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Universal Health Services Inc  (NYSE:UHS)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jessa. And I will be your conference operator today. At this time, I would like to welcome everyone to the UHS Third Quarter 2018 Conference Call. (Operator Instructions) After the speakers' remarks, there will be a question-and-answer session (Operator Instructions) Thank you.

Mr. Steve Filton, you may begin your conference.

Steve Filton -- Executive VP & CFO

Thank you, Jessa. 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 third quarter ended September 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-K for the year ended December the 31, 2017, and our Form 10-Q for the quarter ended June 30, 2018.

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

As discussed in our press release last night, our reported net income attributable to UHS during the third quarter of 2018 was $171.7 million, or $1.84 per diluted share, as compared to $141.2 million, or $1.47 per diluted share, during the third quarter of 2017. As calculated on the supplemental schedule, our adjusted net income attributable to UHS during the third quarter of 2018 was $200.8 million, or $2.23 per diluted share, as compared to $143.4 million, or $1.49 per diluted share, during the third quarter of last year.

Excluded from our adjusted net income during the third quarter of 2018 was an unfavorable after-tax impact of $37.1 million, or $0.39 per diluted share, substantially all of which related to an increase in the reserve recorded in connection with our ongoing discussions with the Department of Justice, as discussed in our press release.

On a same-facility basis, in our acute division, revenues during the third quarter of 2018 increased 6.7% over last year's comparable quarter. Excluding the health plan, same-facility revenues increased 8.1%. The increased revenues resulted primarily from a 1.5% increase in adjusted admissions and a 6.6% increase in revenue per adjusted admission.

On a same-facility basis, net revenues in our behavioral health division increased 2.5% during the third quarter of 2018, as compared to the third quarter of 2017. During this year's third quarter, as compared to last year's, adjusted admissions to our behavioral health facilities owned for more than a year increased 4.77% and adjusted patient days increased 0.6%. Revenue per adjusted admission decreased 1.9% and revenue per adjusted patient day increased 2.1% during the third quarter of 2018 as compared to the comparable prior-year quarter.

Based upon the operating trends and financial results experienced during the first nine months of 2018, we are narrowing our estimated range of adjusted net income attributable to UHS for the year ended December 31, 2018, to $9.25 to $9.60 per diluted share from the previously provided range of $9.25 to $9.90 per diluted share. This revised estimated guidance range, which excludes the favorable impact of the reserve established -- the unfavorable impact of the reserve established in connection with the civil aspects of the government's investigation of certain of our behavioral facilities and also excludes the impact of ASU 2016-09, decreases the upper end of the previously provided range by approximately 3% while the lower end of the range remains unchanged.

For the nine months ended September 30, 2018, our net cash provided by operating activities increased to $975 million from $879 million generated during the comparable nine-month period of 2017. Our accounts receivable days outstanding increased slightly to 54 days during the third quarter of 2018 as compared to 53 days during the third quarter of 2017. At September 30 2018, our ratio of debt-to-total capitalization declined to 42.9% as compared to 45.4% at September 30, 2017.

We spent $151 million on capital expenditures during the third quarter of 2018, and $521 million during the first nine months of 2018. Year-to-date, we have added 76 new acute care beds and 330 new beds to our busiest behavioral health hospitals. In addition, earlier this month, we opened the 100-bed Inland Northwest Behavioral Health Hospital, a joint venture with Providence Health in Spokane, Washington, and next week plan to open the 80-bed Palm Point Behavioral Health hospital in Titusville, Florida. Our behavioral health integrations joint venture pipeline is very strong and robust, with over 30 active discussions.

In conjunction with our stock repurchase program, during the third quarter of 2018, we repurchased approximately 940,000 shares of our stock at an aggregate cost of approximately $118 million, or approximately $125 per share. Since the inception of the program through September 30 2018, we've repurchased approximately 9.45 million shares at an aggregate cost of $1.09 billion, or approximately $115 per share.

We are pleased to answer your questions at this time.

Questions and Answers:

Operator

(Operator Instruction) Your first question comes from the line of Matthew Borsch from BMO Capital Markets. Please go ahead.

Matthew Borsch -- BMO Capital Markets -- Analyst

Hi. Yes. I wanted to just ask on the behavioral side of the business. If you could talk a little bit about the rates that it looked like there was a little rate pressure or at least maybe the rates -- the rate mix that you were getting was a little lower than we had modeled.

Steve Filton -- Executive VP & CFO

Yeah, So, Matt, I'm not exactly sure what metric you're focusing on to arrive at that conclusion. Obviously, our revenue per adjusted admission was down 2% in the quarter, but that I think is a function of the reduced length of stay rather than any sort of rate pressure.

Matthew Borsch -- BMO Capital Markets -- Analyst

Okay.

Steve Filton -- Executive VP & CFO

Yeah. Our rate -- our revenue per adjusted patient day is up about 2%. And honestly, that's kind of at the higher range of our expectations. So again, that revenue per adjusted admission, I think, is a function of length of stay, and honestly that was what I think prevented us from having better results in the quarter, because our overall same-store adjusted admissions on the behavioral side in Q3 were quite robust, almost 5%. We were pretty encouraged by that number, but unfortunately a lot of that benefit was mitigated by the length of stay pressure. And I think that pressure is largely related to the dynamic that we've been discussing for any number of quarters now, which is the continued shift of patients from traditional Medicare and Medicaid programs to managed Medicare and Medicaid programs, mostly on the Medicaid side.

Matthew Borsch -- BMO Capital Markets -- Analyst

Okay. What do you do about that? I mean is that, that that's going to be a continuing dynamic obviously?

Steve Filton -- Executive VP & CFO

Yeah. I think that's a fair observation. Obviously, there is not much we can do about that overall shift of patients that's taking place outside of sort of our ability to impact. What we are doing, I think is -- and have been doing is, trying to develop as much non-Medicaid business as we can. And also within all of our payor groups, working hard to have the appropriate clinical documentation and appropriate processes so that we're getting the appropriate length of stay as is clinically justified for all of our patients.

Matthew Borsch -- BMO Capital Markets -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Steve Tanal from Goldman Sachs. Please go ahead.

Steve Tanal -- Goldman Sachs -- Analyst

Good morning, guys. Thanks for taking my question. I guess just following up on that, I think about the behavioral segment, obviously, we were sort of hoping that you guys would be back to a 5% type same-store revenue number for the segment and it didn't obviously occur, but the compare does get a little easier in Q4. But I guess just bigger picture, I'd like to know how you're thinking about that revenue target now and what that would mean for the sort of growth algorithm or the EBITDA algorithm as you guys have framed it in the past?

Steve Filton -- Executive VP & CFO

Sure. Steve, I mean, look, I'm sure, as you understand, I mean from our internal perspective, we continue to work in a terribly focused and disciplined way on improving that behavioral same-store revenue growth dynamic in all the ways that we've discussed over the last several quarters. But I think we also acknowledge that we've created this sort of 5% target and now disappointed a couple of times, both sort of internally and externally. So I think what we've assumed for our fourth quarter guidance is I think largely a repeat of Q3 and relatively flattish behavioral EBITDA in Q4.

And in terms of when we give our 2019 guidance at the end of February, we'll give considerable thought to how we're thinking about the trajectory of that revenue growth in the behavioral business. I think our long-term point of view has not changed at all. I think, we think that 5% is a reasonable goal. I think we believe that the underlying demand remains robust. I think we believe that the same-store admission growth metrics in Q3 support that view of the world, but how quickly we're able to get to that 5% and over what period of time and what the trajectory is, I think, at the moment, we're going to take a step back and think about how we established those targets going forward.

Steve Tanal -- Goldman Sachs -- Analyst

Got it. Understood. And just one on the acute side as well. The biggest surprise I think for us certainly was the 6.6% jump in same-store revenue per adjusted admission. And I'm trying to think about all the different puts and takes a line like that would capture. One of the ones I wanted to ask you that we don't see as much anymore is just on the bad debt front. What are you seeing there? Was that materially better year-on-year and could that have possibly helped?

Steve Filton -- Executive VP & CFO

So to your point, I mean I honestly I do think there are a number of kind of puts and takes and dynamics that are pushing that number upward in Q3. The comparison to last year's third quarter was pretty easy for the acute segment in large part because we had a hurricane impact in Q3 of last year, particularly in our Florida facilities. So, that was helpful in the year-over-year comparison. The continued ramp up of our newer hospital in Las Vegas, the Henderson facility was quite strong in Q3. So, that was helpful.

And then, we had $10 million or $12 million of California UPL, all related to 2018 that we recorded in the third quarter, that had we known everything we knew in Q3, we could have and probably appropriately would have recorded more ratably over the first three quarters as of '18. So that made first two quarters look a little softer and the third quarter look a little stronger. I think even after you account for all sort of those dynamics, it was still a very strong acute care quarter and we were pleased.

The question that you asked specifically about bad debt and sort of the amount of uninsured patients. I don't think that's having a big impact. I think we had found that over the last several quarters, our payor mix, including the amount of uninsured patients has remained pretty stable. So I don't know that that's having a material impact on the revenue growth, one way or the other.

Steve Tanal -- Goldman Sachs -- Analyst

Perfect. And maybe just one follow-up on that, then I'll yield. When we started the year, you were in the three ranges, pretty strong and if I remember correctly, you kind of thought that you weren't sure that that sort of level is sustainable or that it looked a little bit high. Obviously, your peers were doing similar type numbers. How should we think about the sustainability now? Do you feel like there is a better trend here that could carry into '19?

Steve Filton -- Executive VP & CFO

Yeah and I'm guessing, Steve, that you're asking about the acute business?

Steve Tanal -- Goldman Sachs -- Analyst

Yes.

Steve Filton -- Executive VP & CFO

Yeah. So, we've said for some time that kind of post ACA benefit and post economic recovery, we think a reasonable and sustainable model for our acute care business segment is 5% or 6% revenue growth and 6% or 7% EBITDA growth. I think we find that our acute care results can be a little bit choppier and more volatile. But I think over time, if you look at the nine months, for instance, for the nine-month results for 2018, I think, we're largely hitting those kinds of numbers, and I think that's our expectation going forward. Q3 was a real solid quarter. We are very pleased with it, but I think the idea that we could sustain that sort of growth going forward, I think, it's a bit unrealistic.

Steve Tanal -- Goldman Sachs -- Analyst

Got it. Okay. Thank you.

Operator

Your next question comes from the line of A.J. Rice from Credit Suisse. Please go ahead.

A.J. Rice -- Credit Suisse -- Analyst

Hello, everyone. Couple of questions. First, just a follow-up on that comment about the California UPL. So if you had $10 million to $12 million that you have accrued in the third quarter and some of that related to the first two quarters, is it fair to say that roughly $8 million to $10 million was related to the first two quarters? And then second I guess, on that, I'm assuming that was in your thinking about your original guidance and it just wasn't clear which quarter it would come in, is that the way to think about it?

Steve Filton -- Executive VP & CFO

Yes. I think that's fair A.J. And yes, I think, you are right. I mean, basically two-thirds of the amount related to the first half of the year.

A.J. Rice -- Credit Suisse -- Analyst

Okay. Let me go back to the length of stay question, and maybe drill down a little bit more on that in behavioral. There's a couple of factors, I think, that are having an impact here. Obviously, we had the easing of the IMD exposure as it relates to Medicaid managed care that went effective the summer of 2016. I know not every state accepted that timeframe to start. And then to some it seemed like there was a little bit of a lag into how that rolled out. But I think that's affected length of stay because that's driven more Medicaid managed care people you're way.

Then you've had some states that really were on a managed Medicaid, but didn't include behavioral, now decide in the last year to include behavioral. I'm assuming that's part of what's going on here. And then the third thing would be that the same managed care plans might pressure you more on length of stay this year than last year, you might not have a stable number even with the same plan on a year-to-year basis. Of those three buckets, can you sort of walk us through where you are at? Because it seems like at least the first two, you are on anniversary, that is at some point in the next few quarters, and I wondered if that's your opinion. Any color on that would be helpful.

Steve Filton -- Executive VP & CFO

I think most of what you said, A.J., we would agree with. The IMD -- the lifting of the IMD exclusion created a kind of bolus and an incremental increase in managed Medicaid patients. There's just naturally as well a continued shift in various states from traditional Medicaid programs to managed Medicaid programs and we have said consistently that our managed Medicaid, and it's equally true honestly that our managed Medicare population tends to have a shorter length of stay than the traditional corresponding population. Not surprisingly the managed payors just tend to manage utilization and particularly length of stay more aggressively than the traditional programs do.

And I think, I would also agree with your comment that there is a natural sort of floor to the length of stay as a result of those issues. And we would argue that for I think two reasons, one is simply because at this point a majority of our patients on the Medicaid side, somewhere around 65% or 70% of our patients, are already in managed programs. So at some point that will anniversary and there will be no further shift. Obviously, it has to max at a 100%. It may max before than that, or not all patients may ultimately shift. But I think what our current results reflect is, we're not at that point yet where that -- there are still no further patients to shift.

The one sort of statement that you made that I would object is probably too strong a word, but just correct somewhat, is to say that, within our payor classes, we're not really seeing dramatic changes in payor mix. So within managed Medicaid, our length of stay remains relatively stable. Within traditional Medicaid, within managed Medicare and within traditional Medicare and within commercial, our length of stay remains relatively fixed and stable. So, we're not seeing changes. It's really this shifting population that's creating the length of stay pressure.

A.J. Rice -- Credit Suisse -- Analyst

Okay. My final, real quick would be just on the cash flow, good solid cash flow again this quarter. Are you -- you've got some development projects under development pipeline, you've got obviously your leverage, you can almost argue, you still have some room to take that up even, and then, you've got the share repurchase, which looks consistent with what you did last quarter. Any update on what your thinking is around capital deployment and priorities?

Steve Filton -- Executive VP & CFO

Again, I think I would say and echo what we've probably said in the past. I think we feel like we have a lot of internal organic opportunities, building new beds in our behavioral segment, both kind of de novo developments like the Palm Point project that I mentioned in my remarks, or the Spokane development, reflective of our joint venture integration efforts. On the acute side, we've been extremely successful with our capacity expansion, not only the new Henderson Hospital in Las Vegas, but just new beds and new surgical and ER capacity, which we've built in almost all of our facilities in Las Vegas and in a number of other markets. So our CapEx number has been ramping up and I think will continue to probably ramp up some as we continue to identify these projects that are yielding solid returns.

We look at other inorganic opportunities. Those are a little bit harder to predict. We also find our own staff to be a compelling value at the moment. And we bought, what we believe to be a decent number of shares in the third quarter, and I think that activity will continue as well. So I think that It's more of the same and I think we view more of the same, as a good thing in the sense that these are all good opportunities for us and we like the potential returns that they are going to yield us.

A.J. Rice -- Credit Suisse -- Analyst

Okay. Great. Thanks a lot.

Operator

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

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. On the topic of development activity, just curious, are you seeing more development activity from competitors out in the local market in terms of de novo developments? What's your assessment of the competitive environment for new capacity, and this is in behavioral?

Steve Filton -- Executive VP & CFO

Okay. I was going to ask that. Yeah. So, look, I think we've said in the last few quarters in response to similar questions, Frank, definitely in many of our markets we have seen new behavioral capacity, new beds, new facilities, new outpatient facilities, et cetera. At the end of the day, I think we have said that, I don't know that we feel like it's diminished the overall demand. And again, I think the admission growth that we experienced in the quarter is reflective of the fact that the underlying demand is still strong. But it definitely affects our ability to recruit qualified clinicians, nurses, psychiatrists, non-professionals, et cetera. So, it is certainly a more competitive environment with more capacity out there. I don't think in our minds, it has changed or really diminished the underlying -- or our underlying ability to create the sort of traditional level of demand, but definitely there is more capacity out there.

Frank Morgan -- RBC Capital Markets -- Analyst

Got you. One more and I'll hop back in the queue. Just noticed that obviously the charge -- incremental charge on the DOJ -- for the DOJ investigation. Just curious if you could give us any more color on how close you may -- you think we might be here and how did we come up with this number that we took in the quarter? Thanks.

Steve Filton -- Executive VP & CFO

I mean, I think we've again said, fairly consistently that our reserve is reflective of our most recent offer to the government. That remains the case. I think, obviously, those who are following this and I know many are carefully, the increases to our reserves are coming more frequently and in bigger chunks and we view that as a good thing. I think it's reflective of the fact that this -- our settlement negotiations with the government are meaningful, the pace of them has picked up, the gap between where our offers and the government demands are has narrowed. And we are optimistic or hopeful that that means that we can reach a resolution of this relatively soon. But as we've said, I think every quarter, it's difficult to predict that end game with precision, because we do largely proceed at the pace that the government sets. So I think that pace has picked up and we're encouraged by that and are hopeful for a resolution soon, but difficult to predict exactly how and when and the amount of that would be with precision at least at the moment.

Frank Morgan -- RBC Capital Markets -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Kevin Fishbeck from Bank of America. Please go ahead.

Kevin Fishbeck -- Bank of America Merrill Lynch -- Analyst

Hey. Thanks. Want to go back to the earlier question about pricing. So, I guess 2% pricing on a patient day basis is I guess not a bad number, but it is below the 2.5% to 3.5% number you've been seeing in the last four quarters or so. So I guess as you think about it going forward, 2% is kind of the right number to think about going forward there?

Steve Filton -- Executive VP & CFO

Yes. So it's a fair question, Kevin. I mean if you think about it, when we gave our original guidance for the year and that 5% revenue growth, we actually imagined that that would consist of 3% to 4% volume and 1% to 2% price. You've made the point accurately that we've been on the high end, if not, frankly, over the high end of the pricing range, maybe closer to 2.5%. I think we have a point of view that that number will moderate a little bit. As we've discussed, some of that impact is a result of our transitioning residential beds to acute beds that have a higher level of revenue and there is a cap to that because we don't have that many, or our percentage of residential beds is getting to be relatively small.

So, yeah, I think now that as we think about it, we think that's sort of ultimate model. And again, I'm not going to say when we're going to get there, but that ultimate model of 5% revenue growth is probably now we think about it more as like 2.5% to 3.5% volume and 1.5% to 2.5% price.

Kevin Fishbeck -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful. And then, you've mentioned that in Q4, you kind of expect a relatively similar performance in the behavioral business, as far as, sounds like, same-store revenue growth and then you said relatively flat EBITDA, which is what you did little bit from a market perspective. But I was surprised that will same-store revenue growth decelerating, only being 2.5%, you actually saw some of the best margin performance you've seen over the last year. So, is there anything going on in the cost side that you are now able to keep margins relatively flat, even if you're only growing same-store revenue 2.5% to 3%? I think you've -- in the past you've talked about a higher same-store revenue growth number that you needed to maintain margins?

Steve Filton -- Executive VP & CFO

Yes. So I think it's a couple of things. Kevin, it's a good question. I think to some degree, as you know, we've been talking about labor and wage pressure for several years now, I think sooner and maybe more frequently than any of our peers. And I think to a degree, we're seeing some of that impact start to level out and anniversary out, where maybe others are just starting to feel that a bit more acutely. That's I think a piece of it.

The other piece I think is just a credit to our operators. And I certainly have made this comment on previous calls, I think, in a tough revenue environment, where revenues are not growing as much as we would have liked, and maybe would have expected, I think our operators have managed the businesses generally very efficiently and with great care. And I think that the EBITDA results and the EBITDA growth is reflective of that. So I think it's a combination of those two items.

Kevin Fishbeck -- Bank of America Merrill Lynch -- Analyst

Is that something that's sustainable or is that something where you come through and you've -- you identified a, whatever the number is, $10 million $20 million of savings, but then you anniversary that at some point and you'll need to be growing 4% --

Unidentified Speaker --

Yeah. Look, the models is not perfect, so I would say that at around 3%, 3.5% same-store revenue growth on the behavioral side, EBITDA should be flattish. And again, I think, there will be quarters where we do a little better than that and quarters where we do a little bit worse than that. And then as we get above that. I think, you start to see some EBITDA growth and some EBITDA -- some margin expansion rather. So again, I think, the levels that we are producing, the level of growth correlated to the revenue that we're producing right now is about the best we can do. I don't know that we can sustain that, but I don't know if that's going to vary dramatically from where we are today.

Kevin Fishbeck -- Bank of America Merrill Lynch -- Analyst

Okay. And I guess last question, when you think about getting to that 5% number on the behavioral side, how much of it is stuff that might be within your control, whether it is adding new beds, recruiting labor or doing better documentation as you described? How much of it is just getting to the point where you anniversary some of these more structural headwinds in the business?

Steve Filton -- Executive VP & CFO

So, I think that the element or the dynamic that is most out of our control is that continued shift of patients out of traditional Medicare and Medicaid programs into the managed Medicare and Medicaid programs. That those decisions are being made by the states et cetera, and we really have little impact on that. Now, having said that, I think there are a bunch of other dynamics. I think you ticked through a few of them that are within our control. We can try and alter our patient mix. We can build new capacity to find sources of new patients, and in some cases, to sort of reconfigure our patient mix. We can work hard to justify longer lengths of stay, where it's clinically appropriate with a number of our payors.

We can explore accepting more, both medically and psychiatricly acute patients. We can do all those things. But again, the point that you raise I think is a valid one. I mean the one thing we can't do is sort of hold back the tide of these patients who are moving from traditional programs to managed programs. That will continue, although obviously, as I noted before, there is sort of a natural limit to that as well. No more than a 100% of our Medicare patients can be managed, no more than a 100% of our Medicaid patients can be managed, and in both cases, we're well past the 50% mark.

Kevin Fishbeck -- Bank of America Merrill Lynch -- Analyst

But I guess, when we look at Acadia who is growing above that 5% rate in the US, they are obviously doing something operationally that's allowing them to overcome some of the structural headwinds. Do you kind of look at that and say, there's no reason why at some point in time we can achieve 5% even if these headwinds remain where they or is part of it just getting to a better comp?

Steve Filton -- Executive VP & CFO

Yeah. So, it's always a hard question to answer, when I'm asked for a real specifics, sort of comparisons with peers, since obviously I have little detail and little insight into their detail. I guess, my reaction has been, one of the challenges or a couple of the challenges that we have faced over the last several years in our behavioral division from a labor shortage perspective, is very geographically specific. And when we talk about the markets where our labor challenges have been the greatest, we know that Acadia does not have as nearly as significant a footprint, and in some cases, no presence in those markets.

And the same thing with some of the managed Medicaid issues that we've faced. When we talk about some of the states that have been most problematic for us and then we look at an Acadia map, we see that they haven't -- necessarily have a significant presence in those locations. So I think that's an aspect of it. So again, I think all -- what we are really focused on is what we can do in our markets and in our hospitals. And don't spend a ton of time analyzing what others are doing, because again the one thing we can't really change is the location of our hospitals. So to the degree that issues are geographically centric, we're just going to try and deal with those issues where we have them.

Kevin Fishbeck -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks.

Operator

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

Ralph Giacobbe -- Citi -- Analyst

Thanks. Good morning. I wanted to go back to the behavioral side, Steve. The admission number did accelerate. Is there anything you can point to, whether it be referral channel, IMD, opioid epidemic, the alleviation of staffing challenges? Just trying to get a better sense of the pickup there. And then, the other side of it, I do want to go back to length of stay. I think the challenge is the much deeper deceleration in this quarter that's hard to grasp as the shift from traditional to managed, is there anything new? So, are they being call out that's maybe disproportionate impact by state, if you can call out any states that just would make it worse for the pressure in third quarter than what we've already been seeing as sort of a continued pressure? Thanks.

Steve Filton -- Executive VP & CFO

Yeah. I'm going to answer the second question first, then maybe come back and ask you to repeat the first question. Yeah. I mean we would agree that the shift of patients from traditional to managed programs is nothing terribly new. I do think that in some of the states in which we operate, we've seen the pace of that pickup. We've talked about Florida, Illinois, Kentucky, being among those sort of geographies where that's been more of a concern. So -- and I apologize Ralph, but can you just repeat the first part of your question?

Ralph Giacobbe -- Citi -- Analyst

Yeah. It was actually the positive side of the equation, the admission number did accelerate. So, anything to point to there?

Steve Filton -- Executive VP & CFO

So, two things. I mean, to be fair, the comparisons, and I think we knew this going into the quarter, were relatively easy compared to last year's third quarter. We had a hurricane impact in a number of our behavioral facilities in the third quarter of last year. So, there's a little bit of built-in improvement there. But I think the other piece of it -- and we've been talking for any number of quarters, I think, the other big piece is, I do think we've made a lot of progress on the labor front. We don't have nearly as many what we describe as capped beds or closed units because of a lack of qualified staff. So, I think that's -- the real underlying improvement is the strides we've made in the labor shortage area.

Ralph Giacobbe -- Citi -- Analyst

Okay. And then, just to follow-up. The implied 4Q guidance suggests EBITDA down, I think, low to probably mid-single digits. Maybe, help us with the decline there? I think you mentioned the behavioral side flat, so it would imply a steeper decline within acute, and obviously, they come off of a strong acute print. So anything there?

And then, the last piece of that question is just the, your all-in Medicare rate, could you just remind us what that shook out for fiscal '19, and how that compares to '18? Thanks.

Steve Filton -- Executive VP & CFO

Yeah. So, I think that our view of the fourth quarter and what's embedded in our guidance is a relatively flattish view of EBITDA. So, on the behavioral side, I think that's kind of just a continuation of where we've been. And on the acute side, I think, it is premised on the idea that the fourth quarter of last year was extremely strong and we called out a number of -- call them non-recurring items. We called out a $11 million or $12 million flu impact from a very strong flu season last year. We called out $6 million or $7 million of California UPL in the fourth quarter of last year.

So, we start out, I think in Q4, if you eliminate those items, I'll call it, $16 million or $17 million in the whole, I think we presume, we'll make that up, and that's probably kind of 4% or 5% growth in our acute care EBITDA because I still think the comparison is pretty tough even without those items. But cosmetically, I think it will be flattish EBITDA in the acute business and in the behavioral business. And I think that was the core of our presumptions about Q4 guidance.

Ralph Giacobbe -- Citi -- Analyst

Okay. Thank you.

Operator

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

Josh Raskin -- Nephron Research -- Analyst

Thanks. Good morning, Steve. First question is on the acute care side as well, and just curious if you can give us an update on outpatient facility growth, I guess both from the UHS perspective, but from the competitive perspective as well, and maybe, projects that you guys are working on, and if that's having any impact on the acute care strength this year?

Steve Filton -- Executive VP & CFO

Yeah. Look, I think anybody who follows the acute care industry knows that the trend of outpatient and alternative site delivery has really accelerated over the last several years. We see our competitors doing that in our markets and we've responded in kind. So, I think we've talked about on previous calls, we've developed probably a dozen freestanding emergency rooms, most of which are open, and we probably have another like amount that are on the drawing board. We have a smaller number of urgent care centers. We have a bunch of primary care physician locations and specialist locations in our markets, imaging centers. And our strategy, quite frankly, in every market is really meant to be tailored to the specific market needs and competition. So, yes, we see all those dynamics.

And they are reflected I think, or manifested in different ways in our results. So, for instance, we've clearly seen our emergency room activity decline, our visit numbers decline over the last several years, but we have seen our emergency or the admissions emergency room continue to be quite strong and an increase, which I think reflects the fact that what's happening is, those less-acute, less-intensive emergency room visits are effectively migrating out of the traditional acute care emergency room into these urgent care centers and clinics, and retail pharmacy clinics, et cetera. And honestly, I think we view that as a positive development for everybody. It's a better location of the care where it belongs. So -- but we are participating in that outpatient development in our markets in a very vigorous way.

Josh Raskin -- Nephron Research -- Analyst

I guess, Steve, more specifically, is that contributing to the strong growth in acute or is this more, we're keeping up with what the market's doing, in your view?

Steve Filton -- Executive VP & CFO

Yeah. Look, I think it's a -- I don't know that I have a single answer to that, Josh. I mean, I do think, number one, it is a competitive response. To some degree, we have to do that to keep up. But I also believe that the strong continuum that we establish in markets like Las Vegas, like Riverside County, California, really allows us to put up the sorts of growth numbers. I don't think we could have the acute care revenue growth numbers and the acute care volume growth numbers that we've put up for the last several years if we hadn't developed this fairly aggressive outpatient and alternative care delivery strategy. I think we'd be losing business and losing market share if we weren't doing that.

Josh Raskin -- Nephron Research -- Analyst

Got you. And then, just a second question on separate topic. Obviously, a lot of focus on drug pricing and a lot more news yesterday, and we're hearing about potential change just for Part B drugs, and the hospital companies coming together for generic manufacturing, et cetera. I'm curious, are you -- just from your perspective, is that accelerating from a drug price perspective? And how do you think -- what's your best method to combat some of that growth?

Steve Filton -- Executive VP & CFO

So, we, for the most part, I think, rely on our Group purchasing organization from a pricing perspective to negotiate the best contracts and the best pricing for us. But certainly, we have a significant focus on the operational side of that within our pharmacies, managing to the most efficient formulary and the most efficient use of high-cost drugs, whether they're oncology drugs or whatever it may be. So, it is a big focus of ours. I don't know that -- I think we have a point of view that it's had a big impact on our acute care results one way or the other. Meaning, I think we believe that our drug pricing has generally risen consistently with our overall cost inflation, but it, certainly, is -- obviously, it's a big chunk of our hospital costs and something that we focus on a great deal.

Josh Raskin -- Nephron Research -- Analyst

Okay. Perfect. Thanks.

Operator

Your next question comes from the line of Ann Hynes from Mizuho Securities. Please go ahead.

Ann Hynes -- Mizuho Securities -- Analyst

Hi. Thanks. So, for 2019 (ph), when we think about the outlook, I know you're not giving guidance, but is there any out of the ordinary headwinds or tailwinds we should consider for either business? Like for example, I know in acute care, you're going to get an IPPS benefit. Can you remind us what that should be in 2019? And on the behavioral, I know we've talked a lot on this call about the length of stay pressures and your state exposure. But is there any state that you have exposure in now that maybe hasn't got managed Medicaid, and that maybe, it will in 2019 that's on your radar? Thanks.

Steve Filton -- Executive VP & CFO

So, Ann, I think, as far as sort of the puts and takes for '19, and again, I'm certainly not prepared to give a kind of a comprehensive list, but obviously to the degree that we had any non-recurring items, this year, I'm sure people are thinking about that going forward. You made the point. I mean, I think we have -- and I don't think I fully answered the -- I think it was Ralph who asked this question before. We have, I think, a Medicare increase in the 1.5% to 2% range for next year, as well as an increase in our Medicare DSH payments. I think some people throw the Medicare DSH payments into the underlying rate, which makes them more of a 2%, 2.5% rate increase. If you want to look at the DSH benefits separately, I think it's kind of $15 million to $20 million benefit. So, that's a tailwind, I think, into '19 that actually starts in the fourth quarter of '18.

Other than that I, there is nothing, I think that we haven't previously talked about that at the moment we would call out or highlight. As far as, I'd to say, pressure goes, I mean it is something that is tough for us to have a great deal of visibility on because a lot of times it doesn't take place necessarily when the state moves from managed -- or traditional to managed, whether it's Medicare, Medicaid, a lot of times behavioral a sort of a separate carve out and the timing is different than it is for the rest of the book of, I'll call it, medical business. So it's a little bit hard to say, I mean we'll make our best effort when we give our 2019 guidance to call out particular states that we're concerned about or have focused on, but at the moment, I don't have any that I would specifically identify.

Ann Hynes -- Mizuho Securities -- Analyst

All right. Thanks.

Operator

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

Sarah James -- Piper Jaffray -- Analyst

Thank you. I wanted to go back to the comments on wage pressure. So the behavioral salaries, wages and benefits ratio is about a 100 basis points year-over-year or a 190 basis points from 1Q '17. How much of that is targeted increases to reach staffing goals? How do you think about balancing the revenue opportunity of having more staff with some margin pressure of higher wages and how far along in the process are you in moving wages to the ideal rate on the SIC side? Thanks.

Steve Filton -- Executive VP & CFO

Yeah. I'd say, I don't think it's a finite process. So it's not like, I think we have a point of view that we are 50% of the way there or 80% of the way there. I think we have a point of view that this is a constantly changing market dynamic that we are monitoring all the time. The wages are the result of a competitive tension in the market, and so, we're always evaluating and reevaluating base wages. We're always evaluating and reevaluating what others are doing regarding incentives, sign-on bonuses, retention bonuses, all kinds of nuance ways to approach labor recruitment. And they vary, quite frankly, by markets. So, the point that you raised is certainly one that we've conceded before, which is wage inflation is certainly higher today for both our behavioral business and our acute business than it was three or four years ago, and that's why we say that our underlying business model has changed.

So four years ago, we might have said that 5% of behavioral growth would yield 7% or 8% or 9% EBITDA growth and today, I think, we suggest that it would yield 6% or 7% EBITDA growth. And I think the reason or the main variable there is the wage inflation. But again, this idea of looking at it as a linear issue that we're 60% of the way there or 80% of the way there or a 100% of the way there, I think, it's a wrong way of looking at it because particularly in this very tight labor environment, I think it's going to be an ever-changing dynamic.

Sarah James -- Piper Jaffray -- Analyst

Okay. That's helpful. Can you also update us on the JVs that you have on the SIC side, where you manage the behavioral units for non-UHF hospitals and speak to whether or not the Baylor merger with Memorial Hermann could present any opportunity for you to expand the Baylor JV?

Steve Filton -- Executive VP & CFO

Yeah. So I'm not going to comment on any specific opportunity, but as I mentioned in my prepared remarks, we have somewhere between two and three dozen active, I think, we think fairly serious conversations ongoing with a number of acute care hospitals and some bigger acute care hospital systems. And honestly, in most of our markets, and both Dallas and Houston are big markets for us, we have conversations ongoing. So we have, I think, a very good relationship with Baylor. So from our perspective we would view Baylor as a very positive referral source for us, et cetera.

Whether that extends toward Memorial Herman in Houston? I don't know, but I think the mere fact that we've had some already successful joint ventures with Baylor is something that other not-for-profits around the country view as favorable. Same thing with our Providence joint ventures in Washington State. The fact that we've been able to do these projects with very large and well respected acute care hospital systems I think is a real positive for us.

Sarah James -- Piper Jaffray -- Analyst

And can you just remind us again on the economics of how those JVs work?

Steve Filton -- Executive VP & CFO

Yeah. Again, difficult question to answer in a generic or blanket way. Every conversation is different. I've sort of described, we have these conversations with acute care hospitals and in some instances our Gulfport acquisition from last year is an example of one where the acute care system just agrees to sell us their hospital, their behavioral facility. They don't really want to joint venture, et cetera. We've done a few of those. We have others where we've just leased a unit, some -- a couple of our Baylor JVs are just a leased unit from them. One of our Providence JVs is just a lease unit from them.

And in other cases, we've entered into a natural joint venture where we've built new capacity. We've done that with Providence. We've done that with University of Pennsylvania here in Greater Philadelphia market. The ownership percentage that the acute care hospital takes varies in each one. So it's very difficult to say here's the model, here is what we would expect to earn from a margin or EBITDA perspective. But I think the bottom line from our perspective is that, because more than 50% of the behavioral beds in the US are run at the moment by acute care hospitals, the business development opportunity and revenue growth opportunity over the next several years is quite significant for us.

Operator

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

Steven Valiquette -- Barclays -- Analyst

Great. Thanks. Good morning. So my question is also on the behavioral side. And seems like the large-scale M&A chatter has seemingly heated up again a little bit in the marketplace. I guess, I'm just curious if you're able to provide any high level color just on your current appetite for larger scale M&A on the behavioral side, given that historically you've been successful completing some larger deals? Thanks.

Steve Filton -- Executive VP & CFO

Yes. So, look, we are not going to comment on any specific deal or specific opportunity or news flow. I think we say all the time and we say it because it's true that, we will explore and evaluate any opportunities that are presented to us, and we're going to look for the highest returns. And as I said, in I think response to a A.J.'s question earlier, we think we have a lot of opportunities to do that, whether it's organic capital investment, whether it's share repurchases, which we think is pretty compelling or whether it's inorganic M&A, we're going to pursue all of those opportunities or at least from an evaluation perspective.

Steven Valiquette -- Barclays -- Analyst

Okay. Maybe one just real quick confirmation question. Just quickly on this discussion on your strong acute same-store revenue growth in 3Q and there was obviously a lot of industry discussion earlier this year around perhaps some acceleration of this greater acuity trend within the in-patient setting. You guys have somewhat dismissed that notion earlier this year for yourselves as far as anything out of the ordinary. And it sounds like for 3Q '18 that might be the case again. Just wondering if you can just give any quick color on that topic, and just confirm that one way or the other? Thanks.

Steve Filton -- Executive VP & CFO

Yeah. I don't know that we dismissed that notion. I mean I think what I have said in the past is, actually, it seems to make intellectual sense that what we're seeing is a rise in acuity in the acute care business, getting back to the question before about seeing more ambulatory and alternative site competition, it makes sense that the business that remains in the acute care hospital is higher acuity business and that the level of acuity would therefore sort of be rising naturally in the acute care industry just generally. So I think we sign on to that.

I think we believe also that acute care hospitals in general, and UHS specifically, has been focused in the last several years on more disciplined documentation, clinical efforts to improve clinical documentation on the part of physicians and the hospital itself. So I think that's having an impact as well. So I think there is that element -- or those elements are contributing to the increase in acuity. And so I don't know that we'd discount that.

Steven Valiquette -- Barclays -- Analyst

Okay. That's helpful. Thanks.

Operator

Your next question comes from the line of Anagha Gupte from Leerink Partners. Please go ahead.

Anagha Gupte -- Leerink Partners -- Analyst

Hey. Thanks for squeezing me in. Steve, so on the acute side, as you point out, it's a little more unpredictable, can be choppy. As you look at your portfolio of hospitals across various markets, and you look at the macro labor trends and the cyclical trends, any color you can offer us on market specific, on a same-store basis what the volumes are looking like and if certain markets are beginning to top out? I guess HCA seems to be seeing at least some tailwinds on their markets and what kind of read across you seeing from yours?

Steve Filton -- Executive VP & CFO

Well, I guess, I'd answer the question in two ways Ana. One is, I think geographically, we've been pretty consistent for several years now about what our geographic trends look like, that the strongest markets, the strongest performing markets have been Las Vegas and Riverside County, California, North Dallas, the District of Columbia. The weaker markets on the acute side have been South Texas, in Amarillo. Again those trends really have not very much in the last several years.

I think more broadly, I would say that those markets, those really strong performing markets from a UHS perspective really saw some very extraordinary growth over the last several years as we benefited from the ACA and Medicaid expansion and economic improvement again in those markets that I ticked off. And I think from our perspective, we were likely to see some moderation in our acute care performance, which I think we saw a little bit in '18. I think some of our peers who are now seeing some strength in their markets are just maybe a little bit behind that cyclical curve from where we were. But I think they are experiencing what we might have experienced a year or two in terms of really extraordinary growth, but I think we continue to put up very solid numbers in our acute care segment.

Anagha Gupte -- Leerink Partners -- Analyst

Yes. That's super, helpful. On the payor mix, again on acute, is there any acceleration in commercial? And then, there was a point in time where Medicare seemed to be a huge source of growth and what is that looking like right now and what might that look like, is the next one to three years we see a whole lot of privatization to Medicare Advantage and build the managed MA plans, B, a little bit more -- push back more on the admissions et cetera?

Steve Filton -- Executive VP & CFO

Yes. So I think that again the payor mix trends that we've described over the last several years have remained pretty consistent at least for us and that is Medicare is probably our fastest growing payor population. Commercial probably grows a little bit slower than our overall, uninsured has been fairly stable. And again, I think those trends have largely continued. I don't think -- I think that the Medicare Advantage penetration of the acute industry is more mature than the managed Medicaid penetration on the behavioral side. So I don't know that we view it as nearly as impactful on the acute side as we do on the behavioral side. I just think we're so much more -- this has been going on for so long on the acute side, it's just so much more ingrained in our business.

Anagha Gupte -- Leerink Partners -- Analyst

Got it. Okay. That's helpful too. So on the managed Medicaid, just one more follow-up to what others have asked. Is this kind of one managed Medicaid player? You had suggested maybe Florida with Magellan and then earlier, I think you saw the Pennsylvania pressures, so is it widespread or is it one player that's being the source of the length of stay pressure here?

Steve Filton -- Executive VP & CFO

I think what we find and it is that it really varies by geography, so there is no single payor who we find is most aggressive nationally. In every market, there may be a payor who is more aggressive, but it seems to me more localized then what I would characterize as really national behavior on the part of any particular payor.

Anagha Gupte -- Leerink Partners -- Analyst

Great. And final one then on the inorganic side. It sounds like you've been at the table for some of the deal activity on the acute side. And can you talk about the pipeline here? You certainly have the balance sheet strength to do it.

Steve Filton -- Executive VP & CFO

Yeah. I mean, look, we're encouraged, we've been looking for attractive not-for-profit acute-care opportunities for many years now. And to be fair, I think they've been relatively scarce. We're encouraged that in the last, I don't know, six or 12 months, HCA has announced a couple of deals that I think, are relatively new to them. That it's sort of the first times that those deals they've probably done in over a decade and we're hopeful that that's reflective of maybe an uptick in activity in that area. But I'll just go back to what I said before, we'll evaluate those opportunities as they arise. They are difficult to predict. We're not -- we don't feel obligated to growth for growth sake. So we'll invest in those opportunities, organic, inorganic, share repurchase, et cetera, as they arise, and as they make sense. And we'll just continue to do that.

Anagha Gupte -- Leerink Partners -- Analyst

Okay. Thanks so much, Steve.

Operator

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

Justin Lake -- Wolfe Research -- Analyst

Thanks. Good morning, Steve. (inaudible) voice left. I'll keep it to one question. Can you just tell us, in the behavioral business specifically you had some negative hurricane impact last quarter or last year in the fourth quarter, I should say? I think it was in Puerto Rico. So, one would think that would be an easier comp. Can you tell us whether there was any negative impact in the fourth quarter already from the hurricanes you've seen this year that offsets that?

Steve Filton -- Executive VP & CFO

Sure. So -- and thanks for bringing that up, Justin, because I probably should have mentioned that before. So, I did, I think, say, in response to a question about the strong behavioral admissions earlier on the call that some of that strong performance in this year's Q3 is because of the comparison to last year, where we had a hurricane impact, by the way not just in Puerto Rico, but we had, I think, it was Hurricane Harvey in Houston and I think Irma in the Southeast. And then, we had a little bit of an impact from Hurricane Florence this year, but I think for the most part, it was fairly minimal.

But in Q4, we had Hurricane Michael, hard to keep track of all the names. We had Hurricane Michael which did unfortunately do significant damage to our facility in Panama City, Florida, which is now closed and probably will remain closed for four to six months. The good news is, all patients and employees were safe and nobody was injured. But that'll probably be a $5 million, $6 million $7 million drag in Q4. So as I was talking about the guidance for the fourth quarter, I should have made the point that where we originally thought that we'd have a pick up because we had a drag in Q3 of last year -- or Q4 of last year rather, we will probably have a relatively comparable drag in Q4 of this year from our Panama City facility.

Justin Lake -- Wolfe Research -- Analyst

And Steve that's must have been a pretty big facility to be that big a drag? Is that -- so, you expect that in Q4, into Q1 as well, we should think about a similar $5 million to $6 million drag?

Steve Filton -- Executive VP & CFO

Yeah. I mean the reason it becomes a drag of that magnitude, Justin, is the sort of -- it's one of these (inaudible) between things, a facility that is going to be sort of offline for that period of time, we're going to continue to keep everybody on the payroll and effectively maintain our cost structure, while we're generating essentially no revenues. So that's what creates a drag, even in a facility that may not be the largest facility we have, et cetera.

I will say, it's a bit of a timing issue and that I think ultimately most of this loss will be covered by insurance. But we tend to account for our insurance proceeds on a cash basis, so it will be a drag in Q4. I think it's a little too early to say how much of a drag it will be in Q1. Ultimately, I think we'll recover most of the loss sometime next year.

Justin Lake -- Wolfe Research -- Analyst

Got it. Thank you very much.

Operator

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

Gary Taylor -- JPMorgan -- Analyst

Hi. Good morning. Just a couple quick ones. On the -- going back to topic of the day, I guess the length of stay pressure on the behavioral side, are you seeing that primarily on IPF or is it also the RTC and can you give us the latest updated either bed or revenue split between IPF and RTC?

Steve Filton -- Executive VP & CFO

So I think for a revenue perspective, Gary, and I'm doing this off the top of my head, I can provide better work clarity later, but I think about 75% of our revenues now come from acute. Behavioral revenue is maybe 12% or 13% from residential and the remaining from what we would describe as specialty, which include addiction services, out-patient or management contract business, et cetera. And most of the length of stay pressure, I think, is clearly from the acute business. We see a couple of residential facilities, which have experienced some length of stay pressure, but I think it's mostly an acute issue.

Gary Taylor -- JPMorgan -- Analyst

Great. My last question, on the administration's announcement around Part B yesterday, I mean, hospitals do separately bill under OPPS about a third of the total Part B drugs. I think that would equate to about 1% of the hospital industry's revenue. So the question is, do you contemplate any measurable impact from the announcement yesterday, and the other policy is just the site neutral impact, do you contemplate any measurable impact from that proposal?

Steve Filton -- Executive VP & CFO

I don't believe so. And I think and I don't have them in front of me. So again, I'm doing this off the top my head, Gary, but I would guess that UHS's out-patient percentages of revenue are much lower than the industry standards you said. I mean I think that those are really inflated by hospitals that have, for instance, big out-patient oncology programs et cetera, that for the most part, I think, we have not really participated in. So my sense is that the impact on us is relatively minimal.

Gary Taylor -- JPMorgan -- Analyst

Yeah. Thank you very much.

Operator

There are no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Steve Filton -- Executive VP & CFO

I would just like to thank everybody for their time and look forward to speaking with everybody next quarter.

Operator

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

Duration: 65 minutes

Call participants:

Steve Filton -- Executive VP & CFO

Matthew Borsch -- BMO Capital Markets -- Analyst

Steve Tanal -- Goldman Sachs -- Analyst

A.J. Rice -- Credit Suisse -- Analyst

Frank Morgan -- RBC Capital Markets -- Analyst

Kevin Fishbeck -- Bank of America Merrill Lynch -- Analyst

Unidentified Speaker --

Ralph Giacobbe -- Citi -- Analyst

Josh Raskin -- Nephron Research -- Analyst

Ann Hynes -- Mizuho Securities -- Analyst

Sarah James -- Piper Jaffray -- Analyst

Steven Valiquette -- Barclays -- Analyst

Anagha Gupte -- Leerink Partners -- Analyst

Justin Lake -- Wolfe Research -- Analyst

Gary Taylor -- JPMorgan -- Analyst

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