the third quarter, in particular, can be a volatile seasonal quarter for behavioral.

Is this maybe just a more broad swing in seasonality than normal? I guess you've talked about for a couple of quarters now as length of stay stabilize, you need to be more aggressive in getting the admissions through, and that there's a little bit of an offset there that you need to compensate for. Any flavor on those other items and how much they may have -- I mean is this just an unusual seasonal swing that sometimes you get? Or is Medicaid attrition having any impact?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [48]

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So look, I think you make a decent point. Our third quarter, I think particularly in behavioral, tends to be always be our softest quarter. Particularly in the adolescent business when kids are not in school, we tend to get fewer referrals from -- in our adolescent business. But that's, I think, true every third quarter.

Look, the challenge, and you sort of described it as you framed the question, is revenue growth dropped from 3% in the first 6 months to 2% in the third quarter. It's a pretty small decline. I highlighted a few items earlier in the call that I thought contributed to that decline. The currency impact in the U.K. and the Foundations business and the Panama City facility. But other than that, I mean there was nothing that I think we or our operators could identify in the quarter that was really a specific negative trend in the quarter, et cetera, which is why I think we have a point of view that we'll rebound more in the next few quarters to the levels we have been running.

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Operator [49]

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Your next question comes from Sarah James.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [50]

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You mentioned that there were some increased denials from payers on the acute side. Can you provide more color on that? Was there a pattern for the type of service that was being denied? And is it just a few payers? Or is it more of a widespread trend?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [51]

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So I would say -- and again, this is certainly not the first time that we mentioned the fact that our payers on, frankly, both sides of the business, have gotten more aggressive in the last several years about admission criteria and medical necessity, et cetera. I would say that probably the most common area of denials on the acute side is over the issue of in-patient status versus observation. So it's really not so much an issue of whether a patient belongs in the hospital as it is an issue of whether they should be categorized as an in-patient or an observation patient. Obviously, as an in-patient, they would merit a higher reimbursement.

I don't know whether the third quarter activity is really reflective of a change in behavior on the part of payers or just sort of kind of a coincidental thing. I will say, Sarah, it is not specific to a specific payer or a specific geography. It is something that we're seeing relatively widespread. And to be fair, it's not terribly new, and we have a lot of infrastructure in place to deal with the issue of proper classification of patients. We engage third-party expertise to lend some objectivity to the process and some weight to the degree that we're having disputes with our payers. So we continue to be focused on that. But as I was just describing a little bit of the softness in pricing for the quarter, I thought that the elevated level of denials did contribute, at least partially, to that.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [52]

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That's very helpful. And one more clarification. You've talked a lot about the mechanics of bringing on temporary staff when volume grows. I'm wondering if you could help size the impact it might have had to expenses in the third quarter. Because you've also talked about it kind of subsiding in the next couple of quarters. So just wondering how impactful it was on the third quarter specifically.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [53]

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Well, I guess, just broadly, I would point to the fact that the expectation would be that -- and revenues are growing by 9% or over 9% as they were in the third quarter. You would expect your expenses to be growing at a slower rate, and particularly, I think, on the salary and the other operating expense line because that's where you have a lot of your fixed and semi-fixed costs. I think supplies tend to be much more variable. And I think if you look at the quarterly results, those expenses are growing as fast, if not faster, than revenue. And I think, again, the main reason for that and the main reason we're not able to drive more efficiencies are the dynamics I described before. I don't know that I can size it any more precisely than that. I think it's just kind of that broad impact you'll see on the financial statements.

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Operator [54]

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Your next question comes...

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Alan B. Miller, Universal Health Services, Inc. - Executive Chairman & CEO [55]

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Yes. Before that question comes in, let me tell everyone a couple of things that I've been thinking about. Number one, the whole question of the DOJ is largely completed, and we've had very few to no questions about that. Steve discussed addiction treatment, and he discussed a little bit about, in the U.K., the value of the pound, et cetera. There is a -- the government reports in the U.K., a shortage of behavioral health beds, and we are growing there. So that's very positive. And in addition, at some point, Brexit will be resolved, I'm sure, and that will stabilize the currency.

And the other thing is that we have about $1 billion available for stock repurchase. And if I suspect we have a buying opportunity, we'll certainly employ that. So I just wanted to cover those things.

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Operator [56]

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Your next question comes from Ralph Giacobbe.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [57]

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Steve, could you just remind us what percentage of admissions are uninsured at this point? And then just any general thoughts on what you do attribute that sort of creep or jump in the uninsured too at this point? I know A.J. asked about sort of the reverification and redetermination on the behavioral side. Do you think there's any sort of impact on that as Medicaid rolls maybe are under some pressure as it relates to sort of the acute care side of the business?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [58]

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Yes. So I mean I think I said earlier that our admission growth was 7.5% for the quarter. I think uninsured admissions probably grew by 8% or 9%. I think it's largely driven by emergency room activity, which tends to be a little bit more skewed to the uninsured. I think most uninsured patients enter the U.S. health care system through acute care emergency rooms. So to the degree that our activity is increasing, I don't think we find it surprising that we're seeing more uninsured patients.

I think the other thing is there's been a fair amount of speculation, and it seems reasonable, that since the elimination of the individual mandate, there are fewer people who find it necessary to have insurance or particularly exchange insurance under the ACA. So I think there is -- there probably is an uptick nationally in the number of uninsureds who are no longer concerned about the individual mandate, and that's being reflected a little bit in our payer mix.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [59]

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Okay. Fair enough. And then just to clarify, Steve, I just -- I was hoping you can give us just the percentage of admissions that are uninsured. So what percentage of your admissions are uninsured at this point? Not necessarily the growth, just what percentage is.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [60]

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Yes. So I think we're just not connecting here, Ralph. What I said -- so I think probably somewhere in the 7% or 8% range of our total admissions are uninsured.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [61]

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Okay. Sorry about that. Okay. All right, fair enough. And then a little bit of maybe an unfair question. We're obviously less than a month into the fourth quarter, but you did -- sort of in the first quarter, you did -- were willing to sort of mention, any early indicators on either the surgical volume or the uninsured or just general mix at this point?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [62]

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Yes. I mean the comments in the first quarter, I think, were a little bit different because the main issue was the sort of -- the main issue that was sort of, I think, a drag in the first quarter was this negative medical/surgical mix. And I think we were simply indicating that towards the end of the first quarter and into the second quarter, the surgical mix had clearly strengthened and was continuing to strengthen into the second quarter.

I would say there's nothing extraordinary in our early view of October, which is almost exclusively on a volume basis. I think the trends have largely continued in both businesses, but I think it's way too early to make any judgments about the ultimate direction of the quarter at this point, 3 weeks into October.

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Operator [63]

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Your next question comes from Pito Chickering.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [64]

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If I can go back to A.J.'s question on behavioral. So I understand the headwinds from FX and Panama City in the, like, addiction treatment programs. But save for FX, the other 2 issues were already embedded in the second half growth -- first half growth rates, so trend is definitely down. And while a move from 3% to 2% isn't a big move, neither is the move from 2% to 1%.

So can you give us a little more detail on why you're confident it will bounce back? Do you have good visibility on new staffing being added, so you don't need to turn patients away if you have new beds coming online? Could you sort of give us more reasons why you're so confident?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [65]

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Yes. Look, Pito, I mean it's a fair comment, but I think our perspective is we had been growing the behavioral business in that sort of 3%, 3.5% range for a relatively extended period of time. So I think we're viewing the third quarter performance as more anomalous. But to your point, I mean, we certainly can't guarantee that, but our expectation and our confidence as we move forward is based on looking back on the last 5 or 6 quarters where more often than not, we were hitting that 3%, 3.5% mark than the lower 2% mark.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [66]

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Okay. Fair enough. On supplemental payments, you talked about Texas. Like, as I think about sort of fourth quarter in 2020, any changes in California or other states we should be aware of?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [67]

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I mean that will, again, be clearer when we file our Q and have the schedule. But I think we're expecting a slight increase in supplemental payments in Q4, not a terribly material number.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [68]

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Okay. And the last question is, stocks are off today. Have you guys ever considered doing an accelerated share repo?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [69]

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Yes. I think we consider sort of all the alternatives. Again, I think one of the things that makes us a bit reluctant to pursue some of the Big Bang kind of strategy like that is we do like to keep our flexibility to respond to external -- other external opportunities as they arise. But I think we're -- I think we're always open to consider what we think makes the most sense. Again, I think we've done pretty well. We view it as an opportunistic repurchase of a pretty substantial number of shares over the last several years.

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Operator [70]

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Your next question comes from Peter Costa.

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [71]

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And operator, we're going to make this our last question. Go ahead, Peter.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [72]

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Outpatient seems stronger, it's hard to tell given gross to net and also related to sort of the ongoing movement of services there or maybe perhaps the insurer denials or the ER volumes or the new capacity adds. But one of the things that I'm curious about is could you tell, was there any kind of an increase related to patients being over their deductibles such that you might see that accelerate into the fourth quarter?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [73]

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Yes. So Peter, it's a good question. The challenge for us is that's difficult information for us to really kind of synthesize in a meaningful way. I think the payers are in a much better position to kind of be able to answer that question. I will say that, historically, I think this issue of patients sort of accelerating activity as they satisfy their deductibles tends to be more of a fourth quarter issue. But again, we tend to have to speculate about those trends because we just don't have enough of a database of information to be able to really sort of be able to evaluate that in a meaningful way.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [74]

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And then second question, you outlined new openings from your capital expenditure programs and also higher labor costs due to agency from the higher volumes. I'm curious if your -- some of those new openings from your capital spending programs were operating below capacity. And so as you fill capacity there, they will come online? Or is really the labor cost issue all tied to agency and just new hires?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [75]

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I think it's more the latter, Peter. I think just as the volumes increase, obviously, we've got to have the qualified clinical personnel to treat this bolus of incremental patients, which is quite significant, and it's just expensive to do. So because we're paying a fair -- and overtime and registry pay, again, is -- we call it premium pay because it truly is that, oftentimes 50% or 60% or 70% premium over base pay. So to the degree that you're using that sort of pay, it can eat up your margins pretty quickly.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [76]

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Okay. And I'll ask the last question, just more for Alan. You talked about Brexit a little bit as an impact to currency. But there's been so much uncertainty over there tied to Brexit right now. Is there any kind of slowdown in volume or slowdown in referrals that you're getting or your business there? And could that accelerate if there is a Brexit decision in the short term? And then would that get worse down the road as sort of the issues kind of become more clear?

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Steve G. Filton, Universal Health Services, Inc. - Executive VP, CFO & Secretary [77]

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I'll answer the question, Peter. I mean I think the reality is that I think that demand for behavioral services in particular is really pretty insensitive to what's going on with Brexit. That seems relatively intuitive, the sort of issues that create demand for behavioral services are really going to be pretty independent of that -- those sort of exogenous factors.

I do think the way, in theory, the business does get affected is if there's a change in the labor environment as a result of Brexit or if there's a change in NHS funding as a result of Brexit pressures, that's kind of a different story. But in terms -- and we don't necessarily anticipate those things happening. But in terms of demand, I think we've seen really no impact as a result of the overarching Brexit uncertainty in the country.

Okay. Operator, we'd like to thank everyone for their time and look forward to our fourth quarter call in February.

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Operator [78]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.