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. If you would like to ask a question during this time, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 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. 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 for 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 $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 a trade name and tangible 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 SoutheastHealth to build a new 102-bed behavioral health hospital in Southeast Missouri.
During 2019, we expect to spend approximately $675 million-$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-$1.909 billion.
Our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2019 is $9.70-$10.40 per diluted share. The adjusted EPS guidance range represents an increase of approximately 2%-9% over the adjusted net income attributable to UHS of $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-$11.36 billion, representing an increase of 4.1%-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, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Matt Borsch from BMO Capital Markets. Your line is open.
I was hoping that maybe you could touch on two things, just helping us understand how much of the outlook in 2019 is going to be driven by the acute side versus the behavioral side. Maybe just in the quarter, if you could comment on the because the metrics were good, were strong, but the revenue per adjusted admit on the behavioral side, I was hoping you could just comment on that one.
Okay. 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've been. I think on the acute side, we took the position that the guidance, or at least the midpoint of the guidance, was based on something close to 5%-6% revenue growth and 6%-7% EBITDA growth. On the behavioral side, much more modest revenue growth, generally more like 2%-3% and sort of flattish EBITDA, although particularly on the behavioral side, there are a number of headwinds that we faced in 2018 that will reverse themselves in 2019. Those include the startup 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 continued 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. I think from an EBITDA perspective, I'll call it 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're 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 the behavioral side, because that was the only one that the others were strong, and it was just that one that sort of stuck out because it was a decline.
Sure. What we 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. In fact, in Q4, we had a relatively measurable decline in length of stay, a little over 3%.
Right.
Even on an 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 in reimbursement than our Medicare 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. For the most part, over the last year or so, it has gravitated either to that range or slightly above it.
That makes sense. Thank you, Steve.
Thanks.
Your next question comes from Justin Lake with Wolfe Research. Your line is open.
Thanks. Good morning. First question, just on behavioral length of stays. 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 you think is coming from this?
Sure, Justin. We've said for some time, I think certainly since about the beginning of 2017, really for the last two years, that the reduction in length of stay during this period has been driven primarily by a continued shift of traditional Medicaid patients to managed Medicaid patients. That remains the case. The majority of our total Medicaid patients are now in managed programs. In Q4, I believe 65%-70% of our Medicaid patient days were represented by managed Medicaid days. That number has grown from, I would say, 50% within the last 18 months or so. It's been a fairly dramatic shift. A 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've felt the impact of that.
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 process has to play itself out. As a consequence, I think our guidance and our projections for the next couple of years presume 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.
Steve, that's really helpful. 50% goes to 65%-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. 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. I think length of stay decline bounces around. If you kind of plotted it as points on a regression graph, I think you'd see a fairly steady decline over the last couple of years that on average, is around a 1%-2% decline. Again, that's the trend that we would project would continue for another year or two.
Steve, just last question. I guess what I was asking is more just the last couple of quarters, right? Obviously, this would annualize at some point once it steadies, but the last couple of quarters, and then if you're at 65/70 now, can you run us off a list of states or maybe we could follow up? Is there two, three, four states that kind of the bolus of where they still haven't gone to Medicaid managed care and on behavioral that we should be kind of looking at as kind of the key last states that would be transferring over to this?
Yeah. It's a perfectly reasonable question, Justin, and as you might imagine, I get asked that all the time. 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 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.
We can't always tie those together. We don't, I think, have the same sort of insight, and kind of real-time data that the payers have, quite frankly. The best that we can do, like I said, is to sort of largely track where we are. Obviously, we know that no more than 100% of the population can shift, although I'm not sure we're convinced that it will be that high, and presume that it'll continue to occur at about the same rate. We concede, and we wish this were not the case, that we were better able to predict with greater precision and the trajectory of how that will go.
All right. Thanks for all the color.
Your next question comes from A.J. Rice with Credit Suisse. Your line is open.
Hi, everybody. First, just to clean up a couple things on the guidance. Do you have a bed growth number on the psych side? 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 supplemental payment changes or, I know the health plan's been a drag. Do you continue to expect that to be a drag above and beyond what the acute business does? Anything that's unusual that we might want to factor into our modeling on the acute side?
Sure, A.J. 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%, 6% in the model. We acknowledge that's kind of on the high end of what seems to be sort of industry averages, although there's 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. 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, D.C., 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. Our overall capital spend has gone from roughly $350 million three or four years ago to closer to $700 million in 2018 and again in 2019. 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 a very large new emergency room project to our hospital in Manatee, Florida, or Bradenton, Florida.
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 million-$10 million range. The offset to all that, as you mentioned, is the supplemental payments. I mean, 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. In 2019, we're expecting a measurable decline in supplemental payments.
All that, of course, is included in the guide.
Okay. Do you have a bed growth target for the site business?
Yeah. 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 a lot of it depends on local zoning and regulatory clearance and those sorts of things. I think our point of view is that 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 2.3 times 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. 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?
Yeah. 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 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. At least sort of what we have in our guidance is fairly similar to what we've run the last few years.
Okay. Thanks a lot.
Your next question comes from the line of Steve Tanal with Goldman Sachs. Your line is open.
Thanks. Good morning. Just looking in the Q on the Medicaid DSH and supplemental benefits. I know it's not an item you guys typically guide to, but the Q had a sort of implied $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, the guidance? Or how should we think about the timing there as well, given that the Q was filed in November? Was that a really late in the quarter sort of surprise, or?
Yeah. It's a good question, Steve, and to be fair, I know you posed this morning. We've been looking at it. As I responded to you and I will to everyone, the increased supplemental payments in Q4 were in our guidance. They're about $15 or $16 million in Texas. In our minds, I think largely an offset to the non-recurring benefits we had in last year's Q4, the flu 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. We'll let people know after we have some time to dig into that.
All right, that's helpful. 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 that would be overlooking?
I think it's not appropriate to just sort of make that assumption, although it seems somewhat intuitive or logical. The states themselves, and 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. Oftentimes it's the underlying formula itself rather than changes in sort of the nature of our business per se. I think in the case of Texas over the last several years, it's been much more of that they've been changing the formula than it has been changes in our underlying business.
Got it. Is that kind of a similar sort of story for 2019? In the K you spell out, you expect it to step down $30 million. That's not really a reflection of how you're modeling payer mix shift, I guess, or is it to some extent?
No, that's a good question and a good example of the fact that the reduction in, particularly Texas UPL, which is probably about two-thirds of that overall reduction, is again, absolutely related to a change they've made in their, I'll call it their formula or their approach, rather than any change in our businesses.
Got it. Okay, that's helpful. Then I guess just bigger picture on the Behavioral segment. Just would love to check in on kind of the long-run thought process for the algorithm. Are you still kind of thinking that 5% same-store revenue growth is achievable? If so, when, and how are you guys thinking about kind of same-store EBITDA growth that's achievable longer term in the business?
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 can see that the business itself has been under more significant operating pressures than we've seen in some time. I think our point of view is that the behavioral business same-store revenue growth had been averaging for many years that sort of 5%-7%, certainly, and had been averaging that in the first half of this decade, the 2010 decade. That growth slowed pretty considerably around late 2015, early 2016. A lot of that slowdown was, we believe, attributable to a labor shortage. We still can see 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. 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 maintained this all along, that the underlying demand for behavioral services continues to be strong kind of throughout our portfolio, throughout our service lines, et cetera. That continues to be our view. Our whole focus is just on doing the things we have to do to be able to sort of solve the issues, whether they're 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 2017 and 2018, is we're sort of no longer projecting or predicting an exact timeframe in which we'll get back and restore that 5% growth. I think we, as I said in my remarks earlier, are projecting that in our guidance at least, that the behavioral business continues at about the same pace it's running right now. At whatever point, and we're working on a very focused basis to get there, 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 of projecting and then re-projecting at the moment, because we think that's been a little too difficult to do.
Got it. Maybe just the last question on behavioral then, or in general, for me. The write-down or impairment charge for Foundations Recovery Network, there's three sort of pieces to that. One was the wildfire impact on a 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 competitive dynamics, indicating fewer de novos. Is that a localized issue, or is your outlook on subs sort of changing a bit in that? Help us think about that.
Sure. 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 was an addiction treatment model that really relied heavily on direct-to-consumer marketing, either through the media, television, and radio, or through the internet. There've 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 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 have been more restrictive about those kinds of decisions, et cetera. All those things have, I think, affected the growth trajectory of that business. As you point out, and certainly we've acknowledged that and talked about that for some time. 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 or intermediate future.
That was sort of a triggering event, although certainly not the primary one to the write-down.
Awesome. All right. Maybe just an update on behavioral leadership change as well. How's that search going? Sorry for all the questions. I'll yield there. Appreciate it.
Yeah, 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. 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 we'll continue to do so. We're quite pleased with the way that our behavioral team has sort of stepped up in the interim. Lots of people filling in and taking on additional responsibilities in the interim, and feeling very comfortable about how the business is being run at the moment. So, when we obviously have an announcement of a new person, we'll make that.
Very comfortable in the interim that things are progressing as we would have hoped and expected in the interim.
Very helpful. Thank you.
I'd mention also that Marc has now taken a 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. 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. That's certainly what the reserve reflects or something very close to our latest offer. I also think it's worth noting that the gap between us, 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.
We would hope that the monetary piece of this is sort of the most difficult, 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. I think it's difficult for us to project any sort of precise timeframe here. We're certainly optimistic that on the core monetary issue, we're close to a settlement with the government.
Got you. All right. Definitely a change in tone then, I guess. 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 others sort of step up their spending as well?
That's sometimes hard to say. I do believe, 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. 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. 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.
I don't know, and 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. My anecdotal sort of notion is that many of our peers, at least those that can afford to, are investing in the better markets. I think, we feel that we're 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 where top line grows 2%-3.5% and more like 6%-7% EBITDA achievable on 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 5%. Thanks.
Sarah, as a CFO, I always sort of have the position that we can always drive more efficiencies than we have. That's certainly the message I deliver to operators. 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 historical level of revenue growth at around the 5%, that at 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, the nature of the operating model is that most of our costs are fixed and semi-fixed.
Where you really generate the leverage in this model is through at least modest revenue growth. Until you get that, it's hard. I am going to always say there are pockets of opportunity for greater efficiency, but I wouldn't say that there's 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 underway with supply costs or scheduling that you could look to drive some improved leverage there, or margin expansion on the acute side?
I think the acute side is a different question. I think that there's an acknowledgement 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 costs, broadly in the acute industry. 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're moving, again, incrementally away from the traditional fee-for-service reimbursement model to more of a, what's called fee-for-value model. I think, I would describe as more of a risk-based model. We disclose 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, throughout the continuum, more effective behavior and a wringing out of costs. I mean, we're very focused on that and have talked about it for a number of years. As the payment model changes, I do think that there's an opportunity on the acute side to drive more efficiencies and less variability, in the system and that should be helpful, at least in part, in growing profitability and EBITDA margins.
Thank you.
Your next question comes from the line of Kevin Fischbeck with BofA. Your line is open.
Great. Thanks. Wanted to ask about the psych revenue per patient day. It sounds like one of the factors is the Medicaid mix shift, which is likely to continue, it sounds like, for the next year or two. The other factor you mentioned was going back in-network with some of the addiction centers. I guess I don't remember really hearing a lot about that in the past. Is that something that's just happening now? When does that anniversary, or is that going to be a longer-term headwind to pricing?
We certainly have talked about that dynamic the last couple of quarters. I don't know honestly that it has had a measurable impact on pricing before the fourth quarter. Largely because 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 behavioral pricing should be in that kind of 2%-2.5% a day range, and the reality is, over most of the last couple of years, we've been hitting that range, if not somewhat exceeding it. 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.
Would you say that 2019 is going to be below that number in your guidance?
Below what?
Two, two and a half.
No, I think that effectively, what we're really projecting, when we're projecting 2%-3% revenue growth in 2019, we're essentially saying that that will largely come from pricing and that 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. Just circling back on the labor cost issues in the behavioral business, you talked about making progress there. Where do you think you are in that progress? Are you halfway through, two-thirds 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 suggests it's sort of a linear process that we have X amount of openings at a point in time, then we were able to fill 50% of them or 75% or whatever. The reality of it is that we fill openings and we hire, and we train people, then people leave and et cetera, and 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. I think we've made a lot of progress since we began to talk about this issue in late 2015, early 2016.
We also acknowledge that it remains a tight labor market, and there are still facilities where we have vacancies and in some cases, they're sort of a chronic problem. Certainly, we don't have the level of closed beds and closed units that we had two or three years ago. That tends to occur now on a much more sort of one-off basis. 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, this last question, the new head of the psych business, when you bring whoever that is in, is there any change in direction or emphasis that you would expect the new person to bring in? Does having a new head of that business in any way help, a DOJ resolution? Thanks.
Yeah. I think we have a point of view that we, and I think folks who listen to our conference calls, etc., certainly have a good appreciation of this, over the last several years have faced some difficult operating challenges in the business. We've touched on those already in the call, the labor shortages, the pressure from our managed Medicaid payers, increased competition, et cetera. 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 is a very significant role for behavioral care in the future healthcare landscape. We also believe there's a growing demand for behavioral care.
I think all that is validated by much of the literature, et cetera, that's being written about how to effectively deliver healthcare in the future, et cetera. 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. 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 Marc, as well as a very capable staff of 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.
We would hope that a new person would really be able to do some things from a longer-term perspective that maybe we've neglected for the last year or two.
Okay, is there any implication for the settlement? Does having a new person in there clear the air at all or change the timing, in your view?
No, I don't think that personnel change has anything to do with the DOJ investigation or settlement.
Okay, thanks.
Your next question comes from the line of Steven Valiquette with Barclays. Your line is open.
Great, thanks. Good morning. 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 on 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? Shouldn't that kind of be the end goal to some degree? Just curious to get your thoughts on this concept of being rewarded for having shorter length of stay in behavioral. Thanks.
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. 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.
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 that short-changes the clinical needs of the patient. 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 are perfectly appropriate, in terms of quality rewards and quality bonus payments. We think length of stay is the wrong measure for that.
Okay. All right, appreciate the extra color. Thanks.
Your next question comes from the line of Ralph Giacobbe with Citi. Your line is open.
Thanks. Morning. You mentioned a strong JV pipeline and the new build. I guess, can you just help frame the opportunities there and whether sort of contribution there is sort of an accelerant to growth or just sort of needed to get back to the baseline that you talked about of 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.
Yeah. I'm sorry, Ralph, can you just remind me what the first half of your question was?
Sure. Just the JV pipe-
Yeah, the JV pipeline. I'm sorry.
Yeah.
Look, we've talked about this a lot. We think that 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. To the degree that we can penetrate that market in some way by helping to 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 acknowledged that despite our focused efforts, it's a relatively slow-developing opportunity, and will continue to be. Now we'll continue to focus on it, and we'll continue to do those transactions that make economic sense.
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, I kind of touched on this before, some of those projects can be a little bit of a drag. In 2018, we opened a joint venture with Lancaster new beds. We opened a new hospital in Washington State with Providence Health Care. That's a bit of a drag. In 2019, actually, some of the improvement in behavioral will come from the continued ramp-up and growth in those facilities. There's not a lot of brand-new facilities coming on in 2019, so there's not much of a drag.
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, we think it's a very significant growth opportunity. One that positions us, 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 your question about the addiction treatment business, in general, we are taking a pause on expanding, again, what I'll sort of call this new style model that characterized Foundations Recovery Network of direct-to-consumer marketing, travel for treatment, and this and that sort of issue.
In general, we acknowledge that addiction illness, particularly opioid addiction, but quite frankly, addiction illness 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. 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 and gero-psych treatment for the elderly for diseases like Alzheimer's and dementia, autism, eating disorders, all kinds of niche behavioral treatments. We're certainly open to expansion, but there aren't a whole lot of behavioral illnesses that we don't already treat somewhere in our portfolio.
Yep, that makes sense. Yeah, 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. Just a follow-up question. You typically break out the performance of some of your bigger markets on the acute care side. I know behavioral isn't as concentrated, but can you give us a sense either by market or maybe even as you look at the broad portfolio in terms of what % is really underperforming? I guess I'm really just trying to get a sense of whether it's a small % 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.
Yeah, the math is such, Ralph, that the reality is our two business segments are about the same size from a revenue perspective. 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. We certainly talk always about the Las Vegas market, and it's hard. I'm certain that there isn't another public acute care company that has sort of a market presence comparable or a market contribution comparable to that. 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 a Las 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 your question about sort of what % 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. 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, are issues that are being felt by a relatively wide array of facilities and are not particularly focused on a specific market.
Okay. Fair enough. Thanks for the color.
Your next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open.
Good morning, guys. Thanks for taking my questions. A few quick ones here. Following up on A.J.'s acute bed question, you grew beds in the fourth quarter by 3.4%. What percent of your 5%-6% revenue guide in the acute business comes from bed additions? 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?
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. We 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, Pito, I don't know that I have a precise number because I think it's difficult to really parse it to that level.
What I was trying to say earlier is that of our 5% or 6% acute care revenue growth, some of it, maybe 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. 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 these things, this capacity effectively becomes fungible.
Okay. Fair enough. On the behavioral side of the business, you guys did a great job with admissions to offset the length of stay pressures. How sustainable do you think the 5% admission growth is? Is there any margin impact from having more patients stay for a shorter period of time?
Yeah, 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, et cetera. We also acknowledge that to some degree, that's the way the business is headed, we'll deal with that. I think we have a point of view, and again, sort of hearkening back to an earlier exchange I had, that 5% revenue growth at some point and restoring that number is not unrealistic. It continues to be, in our minds, very achievable. We think of that as sort of 2.5%-3% volume growth and 2.5%-3% pricing growth.
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. Again, I think we have a point of view that in the relatively near or intermediate term, 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. 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's always a flow of personnel at various levels of hospital and regional levels back and forth between the two companies. 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, Alan.
Your next question comes from the line of Whit Mayo from UBS. Please go ahead, your line is open.
Hey, thanks. I wanted to go back to the supplemental program question and DSRIP and 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 DSH, a much favorable IPPS update that should more than offset those headwinds, correct? Is there a number that you could size for what you think your Medicare DSH is this year?
Yeah, the impact of the Medicare DSH, and thanks for reminding me, Whit, and others, I think we've talked about it on previous calls, but it's probably in that $18 million-$20 million annual range for us. It begins in October of 2018, but over the federal fiscal year, it's about an $18 million-$20 million benefit.
Yep.
Obviously, that's embedded in our guidance as well.
Right. Then you've got an incremental pickup with your IPPS update that could be, what, another 10, 15 or so?
Correct.
Yeah. 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, you recorded over 200. Before that, you expected 145 coming into 2017. It came $40 million higher than your 10-K disclosure. 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.
Yeah, it's a reasonable point, Whit, 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 give our guidance is based on what the state's current model is. We project what we think our impact or benefit is going to be, but often that model changes. Often they sort of have interpretive changes and whatever. There are some underlying changes, or some changes to our underlying business that are difficult to project. Yeah, I think it's much more the sort of states changing their models that we often cannot predict. I do think we take a little bit of a conservative approach when we project that at the beginning of the year.
Yep. No, I'd agree. Can we go back to some of the 2018 behavioral headwinds? I just want to make sure that we're all on the same page with the numbers for the hurricanes, the regulatory challenges, wildfires. Is there any way to maybe size each individual bucket so that we're all thinking the same numbers?
Yeah. I mean, the things that I would call out, 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 an $8 million or $9 million benefit going into 2019. Having a full year of the Danshell acquisition, in the U.K. is probably another $4 million or $5 million in 2019. The Florida hurricane and California fire impact is probably a $7 million to $9 million drag in the second half of 2018. The regulatory facility challenges that we had early in 2018 were probably another $5 million or $6 million.
I think all those things have been clearly discussed and delineated if people want to go back and check the numbers. 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, 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 mean, I think our free cash flow in 2018, Frank, was sort of close to $800 million. Basically, I think the free cash flow guidance for 2019 is sort of akin to that with a slight growth in EBITDA.
Okay. Then finally, just any color around surgical volumes, inpatient, outpatient, as well as ED visits in HOPD. 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. In Q4, that 2% admission growth sort of would imply, and I think is what we ran, kind of 2%-3% surgical volume growth, both on the in and outpatient side.
Okay, thanks.
Emily, I think we have time maybe for one more question.
Certainly. Your next question comes from the line of Gary Taylor from JPMorgan. 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, Steve, and just make sure I understand it. When you were talking about how you built up guidance for the year and you talked about behavioral, and I think you're suggesting that you still kind of view that business as running 2%-3% top line with flattish EBITDA, but because of a number of idiosyncratic factors, a number of which you were just discussing with Whit, the actual behavioral EBITDA growth guidance is +3%-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'd 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.