Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Thank you. Steve Filton, you may begin your conference.

Thank you, Heidi. Good morning. Alan Miller, our CEO is also joining us this morning. We welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2019. During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on Risk Factors and Forward-Looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2018, and our Form 10-Q for the quarter ended March 31, 2019. We'd like to highlight just a couple of developments and business trends, before opening the call up to questions. As discussed in our press release last night, the company recorded net income attributable to UHS per diluted share of $2.66 for the quarter. As discussed in our press release and calculated on the Supplemental Schedule, adjusted net income attributable to UHS was $247.2 million or $2.76 per diluted share during the second quarter of 2019. This compares to $233.3 million or $2.47 per diluted share of adjusted net income attributable to UHS during the second quarter of last year, as calculated on the Supplemental Schedule. On a same facility basis in our acute care division, revenues during the second quarter of 2019 increased 9.0% over last year's comparable quarter. The increase resulted primarily from a 5.0% increase in adjusted admissions, and a 3.5% increase in revenue per adjusted admission. On a same facility basis, net revenues on our behavioral health division increased 2.7% during the second quarter of 2019, as compared to the second quarter of 2018. During this year's second quarter as compared to last…

[Operator Instructions] And your first question comes from the line of AJ Rice with Credit Suisse. Please go ahead.

Thanks. Hi, everybody. Well, you've been dealing with this investigation for quite some time, so it's great to hear that it's winding down. I wonder if you have any feeling if we look at it you compared to your largest peer domestically, your same-store revenue and EBITDA growth have been a little less than them and we've talked about some regions historically, but I wonder if you would think that getting this thing done once and for all, is it going to potentially -- and not necessarily in the next quarter, but the next few quarters help you in terms of recruiting, staffing in some of the key markets, where they have been a focus on this? Do you think it will help you with some of your referral sources?

Look AJ, I'll make the sort of obvious statement that, it can't hurt. But I will say that, over the last several years, as objectively and in some cases subjectively as we could, I think we tried to determine whether the government investigation was having an impact on our business, on our referral sources, on our clinicians' behavior, and neither objectively, I think, nor anecdotally, could we really ever demonstrate that in any sort of material way. Now look, I'll also, again, say what I think is fairly obvious, I mean, we have expended substantial dollars in legal fees and other costs to defend this case. So at a minimum, I think on average, our costs associated with defending the case have been in excess of $10 million a year for the last five or six years. So we will free those costs up. We certainly have dedicated a significant amount of time and effort internally, certainly on the part of some individuals. I think we have made every effort to try not to distract our operators with the issues of this case. But again, I think -- and there is no way that -- there's just not sort of a general halo benefit, but I don't think we've ever suggested that there'd be a dramatic and measurable uplift in the business. But like I said, it certainly cannot hurt.

So the criminal investigation also came to absolutely nothing. So you will have to deal with the existing management for a while.

Yes, we expected that, so thanks. The other question, obviously big bright spot in the quarter was the rebound on the acute care side, and I know you had said that you thought it was an anomaly in the first quarter, and you see somewhat of a rebound in the second, which we did. I wonder if you can comment specifically on the -- the big markets you have, Vegas, Southwest Texas, Southern California, was it sort of across the board, or was it focused, and maybe just an update on those.

Sure, AJ. So I think when you have a quarter that has the sort of fundamental strength that we had this past quarter, almost by definition, it has to be fairly broad-based. And I think, in fact it was, and I think for the most part, it follows the -- at least geographic commentary that we've made, and been making for a while now. Las Vegas continues to be strong. Our Henderson facility continues to ramp up. But we're also making capacity expansion decisions in a number of our Vegas facilities, and I think those are benefiting as well. The Southern California, Riverside County market had a strong quarter. The Denison-North Dallas market had a strong quarter. Again, that was a market that I think has also benefited from some fairly substantial capital investment in the last year, and we did talk in Q1 about the fact that we expect that some of these capital investments would begin to yield both revenue and EBITDA returns in the back half of the year. And finally, I'll say something that I don't think I've said in a while, that South Texas, the McAllen market had a pretty strong second quarter and that's a market that, for the most part, has been lagging for us over the last several years. So that's, I don't know if that's the beginning of a trend, but it's certainly an encouraging sign.

And your next question comes from the line of Matt [ph] with BMO Capital Markets. Please go ahead.

Maybe I'll just continue on that line. A little bit more, if you could talk about what you're seeing sort of linked by service category patient in terms of driving the strength on acute care, if there is any more granularity you can give us on that?

Sure, Matt. So look, I think the sort of the headline dynamic in Q1 was the fact that our acute care revenue per unit -- per adjusted admission, let's say, was certainly lower than our expectations, and we attributed that weakness almost entirely to an unfavorable shift from surgical to medical business and surgical to medical patients. We struggled to really come up with a definitive explanation for that dynamic, but said that by the end of the first quarter, it seemed to have sort of reversed itself and we were operating at much more normalized mix levels and in my appearances at conferences and things in Q2, I think I reiterated that that was clearly true. And I think when you look at the results in Q2, you can see that in those trends have been reversed and maybe we've recaptured if you will, some of that, I'll describe it as lost surgical business in the first quarter. I think what I would suggest to people and I suggest this, because I think we think about it this way, is I would look at the first six months of acute care results as sort of a unit, and look at those results as being kind of the more sustainable metrics of this business. 6% to 7% revenue growth. I will say that the admission strength -- that 5% admission growth, which was pretty much the same in both Q1 and Q2, I'm guessing, when we see the other company numbers, will be at the high end, and I'm not sure that those can be sustained indefinitely. But again, that 6% to 7% acute care revenue growth, maybe a little bit higher than what we had in our guidance, but generally in the ranges of what our expectations were.

And one more if I could; as we look ahead to this current third quarter, where you have an extra business day, but there is a mix of other things. Is there anything that we should think about, in terms of the topline volume outlook? Again just sort of sticking on the acute care side for this current quarter?

Yes. Candidly Matt, I don't know that we pay a lot of attention to these calendar issues. I think we have a point of view that all that comes out in the wash [ph] over the course of the year. But broadly, I don't think we have any expectation that other than sort of the normal kind of seasonal fall off in activity that we get in the summer time, which we would expect to occur this year, just like every year. I don't know if there's anything other than that, that we would specifically call out about expectations for acute care performance in Q3.

Great answer. Thank you.

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

Thanks, good morning. First question on capital deployment. I think the market is going to applaud you for all the share repurchase you did in the second quarter. Now that the investigation is pretty much behind you, can you give us an update on how investors should expect you to view kind of the capital deployment through the lens of how much of the free cash flow are you expecting to return quarterly, and then where you think the right leverage level for this business is?

Sure, Justin. Look, I think that first of all, I would suggest that the sort of accelerated level of share repurchase activity in Q2 was a function of a couple of different things. I mean, I think that UHS' stock price along with many of our peers, and just healthcare in general, suffered in Q2, as a result of some of the sort of headline noise around Medicare for All and some of the other sort of legislative initiatives. I think we always felt that was largely overdone, and view that as a significant and unique buying opportunity. But I think also more broadly, we certainly had a greater sense that we were nearing the end of this DoJ process. We also I think were fairly bullish on the underlying fundamentals of the two business segments. So altogether, I think we were just fairly bullish about the prospects of the company, and I think that was reflected in the share repurchase activity. It's also reflected, I think in the $1 billion reauthorization that we announced last night. In terms of sort of committing to a specific level of share buyback or the pace of that or to sort of say what people should expect. I think we're reluctant to do that. I think we've always been an opportunistic buyer, and that opportunistic sort of dynamic depends on a number of factors, including what other opportunities we may find out in the marketplace externally through M&A or otherwise, development, what's happening in the stock market etcetera. So again, I think that we're likely to see a share repurchase pace that's above where we've been the last several years, but not prepared to make any specific commitments today

Okay. And then, if I could just follow up on the behavioral side, you saw a stabilization in length of stay, but then it's a bit of an offsetting drop in volumes. Can you give us any color in terms of, you know, do you feel like there is any kind of light at the end of the tunnel on length of stay, and then what's going on with volumes. Thanks.

Yes, I think a couple of points Justin, and I've made this point before, I do think that there is some interplay between the length of stay and admission dynamics. So that when length of stay is coming down, we generally have seen admissions go up, and it's just I think, a mechanical process of patient beds being vacated sooner and increased admissions to fill those vacancies sort of faster, and I think this quarter you saw a little bit of the reverse of that dynamic as length of stay stabilized, I think you saw admission volume come down a little bit. That's sort of the first point that I'd make. Secondly, I mean, we continue to see the dynamic that we've talked about for some time, which is as more patients shift and transition from managed Medicaid or -- excuse me, from traditional Medicaid programs to managed Medicaid programs, we see their length of stay decline. That overall dynamic or that dynamic was offset overall by a bit of a shift in Q2 from adolescent business to adult business, adolescents tend to have a longer length of stay than adults. And so I think that offsets the Medicaid dynamic at least in Q2. I don't know that that's necessarily a continuing trend. Otherwise, I think generally, the trends remain stable in the behavioral space, I think we believe that a number of our facilities are poised for volume improvement, and our expectation has been for some time, that the revenue growth in this segment will increase from the sort of 3% that we've been at for the last several quarters, to something above that.

Your next question comes from the line of Sarah James with Piper Jaffray. Please go ahead.

Thank you. So it sounds like the acute surgical trend was up related to investments to attract new volume, not just deductible wear down and the timing of patient scheduling in 2Q versus 1Q. So I'm wondering if that makes you more bullish on the second half?

Sarah, I mean I think what we said in Q1 was two things. I mean, one is, we didn't see any reason why the early weakness in the first six to eight weeks of the year of surgical volumes would likely continue. And in fact, they did not. So I think I would particularly to in-patient surgical volumes, which were relatively flat in Q1, and up like 3% in Q2 and that -- I think resulted in a significant shift in acuity and revenue per unit. And I think, again, I would suggest that sort of revenue acuity and revenue per unit that we've seen for the first six months, so ought to generally be more in line with what we see in the second half of the year. But we did also make the point, when I think a number of people asked in Q1 about the -- sort of the guidance ramp and the earnings ramp for the year, and I think we did talk about any number of, I'll call them mid-sized capital projects in the $20 million, $30 million range where we're adding capacity of some sort. It could be beds, it could be ER capacity, it could be surgical capacity. But in any number of hospitals and markets in Las Vegas, in Denison, Texas, in McAllen, and I think we started to see in Q2, some of that. So look, honestly, I think we expressed confidence in our ability to meet our guidance even after Q1, which I think some people found disappointing. But I think certainly after a strong Q2, we're feeling even more confident that our original guidance is very achievable.

Got it. So it sounds like this was contemplated in your full year guidance, and I'm wondering if since the nice return that you got on these investments for expanding capacity in other areas, does it change your strategy on how competitive you want to be on that front, seeing the return that you got on these investments? Could we see rationale for an uptick in investment spend as part of your growth strategy?

Yes look, I think we have a point of view that, we look at capital investment opportunity, as we look at almost all capital deployment opportunities on very much of an individual basis. And so I think our point of view is that, money well spent, well targeted makes sense in a market where we can demonstrate that demand is there for a particular service or a particular investment and that's the way we look at it. I don't think we take the view that, if we have kind of a robust quarter, it's all of the sudden reason to invest more, or quite frankly the opposite, if we have a softer quarter, that is a reason to invest less. I think we have a long track record of being a pretty judicious employer of capital, and that's why I think we had the point of view, that as we invested capital in our markets in these strong franchises, that it would earn a return over a reasonable period of expectation, as we originally contemplated. And again, I think we're seeing that kick in, in Q2 and our guess is it will continue to kick in over the balance of the year, as our guidance is [indiscernible].

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

Hi, thanks. Good morning. I guess Steve, with a little bit more of the details around the settlement known now at this point, I'm curious if you have sort of enough information to know if there is any change in operations expected? I don't know if that's in the corporate integrity agreement, etcetera, sort of any business practices that you feel change because of this? And then do you have a view on sort of final settlement and timing of disbursement and resolution in totality?

I'll answer the second part first. Josh, I mean I think we would guess that this whole process will be ramped up probably by mid-fall. But to be fair and for those who have followed us, the cadence of this process is largely in the government's control. So we've not always been as accurate as we would like in estimating these things. Obviously, we're much closer to the end, and hopefully that makes it a little bit easier to guesstimate the time frame in a more accurate way. But that would be our best guess, that we can wrap this up completely and tie a ribbon around it by mid-fall, and that would be when we make our payment. As far as changes to operations, we've made the point I think fairly consistently. We have vigorously defended ourselves for the five or six years of this investigation, feel that our processes, our compliance, infrastructure, etcetera are all fairly robust and quite conscientious and really, I don't think that with the exception of small tweaks here and there, that really changed fundamentally our own internal processes over the course of this investigation. We've not seen a draft of a compliance agreement or corporate integrity agreement from the government, so I can't really respond in any way to say, this is how our behavior could or would change in response to that. But we're not expecting the government to require significant underlying changes to our fundamental operations. I think they will ask us to sort of strengthen and validate our compliance program, which we're more than prepared to do. But no, I don't think that we anticipate any significant changes to the underlying way that we approach this business.

Got you, that's perfect. And then, last quarter you talked on the acute care side, obviously the slow start in January, getting a little better in February, better in March, April [ph]. Anything to point out, in terms of the cadence across the quarter in the second quarter? I mean it seems like with the 9% revenue number, I'm guessing broad based strength across each month. But just curious if there was any movement intra-quarter?

Yes, look, I think it seemed -- and again, given the fact that I think we still struggle to explain that surgical weakness sort of out of the gate in early 2019, it's a little bit hard for us to exactly sort of describe what was going on. But it seemed like that surgical volume and surgical acuity in particular, just continue to strengthen, as the first six months went on. And to the point where I think we're now back to, after six months, feeling that we're at a much more normalized level. And again, I think if you look at our six month pricing and six month revenue growth, it seems not at all out of line with what our original expectations for the year were.

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

Good morning. I guess hopping over to the behavioral side of the business, you talked about volume trends. But just curious, any updates that you may have around the rate environment, particularly any kind of states that did midyear updates in their rates? And then my other question is just, an update on your health plan business and DSH payments relative to your guidance? Thanks.

Yes. So the health plan, I think as we said earlier in the year, is operating at close to breakeven, that's pretty much what our expectations were, and I think we have every expectation that's the way we'll finish the year and so we're pleased with that turnaround over the last couple of years. And as that business operates at a breakeven and adds value to our markets in other ways, I think it's much closer to fulfilling our original intent for that business. I think our DSH numbers are coming in fairly close, and you'll see when we publish the Q, we give that detail. But I think they're kind of pretty close to what our expectations were. And then as far as rates go, Frank, again, when I look at sort of where we are for the six months in terms of revenue per unit, I think in the -- on the acute side, we're in sort of a 1% to 2% range, that's a little bit lower, but I think that's kind of a function of the -- sort of higher volumes, I would guess that as the year goes on, volumes will come down a little bit and rates will come up a little bit. Rates on the behavioral side in the sort of 2.5% range, I think, are pretty consistent with what our expectations are. So I don't think there's been any kind of midyear rate changes, either by government or commercial entities, that significantly change our outlook.

Your next question comes from the line of Ralph Giacobbe with Citi. Please go ahead. Mr. Giacobbe, please unmute your line. Your next question comes from the line of Kevin Fischbeck with Bank of America. Please go ahead.

Great, thanks. If I want to go to the behavioral business, I think I kind of conceptually understand the comment, that when length of stay drops, then it gives more room for admissions to increase and vice versa. So there is some interplay there, but that almost kind of implies that there is some sort of capacity constraint at the company to have -- need that, to have that trade-off, either from a bed perspective or from a staffing perspective. Why is it that we can't see both happen at the same time, do you feel like you need to add more beds or are there still some staffing shortage that's kind of acting as an offset?

Yes, and I didn't mean to imply Kevin, that's sort of the only dynamic and that effectively, where we can't drive revenue any higher under our existing capacity, and I think you're correct, when you describe sort of the -- the potential capacity constraints as being both physical beds and labor, but I think in some facilities, that's the case, and I do think if you go back and you look at length of stay and admissions for an extended period of time, you will see some of the interplay that I've talked about. Having said that, there is no question that our volume growth is still a little bit lower than we'd like it to be, and that we were expecting. I guess the two places that I point to in the quarter, one sort of obvious and just mechanical, we continue to have this facility in Panama City, Florida, which was closed in the fourth quarter of last year due to a hurricane, reopen sometime during the second quarter, but significantly down both revenue and volume wise in Q2. Hopefully by Q3, that will largely start to wash itself out. The other issue which I know we mentioned, at least in the last couple of calls is that, the addiction treatment business continues to struggle, again, both from a volume and a revenue perspective and that sort of provides some unfavorable movement of the needle on volumes that has nothing to do with capacity or the issues that we discussed in your question earlier.

So I guess, what is causing the addiction treatment center issues, and when do you think you can get those resolved?

Yes look, I think it's a -- it's a bit of a complicated dynamic, but it's mostly payer driven. I think payers are doing a couple of things. I mean one, they are clearly moving away from the out-of-network model that many providers sort of relied on, we relied on, in part, it was not our exclusive model. But as our patients move from out-of-network to in--network, generally the reimbursement rates are coming down. And I think payers are also looking for non-inpatient alternatives to addiction treatment, and we're seeing the impact of that as well. We continue to work on that business. We've seen some sequential improvement from Q1 to Q2. But again, I mean if I would point to a particular segment of the behavioral business that is, is driving that volume weakness, this would be it.

And maybe just last question, and I guess you touched on that maybe a little bit in the past two answers, but you mentioned that you don't really view the investigations being a huge overhang from a volume perspective or growth perspective. But then separately, you talked about how you do expect revenue to be growing or to accelerating in the psych business in the future. So what exactly do you think is going to be the biggest driver to that growth?

Well, and again, those to me are just two discrete statements. I think we have said all along, that our confidence that the volumes in the business would grow, is that our own internal data suggests that there remains a significant amount of unmet demand and a significant amount of what we describe as, deflections. Patients who we are unable to admit at various times, because of different reasons. Again, I mean you touched on some of them, a lack of a physical bed, the lack of sufficient clinical staff, certain clinical criteria, the inability to treat a particular diagnosis, etcetera. And I think we are working and have been working over the last several years on those issues. We have clearly made progress. I mean the revenue growth in our behavioral division is much higher in 2019, than it was back in 2015 and 2016. We are the first to concede that improvements have come slower than we expected. But what has always reinforced our fundamental bullishness, is this idea that there is a significant amount of unmet demand out there, and that the demand sort of dynamic and demand equation has not really changed in any basic ways, since the business slowed three or four years ago.

So when you say, Steven, then working to address these issues is, is that you're spending more on Cape or that you're hiring more nurses, what exactly is the driver to address those issues?

Yes, no, I think it's a multitude of issues, and I think, all of which we've discussed over the course of the last few years, we've added more beds, we've clearly added more personnel and really focused on recruitment and retention over the last several years, and I think we have improve that situation, and we've addressed the issue of our ability to treat a broader array of patients, particularly patients with more acute or more complicated illnesses and in particular, sometimes co-morbid medical surgical illnesses.

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

Thanks. Good morning. Can you hear me?

I can hear you, Ralph.

Okay, thanks. Steve, hoping you can give a little more of a sense of payer mix and/or volume trends in each of the commercial Medicaid and Medicare buckets, if there was sort of any acceleration from baseline or more pronounced move in any of those categories, specifically within the surgical comeback?

No, look Ralph, I think we made the point in Q1 that the surgical weakness or -- and that unfavorable shift from that from surgical to medical was not really payer related, but seemed to be relatively broad based, and almost by definition -- or maybe not by definition, but the improvement has not been, I think, payer based. Our payer mix, I think has been fairly consistent for a number of years now. On the acute side in particular, Medicare is probably our fastest growing payer. Medicaid follows that commercial is probably growing at a slightly slower rate, but still a positive rate, and uninsured rates have been generally the same. The only other kind of payer mix issue that I'd point out, certainly not unique to us, but amongst our commercial population, we certainly see a greater portion of the patient nor of [Phonetic] the bill, the overall hospital bill due from the patient and we've tried to modify our collection processes and procedures to address that. And again, we're certainly not unique in that phenomena that I think every healthcare provider has experienced over the last several years.

Okay, that's helpful. And then you've had some volatility within the acute care stat particularly around sort of the components of revenue with periods of outsized volume and pricing stats. I know in the past you've talked about the dynamic around observation stays, and can't help but notice, a big admission number for sort of the quarter, and year-to-date. Just want to flush out, is there any of that observation noise still at play here or anything else to call out perhaps driving the optics or the stat that kind of makes up the overall revenue? Thanks.

Yes, I don't think so. I mean I will say, certainly as we -- when we talk to our operators, this issue of observation versus admission is an ongoing issue at this point, really with our commercial payers. So again, it's an ongoing issue that we're constantly addressing. We have devoted a significant amount of both internal and external resources to the proper classification of patients, and making sure that we get paid appropriately from our payers. But I don't think, to your question, it's really influencing the optics of admission growth etcetera. I don't think we're seeing significant changes, back and forth.

Your next question comes from the line of Pito Chickering with Deutsche Bank. Please go ahead.

Good morning, guys. Following up on the share repurchase questions. I understand that doing M&A is a priority for the company. But if there are no deals, is there a minimum leverage ratio that you guys can sort of guide us to? So if there is no large deals -- so we think if you guys are running between 2.5 and 3 turns of leverage, is it just your repo or is that the right way of thinking about it?

Yes, Pito look, again, we're not going to commit to a specific leverage ratio on the call today or frankly at any point. I think we like to maintain flexibility, but we acknowledge that our current leverage ratio is low, probably relatively inefficient. But it leaves us a tremendous amount of flexibility to become a more active return of capital to shareholders, which I think we tried to signal in a couple of ways that we would be, in today's or yesterday's press release, but also leaves us the flexibility to respond to other opportunities that frankly we may or may not even be contemplating today, as we move forward, and so we're going to continue to do that. But I think the obvious sort of statement is, we've certainly operated the company at higher leverage levels than we're at today, for the right sort of deals and the right sort of investments back in the mid-2000 period, which may be a long time for investors. But for many of the members of management, it's not so long ago. We bought back probably over a two or three year period, and maybe 20% of the outstanding shares of the company. We're happy to do so. It made sense at the time, and if that sort of an opportunity presents itself in the future, so be it.

Okay. I mean just sort of I guess, ask this a different way, if you guys are running at two turns of leverage with just your repo, are there any deals that you've seen in the last five years, that you guys couldn't complete by going from that leverage to higher multiples?

Yes, I mean, look, it's one of the things about M&A it's difficult to answer, because we're not going to get into specifics of deals that we've looked at and contemplated and what their size was, etcetera. But look, your basic question, Pito, I think it's fair and our -- and maybe commentary. We have a lot of financial flexibility, given our capital structure. We acknowledge that. We like that, and we think that that flexibility, has allowed us over the last many years to respond to opportunities as they arose, and to be judicious employers or deplorers of capital, and I think we continue to view ourselves that way.

And then one last quick follow-up here. We obviously see the key trends be very volatile over the last six months. As you look at the cadence of admissions during 2Q, do you plan on making any changes to staffing going to third quarter, or you assume that things normalized in the back half of the year, from a staffing perspective?

It's a great question. And honestly, it's an everyday challenge for hospital operators as their volume goes up, they have to decide whether it's kind of a [Indecipherable] increase that necessitates more permanent hires, or whether it's a more temporary sort of an increase that is better served by either over time or temporary nurses, registry nurses, etcetera. So honestly, I think we're making that judgment in each market, depending on what's happening in that market, etcetera. Look, I think it's fair to say that UHS' acute care volume strength is not something that's terribly new over the last several years, and quite frankly maybe for periods even much longer than that, our acute care volumes have generally been sort of industry-leading and ahead of our peers. So you know, again, I do think we think about our volume growth as -- that sort of above average volume growth, as sort of more of the norm for us, although again, as I mentioned earlier, I'm not sure that 5% is likely to persist. That would be an extraordinary level of volume growth to see over an extended period of time.

Your next question comes from the line of Steven Valiquette with Barclays. Please go ahead.

Thanks, good morning, Steve and Alan, and congrats on the strong results. And I guess just for us, there has been some continued ebb and flow and washed [ph] in this year, just around the push for greater transparency in hospital pricing and actually healthcare pricing overall. I guess, I'm just curious, if you have any updated thoughts around this topic from the UHS point of view. Thanks?

Look, I think as Steve -- the transparency tends to focus on two things. One is transparency for the individual patient, who does not have insurance or has a significant self-paid portion of insurance that is trying to negotiate a particular rate. Honestly, I think that affects a relatively small percentage of the population and a small percentage of the procedures. Healthcare is complicated and sometimes it's not always easy to just say, look I'm having gallbladder surgery, I want to know exactly what it's going to cost, that may be a difficult exercise for an individual patient. The other dynamic, which seems to be the focus of at least some legislators, is this idea that there ought to be complete transparency at the rates paid between private insurers and private hospitals, whether that is a concept that really will get traction and also proved to be legal, etcetera. I'm not sure. But at the end of the day, I believe that the broad outlines of that sort of pricing landscape are out there, I use the sort of easy example that if we've got a payer who is our -- the number one player in the market, and it becomes public knowledge that the rates that we accept from that payer are the lowest in the market. To me that's not a surprise. It's not a surprise to us, it’s not a surprise to the payers in the market, and if a much smaller payer comes to us and says, well, now that I know that you accept much lower rates than this payer, we want you to accept the same rates from us. We are just not going to do it and no one is going to be able to force us to do that, unless the government decides that they're just going to set prices all around. And I don't think it's going to be the case. So I don't think we view transparency as something that will change our everyday business practices by a great deal.

Your next question comes from the line of Peter Costa with Wells Fargo. Please go ahead.

Thanks and congratulations on the quarter. I had a couple of questions somewhat unrelated. The first one related to the acute care business. I appreciate your view of looking at it sort of over a six month period, but within that period, it sounds like there's a little bit of a difference in the second quarter of improvement, particularly McAllen and maybe Denison as well. And I'm wondering if you can scale those improvements for us, and then perhaps, where are we in terms of how much further there is to improve in those two markets?

Yes, I mean I think that's difficult to do, Peter. I think, you know what I was suggesting is that, earlier in Q1, there was a lot of focus on this idea that some people felt like the ramp for the balance of the year was aggressive or more dramatic than they imagined, etcetera, and we simply suggested that, the cumulative effect of these sort of mid-sized capital projects, was something that we thought was helping this ramp as the year went on. And that we were making the point I think, or I was making the point that, because it was not a whole hospital project like a Henderson or Temecula from several years ago, we tend not to talk about these individual projects, And therefore I cited and I saw it as a potential disconnect between our own internal model and the Street model. Look, at the end of the day, sort of our guidance is our guidance, and I think it suggests to -- not just suggests, it very explicitly said to The Street, this is what we expect our earnings power to be for the balance of the year, and our guidance remains unchanged, and I would just broadly say, we continue to have confidence in our full year guidance. Obviously, we sort of never really get into what the Texoma emergency room impact likely to have. I just don't think quite frankly that's a terribly productive conversation, when you get down to that granular level of detail.

Okay, that's helpful. And second question is more on the behavioral side, you've gone through the change in management there and I'm wondering if you've seen any out migration either of clinical staff for facility level management or referral sources to Acadia since Debbie went away?

No, look, I think that Debbie has talked about and we've acknowledged that a handful of personnel have moved over. I don't think that's a terribly significant surprise when somebody at that level and somebody of that tenure moves. But I think we're very comfortable with the staff that remains here. We've got a very deep and long tenured and hardworking bench that we're quite pleased with, and feel like when we fill that top slot, it will really just sort of round out our approach. As far as sort of the other issue of referral sources and payer behavior or whatever in market, I would say we've seen no impact whatsoever. And again, I wouldn't -- I'm not surprised that those markets tend to operate very independently, those clinicians think of themselves as the employees of XYZ hospital rather than sort of the broader corporate entity, and we frankly encourage that. So we've really seen none of that at the detail operating level

And then just lastly from a leadership position, where are you in that process at this point and do you think we're getting closer to the end of finding somebody?

Yes, when we undertook the process based on that, I mean, it has been a long time since we feel that, particularly behavioral position. But we've filled the comparable acute position a few times over the last few decades, and it has generally been an eight, nine month, 10 month process, we're starting to get towards the end of that, and I think we feel like the original estimate of time, we're about right in that. I'm not going to set an exact date, but I would think sometime within that range or close to it, we should have a very capable person sitting in that seat.

Your next question comes from the line of Whit Mayo with UBS. Please go ahead.

Just wanted to follow-up on that last question. Just as it kind of relates to leadership. Is there anything strategically maybe that you're doing differently now in the behavioral business? Are we going to be talking about any new initiatives a year from now, any investments? Just wondering like what actually has changed like at the local field level in that division, and what we should expect to see in terms of changes in terms of initiatives and strategy going forward? Thanks.

Look Whit, I think we've talked a number of times about the fact that we are trying to use -- I mentioned before that it has been a long time since we changed at this top position in the behavioral segment. And so I think we would like to use the opportunity to at least reevaluate a potential sort of strategic reset. And that, I think, kind of a complete overhaul of the business, so I think we have a very successful business. But as we think about new technologies and things like telemedicine, the use of telemedicine in the behavioral space, or how the behavioral slice of the business interacts with the broader population management initiatives that we see in the healthcare, I think probably, to your point, as you frame the question, a year from now, I would guess that we may be talking about those dynamics more, than we had in the past, and I think where we're hoping that the opportunity to hire a new person with some different experience, etcetera, will allow us to engage and maybe more productively in those conversations.

Okay. So we'll stay tuned there. I wanted to go back maybe for a second just on Pito's question around staffing. Now that we're at 4% unemployment wherever we are, I think most investors, at least in my conversations really struggle to see how acute care hospitals aren't seeing more pressure around staffing costs, and what are you seeing and how do you address the question and maybe if you could comment more specifically on contract labor and professional fees. Obviously, the physician staffing companies are under some level of stress at this point, so wonder if you're seeing more ask around subsidies, any comments would be helpful?

Sure. Look Whit, I think broadly your comments are fair, finding a sufficient number of qualified clinical personnel in -- frankly in either business segment, whether that's nurses or doctors, is definitely challenging, and a very significant portion of our operators' efforts I think are focused on recruitment and retention, again, of qualified clinical personnel, whether that's nurses or doctors. Look, the issue again, when you talk about -- when you sort of look at 4% unemployment, how are we not more challenged. I mean, I think we are challenged, but this is always one of those things where we don't have to outperform 99% of the universe. We just have to outperform our local competitors, who are basically -- who we're competing for, for those clinical personnel. And so, we work very hard at recruitment and retention policies that allow us to do that. It's a big focus and I think our flexibility, our willingness to be creative, etcetera, helps us in that endeavor. But it's absolutely a challenge. And look, I think one of the reasons why the two businesses appear not to have as much cost pressure, as you might expect is, we saw a lot of that cost pressure two or three years ago. Frankly, I think as a company, we talked about it a lot more in 2015 and 2016 than many of our peers. I don't know if that's because we were feeling it sooner in our markets or just because maybe we were being more realistic about the impacts of it. But I think to a degree, what we're seeing now two or three years later is that, those pressures at least as they are reflected in the financial statements, have anniversaried themselves and have largely sort of stabilized.

Can you comment maybe on professional fees and the question around the physician staffing company subsidies, any color would be helpful?

I think other than anecdotally, I mean look, I can -- I could tick off three or four examples throughout our portfolio, where we've seen some pressure from our contract physician providers for increased subsidies or fees or whatever it might be. But I don't think that overall, and I have said -- few people have asked about our other operating expenses over the last several years, and I think a little bit of a tick-up in that, on that line is some of that pressure. But I don't think it's really enormously needle moving in terms of really keeping margins suppressed or anything like that.

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

Hi, good morning. Just a few quick questions. First, Steve, you had mentioned the ongoing DoJ investigation costs were about $10 million or so annually that would go away as this closes. Do you anticipate any measurable costs from complying with the, with the CIA that you're going to have to sign? It seems like other companies might point to a couple of million dollars or so associated with that. But want to get your thoughts.

Yes. So again I think we've tried to be clear, we've seen nothing specific from the government, so it would be difficult for us to kind of frame what the costs could or should be. But I guess and maybe I should have been a little bit clearer than this, I mean I think that the relief of those legal fees at a minimum, should help to fund whatever that incremental costs might be.

Right. And then I may be just missed the tail-end of your response to Frank's question, I didn't catch if he asked it explicitly. But was there, was there anything to call out in the acute EBITDA this quarter in terms of just supplemental payments, extra supplemental payments or something that we might see in the Q?

I don't think anything material.

Okay. And my last one, maybe this one more for Alan, if he's still listening, I was just thinking about Intermountain acquiring Healthcare Partners Nevada and just what are the implications of that? Do you think that's a precursor to them wanting to get into the Vegas hospital market? How much would you care about that? Any thoughts would be interesting

Yes, I mean I'll answer that. [Indiscernible] we've routinely discussed here, so I think we're of the same mind. Look, I think the good news, as this process unfolded, we had concerns that United would be able to keep this business, and I think that would have created a real competitive advantage for them. So when the FTC required them to sell this business, I think that -- we view that as a favorable development. I guess, ideally, we would have liked for the business to be sold to a payer, who would have no real presence in the market, that would have been sort of perfect from our perspective. But the fact that the business has been sold to a provider, who doesn't really have much of a presence in the market, I think is kind of maybe the next best thing. Look, I think it's a signal as you sort of alluded to in your question, that over time, Intermountain probably will -- either has plans or will execute plans to develop some sort of provider present in the market. But obviously, that will take some time, and they will have some obstacles to overcome, in a market that is sort of well entrenched amongst a small number of providers. So we face sort of competitive dynamics in all of our markets. This will be a new one in Las Vegas. But it's not one that at the moment we're losing sleep over. Although to be fair, we're focused on it and we are prepared to respond to it.

Your next question comes from the line of John Ransom with Raymond James. John, your line is open.

Hi, good morning. This is sort of an [indiscernible] question and I don't mean to imply that it's material short term, but we have heard in behavioral, that the payers are starting -- the managed care payers are starting to layer in some outcomes type, penalties, for example readmissions within a certain timeframe. And so my question is, are you seeing that, number one. And then number two, do you think anywhere in our lifetime, we're going to see any meaningful type of quality/outcomes data in behavioral, which certainly has lagged this in acute by a decade or more. But just curious to see if, if this is a way of raising the bar and if there is anything to this? Thanks.

Yes. Yes, I'll go in reverse order, John. I mean certainly, your comment is accurate, the sophistication and the maturity of quality reporting and outcomes reporting in the behavioral segment, certainly lags. The acute care med-surg segment and maybe other service lines as well. But I think UHS has sort of been on cutting edge. We have worked directly with the joint commission as an example, to develop more standardized quality and outcomes reporting. I think we do more in that area than just about anybody else in this space. But I agree with you, we are probably several years behind where the med-surg industry is. As far as the sort of specific dynamic of payers having sort of readmission penalties, I don't think we've seen that. I also find it a little bit incongruous, in an environment where payers are -- at least in our own minds, you know, aggressively and in some cases, arbitrarily insisting on shorter length of stay in earlier discharges of patients, for the payers then to come back and suggest that we should then bear penalty, because those patients have to be readmitted, when we thought they were prematurely discharged. We would struggle with that. So we've not seen that in any sort of material or measurable way.

So just what is the benchmarking for quality? What is being measured and do you even have electronic medical records yet in behavioral, is it just some qualitative reporting, is there anything that's being measured at this point?

Yes, look, I think things like use of restraints and frequency of restraints, outcomes, measurements are actually being measured. I mean it's probably too complicated and by the way, I'm probably not the best person as a non-clinical person to be the one to address it. But happy offline to share more of that detail.

Gentlemen, your final question comes from the line of Steve [ph] with Goldman Sachs. Steve, your line is open.

Good morning, Steve. Thanks for taking the question. I guess just wanted to the clarify first on the DSH commentary before, you said tracking in line with guidance. I think guidance is for DSH to be down -- well, Medicaid supplemental payments to be down $30 million year-on-year in '19. And so I just want to understand, is that sort of still the latest thinking, is that what you're tracking to and maybe anything to know in the cadence there?

Yes, I mean, I think as we disclosed in the first quarter, it's a little bit less than that or the decline is not as great. But I don't think in the second quarter, the trajectory changed a great deal from what our first quarter Q had.

Got it, okay. And maybe just one on the behavioral side then as well. So noticing same facility earnings were higher than non-comp -- or sorry, higher than total. So like the non-comp facilities seem to have lost about $7 million in the quarter. I am just sort of thinking about what's in that bucket. I think Danshell will fall in there. It's 25 hospitals, but it looks like there is 39, just the way you guys reported. So maybe Panama City is another one. But can you remind us sort of what else may be in there, and then how Danshell did in the quarter?

Yes. So Danshell is tracking pretty much. I think when we acquired them, they had about a $10 million annual EBITDA stream, and I think they are tracking something close to that quarterly, obviously. I think in terms of otherwise, the non-same-store -- I know we had a -- Florida has eliminated their CON and we had I think a $3 million write-off or so of our behavioral CON assets that and that non-same-store number. I can't think of anything else terribly material in that number for the quarter.

Got it. Perfect. And just maybe bigger picture thinking Danshell and UK, can you give us your thoughts on how that business is doing, maybe your level of interest and potentially growing the UK business on the behavioral side?

Yes, I mean, look, I think that Danshell is sort of reflective of the way that we envision growing the UK. It was a small -- again $100 million so acquisition. And I think we are looking for those sort of one-off, either development opportunities. We've done a few de novo developments. We've added beds to a number of facilities in the UK. We've done a few smaller acquisitions like Danshell and a company called Alpha. But I think other than that, it's not like we are looking to increase the size of our footprint in the UK by multiple times, that's not our intent.

Got it. That's helpful. All right, thanks a lot

This concludes our question-and-answer session. I'll turn the call back over to the presenters for closing remarks.

Okay. We just thank everybody for their time and look forward to speaking with everyone again next quarter.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.