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Universal Health Services, Inc. (NYSE:UHS)

Q1 2017 Earnings Conference Call

April 26, 2017 09:00 AM ET

Executives

Alan Miller – CEO

Steve Filton – CFO

Analysts

Joanna Gajuk – Bank of America

Gary Lieberman – Wells Fargo

Frank Morgan – RBC Capital

Chris Rigg – Deutsche Bank

Sarah James – Piper Jaffray

A.J. Rice – UBS

Justin Lake – Wolfe Research

Ana Gupte – Leerink Partners

Ralph Giacobbe – Citi

Whit Mayo – Robert Baird

Ann Hynes – Mizuho Securities

Operator

Good morning. My name is Toni, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings conference call. [Operator Instructions] Thank you.

Mr. Filton, you may begin your conference.

Steve Filton

Thank you. Good morning. Alan Miller, our CEO, is also joining us this morning. And we welcome you to this review of Universal Health Services Results for the First Quarter ended March 31, 2017.

During this 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 the careful reading of the section on Risk Factors and Forward-looking Statements and Risk Factors in our Form 10-K for the year ended on December 31, 2016.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $2.12 for the quarter. After adjusting for the favorable impact from our January 1 adoption of ASU 2016-09, as discussed in our press release and the depreciation and amortization expense associated with the implementation of electronic health records, applications at our acute care hospitals, our adjusted net income attributable to UHS per diluted share was $2.10 for the quarter ended March 31, 2017.

On a same-facility basis in our acute care division, revenues increased 4.8% during the first quarter of 2017. The increase resulted primarily from a 5.1% increase in adjusted admissions, and a 0.4% decrease in revenue per adjusted admission. On a same-facility basis, operating margins for our acute care hospitals decreased to 19.7% during the first quarter of 2017 from 21.1% during the first quarter of 2016.

On a same-facility basis, revenues in our behavioral health division increased 1.4% during the first quarter of 2017. Adjusted admissions to our behavioral health facilities owned for more than a year increased 2.4%, and adjusted patient days increased 0.2% over the prior year first quarter. Revenue per adjusted patient day rose 1.1% during the first quarter of 2017 over the comparable prior year quarter. On a same-facility basis, operating margins for our behavioral health division increased to 25, excuse me, decreased to 25.6% during the quarter ended March 31, 2017 as compared to 27.5% during the comparable prior year period.

Our cash provided by operating activities increased to approximately $483 million during the first quarter of 2017 as compared to $475 million in the first quarter of 2016. Our accounts receivable days outstanding declined slightly to 50 days during the first quarter of 2017 as compared to 51 days during the first quarter of last year. Our ratio of debt-to-total capitalization declined to 45.2% at March 31, 2017 as compared to 47.7% at December 31, 2016. We spent $144 million on capital expenditures during the first quarter of 2017.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Kevin Fischbeck with Bank of America.

Joanna Gajuk

This is actually Joanna Gajuk filling in for Kevin today. So first on the psych business, if I may. So same-store revenue growth decelerated, right, to 1.4% from like a 2% growth, call it, from second half of ’16, right? So there’s probably a leap year impact there, right, which maybe the 100 basis points, is that right?

Steve Filton

Correct.

Joanna Gajuk

And then, was there also maybe some headwinds still from the exchange rates, right, because in the Q4, you said it was about 100 basis points. So was it also in that ballpark?

Steve Filton

Yes. I think it was a little bit lower, but yes, we have the same sort of directionally currency impact in the quarter.

Joanna Gajuk

Okay. So I guess if you adjust for those two things for the leap year and the exchange rate, so maybe your kind of say, core sort of same-store revenue growth was maybe 3%, 3.5%. So what I’m getting at, and the main question that I have here is last quarter you kind of talked about your expectations for that business to come back to a 5% call it, same-store revenue growth by the end of the year. So do you feel like in traction, you’re getting towards the target, and how you’re going to get there whether it’s 3% or 3.5% kind of starting point for the year?

Steve Filton

Okay. Thanks, Joanna. Yes. So I think everything that you said is accurate, and I think for the most part, we feel like we’re largely on track to continue to improve. I think we started to see improvement in our behavioral volumes and consequently, revenues in the back half of 2016. I think admission growth continued to improve into the first quarter, and we continue to adhere to our guidance, which is that we anticipate exiting 2017 at about a 5%, 5.5% same-store revenue growth rate in behavioral which would restore us to sort of where we were right around the middle of 2015 when we started to suffer from labor shortages, both physicians and nurses in a number of our hospitals.

Joanna Gajuk

Okay, that’s good to know. And a follow-up to that was — so the one thing I’ve noticed was for the same-store length of stay was actually down 2% year-over-year. And I guess it was somewhat stable in ’16. I mean, prior to ’16, you had multiple years of declines but I guess ’16, it seemed like it was stabilizing. So is there something that you’ve noticed in Q1? Or is there some impact from the leap year effect here? How should we think about length of stay in terms of same-store, and how’s that kind of impacted the adjusted patient days?

Steve Filton

Yes. So well, length of stay was down about 2% in the quarter as you note and that obviously has a muting impact on revenues because virtually, all of our reimbursement is on a per day or per diem basis in the behavioral business. The decline in length of stay was in our acute behavioral business. We’re doing, I think some further analysis, but anecdotally, as I talked to the hospitals, it seemed like it seemed to be focused on the managed Medicaid portion of our business, but it wasn’t really focused specifically on a particular payer or a particular geography or a particular hospital.

It didn’t strike me in the work that I did in reviewing it to be necessarily indicative of a continuing trend. And as you point out, length of stay has been relatively stable for well over a year now. So we’ll see as we move forward, but, and I did notice that our public peer announced a similar decline in their U.S. length of stay during the quarter, and I don’t know if they had any comments on it, but it seemed, we seem to have a similar dynamic.

Operator

Your next question comes from the line of Gary Lieberman with Wells Fargo.

Gary Lieberman

Maybe can you update us on your JV pipeline with hospitals that you’ve talked about in order to attempt benefit from the changes to the IMD exclusion?

Steve Filton

Yes. I mean, what we’ve said before, Gary, I think is, remains largely true, and that is, we continue to have a large number of conversations with a variety of not-for-profit hospitals, largely not-for-profit, actually, some for-profit hospitals around the country about being able to joint venture with them in some way to help them run their behavioral operations. Some of those conversations have already been executed and acted upon. We had, as I think we’ve mentioned before, probably 7 or 8 existing arrangements that, quite frankly, have been existing for quite some time now.

We announced a couple of new hospitals that we’re building in conjunction with acute care systems last quarter or the quarter before that. And we continue to have significant number of conversations with other hospitals. We continue to believe that, that opportunity that we describe as acute care integration is probably our single biggest, at least domestically, the business development opportunity over the next several years. And we are very focused on it and devoting a significant amount of resources to it.

Gary Lieberman

So maybe, can you just update us on where you are in U.K. and the CMA review? And any remedies that you guys may expect to offer up?

Steve Filton

So we got the report from the CMA last Friday, late last Friday on the markets that they have expressed some concern about. The way the process works, is we have until this Friday to decide whether we want to offer a remedy, as they describe it, which would be the divestiture of certain facilities. We are, literally, as we speak, going through the process of cost-benefit analysis of whether we think offering a remedy is an appropriate solution or whether we would just rather go to a Phase II review, where we think we might have some fairly robust and valid arguments that might cause the CMA in Phase II to modify their position, and we have to see.

If we offer remedies this Friday, the CMA has until May to respond to those remedies and decide whether they are in their minds adequate. And if they decide they’re inadequate, we would also go to Phase II. So obviously, within a couple of days, we’ll make an announcement of what we have chosen to do.

Gary Lieberman

I guess, maybe just to follow up on that. Have they said or have they told you how many actual facilities are under review? And if you do go to a Phase II review, is there any negative financial impact you’ve met?

Steve Filton

So there are basically, I think 5 individual markets that the CMA has identified as having some level of concern with. I think the answer to your question is if we go to a Phase II, we don’t really believe that there’s any material implication in the sense that, and I think we were clear about this when we announced the transaction, that because our presence in the UK is relatively small and the transaction itself is relatively small, there were no significant synergies to be realized by the combination of our existing business and the Cambian adult business. So any delay is not really costing us in terms of being able to achieve some measurable amount of synergies. So we’ll make a judgment again about whether the costs of going through Phase II, how that compares to the benefit of potentially getting the CMA to modify their position.

Alan Miller

Also, were we to sell a facility or two facilities, there’s a robust market in the UK And we would recoup whatever we sold the facilities for. So we have to see what that all means.

Operator

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

Frank Morgan

Certainly, HCA and even then they actually called out commercial mix shift. Are you seeing anything like that in your acute business?

Steve Filton

Frank, I don’t think so. We got some questions last night about the relatively flattish acute care revenue per admission and inquiries about whether that sort of implied some issues with payer mix. I think as we looked at our payer mix for the quarter, it seemed to be pretty consistent with what we’ve been running. And I would think that what is really sort of driving or the impetus behind that relatively flat revenue per admission are two things. One is simply mechanical and that is as we’ve talked about at some length, we opened our Henderson facility in the fourth quarter of last year in Las Vegas.

As Alan mentioned on our year-end call, it’s doing quite well. It’s ramping up rather robustly, but obviously, its results and its revenues are in our non-same-store numbers to the degree that some of its business is coming from our existing facilities, and there’s a cannibalization of some of our existing revenues in Vegas that’s impairing or muting, I guess, a better word, our same-store revenues in the Vegas market. So there’s a little bit of shift in my mind from same-store to non-same-store.

And I think the other issue that we did see in the quarter was a bit of a decline in acuity. And again, nothing that I sort of view as worrisome or troubling in the sense that our surgical volumes were rather strong in the quarter. Surgeries were up 3% or 4% between in and outpatient. But our medical volumes were up even more, given the fact that our same-store adjusted admissions were up 5%, medical admissions were up even more. And the increase in medical admissions which tend to be lower acuity just skewed those revenue per admission numbers down a little bit. But I think that’s more a function of a relatively robust admission numbers than anything else.

Frank Morgan

Got you. And on the ED, emergency department, ER volumes, what were those on the same-store basis?

Steve Filton

I think our ER volumes were up also, like 3% or 4% in the quarter.

Frank Morgan

Okay. Maybe, if I can, just on the behavioral side. I think you’re acknowledging that you’re going to see some growing momentum in census that started last year and carrying on. Could you give us any color on how that volume moved across the months of the quarter? Did you end, say, the third month of the quarter at a high note? Or was it flat? Any kind of color on the possibility of growing momentum in census?

Steve Filton

No. Other than what I said before, I mean, I think that stepping back from the quarter, and stepping all the way back to the back half of last year, I think beginning in Q3 of last year, we began to make some progress, particularly on this labor shortage issue. And I think our admission started to grow, albeit gradually and pretty incrementally, but we saw improvement in Q3, improvement in Q4, a little bit more improvement in Q1.

Within the quarter, I wouldn’t say there was any particular trajectory to point to, but again, over the last few quarters, I think that the trajectory has generally been incrementally positive, and we would hope that would continue through the balance of the year, and that certainly what our guidance is based on.

Frank Morgan

Got you. One last question. On the 5 markets identified by CMA, how many beds or how much revenue would those 5 markets represent? And I’ll hop off.

Steve Filton

I’m not sure I know the answer to that question, Frank. I think what we’re trying to, really more precisely, I think quantify is what other satisfactory remedy to the CMA would involve in terms of EBITDA that they would be asking us to divest. I’m not sure we certainly have a sense of what exactly that number is, but I would certainly make the argument that in terms of our consolidated EBITDA, it’s a very minor number. We have a next question?

Operator

Yes. Your next question comes from the line of Chris Rigg with Deutsche Bank.

Chris Rigg

I got on a little late here. So hopefully this wasn’t covered, but when I look at the behavioral segment, EBITDAR margin down roughly 200 basis points year-to-year. Obviously, there are several moving factors there, but you’ve got the leap year, you’ve got the FX, and then sort of the core staffing concerns that have been out there for a while. Can you sort of just maybe flesh out those 3 items, just to give us a sense for what sort of anomalous because of the calendar in FX versus sort of core pressure?

Steve Filton

I mean, I think the fundamental issue, Chris, and I think we’ve been pretty candid about this for a bit now, is that with same-store revenue growth of 1.5%, it is extremely difficult to have, I think in any sort of practical expectation of an expanding margin. We think we need to get to probably 3% or 4% same-store revenue growth to even begin to sort of have the possibility of expanding margins. And if we exit the year as our guidance suggests that we will at 5%, 5.5% revenue growth, then we believe, we will return to a model where we’d have expanding margins. But I think the reason that you see contracting margins currently is simply because our current revenue growth is not sufficient to support the increase in expenses.

And I think we talked about this in the last quarter or 2, the current expense load does incorporate some investment in solving the labor shortage problem. Meaning, in wage increases in certain markets that we’ve had to make to be competitive as well as temporary use of, or use of temporary nurses and temporary physicians, so there’s some amount of what I would call extra or excessive expense as well. So until we get that same-store revenue growth up to a somewhat higher level than we are today, I think we’re going to be faced with these relatively stagnant or even declining margins.

Chris Rigg

Got you. And then on the labor issue, and I’m not even sure if this is the right way to think about it. But can you give us a sense do you think you sort of fixed the problem, are you 80% of the way to fixing the problem, 50%? I’m just trying to get a sense for where you think you are in terms of getting things completely under control and sort of back to normal inflationary trends.

Steve Filton

I get asked that question a lot, and it’s a difficult one to answer because it sort of implies that it’s kind of a fixed or static issue, and you can sort of measure, as you ask the question, you measure your sort of percentage of achievement. And the challenge really is that it’s very fluid and I think we’ve made a lot of progress on hiring nurses and physicians and filling vacancies. We’ve worked hard to increase our retention rates and reduce our turnover rates, but they’re constantly changing. I mean, literally, every quarter, we’re hiring new nurses, and some are leaving. I sort of think about it as a process in which we take two steps forward and one step back.

We make improvements, I would cite, Boston is a market that was maybe at one point in time, our number one more challenging market from a labor perspective. We’ve got multiple facilities in that market, and I think all of them are really running kind of back to normal levels with the exception of maybe one. But a couple of other markets have proven to be a little more problematic in the interim. So I think we’re making net progress, and I think that net progress is reflected in that incrementally growing admission number. But it’s hard to peg it as a sort of a percentage of achievement towards the ultimate goal. It’s sort of a constant and continual process.

Operator

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

Sarah James

So in the past, you’ve kind of framed up where you are with the labor shortage in terms of bed closures. And in the past, I think you’ve talked about making good progress being maybe like a quarter or a third of the way there, and with the goal of reopening all of the closed beds by the end of the year. Do you still feel like that’s a realistic goal? And are you any further down the line towards reopening beds?

Steve Filton

Yes. I mean, I appreciate the question, Sarah. I think as I was saying to Chris, we absolutely have reopened a number of units where we had closed beds. We’ve uncapped census in a number of facilities where we had previously capped census. And I think again as I was addressing Chris, on a net basis, I think we have less closed beds or uncapped census today than we did six months ago or nine months ago.

But to be fair, I think we still have some places where we are still suffering from a lack of clinicians, whether they’d be nurses or psychiatrists. And we continue to address those as we go forward, look, I’m a financial guy, who’s very objective, and I just continue to point to the admission data as really the proof in the pudding here rather than any sort of labor metric that to me, the proof that we’re making net progress is that our admissions are growing incrementally each quarter for the last three quarters.

Sarah James

Okay. Then a clarification on the length of stay. It sounded like you’re indicating that this is an industry-wide trend for the behavioral health sector. I just wanted to clarify that there were no policy changes that impact how you evaluate the necessary length of stay, that this was more a factor that you did not I guess, direct.

Steve Filton

Yes. So just to be clear, I mean, I’m not sure that I was bold enough to suggest there was an industry-wide trend, simply to note that our peer in the behavioral industry who also reported publicly last night had a, what seemed like a similar decline in their U.S. length of stay. So I’m not sure that’s the same as describing it as an industry trend, but no. In response to the second part of your question, as we did the analysis, it is not apparent to me, in any way that we are changing our policies.

Length of stay, I think is largely a payer-driven issue. And sometimes when payers put additional pressure on us, it takes us a little bit, a little while to get our response in place, et cetera, or even realize that quite frankly, we’re under pressure. So there may be some of that going off, but we haven’t internally changed any of our policies.

Sarah James

Okay. And last question here is on the joint ventures. For the ones that you’re kind of stepping into like a Baylor or Providence, their large systems, how do you think about the time line to when you can start to have those conversations about expanding system wide? How close are we to that step?

Steve Filton

Well, I think to some degree, we’re already there. I mean, we have multiple arrangements with Baylor, and we have multiple arrangements with Providence. So I think that we’ve already demonstrated a level of expertise and competence that has given them confidence to do further deals with us, further joint ventures. There is no sort of prescribed time line in our arrangements or in our contracts.

I think this is as you might expect with any sort of a vendor, the notion of gaining confidence from the company that you’re serving, and hoping that in doing so, they’ll allow you more opportunity and more responsibility. And again, I think we’ve demonstrated that in the case of both Baylor and Providence, and I think we’ll, we hope to continue to do that with lots of other hospitals and hospital systems around the country.

Operator

Your next question comes from the line of A.J. Rice with UBS.

A.J. Rice

Maybe a couple of questions, if I could. You’ve obviously seen a nice strength in the absolute admissions on the site side, and especially, given the leap year day in the first quarter. I wonder, as you’ve drilled down, obviously, there’s been some adverse publicity around the site business — are you seeing any impact at all from that, that you can discern of maybe the facilities that have already been discussed? Are they seeing any different trends than the ones that haven’t? Just and any, is there any update in discussions with the regulatory authorities that’s worth highlighting?

Steve Filton

So I think that, at your last question, A.J., there really is nothing substantive to report on a sort of a status update regarding the large government investigation. There’s really nothing new there. As far as your other question about have we really seen an impact on the underlying business since then, I think the most recent negative publicity began in early December, I think we’ve said a number of times, we’ve said it on the year-end call, and I’ll just reiterate it today, I think the answer to that is no.

We really see no response from our referral sources of any measurable note. We’ve seen no response from our own clinicians and a change in their behavior. Honestly, the single biggest reaction, external reaction that we’ve gotten to that and to the media reporting has been from the investor community, not from clinicians themselves.

I think clinicians have tended to discount that reporting as being largely anecdotal and not an accurate depiction of what it is really like to run a behavioral hospital in the U.S. So no, I mean the short answer to your question is no. And again, I’m just going to go back and say Q1 is the first full quarter we had since these articles started to appear, and our admission growth actually ticked up in the quarter.

A.J. Rice

Right, right. Then maybe I could ask you about capital deployment. You guys just standout that your debt-to-EBITDA is approaching two, I guess, now the lowest by — well range in the industry. You made an opportunistic buy of some shares in the fourth quarter, you slowed it down a bit in the first quarter. Is this approach on share repurchase really to try to look for the opportunistic situations like you had in the fourth quarter? Or you think we’ll see a pickup in that? And maybe as an alternative deployment of capital for de novo projects or for acquisitions, what are you all seeing out there?

Steve Filton

Look, I’d make the one comment, being that the first quarter is the most difficult sort of the mechanical quarter for us to be a repurchaser of shares. We literally have about a two week window during the quarter where we are not in a quiet period, and just the first couple of weeks of March, and sometimes it’s a little bit awkward to manage through that.

Look, I think we continue to believe that we’re very bullish about the prospects of the company’s future earnings potential in both divisions and as a consequence, I think that we view share repurchase as an attractive use of capital deployment. And I think we’ll continue to be an active purchaser of our own shares throughout 2017, as I think we represented we would be as well as continue to investigate other potential acquisition and deployment opportunities because I think our capital structure is such that we have a lot of flexibility to do both.

Operator

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

Justin Lake

I’m going to follow up on A.J.’s question for the second time this morning. I’d love to hear Alan, just your view, big picture on capital deployment. You’ve created, Alan, a lot of value for shareholders over time. And a big part of that in my mind, I’ve been covering the stock for pushing 20 years now, is how disciplined and thoughtful you’ve been on capital deployment, whether it was the original site facility buys, the PSY deal, and also, aggressively buying back your stock, even going as far as doing big ASRs and levering up to do them.

So with 2 times leverage and a free cash flow, this 6%, 7%, probably the biggest question I get is how you deploy capital from here? So can you give us kind of your updated kind of state view of the world on capital deployment and M&A and share repurchase? I’d really love to hear it.

Alan Miller

I think that I’ll reiterate that we are opportunistic. We’ve been in a fortunate position that we’ve been consistent with earnings, and we certainly have a big bank line and all the capital that we would need in the foreseeable future. So whatever is opportunistic for us, we take advantage of. Steve talked about difficulty in buying our shares in the first quarter. We think our shares, and I think the Street usually thinks that they’re good values just not undervalue, but we’re always looking at deployment of our capital, where we think we can do well with it.

We’re very excited about the 2 new hospitals that we built in acute care. We’re excited about our acquisition in the U.K. our latest acquisition. We’ve got to work our way through it, obviously. But we’re excited about all of those. So depending on what appears to us opportunistically in good returns, that’s what we follow. So just to reiterate, we can buy stock, we can buy a company or a small company. We can build a hospital or a number of hospitals. So we have all of those avenues open to us.

Justin Lake

And Alan, can you just tell us what, do you see a robust M&A pipeline? I mean, the, obviously you’ve done some of those site deals that are certainly interesting, but you generate so much cash that the, I think people are somewhat surprised that you’re paying down debt at these leverage levels rather than buying back more stock. I mean, are there mechanical ways to accelerate share repurchases whether it’s an ASR or whatever, so that you don’t run into these mechanical issues? And maybe that is just you’re seeing a big M&A pipeline. So if you just follow up with that, that would be really helpful.

Alan Miller

I think there are all of those. I think we would like to buy shares. There is an M&A pipeline. We’re very excited about the Cambian Adult business that we bought. Cambian was offered, as you may know, for the last few years, a whole company, which we weren’t interested in, so we opportunistically bought the business that is profitable. We’re very excited about that. We’re excited about opening the hospital in Henderson. We like our shares. I don’t know what else to say other than we look at all of these things.

Operator

Your next question comes from the line of Ana Gupte with Leerink Partners.

Ana Gupte

The first question I had was on acute, on bad debt, and I apologize if someone asked this. It did pick up, and you guys have all had a pretty solid 2016. So is this about exchange attrition or something else that’s going on or just one-offs?

Steve Filton

So I’m sure people who listen to our calls regularly feel like I sound like a broken record on this issue. I always make the point that we never look at bad debt expense in isolation, that we only look at uncompensated care in total, which is bad debt and charity care and uninsured discount. And we also look at it as a percentage of gross revenue because it is impacted by our gross pricing, uncompensated care, the nature of our accounting will always be that it will increase at a minimum by the amount that we increase our gross pricing.

And when we look at our 2017 Q1 uncompensated care in total as a percentage of gross revenue, it is exactly flat with the first quarter of 2016. So while I can see that bad debt expense increased significantly, I think that the total amount of uncompensated care really has not changed in a measurable way between Q1 of ’17 and Q1 of ’16.

Ana Gupte

Okay. So nothing, no trends outside of the accounting for it. Nothing that you’re seeing that should change the uncompensated care on a go-forward basis for ’17?

Steve Filton

No. Look, I think we have acknowledged, probably since the middle of 2015 that, after a year and half, beginning in the beginning of ’14 of uncompensated volumes declining fairly dramatically, that beginning in 2015, they started to creep back up for I think some of the reasons that you alluded to, Ana, which is that, first of all, I think that the benefit, the significant benefit from the Affordable Care Act leveled off. I think there was some disenrollment in the exchanges as premiums went up. I think some people got the care that they were looking for, and maybe disenrolled from the exchanges as a result of that.

But I think that trend has been fairly steady. We don’t see it necessarily accelerating. We believe we’ve incorporated it in the net revenue guidance that we give, so when we talk about acute care net revenue going up 6%, or anticipated going up 6% in 2017, that already presumes a slight and continued uptick in uncompensated care. But no, I don’t think we’re seeing any changes that we did not anticipate.

Ana Gupte

Okay. Then moving on to behavioral. The slide say the length of stay declined, I think the question has been asked about that the revenue per patient day and the mix shifting to Medicaid, I’m assuming, is a piece of it. How much pressure are you seeing, if any, on commercial contracting in a downward? And should we think about that as it’s going to be flat going forward?

Steve Filton

So I think we have talked about pricing, sustainable pricing in the behavioral division to be in the kind of 1% to 2% range. So when we talk about hoping to exit the year at 5%, 5.5% volume growth in behavioral, which is sort of getting us back to where we were before the labor shortage began, we’re really thinking of that being composed of 3% to 4% volume and 1% to 2% price.

If you look at our pricing for the quarter, our revenue per patient day, per adjusted patient day is right in that 1.5% range, particularly if you adjust for the currency fluctuation. So I think from a pricing perspective, we’ve been where we think we’re going to be and we were in the first quarter. So I think on the behavioral side, the outstanding variable remains volume. And what will be required for us to get from where we are today to where we hope to be at the end of the year is an increase in volume.

Operator

[Operator Instructions] You have a follow-up from the line of A.J. Rice with UBS.

A.J. Rice

I thought that maybe I just come back. Any comments that you guys would care to make on what’s happening down, and watching with the ACA repeal and replace, where you see that? I know, Alan, you follow pretty closely. Second, I know you’ve gotten a way from talking about your exposure, but I think it’s relatively modest you perceive to some of the changes that are being made, but any updated thoughts on — of the acute and behavioral and what your exposure might be to some changes? And then I guess, the third aspect to this question is the administration.

The new administration clearly is asking for people to give them insights on what regulatory changes they might like to see. And it has been instructed in healthcare, there just doesn’t seem to be that much, that healthcare providers or payers are bringing forward, at least overtly. And I wondered if there was anything that would be on a wish list that you guys might put in front of the administration in terms of regulatory changes that would be helpful.

Alan Miller

A.J., we got some information this morning, but I don’t know what you could make of it. I don’t think we’re going to see anything in the short run. I mean, the House, the 2 sides of the Republicans in the House have been talking to each other. And this morning we saw a couple of changes, but they haven’t come up with a consistent plan to be voted on, and then after that, it has to go to the Senate. So I don’t think we’re going to be looking at anything in the short term. I really don’t. And I’m familiar with all the different changes that they’ve been talking about, but I don’t think it makes sense to get all concerned about it.

They’re trying to, a lot of different things, they’re trying to keep the insurers in line, and there’s a lot of ways to do it, subsidy. We did go through this in great detail, but I don’t think it’s worthwhile. The bottom line is, I don’t think we’re going to see anything in the short term. I don’t think they’ll even get to a vote because they learned that it doesn’t make sense to bring it up to a vote if you don’t have the votes. I think Ryan is learning about how these guys, how it should work. What was your other question? Also, just give me a call, A.J.

Steve Filton

So A.J., I mean, you asked about our exposure. I mean, and look, I think the point that we made when repeal and replace was being discussed, was that we really have said fairly consistently from the outset that our behavioral business has benefited very little from the Affordable Care Act, and therefore, to the degree that it is scaled back. We don’t think the behavioral business would be impacted much. I got into a lot of questions a few weeks ago when the Republicans first floated this idea of getting rid of the essential health benefit, and I’d made the point that I don’t think again that our behavioral business has benefited a great deal from the essential health benefit.

I think that the real benefit to the behavioral business from a benefits perspective was when mental health parity passed, legislation passed several years ago. And that’s really what I think has increased and made more robust behavioral coverage around the country. And I think as long as mental health parity remains in place, and to the best of my knowledge, there is no conversation in any corner of the legislative activity that suggested that is in any way, is being tinkered with. I think that we should be in pretty good shape there. Your last question, I think about the industry suggesting regulatory changes, first of all, I think we would largely do that through our industry organization.

But I think the second part of that is maybe why our lobbying organization has been not quite so aggressive about that is because they’re really fighting the, what I think the big battle is at the moment, which is ACA repeal. And I think that’s occupying their attention.

Alan Miller

Yes. The point that Steve made just bring us back to the point I was making earlier about all the changes. I mean, essential benefits, they’ve been arguing about it. So what they came up with was, it seems to me a very lenient way for all the states to get exceptions. So what do you have? Depends on what states, one which, have exceptions based on what? Of the essential benefits. So you really don’t, we don’t have anything to really comment on that I think that’s worthwhile at the moment.

Operator

Your next question comes from the line of Ralph Giacobbe with Citi.

Ralph Giacobbe

I hopped on late, so apologies if this was already addressed. But can you give a sense of same-facility EBITDA? And maybe what that was down year-over-year kind of on a dollar basis? And if you can give the contribution of maybe non-same facility, that would be helpful.

Steve Filton

So I think on the acute side, Ralph, same-facility EBITDA was down like 2%. And I would make the point that I think that was very much within our expectations. We were asked maybe even by you directly on the Q4 call whether it was possible that acute care EBITDA could be down in Q1, given how robust the numbers from Q1 of ’16 were. And I think we said that not only was it possible, but I think we thought it was likely. So same-store EBITDA was I think down 2% in the acute. I think full non-same-store EBITDA was actually up 2%, and that’s largely I think the Henderson impact that I discussed before. On the behavioral side, I think same-store EBITDA was down like 5% on the behavioral side.

Ralph Giacobbe

Okay. All right, that’s helpful. And then anything on the health plan business? Is that something you’re still testing? Do you want to grow it? How’s performance been? Just any thoughts there.

Steve Filton

Yes. I think we have said fairly candidly that the health care business in its first couple of years has been a drag on our acute care results and margins, but that we thought 2017 was an important transition year in which we would really minimize that drag. And I think, at least in the first quarter, that was the case, I think we had a few million dollars of losses, but nothing that I think materially impacted the numbers. And we would certainly expect that trend to continue.

Operator

Your next question comes from the line of Whit Mayo with Robert Baird.

Whit Mayo

I might just sneak one in here. Just looking for an update on foundations, and then maybe how that is trending versus your expectations. And do you think about getting much larger in the addiction space going forward?

Steve Filton

Yes. Whit, when we bought foundations, I think we acknowledged that it was sort of a transition period for the addiction treatment business largely moving from sort of an out-of-network model to an in-network model. And one of the attractions to us of the foundation itself was that it sort of had a blend of business, and therefore, we thought could and would make that transition more easily than another company that was really more exclusively reliant on the added network model.

I think in the short period that we’ve owned them, they are going through that transition, and there’s some temporary disruption. And we’re working our way through that. I think we feel like over the long run, the demand, especially for addiction treatment services, is doing nothing but increase. And we still think it’s a smart thing to have a significant presence in that business. And so we continue to focus on working our way through transition in the model by being able to take advantage of that demand as it grows.

Operator

Your next question comes from the line of Ann Hynes with Mizuho Securities.

Ann Hynes

I’m getting back to Washington since Trump is introducing his tax plan today, and based on our analysis, any change in the statutory rate is very good for Universal. With that potential change in capital allocation plans, any, maybe an increase of dividend or anything like that?

Steve Filton

So Ann, I mean, I think we would concur with your 20,000-foot analysis, which is that likely, almost any reform and reduction in the corporate tax rate would benefit a company like ours, which is basically a statutory rate taxpayer. But I think we’re still so far away from any relevant details or being able to really calculate what the impact would be. It would be sort of wildly premature for us to say that we’re going to take this windfall and reinvest it in a particular way that I think we’re a long way away from that. But we’d certainly concur with the notion that if the Trump administration is able to advance tax reform, and I mean, incorporate tax reform in a meaningful way, we should be a beneficiary on that.

Ann Hynes

Okay, great. And on the de novo facilities, this seems to be a very successful strategy for you. Is there any other markets that you currently operate in that you see more de novo facilities?

Steve Filton

Sure. I mean, in the, I think if you look at our history, one of our most significant strategies has been enhancing our existing franchises, and we’ve built new hospitals in any number of our existing markets. We’ve built 3 new hospitals in the Vegas market, and with the Henderson, that’s actually the fourth new hospital that we’ve opened in the last 10 years or 12 years. We’ve opened the new hospital in Riverside County, California. And I’m not going to get into details because I think we have for certain competitive reasons, we like to keep our strategies sort of close to the vest.

But we are certainly looking at other markets where expansion would make sense to us, where we have a strong franchise currently, and have desire to take advantage of a continuing growth in the market and strengthening our franchise in those markets. But yes, absolutely, that’s a continued focus and likely a continuing strategy of ours.

Operator

And there seem to be no further questions at this time.

Steve Filton

Okay. Well, we’d like to thank everybody for their time and look forward to talking with everyone next quarter.

Operator

Thank you for your participation. This does conclude today’s conference call. You may now disconnect.

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