Earnings Call: Q2 2018

Jul 26, 2018

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Mr. Steve Filton, you may begin your conference. Good morning. Thank you, Christy. Alan Miller, our CEO, is also joining us this morning. We welcome you to this review of Universal Health Services results for Q2 ended June 30, 2018. During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates and similar words that represent 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 ks for the year ended December 31, 2017, and our Form 10 Q for the quarter ended March 31, 2018. We would like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company recorded net income attributable to UHS per diluted share of $2.39 for the quarter. After adjusting for the unfavorable $7,200,000 after tax impact from the increase in our reserve related to the Department of Justice discussions, as discussed in our press release and calculated on the supplemental schedule, adjusted net income attributable to UHS was $233,300,000 or $2.47 per diluted share during the Q2 of 2018. This compares to 188,100,000 dollars or $1.94 per diluted share of adjusted net income attributable to UHS during the Q2 of last year as calculated on the supplemental schedule. On a same facility basis in our acute division, revenues during the Q2 of percent. The increase resulted primarily from a 1.9% increase in adjusted admissions and a 3.1% increase in revenue per adjusted admission. On a same facility basis, net revenues in our behavioral health division increased 2.8% during the Q2 of 2018 as compared to the Q2 of 2017. Excluding the Health Plan in the Behavioral division, same facility revenues increased 3.3%. During this year's Q2 as compared to last year's, adjusted admissions to our behavioral health facilities owned for more than a year increased 1.2% and adjusted patient days increased 0 point 3%. Revenue per adjusted admission increased 2.0 percent and revenue per adjusted patient day increased 3.6% during the Q2 of 2018 over the comparable prior year quarter. For the 6 months ended June 30, 2018, our net cash provided by operating activities increased to $629,000,000 from $534,000,000 generated during the comparable 6 month period of 2017. Our receivable days outstanding increased slightly to 53 days during the Q2 of 2018 as compared to 51 days during the Q2 of 2017. At June 30, 2018, our ratio of debt to total capitalization declined to 42.9% as compared to 46.1% at June 30, 2017. We spent $181,000,000 on capital expenditures during the Q2 of 2018 $370,000,000 during the 1st 6 months of 2018. Year to date, we have added 52 new acute care beds and 313 new beds to our busiest behavioral health hospitals. Our behavioral health integrations joint venture pipeline is very strong with a large number of active discussions ongoing. Earlier this month, we opened the 126 Bed Lancaster Behavioral Hospital, a joint venture with Penn Medicine Lancaster General Health in Lancaster, Pennsylvania. And later in the year, we'll open a 100 in Spokane, Washington, a behavioral joint venture with Providence Health System. In conjunction with our stock repurchase program during the Q2 of 2018, we repurchased approximately 1,120,000 shares of our stock at an aggregate cost of approximately 130,000,000 or approximately $116 per share. Since inception of the program through June 30, 2018, we repurchased approximately 8 5,000,000 shares at an aggregate cost of $971,000,000 or approximately $114 per share. Alan and I are pleased to answer your questions at this time. Your first question comes from the line of A. J. Rice with Credit Suisse. Please go ahead. Thanks. Hi, everybody. Maybe just a detailed question first. You have this $15,300,000 other income item now that you haven't had that line before. And I think some of it's related to accounting change. How should we think about those items in there and trying to compare your operating income with prior periods and what you've talked about in terms of guidance and so forth? Okay, A. J. So I think there's really 2 different kinds of items on that line. The first, as we disclosed in the 3rd paragraph of the press release, is an unrealized gain on the change in market value of certain marketable securities, essentially our investment in our group purchasing organization Premier and the shares that we own in Premier. We would presume that because I think it's impossible for us to predict that change in those marketable securities, we'll never include that number in our exclude it, whether positive or negative. Obviously, it was positive in this particular quarter. The rest of Obviously, it was positive in this particular quarter. The rest of what's in that line are income from unconsolidated subsidiaries, miscellaneous gains and losses from the sale of the assets, etcetera. We believe there's sort of the normal nonrecurring sorts of things that in the past would have been included in our EBITDA and suggest that, that's the appropriate way to continue to think about that moving forward. Okay. And then let me just ask you about where you feel you are on the rebound in the behavioral health business. I know over time you have highlighted, I guess, over the last couple of years, labor challenges, obviously, dealing with managed Medicaid and the fact that they become a bigger chunk of the payer mix in behavioral. And then there was a couple of isolated situations that you've addressed in the Q1. Where are we at? I know the goal is to get back I think the goal is to get back to 4% to 6% sort of same store revenue growth on a steady basis. Can you just sort of update us on those areas and what's your confidence level to getting back to that in the back half of the year? Sure. And to some degree, A. J, I think that the metrics that I mentioned in my opening comments provide a reasonable sort of overview to where we are with this. The encouraging development from our perspective in the behavioral health division is over the last couple of quarters, our revenue per patient day has been higher than we anticipated. We originally in our initial guidance for the year talked about that number being in the 1% to 2% range and it's been in the 3% to 4% range the last couple of quarters. And I think that's reflective of the success that we've had in a number of initiatives, including continuing the shift of patients out of our residential beds and into our acute behavioral beds, which are a higher paying and higher revenue service. I think that, that higher revenue per day growth reflects progress that we've made with our managed care and insurance companies in things like reducing denials, etcetera, which has the impact of raising those raising that revenue growth number. So that's a plus for us. We're sort of exceeding our expectations there. Obviously, the negative for us is that patient days are relatively flat in the quarter compared to last year. Even though admissions are growing, we continue to see length of stay pressure. The length of stay pressure, as I think we've discussed for any number of quarters now, mostly comes from the continued shift of Medicaid patients, traditional fee for service Medicaid patients into some sort of managed Medicaid program, where we generally find the payers are more aggressive about utilization review, etcetera. We continue to where it's appropriate clinically to push back on our managed care payers. But to be fair, I think as long as that shift from traditional Medicaid to managed Medicaid continues to take place, we're going to face that phenomenon. Now it's worth noting that about 2 thirds of our Medicaid patients today are already in a managed program. So there's a limited amount of that shift that remains, but it will be somewhat of a challenge. I think the opportunity for us really remains on that admission metric, which grew by a little less than 1.5% this quarter. I think we continue to believe that the demand that we see in our facilities is sufficient enough to drive that number measurably higher. The main thing that we have to do is make sure that our available beds are appropriately staffed with nurses and psychiatrists. That's been the biggest challenge. In some cases, we're building new capacity to accommodate that demand. And in some other cases, we're evaluating the clinical criteria that our hospitals are used for admitting patients because I think we feel like in some cases, patients are being turned away who really do meet the appropriate clinical criteria. So we're focused on all those things. We feel like we've made progress on a number of them, and I think it's reflected in that revenue number. But we are the first to admit that it's a it's been a tough slog. There's a lot of moving parts. We feel like we've made progress. We feel like the demand is there and that we're going to continue to make progress. And just in terms of stepping up in the back half of the year, I think the comps get a little easier and some other things. Do you still feel like you'll do that? Yes. I mean, I think our original guidance contemplated that our behavioral health revenue would continue to grow in the back half of the year and we're not adjusting our guidance. So we continue to believe that, that is correct. And we are aided by the fact, as you articulated, that the comparisons, particularly for our behavioral health facilities, will get easier in the back half of the year. And also, we had a number of unfavorable nonrecurring items in the back half of twenty seventeen, which by definition, we presume will not reoccur in 2018. Your next question comes from the line of Josh Raskin with Nephron Research. Please go ahead. Thanks. Steve, maybe just to follow-up on that last question. It sounds like you guys are confirming guidance here. But obviously, there's a decent ramp embedded in that guidance now that you reported the first half of the year. And I heard easier comps, but maybe you could just give us a little bit more color on what gives you the confidence that the trends will improve and maybe you could spike out a couple of those unfavorable second half twenty seventeen items, just so we get a magnitude, a perspective on magnitude? Sure, Josh. I think it's worth noting, we talked a little bit about this in Q1. In Q1, we talked about the fact that UHS's own internal budget or guidance was somewhat lower than The Street's and that later in the year that would turn around because for the full year, our internal budget seemed to be pretty consistent with The Street consensus numbers. I think for the 1st 6 months, our results are pretty much in line with expectations. So while I earnings, particularly for the behavioral business in the second half of the year. I will say that was what we originally contemplated and that really hasn't changed. And I will reconfirm again what you're suggesting, which is that we are not changing our guidance at all this quarter. As far as those non recurring items, again, those were all in our press releases and publicly discussed last year. So you can go back and see them in detail. But I believe that for the most part, they centered around negative headwinds from hurricanes in the Q3 last year that affected both our acute and behavioral businesses. And then what we described or I described as sort of regulatory challenge facilities in the behavioral division, that ultimately there were 3 facilities that we talked about, 2 of them have ultimately closed and one has been downsized. So the significant decline in revenues and profitability that we experienced in the back half of last year obviously will not reoccur in the back half of this year. Got you. So those were non recurring, but those were actually included in your adjusted earnings. You just spiked them out, you're saying. Got you. And then just the last question, it sounds like there's a I don't know there's a little more progress or not on the settlement. Obviously, the reserve change there, so probably indicative of at least some conversations. But more importantly, is the settlement in overhang in any way from a capital deployment perspective? Do you think about share buybacks or even M and A differently as you're waiting for some further guidance from the government and or a final settlement? So just to make some further commentary, which I think is largely consistent with what we've said about the process. We've said for now several quarters that we certainly feel like we're in a settlement phase with the government. We're discussing the settlement terms. We're making offers and counter offers and then making demands and counter demands. Having said that, I think I've acknowledged every time I speak about this that it is a relatively slow pace, probably slower certainly than we would like, and there's not a whole lot we can do about that. We move largely at the government's pace, but the process of offers and counter offers and demands and counter demands continues. We still hope that there's a relatively near term resolution to this and hopefully by the end of this year, but that's certainly not a certainty. And again, I think we're doing everything we can to keep this moving along apace. I think your second question about to what degree it's an overhang, I don't think and particularly, I think as the discussions continue and obviously the potential magnitude of the settlement tends to narrow, I don't think it's had much effect, if any, on our willingness to invest, whether that's capital internal capital or external uses of capital, acquisitions or share buybacks. Your next question comes from Peter Costa with Wells Fargo Securities. Please go ahead. Thanks. I'd like to move to the acute care side of the business. Looks like the seasonal drop off was a little bit worse this quarter coming from 1Q down to 2Q with margins deteriorating a little more than we've seen in the past. Would you say that was more pressure on admissions and your staffing levels were too high? Or do you think there was something else going on in that? So I think, Peter, in both Q1 and Q2, we talked about not only in our 2018 guidance, but sort of ours kind of sustainable growth rate for the acute division over the next several years, would yield kind of 5% to 6% revenue growth and comparable maybe 6% to 7% EBITDA growth. The 5% to 6% revenue growth numbers we've hit in Q1 and Q2, I think what you're alluding to is that EBITDA growth and profitability was a little bit lighter than we expected. Although, I think again, our own internal expectations seem to be lower than the streets. And I think in part, we were acknowledging that particularly in Q2, we had a pretty tough comparison not only to last year, but I think to a couple of years of very robust growth, both revenue wise and profitability wise in the acute business and some slowing. I think we've also found over the last several years, even though the trajectory of the acute business has generally been rather positive and pretty robust, there's a little more volatility in that business, I think, than we have found in the acute in the behavioral business. And so I think we largely attribute the 2nd quarter lightness and the margin contraction sequentially to just some of that quarterly inter quarter volatility in that. I think our point of view is still that over time, if we can grow that business 5% to 6% of the revenue line, that EBITDA growth in the 6% to 7% range should follow. Even though we didn't hit those numbers exactly in Q2, I think we think that over time and I think if you go back and you look at our performance over time, you'll see that that's true. Okay. And then do you have any comments on the M and A environment right now in the acute care space? We continue to look at acute care opportunities really that span the gamut of whole hospital and whole system acquisitions, the expansion of ambulatory care capabilities. We have a pretty aggressive program of our own development of freestanding emergency departments in some geographies, etcetera. I think what we're finding on the acute side is that there have been a fair amount of not for profit to not for profit transactions. I hesitate to describe them as acquisitions because I think a lot of them are just kind of merged assets. But I think that has limited some of the opportunity. But we continue to find not for profit hospital systems, which I think are, from our perspective, the most sort of target rich assets that we look at, yes, that there are a number in the pipeline and we continue to evaluate them. And in the meantime, I think as we've stressed a lot over the last several years, we continue to invest very heavily in our own facilities. We tend to talk on this call about the new hospitals that we've opened in Las Vegas and Henderson and in Riverside County, California. But in the back half of this year, we're opening quite a bit of new capacity, not quite at those same levels of magnitude, but new beds, new emergency room capacity, new surgical capacity in Las Vegas and several of our hospitals in California, in the North Dallas market in Texas. So while there hasn't been as much of an opportunity for external M and A, we still are finding quite a bit of opportunity to enhance and expand our own Your next question comes from Steve Tanal with Goldman Sachs. Steve, I think you'd been you'd mentioned looking for sort of an acceleration in the behavioral same store revenue growth number in 2Q to instill confidence in that 5% target. And I think the timeline there most recently was sort of 3Q. I'm sort of curious how you're thinking about that level now as well as when you think it's reasonable to underwrite a return there? Yes. Look, I mean, I think one of the challenges that we've had, Steve, is that we saw this slowdown in our behavioral revenue growth really begin in the back half of twenty fifteen, and we attributed most of that slowdown to a labor shortage of particularly nurses, but to a lesser degree, psychiatrists. And I would say for about a year, we focused on that and really kind of redid a lot of our infrastructure to better to be able to better address the shortage. And I think beginning in the back half of twenty sixteen, we began to make measurable progress and both our volumes and our revenues began to increase. As we sort of projected how that would continue to play out, we tended to project that as sort of a ratable increase. The reality is the business doesn't necessarily work that way and the recovery has been somewhat choppier and to be fair, somewhat slower than we originally imagined as well. We still think that that 5% target is reasonable, that 5% revenue growth target is reasonable. We still have it out there for the back half of the year. It's part of our guidance and I think we presume that we can get there or get pretty close. But we acknowledge that it's a bit choppy. And again, I think as I sort of commented on in responding to A. J. Original question, we find that we're making progress in some areas like the shift of services from residential to acute and reduction in denials. But in others, in solving the labor shortages is a bit more problematic than we thought, but we think we're continuing to make progress and feel like that 5% target is still reasonable. Got it. And I guess just thinking about the behavioral business overall, can you remind us what percent of admissions come from acute referrals? And I know you said the mix of Medicaid has been rising in that, but what about the pace of growth in the total number of referrals system wide? So I think in our acute behavioral business, which is about 75 percent of our revenues in that space, historically, somewhere in the 35% to 40% range of our admissions tend to come from acute care hospital emergency rooms. It's still probably our single largest source of behavioral patient referrals. That can vary by geography, it can vary by hospital, it can vary by program, but that gives you order of magnitude, that's, I think, a good indicator. And the pace of growth, is it changing? Do you think the DOJ investigation is affecting the referrals at all on any level or no? Look, I think that's always difficult to determine with absolute precision. But over the last several years, we, the management team here, I think talks to our operators in the field quite a bit. And as they describe challenges to us, things like the nursing shortage, etcetera, and potentially other challenges that we've talked about in various of our calls, the government investigation really never comes up. I'm of a mind that the people who are aware of our government investigation are people who read our 10 Qs and 10 ks. And while we spend a lot of time preparing those and writing those, there's a pretty small audience for them. And I think in the sort of broad behavioral operational landscape, there's not a whole lot of people who are terribly familiar with that. Understood. And maybe just the last maintenance A follow-up on A. J. Question on the add backs. If I think about that $15,300,000 it seems like the marketable securities just the changes in the value there $8,000,000 in that third paragraph you referenced, which implies there's about $7,300,000 of items that you suggested would normally have been, I guess, in the reported adjusted EBITDA less NCI number. Is that the right way to think about that? And maybe if you could give us some more color on the nature of the $7,300,000 of earnings, what exactly those are and how that amount compares to the prior year? That would be helpful. And then I'll yield. Thanks a lot. Yes. So what I said, I think, before, Steve, was I think what's in that number is, quite frankly, a bunch of small miscellaneous items that include income from unconsolidated subsidiaries, gains and losses on small asset sales, etcetera. We didn't go back, quite frankly, to recapture the prior year number in part because the accounting sort of perspective was we were not going to restate the prior year for that. But I think as we looked at those various items that are included in the balance of, I'll call the non premier items on that other income line, our general view was that those are items that will kind of normally be there, they'd be largely recurring and they historically have been part of our reported EBITDA. Got it. Thanks a lot. Your next question comes from the line of Justin Lake with Wolfe Research. Please go ahead. Thanks. Good morning. First question, just obviously, Steve, a lot of focus on guidance. Can you tell us if the behavioral business stays in that 3% to 4% range in same store, what I'm mathing to is if Acute does 5% and the one timers reverse themselves, which they should, you end up at about in the range of the low end of EBITDA. Is that the right way to think about it? And then anything above the low end would be driven by behavioral getting better? Yes, I think that's generally fair. I mean, I will say that the behavioral, I think EBITDA performance in Q2 was probably better than expected in part because a larger component of that revenue growth came from the pricing side of things. And sort of by definition, the pricing side of things doesn't have an associated sort of incremental cost to it. So if we can continue to make progress on that front, I think that's helpful, etcetera. But I think you're if I get sort of the what the question that you're asking, Justin, is if we can't get the behavioral revenues to grow in the way that we expected in our original guidance, it certainly would be tough to get to the high end of our guidance in the back half of the year. We're not certainly conceding that at this point, but I think it's a fair statement. Got it. And then Steve, depreciation number was a little bit lower than I expected. Was there any kind of change in accounting there or anything driving that? I can't think of anything material, Justin. I will certainly go back and look at the detail. Your next question comes from the line of Kevin Fischbeck with Bank of America. Please go ahead. Great. Thanks. Can you remind us maybe what just the math behind some of those one time items and comp issues were in the back half of last year. So if you don't actually show any improvement, but just the one time issues abate, how much should that be a tailwind to volume for the second half of the year? Yes, Kevin, I mean, I'm going to do this a little bit from memory. I don't have them in front of me and all those items were very publicly reported, so they're available to everybody. But I think in the 3rd and 4th quarters of last year, we had a drag from the hurricane in the 2 divisions that I think probably totaled in the kind of $15,000,000 to $18,000,000 range. And then the losses and additional expenses from the 3 regulatory challenged facilities in the behavioral business, which I think were another sort of $10,000,000 to $15,000,000 So I think somewhere in that $25,000,000 to $30,000,000 range in total. But again, I make the point that those items were all disclosed and very publicly discussed. So they're all out there for people in the city. I'm sorry, I guess I was actually kind of more interested in from like a same store revenue perspective. I guess when you think about achieving that 5% number because people seem to be focused on that as much as the EBITDA number itself. Is it 100 basis points to same store revenue growth? Or what is is there a ballpark number for that? Yes. So I think when we talk about getting back to that same store growth level, we're really viewing those items as discrete from that. Okay. So it's not a situation. So you would do those were one time headwinds last year. So the fact that there's an easy comp, you still think 5% on a run rate basis, not just from an easy comp is the right way to think about it? Yes. So when I say there's an easy comp, I'm just referring to sort of the core business, not to those non recurring items. Okay. All right. That's helpful. And then you mentioned that the challenge has been to kind of make sure that your beds are staffed and that you're adding beds in the places where there's capacity issues. Can you give a little commentary on kind of where we are in that process? How much of a challenge is that still? How close are you to kind of getting fully getting over that hump? Yes. I think, look, the challenge in describing it and look, I understand when people question and try and get a sense of this issue, they tend to view it in sort of a linear fashion that it's kind of an issue that we are we have X number of vacancies and that represents Y percentage of our total labor slots and we filled so many of them and so we've made this much progress. But the reality is particularly in an industry like ours that has such high turnover rates, I think nursing turnover nationally in the U. S. Is in the 30% range. The issue is, we hire nurses, nurses leave, we hire psychiatrists, psychiatrists leave, we sort of solve the labor problem in a hospital and we don't have any sort of restriction on bed capacity in that hospital and then the issue arises in another hospital in another market. It has always remained throughout this, I think a relatively small number of markets and small number of hospitals that have been affected. But to be fair, I mean part of the challenge is, we'll solve the problem at 2 hospitals and it'll arise at another hospital, etcetera. So that's part of the reason it's been sort of a slower recovery. But I find it difficult to sort of be able to quantify kind of in a percentage way or something like that, how much progress we've made and how much is left to go. I guess what I always point to, and by the way, I do this internally as well, is I just focus people on the level of revenue growth because in my mind, ultimately, that's how the progress is measured. The problem manifested itself in a slowdown in our revenue growth. And in my mind, it will be fixed, completely fixed when we recover that level of revenue growth. So while I think there are metrics and measurements that you can use to sort of help define your progress, number of vacancies, turnover rate, number of people in orientation, all those sorts of things, which we get internally, I think ultimately, our main focus continues to be on that revenue growth metric. Yes. I think it's a 100% fair for us to judge you on that as whether you're making progress. But I guess from a forward looking perspective, it seems like staffing is a potentially gating factor, so progress on that would be a leading indicator towards achieving that revenue number. I think maybe just last question on this topic would just be that I think people think that the labor market is getting tighter and that staffing is getting more difficult. Do you just feel, I guess, anecdotally or directionally that the staffing is actually normalizing or stabilizing in some way for you versus where it's been the last couple of years? Is it the same? Is it getting worse? I guess anecdotally, what does that look like? Yes. Look, I think, Kevin, we have a point of view. As I said, I think there's the labor challenges really started to manifest themselves. By the way, in both divisions, in kind of the back half of twenty fifteen, and we've been very focused again in both divisions on addressing them. I think our sense is they have generally stabilized now that we're a couple of years into it. But having said that, I mean, I think we acknowledge we're in a very tight market. As a nation, we're at the lowest unemployment rates we've seen in 20 or 30 years depending on exactly who is quoting that. But so I think it's going to continue to be a challenge. But certainly, I think we feel like it's stabilized, not getting worse, and we continue to make progress, although it's incremental. All right. That's helpful. Thanks. Your next question comes from the line of Ralph Giacobbe with Citi. Please go ahead. Thanks. Good morning. Just wanted to jump to the acute care side. Your organic revenue slowed a little bit, still the 5% top line number that you talked about, I think still a good number. But the EBITDA up only sort of low single digits. Is there anything to sort of call out on why you didn't see better pull through? I think you've been seeing pretty hefty EBITDA growth on pretty stable sort of top line. So just any color there, Steve? Yes. I mean, I think Ralph, this is largely the question that Peter Costa asked earlier. As I said that and so I'll just quickly repeat, I mean, I think that the acute pull through of EBITDA is a little bit more sort of volatile and erratic than it is on the behavioral side. There was nothing, I think, extraordinary in Q2. I think our point of view is that over time that 5% or 6% revenue growth will yield 6% or 7% EBITDA growth. I think our historical performance supports that. But in my mind, there was nothing extraordinary in the quarter. Okay. Fair enough. I mean, part of it is just, I mean, the pricing number did look pretty good and better than what you've had in the past, I thought would just pull it through. But on that topic a little bit on the acuity side, that's been a sort of topic of focus. Can you just give us maybe acuity mix in the quarter, maybe how much that helped the pricing spend? Yes. I mean, I think that obviously, the acuity for the entire acute public company sort of universe was strong in Q1. It seemed to be strong for at least HCA in Q2 and continued strong for us. Now I will say that our revenue per unit has been relatively strong, although I think we've talked a lot about in 2017 that I think some of that was due to inpatient admissions and fewer observation patients, and I think we still are benefiting from that to a degree. I think generally, the industry is also benefiting from kind of a stabilization. We've all been focused on this sort of trend of moving the lower acuity outpatient procedures out of the inpatient setting and into other outpatient settings either in the hospital or out of the hospital. And I think that's hurt acuity over the last several years, but I think we've seen kind of a stabilization and a bottoming out of that trend. So I think that's helping acuity as well. So I think we're benefiting from that. It's difficult for me to say that our peers are benefiting in the same way, but it just seems like the numbers across the industry are reasonably consistent. So I would guess that we're all benefiting in the same way. Yes. And then just last one for me. Can you just give us a sense of payer mix in the quarter and specifics focus on the Managed Care side? Yes. Our payer mix has actually been and again, I'm answering this question, I think, for the acute business, Ralph. Our pay mix in the acute business has been relatively stable over the last several quarters, meaning probably Medicare is growing faster than any of our other payer mixes. Medicaid is growing, but at a slower rate. Commercial is still positive, but at a lower rate than our overall admissions. And, uncompensated admissions have remained pretty flat for the last few quarters. Okay. Thank you. Your next question comes from the line of Frank Morgan with RBC Capital Markets. Please go ahead. Okay, sorry about that. Actually, I wanted to talk a little bit on the acute side. I don't know if you discussed this yet, but I wanted to talk about or get some updates on looking at surgical volumes, both inpatient and outpatient and then also ED. Thanks. Frank, I didn't hear the very last thing you said. Surgical volumes and what? Yes, surgical volumes both in and outpatient as well as ED volumes or emergency department volumes. Thanks. Okay, sure. So I think on the ED volume side, and again, the trends that I'm about to describe, I think have been in place for several quarters. I don't think there was any kind of terribly new or different in Q2. EV volumes have slowed down a little bit. They're actually, I think, rising slower than our overall admission growth. They've been pretty flat actually, I think, the last couple of quarters. I think it's reflective of the fact that we're seeing a little bit of what I was describing to Ralph in the previous question. More of those lower acuity emergency room patients are being shifted into other settings, whether that's urgent care or freestanding EDs or doctors' offices, whatever it may be. And so we see our emergency room visits have kind of flattened out, although our admissions and the amount of business that we're getting in terms of inpatient admissions from the emergency room has not really changed, which I think is reflective of the fact that those more acute ER visits Surgical volumes are fairly consistent with our overall admissions. I think in Q2, both in and outpatient volumes for us were up 3% or 4%, which also sort of in reference to Ralph's previous question, are keeping that acuity number and revenue per unit number strong. So, I think we continue to see relatively strong surgical volumes throughout the portfolio. Okay, thanks. Your next question comes from Ana Gupte with Leerink Partners. Please go ahead. Hey, thanks. Good morning. Yes, just sticking with the acute side of it, looking at what HCA was saying yesterday about the Department of Labor survey and how in their markets they're beginning to see accelerating commercial volumes probably because there's a higher rate of insurance even on the smaller employers. As you kind of look at your markets and Vegas has been a very good market for you for a while, I mean, do you think that that's impacting somewhat of a slowdown on admissions because it's more late cycle perhaps and the recovery was sooner than in the other parts of the Southwest and Southeast? So I'll try to answer your question and I will sort of provide one caveat, which is the day before we announce earnings, we don't get to spend a lot of time looking at our peers' earnings releases and analyzing their numbers. So you referenced their Department of Labor comments. I'm at a loss. I don't know what they said. No. All they said was, I mean, you don't need to I haven't gone in detail to that survey either. Just all it said was, I believe that unemployment going down in their view might be finally driving some of the as I understood, some of the commercial volume pickup, payer mix pickup. And they talked a lot about Texas and Florida, and I was just trying to compare that to the timing of the cycle in Vegas versus their markets. Yes. And I think you make an important point. By the way, we were pleased by the HCA results. We like to see our peers doing well. I think it's reflective of the underlying strength of the acute care business, particularly for companies that have strong franchises in robust market. But I will say, one of the challenges for us is those kinds of numbers that were in the HCA second quarter release were numbers that our acute care division has been putting up in a number of quarters over the last several years. And one of the challenges that we face is those comparisons have become more and more difficult for us. So when we started to put up really strong numbers in Las Vegas and California and to a lesser degree Florida, but at the end of 2013 and into 2014 and 2015, we're into sort of the 4th or 5th year of that recovery in our end markets. And so I just think those that comparison is a little more challenging for us. But again, I think to the degree that any of our peers are experiencing those underlying strong metrics, that's a good sign for us. No, fair enough. Your comps are definitely getting more challenging. The other driver, I think, that's being mentioned just more broadly is about mix shifting to lower cost sites of service and that's what's driving potentially the higher pricing growth in the inpatient setting and so on. So are you observing that? And is that part of the higher 3% to 4% kind of pricing growth at this point? Sure. I mean, I think you make growth at this point? Sure. I mean, I think you make the right point and that is if we acknowledge, which I think we all do that, that lower acuity business has been shifted out of the acute care hospitals into a whole variety of other lower cost and lower care settings, whether they're ambulatory surgery centers or freestanding EDs or urgent care centers, then by definition, what's left in the acute hospital is the more acute, the more severely ill patient. And I think you would expect that acuity and acuity measures or revenue per unit measures would be going up, which I think is what we've seen certainly in the 1st 6 months of 2018. And then just following up on that with CMSs and you may not have obviously with your earnings today and all, they put out the rule yesterday around site neutrality and they seem to be trying to feel like foster serve clinical care in lower cost sites of service physician clinics and away from outpatient. I mean is that impactful broadly for the hospital industry? They also did the small change on new drugs for with AWP plus 6 going to AWP plus 3 to maybe discourage physicians from adopting drugs outside of like clinical efficacy and safety? Yes. So I mean, I'm going to make a little bit of a repeat comment as before. So when CMS releases a several 100 page new rule on the night we're releasing earnings, we don't get to study it a whole lot. My sense in looking at it very quickly is that we're largely unaffected by that and the sort of site changes. But we'll say more about that as we have a chance to look at it. And then one final one on behavioral, if I could. The IMD exclusion at one time was viewed as a fairly big tailwind to behavioral, the talk about acute JVs and then it kind of the volumes have been or the contracts haven't fully materialized and or the acute hospitals may be preferentially driving less attractive payer mix Medicaid or the like into freestanding. Any comments on that? And is that likely to at some point become the promise is going to be realized? I think that the original premise of the IMD exclusion being lifted and that being a significant benefit to the freestanding behavioral industry was valid and I think still is valid. I think that the challenge, the practical challenge that we didn't necessarily anticipate at the time was that exclusion got lifted at a time when we were already having difficulty satisfying the existing demand that we had for our beds largely because we didn't necessarily in some markets have a sufficient number of clinical staff. And so all of a sudden, we got an uptick and an upsurge in adult Medicaid business that we had never had before. But the difference was in this interim period that adult this incremental adult Medicaid business proved to be not really incremental, but it wound up squeezing out or pushing out other better paying, better revenue business Medicare or commercial. I think over time as we continue to solve the labor problem, the that incremental business will truly become that incremental business and it will be as profitable as we once originally imagined. Discussions we couldn't be having these dozens of discussions about potential joint venture arrangements and integration arrangements with acute care hospitals unless the exclusion had been lifted because there would be this sort of awkward disconnect of a good chunk of their patients were adult Medicaid and we couldn't treat them. So having the IND exclusion being lifted was, I think, a significant tailwind to these integration conversations, which I think over time, over the next several years, wind up being a very significant development opportunity for our behavioral business. Your next question comes from the line of Gary Taylor with JPMorgan. Please go ahead. Hi, good morning. I feel like I'm really beating a dead horse at this point, so I'll be really quick. Just going back to, and I'm sorry, the other income, the 15.3%, Steve, just to be clear, so, the 7.3% that you said was kind of normal recurring noise miscellaneous items. Given the new accounting treatment and the way you're breaking out this line now, I mean, you're basically saying you would expect to have a few million, several million positive gain on a go forward basis as you're reporting on that line, right? Yes. I mean, again, I think to the degree that some of the items are truly recurring income from unconsolidated subs. And I think honestly, the way we'll address this issue next year, Gary, is we'll just create an income from unconsolidated subs line to make that a little bit more straightforward. But yes, I mean, again, the incremental gains and losses could bounce around. But again, I don't think that they're going to have a material impact. We wouldn't expect that. I mean, that's the nature of them. They're sort of these miscellaneous items. Okay. And then just going back to seasonality for one moment in the second half on acute, I want to make sure we're on the same page because you made a few comments about seasonality. So we think about acute EBITDA for the Q3. Obviously, you had the hurricane impact that was modest and the year to year EBITDA growth comp is easier. So as we see in here today, we would think perhaps the growth year to year growth might accelerate. But then as you go into the 3rd quarter I'm sorry, the Q4, it was a really big EBITDA quarter in acute. You had California provider tax, you had some health plans improving, you had the flu incident, etcetera. That would seem to be a more challenging quarter for acute EBITDA growth. Am I just thinking about the acute seasonality correctly? Yes. I think all those comments, Gary, are appropriately valid. I think my comments about the easier comparisons in the back half of the year earlier in the call was really specific or I meant it to be specific to the behavioral business, not to the acute business. So again, and I think the way you described it is correct. I think the Q3 comparison for the acute business is not too bad, but the Q4 was a real bang up quarter, largely because of a real busy flu season and some other issues. And again, I think we've incorporated that into our own guidance. Okay. Thank you. Your next question comes from Ann Hynes with Mizuho Securities. Please go ahead. Hi. I just want to follow-up on your comments about IMD and the JV opportunity. I know for the past couple of years, we've been talking about it. And in your prepared remarks, you talked about you have some things in the hopper. But I guess when will we see these coming to fruition? And do you think that maybe the DOJ overhang, does that impact some negotiations at all or it really doesn't? No, I mean, again, because Ann, these negotiations tend to be with large not for profit hospitals or not for profit hospital systems. And to be fair, they are not necessarily these negotiations about joint venturing their behavioral business are not necessarily their top priority. They tend to be slow. They tend to move at kind of a slower pace than I think we're accustomed in the for profit industry. I don't know that any of our peers are closing these kinds of transactions any faster than we are. But what we are encouraged by is the general enthusiasm of the acute hospitals that we're talking to about pursuing these sort of arrangements. And as I did say in my comments, we just opened a hospital in Lancaster, Pennsylvania last month. We're going to open 1 in a few months in Spokane and Washington. Obviously, where we're building new capacity, that takes some time. So there is a bit of a ramp up here. But I think from our perspective, and again, I think these are 2 different issues. The original premise of the IND exclusion being lifted was there would be these surge of adult Medicaid patients and that would be an immediate benefit. And I think to some degree, we've clearly seen that surge of patients. Although, as I said, I think in some cases, they've been more replacement patients than new. And until we solve that problem, we won't really get the benefit. But I think these acute joint venture conversations, we always perceived was a longer term development opportunity and something that I think we feel like we'll be seeing the benefit of not just in 2019, but over the course of the next 3, 5, 7 years as more and more of these transactions or arrangements are brought to fruition and new capacity is built and these arrangements are finalized. Okay, thanks. Then just on the behavioral, I know the Boston market has been a very tough market for you guys and has weighed on the overall growth. Is that still the case? I know you closed a hospital, but regardless of this hospital, is it a market that still weighs on the overall growth and maybe the rest of the portfolio is growing more than the consolidated? I mean generally the behavioral portfolio is more diffuse and sort of geographically disparate than the acute portfolio. So it is almost impossible for one single market in the behavioral portfolio to really have the influence that as the obvious example of Las Vegas does on the acute side. Having said that, I mean, I think your commentary about the Boston market is fair. We run hospitals in the Boston market that are very highly occupied, meaning we run it at very high occupancy rates, but there's a big chunk of managed Medicaid and we've had managed Medicaid business in the Boston market for years years years. It's a pretty low Medicaid rate. So the profitability is going to be challenged in that market, etcetera. It's a big market for us. It's one of our bigger market. It's not by any means our most profitable market. But I don't think the change in that market, as I would say, the change in any of our markets really drives the portfolio results in a meaningful way. Okay, great. Thank you. There are no more questions at this time. Christy, I just want to go back to one question we had earlier. Justin Mike had asked me a question about the decline in depreciation. And as I have a chance to look at it, I can see that I think the dynamic that he's referring to is we had depreciation and amortization associated with our electronic health records still in the Q2 of last year, several $1,000,000 that has now become fully depreciated, so we don't have this year. So that I just wanted to close the loop on that one question. Otherwise, we thank everybody for their time and look forward to speaking again next quarter.