Universal Health Services Stock

Good day, and thank you for standing by. Welcome to the Q3 2026 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Darren Lehrich, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Universal Health Services Third Quarter 2026 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will offer some remarks about the quarter, and then we'll open up to Q&A.

During today's conference call, we 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. We 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 December 31, 2025, and in our Form 10-Q for the quarter ended June 30, 2026.

In addition, we may reference measures during today's call, such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI and adjusted net income attributable to UHS which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in yesterday's press release and under our supplemental materials on our website.

With that, let me now turn it over to Marc for some introductory remarks.

Thank you, Darren. Good morning, and thank you for joining today's call. I will begin with our key takeaways from the quarter, performance relative to our expectations, the principal operating drivers and progress on our strategic priorities. Before Steve reviews the detailed financial results and our outlook.

Overall, underlying performance in the third quarter reflected sequential improvement in several areas. Acute care demand remained favorable. Behavioral health volumes demonstrated an increase relative to recent quarters and labor trends continue to moderate. Expense management remained disciplined overall. Health insurance exchange trends were consistent with our expectations. Steve will provide the reported financial results and segment metrics in his remarks.

Third quarter results included certain items that were not reflected in the outlook we provided with our second quarter results in July. These items included the benefit from the expansion of existing Medicaid supplemental programs in several states, partially offset by other nonrecurring litigation and transaction costs, which Steve will take you through in a moment. Against that backdrop, I want to highlight 3 operating and strategic priorities: expanding acute care capacity and outpatient access points, integrating Talkspace, and advancing the recertification process at Laurel Ridge Treatment Center in Texas.

First, our recent investments in acute care inpatient capacity helped us meet favorable demand in our markets the additional 177 beds added during the second quarter are expected to continue ramping through year-end. We also expanded our outpatient portfolio by opening one freestanding emergency department in the third quarter and another FED that recently opened during the fourth quarter. In addition, our ambulatory development pipeline is expected to add several outpatient access points over the coming quarters. The key takeaway is that these investments are performing well, broadening access and supporting growth. We expect their contribution to build over time as the new capacity matures.

Second, in behavioral health, we completed the Talkspace acquisition on August 17 and began executing the integration plan. We intend to discuss anticipated synergies in greater detail when we provide 2027 guidance in February. For the balance of 2026, we are taking a phased approach centered on 3 integration work streams. The first, deploying a technology platform and tools that enable smoother transitions of care and greater continuity of outpatient care for UHS patients. Number two, establishing referral flow processes to Talkspace from UHS behavioral health and acute care facilities for both individual therapy and medication management services.

And three, developing more flexible market-based outpatient offerings, initially emphasizing a virtual intensive outpatient program, or IOP, offering designed to address strong demand in this area. We expect these initiatives to support the acquisition's long-term benefits over the next 12 to 24 months. Our priorities are to expand access to outpatient mental health services and strengthen our outpatient growth profile. The key takeaway is that our integration is underway, and the expected benefits will develop in phases as technology, new referral pathways and service offerings are enhanced through our integration efforts. And we'll provide further updates as the integration progresses and the rollout expands across our operations.

Third, at Laurel Ridge, our San Antonio team continues to work productively with regulatory authorities and the local community towards recertification, which we currently expect during 2027. The facility's third quarter financial impact was consistent with the assumptions in our updated July outlook.

In closing, I want to thank the UHS team for its continued dedication to our mission to provide quality care. Our strategy remains consistent, invest in attractive markets, expand access to care, operate efficiently and create long-term value for patients, employees and shareholders. We remain mindful of execution requirements and the ever-evolving operating environment, and we believe the strength of our portfolio, the experience of our management team and underlying demand in our markets continue to position us well over the long term.

With that, I will turn the call over to Steve for additional detail on the quarter.

Thanks, Marc. I will organize my remarks in 4 parts. Reported results in unusual items, segment performance, cash flow and capital allocation and our 2026 outlook. Starting with reported results, the company reported adjusted EPS of $5.22 for the third quarter of 2026, representing a decline of 8% year-over-year. Third quarter adjusted EBITDA less NCI was $625 million as compared to $671 million in the third quarter of 2025. The net out-of-period DPP headwind in the quarter was $37 million when considering amounts recognized for the Washington D.C. program approved in the third quarter of 2025, netted against out-of-period amounts recognized in this year's third quarter.

To distinguish reported results from underlying performance in the third quarter of 2026, 3 specific items not contemplated in our annual adjusted EBITDA less NCI guidance provided in July produced a net favorable impact of $12 million. These items were $47 million of supplemental Medicaid benefit, not included in our July forecast, $26 million of additional professional and general liability reserves primarily associated with the tentative settlement of a litigation matter related to our Cumberland facility in Virginia and $8.5 million of transaction-related costs associated with the Talkspace acquisition.

Excluding these items, adjusted EBITDA less NCI was below our internal expectations despite modest sequential improvement. The shortfall primarily reflected a slower-than-expected ramp-up at our de novo hospitals and softer-than-expected surgical trends.

Turning to segment performance. On a same-facility basis, adjusted admissions in our acute care hospitals increased 4.9% compared with the third quarter of 2025. Volume performance was broad-based geographically and also benefited from capacity additions at 3 hospitals during the second quarter of 2026. Same-facility acute care emergency department visits increased 4.6%, while same-facility surgeries decreased 0.7% compared with the third quarter of 2025. Inpatient and outpatient surgical cases declined at similar levels in the quarter. Inpatient medical admissions significantly outpaced surgical admissions, which negatively skewed pricing trends in the quarter.

By service line, we experienced strength in cardiology, neurology and urology similar to recent quarters. By payer class, adjusted admissions growth for Medicare and Managed Medicare was above the acute care segment average. Volume growth for Medicaid, managed Medicaid and managed care, excluding exchanges, was positive in the quarter, although below the segment average. On a same-facility basis, net revenue in our acute care segment during the third quarter of 2026, increased 4.7%. Excluding the impact of our health plan, same-facility acute care net revenue increased 3.1%.

Acute care same-facility revenue per adjusted admission decreased by 1.7% during the third quarter of 2026 on a reported basis and was slightly positive when excluding the net headwind from out-of-period Medicaid supplemental benefits and the shift in exchange to uninsured volumes. We estimate underlying acute care rate growth was approximately 3% and consistent with recent quarters, after adjusting for these factors and normalizing for the higher inpatient medical versus surgical mix.

Operating expenses continued to be well managed across labor, supply and other expense categories. Same-facility acute care salaries, wages and benefits expense per adjusted admission increased 2.1% and supply expense for adjusted admission decreased 2.3% over last year third quarter. Other operating expenses increased primarily due to our health plan, which experienced revenue growth of approximately 25% in the third quarter. Same-facility acute care segment EBITDA declined 4.5% in the third quarter of 2026. Excluding the out-of-period supplemental program benefit from both periods, third quarter same-facility Acute Care segment EBITDA increased 2.9%.

In our acute care segment, the net out-of-period headwind related to supplemental payments was $29 million comprised of $26 million in the third quarter of 2026 from expanded funding under existing programs, primarily in Washington, D.C. and California compared with $55 million of out-of-period amounts in the third quarter of 2025 related to the Washington D.C. program approved last year. For the third quarter of 2026, we estimate that health insurance exchange trends had an impact of slightly less than $25 million which was consistent with the updated outlook provided in July. Exchange volumes declined 17% from the third quarter of 2025, accompanied by a similar increase in the number of self-pay volumes.

At Palm Beach Gardens, our acute care de novo hospital remains in the early stages of ramping volumes across multiple service lines. Start-up losses improved each month during the third quarter. While the ramp at this facility remains gradual, the progression supports our expectation for continued improvement as we enter Florida seasonally busier winter period. In Washington, D.C., Cedar Hill Regional Medical Center operating losses were similar on a sequential basis, excluding supplemental payments. We continue to support the build-out of primary care and specialty physician practices in the community around the hospital and in our MOB.

Because these practices remain at varying stages of developing their patient bases within the community, we now expect the hospital to reach operational breakeven in the first half of 2027 compared with our prior expectations of the fourth quarter of 2026. Taken together, Palm Beach Gardens and Cedar Hill are progressing but their pace of maturation remains an important factor in the timing of margin improvement for the Acute Care segment.

Turning to behavioral health. Third quarter same-facility net revenue increased 4.0% supported by a 2.1% increase in same facility revenue per adjusted patient day and a 2.1% increase in same-facility adjusted patient days. Volumes improved modestly compared with recent quarters, reflecting steady demand and greater emphasis on the continuum of outpatient levels of care. Included in our total behavioral health segment results are Talkspace and an acquisition we completed in our U.K. operations in July, offset by start-up losses associated with 2 de novo projects and ongoing operating losses at Laurel Ridge while we work towards recertification. Given the mid-quarter closing, Talkspace's contribution to third quarter earnings was immaterial.

In our behavioral health segment, the net out-of-period headwind related to supplemental payments was approximately $8 million in the third quarter of 2026, due primarily to the new Washington D.C. program benefit in the third quarter of 2025. For the third quarter of 2026, behavioral health segment, same-facility salaries, wages and benefits per adjusted patient day increased 3.6% over the prior year, improving further on a sequential basis due to continued moderation in head count growth.

Turning to cash flow and capital allocation. Third quarter cash generated from operating activities was $637 million compared with $381 million during the same period last year. During the third quarter of 2026, we spent $214 million on capital expenditures, and we anticipate capital expenditures to be slightly below $1 billion for the full year of 2026. The as several large acute care de novo and expansion projects are now completed, we expect capital expenditures to moderate towards $800 million beyond 2026.

During the third quarter of 2026, we acquired $1.35 million of our own shares at a total cost of $242 million, bringing year-to-date share repurchases to a total of $690 million. As of September 30, 2026, we had $735 million repurchase authorization available pursuant to our stock buyback program, and we expect to remain active with share repurchase for the foreseeable future.

From a balance sheet perspective, we ended the quarter with cash of $169 million, total debt of $5.7 billion, an average of 2.17x. Total debt reflects the August refinancing of our September 2026 debt maturity and incremental borrowings associated with the Talkspace acquisition. As of September 30, 2026, we had approximately $1.2 billion of additional borrowing capacity available pursuant to our revolving credit facility. We remain committed to maintaining leverage within our target range of 2 to 3x.

Finally, turning to our 2026 outlook. We are reiterating the financial and operating forecast ranges issued with our second quarter results in July. Based on year-to-date trends through the third quarter and the ongoing ramp of our acute care hospitals in Washington, D.C. and Palm Beach Gardens, Florida, we currently expect results to be towards the lower end of these ranges. The reiterated ranges reflect continued underlying operating improvement balanced against the pace of de novo facility ramp-ups and the other near-term variables discussed today.

Operator, that concludes our prepared remarks and we'd be pleased to answer questions at this time.

[Operator Instructions] Our first question comes from the line of A.J. Rice of UBS.

Just -- I know it's early and to be talking about '27, but some of the companies are. So I'll ask it a view. At least how do you think about puts and takes for next year? I guess, specifically, I'm going to ask you on EPP headwinds, supplemental payment headwinds next year given some out-of-period recognition this year. and early thoughts on incremental public exchange headwind, if any.

Yes. So I would just remind everybody, A.J., that consistent with prior years, we plan to issue our full comprehensive 2027 guidance in February when we report our fourth quarter results. We feel good about the core elements of our 2026 growth algorithm guidance in both segments, which we went through last quarter. Outside of that, we can point to a few items, a couple of which you mentioned, in terms of material headwinds and tailwinds as we begin to think about 2027.

The biggest swing factors, I think, in 2027, relate to improvements at facilities that are incurring operating losses during 2026, particularly the Laurel Ridge San Antonio facility that we talked about and the 2 acute care de novos that we mentioned in our prepared remarks. Cumulatively, these facilities are expected to contribute operating losses of $80 million to $100 million in 2026, and we believe there is potential to recover at least a meaningful portion of those losses in 2027 as we anticipate making further operational progress at the de novo facilities over the next several quarters and regaining certification at the San Antonio facility. As it relates to San Antonio, I would just note, we're making progress towards recertification and remain confident that we'll achieve that in 2027, giving us a path to rebuild census in a dilert manner.

On the headwind side, and I think you mentioned a couple of these things, the biggest swing factors relate to regulatory changes that continue to play out in the operating environment, particularly the impact from the exchanges the potential impact of Medicaid work requirements and the initial impact of reduction to Medicaid supplemental funding. We also had a material amount of prior year DPP benefit in calendar year '26 that will not repeat in 2027.

As it relates to Medicaid supplemental payments, we estimate the 2027 headwind will be approximately $175 million to $200 million. This primarily includes prior year amounts that we recorded in '26 for DPP programs in Florida, Nevada, io, California and Washington, D.C. as well as approximately $10 million of impact during the fourth quarter 2027 from the initial provider tax portion of the OB3 funding cuts. As it relates to the exchanges, annualizing the second half 2026 run rate would create a $15 million headwind in 2027. Further changes in exchange enrollment could increase that number and we'll have greater insight into that following the open enrollment period.

As it relates to Medicaid work requirements, it's difficult to provide an estimate on the potential impact because the implementation timing may lag up to 6 months in certain states. More importantly, the state specific regulatory guidance related to the medical frailty exceptions remains a key open item. Our baseline assumption is that the impact of Medicaid work requirements will be primarily concentrated in Medicaid expansion states and that a vast majority of behavioral health patients and a meaningful portion of our acute care patients could be exempt from work requirements because their diagnoses meet the medical frailty exemption.

As investors develop estimates on work requirements, it's worth noting from a volume perspective, Medicaid volumes and expansion states represented approximately 15% of our total acute care segment adjusted admissions and 30% of total behavioral health segment patient days. Broadly, I think as most investors know, Medicaid revenue per unit of volume is lower than other payers. So as you do those calculations, you should keep those in mind.

That's very helpful. Maybe just a follow-up. You've had very strong volumes. Obviously, it's been a shift. It looks like to medical from surgical. I wondered if you could drill down just and talk a little bit about service lines, what's been strong on the medical side? And are you attributing the softness in surgery mainly to public exchange disenrollment or economy or something else?

Yes. I think from our perspective, A.J., the trend towards a slightly weaker surgical mix is an acceleration of existing trends that we've seen for some time. And that is the continued shift of procedures, both in and outpatient procedures out of the hospital in and outpatient services and into alternative settings, whether they are ASCs or physician offices, and you really see this in particular in certain service lines. So GI, as an example, and we've seen just an accelerated shift of procedures within an outpatient into alternative settings and out of the hospital. A number of orthopedic procedures as well.

We mentioned in our prepared remarks some of the service lines that have been performing fairly robustly, that those included cardiology, neurology and urology. But yes, I think, again, in our minds, what we're just seeing is this accelerated shift of procedures into these alternative settings.

Our next question comes from the line of Ann Hynes of Mizuho.

Just the 2 acute facilities that are not ramping as you thought? What's driving that slower ramp? Is there anything structural or challenges that you face. I've been covering the company for a long time, and I don't remember a time where like the new acute care hospitals are ramping below expectations. So if you can just go into each market, and what's driving the loss versus your expectations? That would be great.

Yes. So I'll address Cedar Hill first. Cedar Hill in Washington, D.C. opened in April of 2025. And I think as we've been commenting consistently since that opening, it opened with a busy emergency room activity and emergency room activity has remained busy since its opening. But what has lagged has been a busier surgical and procedural schedule. And I think the reason for that primarily is a lack of physician infrastructure in that part of the Washington, D.C. market for years, and this is for those of you who are familiar with Washington, D.C. and Ward 7 and 8, there was really a lack of quality health care and nations were leaving Ward 7, 8 to get their health care elsewhere in the city.

And as a consequence, doctors really were not locating in Ward 7 and 8, doctor offices were not. And as we indicated in our prepared remarks, we've addressed that by working with a number of different physicians and physician groups to establish practices in Ward 7 and 8 -- within Ward 78 in the MOB adjacent to our hospital, et cetera. But those practices are relocating and they're developing, but they're in different stages of development. And that takes some time. And I think that's been the major issue in terms of the timing of the development of Cedar Hill. Structurally, I think we believe that all the things that we thought about what would make this hospital successful are still there and will do so just taking somewhat longer.

The other nuance comment that I'll make, and I think I made it last quarter as well as it relates to Cedar Hill is that the arrangement we had with the district in entering the Cedar Hill partnership with the district was that they would build and essentially finance the construction of Cedar Hill. So the absolute amounts of earnings, the absolute margins that we're going to have to achieve at Cedar Hill to get to our sort of target rates of return will be less than in those hospitals where we built and invested the hundreds of millions of dollars to build the hospital.

As far as the facility in Palm Beach Gardens goes, I think that, honestly, one of the biggest challenges we had at its opening was that we opened in the beginning of the summer which is a difficult time to open, as you might imagine, in South Florida. It was not our original intent. We had originally planned to open earlier and take advantage of the busy season in Florida, but construction delays sort of made that impossible.

So I think by opening in the summertime, we got off to a bit of a slower start, but expect the facility. And I think, again, in our prepared comments, we indicated the facility's getting better. Volumes are increasing every month. and we expect that to accelerate as the busy season sort of ramps up in Florida over the next several months. I'll reiterate the same comment. No structurally, I think everything believed about the potential success of that hospital is still consistent with our original views, just taking a little bit longer to ramp up than we originally anticipated.

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

Just a couple of numbers questions here. Steve, maybe you can break down the $80 million to $100 million of losses between those 3 facilities. And Laurel Ridge in particular, what were the operating profits there when it was open, so we can get what it could recover to? And maybe Marc can give any time line he thinks within 2027 when you're thinking that might that might come back online?

Yes. I mean we're confident that we're going to be back online sooner than later, but we don't have an exact date in 2027. We're still working with all the regulatory agencies. Things are going well. That will be back to where we were, we expect in 2027, but I can't give you an exact date.

And as far as the numbers go, Justin, when we first announced the loss of certification at Laurel Ridge, we disclosed that last year the pretax income at that facility was in the $20 million, $25 million range. We've talked about incurring since it has lost it's certification, but has continued to treat a small number of patients that we expect it will lose $5 million or $10 million a quarter each quarter that we remain open without certification.

We've talked about Cedar Hill over the last several quarters, losing roughly $10 million a month. And as far as the Palm Beach Gardens Hospital, you can pretty much get that from looking at the difference between our same-store acute results and our full acute care results, but we lost about $15 million in this quarter, expect to improve a little bit in Q4 and then continue to improve gradually from there.

Our next question comes from the line of Matthew Gillmor of KeyBanc.

You called out labor as a positive factor in the quarter. I was hoping you could elaborate on what you're seeing in terms of wage growth or turnover or use of contract labor.

Yes. So I think a little bit different story in the 2 segments. I think in the behavioral segment, we talked over the course of several quarters that we had sort of invested in -- I'm going to describe it as outsized account growth. because we've discussed, I think, for quite some time that in some of our behavioral facilities and markets, we were -- our volume growth was muted because of a constraint in staffing, not enough nurses or therapists or the nonprofessional techs that are important to care in the behavioral segment.

But we accomplished that, I think head count growth has continued to decelerate. It decelerated in the third quarter. I think it rose by about 1.5%. And I think going forward, head count growth in the behavioral segment will largely be aligned with volume growth. So that's been a benefit and an improvement in the Behavioral Health segment.

I think in the acute segment, as your question sort of alluded to, our -- we've seen a fairly significant reduction in temporary and traveling labor I think that has risen in the most recent quarter by 3%. So it is well controlled. And wage inflation has certainly come down from its heights during the pandemic to something in the 3%, 3.5% range in both segments.

Got it. And then if I could follow up on the Talkspace acquisition. It sounds like you'll share more on the fourth quarter call about the integration and synergy opportunity. I wanted to see if you'd be willing to discuss will there be synergies that you think you'd be able pull through during the 2027 period? Or is that a longer-term priority?

So what we said originally, Matt, when we disclosed the Talkspace acquisition is that our expectation in the first 12 months of ownership, which would be into the third quarter of next year, was that the transaction would be slightly accretive. There's a very small amount of overhead and cost savings sort of duplicative cost savings as we combine 2 public companies. But the vast majority of synergies are revenue synergies. And the opportunity that combining the lower acuity population -- patient population that Talkspace has and the higher acuity patient population that UHS has really creates this robust continuum of care that really doesn't exist anywhere else in the behavioral space. And that's the opportunity.

As far as the timing of it, I think we'll begin to realize that, and we said this in our prepared remarks in the first 12 to 24 months of ownership. So beginning in the back half of next year. And as we, I think, noted in our remarks, I think we'll be more specific about that and how much of that we've included in our guidance when we when we present guidance in February. But as Marc indicated in his remarks, we're certainly beginning to focus on those revenue synergies and create all the changes in policies and procedures and infrastructure and technology that we'll need to execute on those synergies next year.

Our next question comes from the line of Stephen Baxter of Wells Fargo.

I wanted to ask about the same-store acute revenue per adjusted issue in the quarter. How should we think about what that figure would be if we were to exclude all change in year-over-year Medicaid supplemental, I guess not just the out-of-period components. I guess how did that compare to your expectations? And how much of a pressure is the surgical decline putting on those metrics?

Yes. So again, in the remarks, I think we called out 3 items that I think are putting pressure on that revenue per adjusted admission metric in the quarter. And I think you tick through them. One is the impact of the exchanges, while that's playing out, I think, consistent with our expectations, it's certainly a drag compared to last year. Then there's the out-of-period DPP which we talked about and then the MedSurg mix pressure, which we talked about.

We think the MedSurg mix pressure probably reduces the growth in revenue per adjusted admission by about 100 basis points. We think if we adjust for all 3 of those items revenue per admission would have been up in the 3% range, which is within the range that we've talked about as the sustainable going forward range for pricing.

Okay. When you look at the improvement in acute volumes that you saw in the quarter, is there any meaningful difference in either like geographic strength or different payer strengths you want to call out?

I think it's pretty broad-based geographically. We talked a little bit about payer mix in our remarks. I think Medicare is growing faster than the divisional average, Medicaid and commercial is growing a little bit -- are both positive but growing a little bit slower than the divisional average. And we've seen an increase in self-pay or on compensated care largely sort of a one-for-one swap in the decline for exchanges.

I think the only other geographic note I would make and it's probably more a fourth quarter note is that last year, we had a pretty soft fourth quarter in the Vegas market. They had a very light flu season in a year in which almost everybody else had a pretty acute flu season. So I think we're thinking about that as a bit of a tailwind for us in the fourth quarter. But otherwise, the strength in acute volumes has been pretty broad geographically.

Our next question comes from the line of Kevin Fischbeck of BOA.

I want to go back to your answer about the surgical volume coming in a little bit lower than what you guys were thinking about and kind of attributing that to an acceleration of recent trends. What would you attribute that acceleration to though? Is there something specific? Is it the IPO? Or is it something else. I'm just trying to figure out how long this acceleration might last and would be better to understand what's causing it.

So first, Kevin, I would say I don't think it's the inpatient-only dynamic. When we looked at the procedures covered by the inpatient-only regs, I think we concluded that most of our procedures that fall into that those categories were procedures that had more than a 2 midnight stay and appeared to us to be more acute than would allow them to really be transferred or evolved into outpatient procedures.

Yes, I don't know that I have a great explanation for exactly why we -- and I think the industry in general has seen this acceleration in certain procedures to outpatient. But I'll describe one of the challenges we see, and I'll use GI as an example, is that as more and more GI procedures are being done outside of the hospital and largely in physician offices and in ASCs. We have found it difficult even to get GIs to cover our emergency rooms. We either can't get them to do it at all or the expense of doing it and the cost of doing it is really sort of outsized. And so as a consequence, in some of our facilities, even our emergency room visits that are GI-related are being diverted to someplace else because we just don't have the coverage.

So I think there's a bit of a sort of compounding effect that as more and more of these procedures, elective procedures move into outpatient settings in some of these areas. And again, I think GI sort of stands out for us. even the emergency procedures that would have traditionally come to our emergency rooms are being diverted elsewhere.

Okay. Great. And then, I guess, one of the -- I guess, the tailwinds that you mentioned in 2027, you just said the long-term growth algorithm. Can you just remind us that -- I know that like this year, you're looking for 4.5% to 6.5% on the acute and 3% to 5% on behavioral. Is that what you're talking about? Or are you talking about something a little bit different.

No. I think in last quarter, we sort of laid out our growth algorithms for the 2 segments in acute care. We're talking about 1.5% to 2.5% adjusted admission growth. for the year, I think we're averaging slightly above that, I think 2.6% for the year and then 2% to 3% pricing growth. As I mentioned in my previous response, we believe you sort of adjust for all these exogenous factors, we're running at around that 3% in the quarter, so at the low end of that range.

On the behavioral side, we modified our growth algorithm, our adjusted patient day growth algorithm to 1% to 2% last quarter. And I think we're running for the year in the 1.7% range, so kind of towards the higher end of that range. and then 2% to 3% pricing in behavioral, and I think we run within that range in behavioral as well.

Our next question comes from the line of Craig Hettenbach of Morgan Stanley.

Just following up on Talkspace and understanding it's recently closed. But if you can just give some context of how that business is performing, kind of growth rates you expect. And then as a follow-up on that, you mentioned kind of the unique offering across Mental Health, how are you thinking about that in terms of implications of payer relationships on a longer-term basis as this strategy unfolds.

So this is Marc. As we're integrating Talkspace, I mean one of the big things when we talk about the continuum Talkspace was acquiring patients in a distinct way, having nothing to do with patients coming from other behavioral health settings, primarily. That opportunity now exists for us to send patients, refer patients over to Talkspace who are already in our ecosystem, whether in our outpatient things or in our inpatient settings.

Conversely, we have an opportunity now, and we're just starting to see this where there are patients that are in that Talkspace ecosystem that if they need further care, a higher level of care, they're getting directly referred now to us within our own system here. So those opportunities didn't exist on either end previously. They exist now, and we're just starting to see some of that come to fruition. I can't give you exact numbers yet, but we feel like we're off to a good start.

The Talkspace folks have been very encouraged by the way that this has been set up thus far. Again, we're only into this for a few months. But the teams are working very well together. So we're very optimistic going forward. that this is going to make a real difference for us and for their business.

Helpful. And then just maybe just following on to that, as you think about what you have today, how do you think about just organic in terms of the outpatient push and then maybe even other tuck-ins around kind of virtual more broadly.

You're talking about non-Talkspace?

Yes.

Yes. I mean, we continue -- look, we've always had robust outpatient business, especially with our intensive outpatients, some of our partial hospitalization programs. But we're trying to expand even those in some of our locations where we didn't have it at all or we didn't have it as much. So we're certainly focused on that. We also have what we've talked about in previous quarters, 1,000 branches, which has been a newer effort in the last couple of years to expand into different areas in outpatient that's been going well, and we see further opportunities on the horizon to continue that expansion.

As far as other tuck-ins, other acquisitions, we're constantly looking. We're contacted often about that. And if something makes sense, price-wise, we'll certainly pursue it. But right now, I think that we're moving in the right direction in the areas that I just mentioned.

Our next question comes from the line of Jason Cassorla of Guggenheim Securities.

Wanted to ask about behavioral. Obviously, strong volume up 2.1%, same facility up 4% or revenue up 4%, excluding out-of-period, supplemental same-facility EBITDA was only effectively flat. I guess, can you help in terms of the disconnect on the EBITDA growth side? Is that almost entirely explained by Laurel Ridge and same facility EBITDA growth for behavior what otherwise been in line with revenue growth? Or are there puts and takes there?

No. I think, Jason, in some -- to a large degree, you've answered your own question. Yes, so I think that Laurel Ridge is probably the single biggest drag on the behavioral earnings improvement. Beyond that, as I said earlier, as we think about revenue growth from a pricing perspective, I think we're running towards the high end of our range for volumes, expected volumes towards the lower end of our range in pricing.

I think some of that is a reflection of the fact that over the last several years, pricing has been very robust. Some of that has been the benefit of DPP. But even when you exclude that, our pricing and our contractual pricing has been very robust as we've been getting contractual price increases from payers, particularly Managed Medicaid payers who have not given us increases for several years.

Unfortunately, obviously, after several years of that, we've started to anniversary some of that benefit and the pricing, I think, it has moved into that 2% to 3% range. But I think we're fairly confident that we'll be able to sustain that. And as we go into next year, et cetera, those comparisons will become easier.

Got it. Very helpful. And maybe just as a follow-up. I wanted to ask about the $10 million Medicaid supplemental headwind that you flagged for the fourth quarter of '27. Maybe could you just expand on how you're thinking about that estimate or which state programs are impacted in that quarter I know that the rules out there are still proposed, but just any other color related to that fourth quarter '27 headwind. And then any updates you may have around the potential DPP and provider tax headwinds from '28 and beyond would be helpful.

Yes. So I mean as far as the headwinds in '28 and beyond, we've been disclosing those estimates in our SEC filings since the passage of OB3. We'll update those with our current filing. But they shouldn't be terribly different from what we've been disclosing to date. As far as the $10 million specific headwind in the fourth quarter of '27, Jason, I don't have that detail in front of me, but happy to discuss that off-line at some point.

Our next question comes from the line of Andrew Mok of Barclays.

Just wanted to follow up on the acute dynamics in the quarter. Acute volumes were very strong, but MedSurg mix was negative and weighed on acute pricing, how does the management team internalize this? Are you comfortable trading mix and price for stronger volumes? Or does this lead you to reconsider elements of your strategy.

So I mean, the answer, Andrew, is that's not a sort of conscious swap on our part. We didn't make a conscious decision to increase volumes, but decrease procedural volumes. Most of our medical volumes honestly come thorough to the emergency room. So those are patients [indiscernible] procedural volumes tend to be more elective. We have done a lot of things to continue to build the procedural volumes, including investments in technology and things like robotics and things like OR capacity et cetera. And it's paid off in the service lines that we mentioned earlier.

The other issue, I think, is -- and we talked about -- and I think Marc talked about in his prepared remarks, we continue to try and increase our outpatient access points that includes things like FEDs, freestanding emergency department, it includes physician offices, all those things are designed to create more referrals into our procedural volumes. So attempting to do that as well. So again, I would just sort of emphasize the fact that we're looking to do both, to grow volumes overall, but also absolutely to grow surgical and procedural volumes to the extent that we can. We're not making a choice of medical admissions over surgical admissions.

Our next question comes from the line of Ben Hendrix of RBC Capital Markets.

As we get past the de novo ramp and the tax base integration, I think you noted that CapEx would normalize down to an $800 million range. It seems like that's getting closer to maintenance levels, but just are there any kind of development priorities you would rank order going forward following the integrations and de novo ramps? I mean, would you be focusing on further build-out of behavioral capabilities versus acute service lines versus tech and AI development? Kind of what -- how would you think about your priorities there?

Yes. So I would just clarify a little bit, Ben, your comments. So as we go from $1 billion a year roughly that we've been spending on CapEx to $800 million going forward, that's largely because these large de novo projects that we've had over the last several years, the Palm Beach Gardens Hospital, the Riverside County, California replacement facility, West Henderson, we don't really have any full-scale de novo projects, and that's largely contributing to the decline. Use sort of characterize $800 million as maintenance capital, I think that's a bit of an exaggeration, but we sort of, I think, consider maybe 2% of our revenues to be devoted to maintenance capital. So something in that $250 million $300 million range.

So there's another $400 million -- $500 million, $550 million of expansionary capital in the $800 million, and that's new capacity, new beds, new ORs, new ERs, robotics in the acute care segment. And I think an emphasis on -- and we've touched on this in other ways in our comments here, an emphasis on outpatient growth and outpatient access points in both of the segments. So yes, I mean, I think the primary driver of the decline is just not having any of these big de novo projects in the pipeline over the next several years, but it certainly doesn't indicate and unwillingness on our part to continue to reinvest in the business and strategically in the areas that we think will drive growth in the future.

Our next question comes from the line of Scott Fidel, Goldman Sachs.

First question, just I appreciate the details that you gave us on the anticipated same directive payments headwind, would you be able to break that out between the mix of that between acute care and behavioral?

So Scott, I think what we've said historically is that the SDP payments are split pretty evenly between the 2 segments. And I think the reductions are similarly split.

Okay. And then -- just would be interested in an update on the health plan, the Medicare Advantage plan, which is getting quite -- you guys have been growing it pretty impressively the last couple of years, and it's getting quite sizable. But could you sort of talk about how the MLR trends in the business have been going this year? And then in terms of your bids for 2027, how you position those relative to growth versus margins?

Yes. So you described the health plan as an MA plan. It is largely an MA plan. About 90% of its revenue comes from MA, but it does have about a 10% commercial mix as well. We talked about in 2026, a $25 million roughly tailwind from improvements at the health plan. And I think we are largely tracking to that I think next year, there'll be sort of a normal amount of growth as the revenue has grown, but not expecting a material impact up or down in terms of our earnings in 2027 as a result of the health plan. Obviously, the health plan from our perspective continues to provide a significant benefit to our acute care hospitals. We operate the plan only in those markets in which we have acute care hospitals.

Steve, could you just on the margins, just sort of where you view the MA pretax margin now after getting that $25 million sort of improvement in the underlying earnings. And that's it for me.

Yes. We think that historically, the plan has operated with sort of either low negative single-digit margins or low positive single-digit margins. I think the improvement last year is because the plan is operating in low positive single-digit margins. And I think that's our expectation that it will continue to do so over the next couple of years.

Our next question will come from the line of Benjamin Rossi of JPMorgan.

I've heard you describe a few offset opportunities in recent quarters related to your payer mix initiatives, your outpatient network development across segments, some of your technology investments and then some of your expense initiatives or things like supplies I know you aren't providing formal 2027 commentary, but could you walk us through how those initiatives are coming together and where you expect to see contribution to margins in the coming quarters.

Yes, Ben, I think you've done a decent job of framing your question around the things that we have already discussed. As we think about the challenges that will come, especially from OB3 in the next few years, whether that's Medicaid work requirements in '27 and '28 or the Medicaid supplemental reductions mostly in '28 and beyond.

A number of things that we are trying to address. Technology developments, we've talked in previous quarterly calls about the things that we're doing in revenue cycle to improve revenue cycle performance. We had a very large third-party consulting exercise in our acute care revenue cycle in the last several -- 18 months or so. We're undergoing a similar exercise in behavioral developing technology, AI and otherwise to help us do that, developing technology, AI and otherwise to help us control length of stay, better control length of stay in acute care.

I think you alluded to this in your question, a lot of the outpatient emphasis in behavioral, whether that's Talkspace or Thousand Branches or just the efforts within our existing facilities, really have the double benefit of meeting demand where patients are looking for it in the outpatient setting, but also as we build out patient we're really shifting our payer mix away from Medicaid and more to commercial and Medicare because that's where that's where we think the growth is, and that helps us avoid some of these Medicaid cuts. So doing all those things, again, in terms of their specific impact and their specific impact in 2027. I think we'll provide more color on that in February.

Stephen, I think we have time for one more question.

Our last question comes from the line of Sarah James of Cantor Fitzgerald.

Just a quick clarification on exchanges? And then I have a question on talk. So on the exchanges, when you talked about at least a $15 million headwind year-over-year, that's just annualized in the second half. So I wanted to clarify, does that mean that assumes flat exchange market size from '26 to '27. Is that what that $15 million is based on?

Yes. So Sarah, what we've said this year is we expected an $85 million negative impact from the reduction in exchange coverage. $35 million of that was in the first half of the year, $50 million was in the second half of the year. We're assuming that at a minimum, the $50 million is the run rate into next year. So that's a $15 million -- that's where the $15 million headwind comes from.

And then what we further said is that to the degree that there are further reductions in exchange volumes next year, that could create an incremental headwind, but we really won't know that until some of that enrollment data becomes more widely available.

Got it. And then on talk, what do you need to see in the first 12 months, this proof of concept wise to show that step-down capture is working. In the past, you've referred to currently capturing low to mid-single digits and step down possibly reaching double digit over time. So what is that time line? Is that like a 5-year goal or 10-year goal? How do we think about that growth?

Yes. So Sarah, I think the way it will be reflected will be an increase in outpatient activity at both UHS and a Talkspace. So today, our outpatient [ wins ], I think, in the third quarter grew by about 3%. I think Talkspace just on an organic basis on their own, their visits or procedures or units increased by 5%. I think our expectation is that both of those numbers will accelerate as a result of the merger and the continued integration of the 2 platforms.

And so yes, that's, I think, what will provide the proof of concept. And I think as we said earlier, we're not going to see a ton of that in the first 12 months. But beginning, I think, in the next 12 months after that, we'll start to see that benefit. And I think it will continue to be sustainable for many years beyond that.

This concludes the question-and-answer session. I would now like to turn it back to Darren for closing remarks.

Thanks, Stephen, and thank you, everyone, for participating in today's call and for your interest in UHS. Have a great rest of your day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

All right. Great. Welcome, everyone. My name is Michael Ha, the managed care and health care facilities analyst at Baird. Our next session is with Universal Health Services, an operator of acute and behavioral health care facilities. I'm very pleased to have with us today, Chief Financial Officer, Steve Filton and Head of Investor Relations, Darren Lehrich. Thank you for being here. And with that said, Steve, Darren, would you like to make any introductory comments?

Yes, I'll make -- just a couple of quick things, maybe a recap a bit of Q2, which I know seems like a long time ago, but we were pleased in Q2 with the rebound in volumes in both of our business segments, the continued, we think, effective cost control in both segments. We have the benefit of the Florida directed payment program monies that related to calendar year 2025. Offsetting those favorable items were some unfavorable exogenous items, which I'm guessing we'll get into in a little bit more detail. As a result of all those items, we did revise our guidance in Q2, our full year guidance for 2026 from the midpoint of EBITDA less NCI perspective, down about 3%. And at that midpoint, leading us to a projection for the year of EBITDA growth of about 3% and EPS growth of about 6%.

Subsequent to the second quarter, probably the two most significant items are when we closed the Talkspace transaction, which I'm sure we'll talk a little bit more about. And we completed a bond issuance of $1.1 billion, setting us up for the next several years. Very excited about the Talkspace acquisition, really an opportunity for us to accelerate our outpatient growth in behavioral access to the 6,000 therapists that Talkspace has on their panel. Again, I'm sure we'll get into all that. So yes, I'm happy to answer your questions, Michael.

Perfect. Thank you. I think we'll start with acute, then go sort of coverage policy then end off of behavioral. So on acute, same-facility acute adjusted admissions rose up 1.4% in the first half, including a pretty strong second quarter, 2.9% growth, while you did revise your full year target to 1.5% to 2.5%. So my question is, how are volumes tracking in third quarter? And what will determine whether this year finishes towards the upper or the lower end of that range? And should we interpret this as sort of a new long-term target or more of like a target applicable for next year and more medium term?

Yes. So the slight downward revision in our projected acute adjusted admissions for the year was really, I think, just an acknowledgment of the real soft first quarter admissions. I think our original guidance, where the midpoint was about 2.5% would be difficult to achieve given the softer first quarter volume. So the 2% midpoint for the year seems just more reasonable and achievable. And I put that in the context of if you look at our last 10 years of experience, I think acute care adjusted admissions have basically traded in a sort of 2% to 2.5% range. So the 2% that we've got for this year is well within that range, it's, I think, reflective of the fact that we think that overall volumes are relatively solid. As far as your sort of question about what would sort of drive kind of it to be on the upside or the downside. I think it's, to some degree, the continued ramp of the de novo facilities, particularly Cedar Hill. It's how quickly the 177 beds that we added in the second quarter to our existing facilities ramp up, and we think that will happen relatively quickly. But generally view the demand environment in acute to be relatively stable and fairly consistent with historical norms.

Great. So on that topic of Cedar Hill, emergency department activity has been encouraging, but elective volumes have ramped more slowly because as you've talked about limited primary care specialist based in that surrounding market, what concrete physician recruitment and referral milestones are really required at Cedar Hill to move from expected fourth quarter breakeven toward more, call it, mature profitability? And how should your new ownership of that affiliated physician group accelerate that process?

Yes. So I think it's worth just providing just a tad little bit of perspective. The impetus to build that Cedar Hill facility really came from the District of Columbia government itself. They viewed that part of the district, which is Ward 7 and 8 as a historically underserved part of the district from a health care perspective, and they were extremely anxious to build a state-of-the-art facility operated by an experienced, mature operator. We have a long history with the district at GW Hospital. And so the district undertook the capital commitment. They put up the funds to build the hospital, several hundred million dollars' worth of investment. We have a long-term operating and management agreement with them.

When we opened the facility back about 1.5 years ago in April of 2025, what we found was almost immediately, and you alluded to this in your question, Michael, emergency room volumes were quite strong which I think was reflective of the fact that, in fact, the resonance of that part of the district really were hungering for this opportunity to have their own facility, one that they could go to for quality care, et cetera. And honestly, I would say we were almost overwhelmed by the emergency room volumes at the outset.

What we were lacking, and again, I know your question addressed this, was a balance of more elective procedures. And I think the reason for that is that because historically, most people in Ward 7 and 8 were leaving that part of the city to get their health care elsewhere. There really was a lack of what I would describe as physician infrastructure. Primary care physicians, specialists, they just didn't have their offices in Ward 7 and 8. And that's what really needs to happen. We need to have more physicians based in and around the hospital. We're recruiting physicians. We are doing our best, not just necessarily recruiting new physicians, but getting physicians who have a presence elsewhere in the district to open offices in Ward 7 and 8, et cetera. And that's what I think will happen. It's taking some time, maybe a little bit longer than we expected. I think we normally view the ramp-up of a de novo hospital to take about 18 or 36 months before it reaches divisional averages. In the case of Cedar Hill, it's taking somewhat longer than that. We do project and have said that we expect to get to breakeven in Q4.

The one nuance that I highlight, however, is that because we didn't provide the capital to build the hospital to get to our target rate of returns for this particular project, we'll be able to do so without getting to necessarily average margins or average absolute levels of profitability. Your last question or the last part of your question was how does the migration of the medical faculty group that was owned and run by George Washington University for many years. And we took over for that in early in the second -- or early in the third quarter, rather. How does that affect the Cedar Hill ramp-up? I think we'll have some of those physicians helping us in Cedar Hill, but the reality is most of those physicians will practice at GW. They have practiced at GW historically and will continue to do so, so I don't think that's going to have a big impact. I think it will be mostly non-GW or nonmedical faculty, what we call capital medical group physicians that will staff the Cedar Hill facility.

Got it. And Nevada remains one of your most important markets with West Henderson adding capacity as you anticipate a recovery in Vegas tourist demand. How would you disaggregate West Henderson's growth between improving market demand, I mean, share gains from competitors and volume shifting from your legacy facilities?

Yes. I mean so if you go back to just the previous question and the comment that I made about it usually takes 18 to 36 months for a facility to ramp up and get to divisional averages. West Henderson, and we've commented on this before, became profitable in its first full quarter of operation. It opened in December '24, and it was profitable by the first quarter of 2025, not necessarily divisional averages, but even that accelerated ramp-up is sort of really extraordinary. And honestly, we've only experienced that in hospitals in Las Vegas. And to your point, there was demand, Henderson and now West Henderson are located in the Southeast part of the market. That's a market that was really owned by a competitor for the longest time. Nobody else competed there. And Henderson opened and was very busy, and then the population continued to move west, and we saw the need to open yet another hospital. We opened West Henderson.

West Henderson, to some degree, capitalized a little bit of our own hospital business. We sort of estimated that in its first few quarters of operation to be a 40, 50 basis point impact on our adjusted admission growth, same-store, but just to show how much -- how strong the market itself is, the 177 beds that we talked about adding to our acute facilities in Q2, some of those beds, 35 or 40 of those beds were added at Henderson Hospital, which is our closest hospital to West Henderson, and it's just a demonstrated, I think -- or it's reflective of the demonstrated need for health care in that space. So broadly, our Vegas hospitals, I think, are doing well. '25 was a bit of a softer year. There was sort of a softer flu season. Your question kind of alluded to, I think tourism and conferences and meetings were down a little bit, but seem to have rebounded and I think the Vegas market is kind of back to fairly robust growth that is helping to propel the overall divisional performance.

And the only thing I'd add to that, Michael, is when you think about the Las Vegas economy, it really has broadened beyond gaming and West Henderson, that Henderson area that we're talking about. I think it's a great example of how the economy and Clark County has really changed. A lot more sports teams are there. Our hospital is actually very close to the Raiders facility, a lot more technology businesses coming into Nevada, especially in the northern part, where we have hospitals in Reno. And so I think a little bit more balanced to the broader economy is starting to really unfold in Las Vegas.

Great. And switching over to exchanges now. Your estimated '26 exchange headwind is now up from $75 million to $85 million, approximately $35 million of that's in the first half, $50 million in the back half. So our checks in recent weeks, and we published on it, they don't appear to be great when it comes to uninsured volumes, and it seems like the pressure continues to mount into July and August. That said, is the $50 million second half assumption still intact? And what visibility do you have given the lag between member stopping premium payments and what appears in your hospital data?

Yes. So again, I think it's worth kind of just reminding people that, that original $75 million impact estimate that we had made with our original 2026 guidance was based on a couple of critical assumptions: one, that there would be about a 25% to 30% decline in people who had exchange coverage, two was that a small percentage of those people, maybe 10% to 20%, would lose their exchange coverage but would be able to replace it with other commercial coverage potentially through their employers or others; and three was that there would be a shift in those people who kept their exchange coverage of metal tiers, mostly from silver to bronze. I think for the most part, those assumptions have played out in the first half as we expected they would. Probably the single biggest divergence from what we originally projected, and I think you kind of alluded to this in your question, Michael, was that we've seen an almost one-for-one swap or trade, if you will, from the number of people who have lost their exchange coverage to an increase in uncompensated care, meaning that virtually everyone who lost their exchange coverage turned into an uncompensated patient.

And that was something a little -- that we really didn't anticipate fully. And that's really what drove the $10 million increase in our estimate. I think what we've said is, as you point out, we had a $35 million impact in Q -- in the first half of the year with $15 million in the first half of the year -- or excuse me, $15 million in the first quarter, $20 million in the second quarter and now projecting $50 million in the back half. And I think that's reflective, again, of how this has played out in actuality, meaning not everybody stopped paying their premiums on January 1. Some people may have paid their premiums for a month or 2 months or 3 months before stopping, et cetera. So some of that impact is back-end loaded, but some of it is also reflective of exactly when we become aware of somebody not making their premium payments.

We really only become aware of that through the managed care companies. So when a patient comes in with exchange coverage and exchange card, we'll verify the insurance. If the managed care company verifies the insurance, we assume that it's good, premiums are paid, et cetera. We may then go to bill that bill a month later, 2 months later, and we'll then get feedback from the insurance company that premiums haven't been paid and then they're not going to cover the care, et cetera. So there is a delay in sort of our awareness. There is a delay I think in some cases with people actually paying their premiums. And I think that's what's reflected in sort of the buildup as the year goes on. We're not really commenting on sort of our intra-quarter commentary about exchange volumes or payer mix or volumes in general. But I would say that we're still comfortable that, that revised estimate should be fairly accurate for the balance of the year.

Got it. And when we think about, I believe your preliminary '27 outlook appears to assume the second half exchange headwind carries forward approximately the same exit rate, which would annualize $50 million into $100 million for '27. I mean, given another year of material premium increases in the marketplace, more potential metal tier migration, if exchange enrollment does decline incrementally, call it 5%, 10%, or more in '27, why wouldn't the total headwind rise meaningfully above?

It could, Michael, to be fair, I think our point of view, at least at the moment, is we just don't have any real insight into that. There's also been speculation that there could be some level of reenrollment as people realize that having -- going uninsured has been problematic, maybe they can get -- some of these people are working people who maybe will be able to get insurance through their employers, et cetera. We just don't know, so you're right. I mean, I think the way you framed it is our presumption at the moment is that the run rate for the exchange impact in the second half of the year will be the run rate for next year. As we get closer to giving our actual 2027 guidance in several months, if there's more visibility, if there's more clarity, we'll update those estimates, but we just don't have nearly enough information or precision to do that at the moment.

And on Medicaid, managed Medicaid volumes have declined modestly during the first half. Several Medicaid plans have recently reported greater-than-expected eligibility-related attrition, especially with work requirements, creating more uncertainty to '27. How should we think about size and incremental risk to UHS' payer mix and uncompensated care after considering medical frailty exemptions, which I believe you've mentioned in the past may affect most of your behavioral lives? And basically in your ability to help those eligible patients document those exceptions.

So yes, just sort of the level set in terms of our payer mix experience to date in 2026 through the first half of the year, we haven't really seen significant changes in our mix. Putting the exchange dynamics aside, which we've already talked about. But in doing that, we've seen slight increases in Medicare and Managed Medicare. We've seen slight decreases, which your question, I think, alluded to in Medicaid and managed Medicaid, our commercial volumes, again, outside of the exchanges have remained fairly stable.

As we think about going into next year and potential headwinds into next year, the biggest one is the one you highlighted, Michael, which is the Medicaid work requirements which are part of OB3, will take effect in 2027. We have not tried to precisely size that impact. I'm not aware of any provider who has chosen to do that. I think in large part, because collectively, I think as hospital providers, we're waiting for greater clarity on how the Medicaid work requirements are going to be implemented by the states. How quickly, how aggressively the states have an option part of OB3, to ask for a 6-month waiver and implementation. We don't know how many states will do so.

We do know that there are states that are actually suing in the courts to challenge of some of the requirements of the Medicaid work requirements. There is -- again, you alluded to this in your question, there's an exception in the Medicaid work requirements in OB3 for patients who are described as suffering from medical frailty. There's not a lot of definition in the bill for that. We've always understood it to cover potentially a significant amount of our behavioral diagnoses, but again, that's going to be up to the states to promulgate the regulations and define them in each of the states. And so we'll see how that plays out. And again, maybe in several months when we're ready to give our 2027 guidance, there'll be greater clarity.

CMS really probably one of the few organizations that's really tried to size this issue, they projected that Medicaid work requirements could result in a disenrollment of up to 4% of the Medicaid population. But even CMS has not tried to tackle which of the Medicaid participants likely to lose coverage, be disenrolled, is it the higher utilizers. I think the speculation has tended to be -- it will be the lower utilizers, but again, we have to see that.

In terms of that, we're prepared for that, Michael, which again, was part of your question, when -- any time a patient comes into one of our facilities, I'm going to say generally through the emergency room, they will interact with a registrar, with an intake person. And if they don't have insurance coverage, if they don't have Medicare, they don't have Medicaid, they don't have commercial, our intake folks are trained to work with people to determine, look, are you eligible for some coverage that you don't currently have? Could you qualify for Medicaid? We have, in most of our hospitals work with third-party companies that will turn those folks over to who work, quite frankly, on a contingent basis and go through the exercise of helping those people fill out Medicaid applications. Literally, they'll accompany them to the Medicaid office, et cetera. We're prepared to do that. We'll search for other options as well. Sometimes they are county programs. Sometimes we'll -- a patient can qualify for COBRA if they've been employed, et cetera.

So we're -- our folks are trained to do that. They've always been trained to do that. It's part of what they do. They'll do that with the work requirements. Again, they'll need to have better understanding of exactly what -- how the requirements are going to play out. But those of you who've kind of studied or read the bill, people can qualify for work requirements if they're in school, if they have volunteer jobs, et cetera. So we'll go through all those processes to understand whether people qualify for the Medicaid work requirements.

Got it. A couple of quick ones on policy, and then we'll move on. The statutory SDP limits begin with state fiscal year '28, which starts during calendar '27 for several of your important states while some payment pool is even -- they fluctuate with Medicaid utilization. So how should we phase in the potential SDP headwind across calendar years '27 and '28, including any earlier pressure caused by Medicaid disenrollment? And maybe the follow-up is, some of our policy checks seem to think if Congress flips or could be a chance that SDP gets delayed or rolled back post midterms. Would love to hear your thoughts on that.

Yes. So I think you have a number of sort of questions embedded in there. Number one, I think, is we believe that the impact from those DPP reductions in calendar year '27 will be relatively minimal. And so our projections really presume that the bulk of the cuts start to impact us in 2028. We provide a lot of detail on that in our public filings. Of the $1.5 billion worth of Medicaid supplementals that we project today or in our second quarter 10-Q that we'll receive this year, we believe that the cuts beginning in 2028 and playing out over the next 5 years would amount to about $500 million of that $1.5 billion and incurred fairly ratably, about $100 million a year. .

Your kind of second or maybe a follow-up question about how might the outcome of the elections affect some level of modification or retraction of some of the requirements of those cuts, hard to know. We're not counting on that. I think that it's entirely possible that, particularly if there is some sort of blue wave and the Democrats take control of the House or maybe the House and the Senate, that there could be some movement towards delaying or elongating those cuts or the impact of those cuts. I think the other, quite frankly, sort of political impetus may be just simply the passage of time. The OB3 cuts were sort of controversial when they were first passed and there were even Republicans who objected mostly on the ground that they would unfavorably impact rural facilities. And that objection came from senators sort of from different backgrounds, including Senator Collins from Maine and Senate Hawley from Missouri, very different sort of political -- different parts of the political spectrum.

But as a consequence, they did include in the bill, the rural fund to help that. But the reality is as these cuts, both the Medicaid work requirement cuts and then the DPP cuts as they start to take effect in '27 and '28, the truth is they're going to affect hospitals well beyond just the rural hospitals. They're going to affect urban hospitals, they're going to affect safety net hospitals, they're going to affect children's hospitals. And as I think those cuts become a lot closer to reality and then perhaps start to be implemented, I do think there is a good chance that political pressure might grow to sort of relieve some of that. But as I said, to be fair, in terms of both the way we projected, both the way we're approaching this. We're not assuming there are changes. If there are, we'll welcome them. But if not, we're going to be prepared for the cuts that are on the books at the moment.

Got it. And in a similar vein on the proposed 2027 OPPS rule would reduce reimbursement for 340B acquired drugs, which has been a hot topic today and redirect savings into higher nondrug components which UHS has limited direct exposure to 340B. If finalized, how could this rule affect your net reimbursement and also your competitive position given a lot of these non-for-profit systems have been benefiting a ton from 340B?

So we disclosed again in our public filings that if the proposed rule stands in its current form, that we, as many of our for-profit peers would benefit because we've not never benefited from the 340B favorable implications. Our outpatient Medicare reimbursement would increase by about 8%. Outpatient Medicare for us is not a huge part of our revenue stream. It's single digits of our total revenue, 5%, 6% or so, but honestly, this is one of those things where we're definitely sort of waiting on the sideline to see. We imagine that there will be significant or has been significant pressure from the not-for-profit industry about the rule and its implications for them. So we'll see how it plays out. But it would have an incremental effect, an incremental positive effect on us if it were to stand.

Got it. And we have a few minutes left, and even touched on behavioral, but -- all right. So with Talkspace, 1,000 branches, UHS is now uniquely positioned as the only scale provider with end-to-end continuum of behavioral health care. So I'm trying to think. How does that breadth of service create tangible value, commercial value through stronger rate negotiations, preferred network status, greater directed volume relative to this fragmented local provider landscape? Over time, could it help enable UHS to assume greater accountability for outcomes, total cost, episode-based shared savings, could there be capitated arrangements? I mean, how should we think about the evolution of this model given how uniquely positioned you are?

Yes, I almost feel like I should be asking the questions, this is like Jeopardy. I think you've answered the questions. No, look, I think -- and I think it's worth noting, we've talked a lot about a shift in focus over the last several years in our behavioral segment to more of an emphasis on outpatient revenue growth. We have been for our 40-plus years of behavioral history, really an inpatient-centric provider. And quite frankly, we think that the inpatient business is a solid business that will continue to grow incrementally.

But the real growth and the real accelerated growth we believe in behavioral demand will take place on the outpatient side for a variety of reasons, that's where patients would prefer to be treated if the clinically appropriate space, payers and employers would prefer that. I think their subscribers and their employees can be treated on an outpatient basis. It tends to be cheaper, et cetera. And we have been focused on playing a bigger part in delivering that outpatient continuum of care.

And your question alluded to the various ways that we've done it. Today, most of our outpatient revenues are generated by patients who we describe as step-down patients. So these are patients who are discharged from our inpatient facilities but who require some level of continuing care. And it's a level of generally relatively high acuity continuing care, meaning not just an hour's worth of therapy a week or a couple of hours of therapy a week, but things that we call partial hospitalization or intensive outpatient where they're receiving outpatient therapy 3, 4, 5 days a week, 3, 4, 5 hours a day depending on their clinical needs.

Today, we only capture a very small percentage of those patients, in the mid-single digits top 3%, 4%, 5% of those patients. We think that the ultimate ability to capture that could be in the double digits, et cetera, that which would be a significant opportunity for us. And we've developed our own sort of focus is to get there. Paying more attention to the discharge planning for patients, building out our 1,000 branches, freestanding facilities. But the Talkspace acquisition is really the one that really exponentially increases our ability to provide an alternative to patients because by being able to provide a virtual alternative to patients, we're not limited by proximate geography. They don't need to live near our hospitals to get that care. We're not limited by the therapists that we can offer and the schedules that we can offer. Let's say, we do our intensive outpatient 3 days a week in the mornings and a patient wants to have their therapy in the afternoons or in the evenings or on the weekends, much more likely that we'll be able to accommodate that need with Talkspace.

So again, the ability to really be, as your question suggests, the only viable end-to-end continuum provider from the lowest acuity, hour long therapy that is sort of in the bread and butter of what Talkspace has done to the intensive inpatient care that we provided on both an acute and residential basis for our whole history really positions us, I think, uniquely and what makes us so excited about the opportunities with Talkspace.

Beautiful. Well, that's all the time we have. Thank you, Steve. Thank you, Darren, and everyone, enjoy the rest of your day.

Great. Well, good morning, everyone. I'm Craig Hettenbach. I cover health care technology and providers at Morgan Stanley. Very pleased to have with us Universal Health Services this morning. So Steve Filton, CFO; and Darren Lehrich in Investor Relations. For disclosures, you can see them at our website, www.morganstanley.com/researchdisclosures.

With that, Steve, I'll just pass it over to you for some intro comments before we get into the Q&A.

Yes, sure. And I think maybe as a brief start, kind of a quick recap of Q2, which at the moment seems like ages ago, but we were pleased with our Q2 results in the context of rebounding volumes in both of our segments. We felt like both segments continue to demonstrate strong cost control. And I'm pleased by the benefit that we got from the Florida DPP program, which we recognized for calendar year '25, still waiting for the approval for calendar year '26.

We had some exogenous unfavorable items in the quarter caused us to revise our guidance downward by about $50 million at the midpoint. At that sort of midpoint of our revised guidance, we're now projecting, on an EBITDA less NCI basis, about 3% growth for this year over last year on an EPS basis at the midpoint, projecting about 6% growth.

I think subsequent to the quarter or at least the quarterly announcement, probably the most significant items of note were we closed the Talkspace transaction, which we're very excited about and the opportunities to really accelerate the growth in our outpatient behavioral business, and I'm sure we'll touch on that more and the 6,000 therapists that Talkspace currently has on their panel that add a tremendous amount of capacity for us.

And then we also did execute on our $1.1 billion bond deal, both the Talkspace closing and the bond deal were in mid-August, and that sets us up for even several years now of solid and comfortable financing. So I'll pause and, Craig, happy to entertain your questions at this point.

Great. Thanks for setting that up. I want to start on just the behavioral health side of the business. And if you look at the last couple of years, growth -- pricing has been a very important driver of that growth and volume has been a little bit on the lackluster side. So what are some of the key things that have been driving both those parts of the equation?

Yes. So on the volume side, we did adjust our guidance for volume for adjusted patient days on the behavioral side down about 50 basis points. So we're now talking about something in the 1% to 2% range. We ran for the first half of this year about 1.5%. We ran 0.9% last year, so we are incrementally improving.

I think the real opportunity, as I alluded to very briefly already, to see adjusted patient day growth in behavioral is in the outpatient side. We have been primarily, for most of our history, an inpatient-centric company. 90% of our revenues today are inpatient prior to the Talkspace acquisition. And so I think we believe that a lot of the demand is on the outpatient side in behavioral. We also believe that by growing in the behavioral, we will limit our exposure to Medicaid and become a more Medicare and commercial centric company, which I think is a great way to set up the next few years as there's more pressure on Medicaid over the next several years.

From a pricing perspective, we're talking about revenue growth in the behavioral business in the sort of 3% to 5% range in our guidance. That's kind of 1% to 2% volume, 2% to 3% pricing. The 2% to 3% pricing is a little bit lower than it's been over the last several years. I think it's been somewhat inflated or it's been somewhat higher in the last several years. As a result of Medicaid supplemental payments increasing over the last several years as well as, I think, a bump in commercial payments as we came out of the pandemic and commercial contract pricing recognized sort of higher labor inflation and just higher inflation all around. But that's largely, I think, how in the near and medium term, we think about both -- the revenue growth in the behavioral business, both from a pricing and a volume perspective.

Got it. And then on the inpatient side, if I think about COVID, just some of the ups and downs and there was some pressure on labor, how do things stand today in terms of some efforts you've made, whether it's on staffing and things like that?

Yes. So I mean, what we saw, and I think your question alludes to is, during the pandemic, in particular, there was significant pressure on our behavioral volumes as a result of labor constraints. Very often, we couldn't admit patients because we had a lack of staff. And that meant could be nurses, could be therapists, could be nonprofessionals. But I think we've largely -- well, first of all, I think the market has settled down post COVID. The demand for providers in the subacute facilities -- from the acute facilities is not as great as it was during the pandemic. But also, we've been very focused on getting to an appropriate level of staffing.

I think we added about 4% to our headcount last year. We added about 3% to our headcount in the first half of this year. I think that's -- we certainly still have a handful of markets, facilities that face labor constraints at any particular time. But I think that issue is, I'm going to say, largely behind us. And honestly, I think that headcount now will start to move much more in sync with demand and volumes. And as a consequence, that should be a help to our margins as well.

Got it. And you alluded to the 1.5% growth in the first half of the year. And for the full year, you're talking 1% to 2%. How does that kind of frame like, if you will, like a multiyear outlook? Is this kind of the right run rate would be the first question. And maybe as part of that, is there anything you've observed kind of in the competitive landscape on the inpatient side of things?

Yes. I think that our view is that the inpatient business is a very solid, steady business, likely to grow in small amounts, that 1% to 2% that I think I would cite as a sort of near to midterm goal for us, is really largely targeted at the inpatient volume. And again, what I would say is, I think the upside for us is really on the outpatient side. I think that's where the demand is growing.

I think patients more and more would prefer to be treated if possible on the outpatient side. I think payers and employers would prefer to see their subscribers and their employees treated on the outpatient side. It's less expensive if it's appropriate, clinically appropriate. So our goal, both with the Talkspace acquisition and with our own standing up of freestanding behavioral facilities, is really designed to capture more of that outpatient demand and outpatient growth over the next several years. And that's, I think, where we have the opportunity to push that 1% to 2% up in the mid and longer term.

Got it. Maybe before we shift over to the outpatient side of things, I do want to touch on just on the last call, you talked about San Antonio and the issue there. And really, the question is in the context, is that kind of a one-off? Any other back story there? And how you think about that coming back?

Yes. So we have a facility in San Antonio, Texas, called Laurel Ridge that lost its Medicare certification back in April. It was something that we believe was very much isolated to this facility and the regulators of the facility. We don't believe that it has sort of ramifications or sort of a read-through to the rest of the portfolio. We believe that we have a long history of regulatory compliance and quality patient care and safety. And so yes, our goal and our plan is at the Laurel Ridge facility. We -- it has remained open throughout this time.

We continue to treat patients, a small number of patients, albeit. And the reason we do that is it's an effort to continue to work with the regulators, state regulators and CMS to get the facility relicensed as quickly as possible. We would hope that, that could be as early as early 2007 (sic) [ 2027 ], and then we would begin to ramp the facility back up in terms of volumes and EBITDA, et cetera. So difficult to predict the exact timing of that at the moment or the exact pace of the ramp-up. I assume by the time we give 2027 guidance, we'll be able to be more specific about that, but that's where we are from a current planning perspective.

Got it. Just going back to the outpatient side of things, and I want to spend some time on Thousand Branches in terms of that initiative kind of where you're at. If there's any context you can provide in terms of number of centers you have today and ultimately, where you'd like to see that kind of build-out continue?

So I think it's worth just providing a little bit of perspective. As I indicated earlier, we have been, for most of our history, an inpatient-centric behavioral company. We have always had outpatient services, but most of them are related to what we describe as step-down services. So when we discharge a patient from our inpatient facilities, they often require some level of -- and some, I'm going to say, relatively intensive level of continuing outpatient care, not just the hourlong therapy session a week that many of us might be accustomed to either personally or friends and family experiencing.

But people who are being discharged out of an inpatient facility often require programs that we describe as either partial hospitalization or intensive outpatient. So these are patients who are getting care and treatment and therapy 3 hours a day, 4 hours a day, 5 hours a day, 3 days a week, 4 days a week, 5 days a week. And we, in many of our facilities will provide that level of care at the facility level.

And the gating factor we find and have found over the years is that there's only a small number of patients who choose to be treated that way. And it's usually 2 issues or 2 major issues. One is on the patient's part. And it's often a geographical issue or a convenience issue. So the patient lives 2 hours from our facility. They were willing to make that drive or be driven for an inpatient admission for 10 days or 11 days or whatever, but not -- unwilling to make that drive 3 days a week, 4 days a week, 5 days a week. So they're looking for something more convenient or it becomes a scheduling issue.

So we will say, okay, we have a partial hospitalization program, but it runs Monday, Wednesday, Friday, from 9 in the morning until 2 in the afternoon. And that, for whatever reason, doesn't work for the patient. He works. He does -- there's child care, whatever it may be, he'd prefer to go at night, he'd prefer to go in the afternoons, he'd prefer to go on the weekends.

And what we've done over the last several years is really try and now create alternatives that can capture and solve some of those issues. So our first initiative, which is the one you asked about was what we have branded as Thousand Branches. These are freestanding behavioral facilities that we're standing up around the country and generally high population areas, et cetera, where we think the demand is significant. And these are really for people who are entering the health care system as an outpatient. Certainly not everybody enters the health care system as an outpatient or as an inpatient rather, many enter as an outpatient. And these facilities, I think, will capture more of those patients.

What we have found is that patients who are entering the system as outpatients often don't want to do that on the campus of an inpatient hospital. They sort of fret about kind of being swept up in sort of the inpatient -- net is, I think the way they think about it. I don't necessarily think it's a realistic concern, but it's a concern that they have.

The other issue and the one that I mentioned just very briefly earlier is we acquired Talkspace. Talkspace is one of the largest virtual providers of behavioral care in the country. And really being able to offer that virtual alternative, again, either the patients entering the system as an outpatient or the patients who are stepping down as an outpatient, now we can sort of meet them where they, if you will, live work, want to be treated afternoons, evenings, weekends. We can sort of accommodate their schedules and really puts us in a position where we're really the first behavioral provider in the country to have this end-to-end continuum of care going from -- is the lowest acuity of care, sort of hourlong virtual sessions to the highest acuity of care, acute and residential facilities that are treating inpatients, et cetera. So that's really how the Thousand Branches strategy as well as the Talkspace strategy fit into the overall strategic direction of our behavioral business.

Got it. How do you think about even like dual tracking in terms of some of the things you're doing with Thousand Branches and then Talkspace layers in to the business?

Yes. No, no, it's a great sort of question and point, Craig, in the sense that we view all these things not as sort of discrete and distinct offerings, but integrated offerings along a continuum. So if we have patients who are discharged from an inpatient facility and would prefer to receive their care in a freestanding outpatient setting. We've got now 15 of these Thousand Branches facilities today. We're planning on standing up about 10 a year over the next several years. So we hope that, that's an alternative.

Patients from there can be, if you will, stepped down into a virtual setting with Talkspace. Patients who are in Talkspace today may -- Talkspace really has offered in their history, mostly these relatively short hourlong sessions to people once or twice a week, that kind of thing. But now they've got these therapists, these 6,000 therapists who are able to offer, again, partial hospitalization, intensive outpatient, et cetera.

And so again, I think our view is patients being able to move up and down this continuum of care based on their needs. And like I said earlier, we're really the only provider in the country that's able to do that. There are lots of providers who provide kind of one element of that continuum of care, but virtually none that provide it all. And hopefully, in a seamless way with a shared medical record, that's convenient for the patient, that's going to bring the highest quality of care for the patient, keep the patient the safest.

Got it. And you touched on before just the payer mix, which is different for Talkspace. So if I think about the inpatient and the base business, it means a little bit more Medicaid. How do you think about that payer mix and what that means for the business, again, on more of a multiyear kind of basis?

Well, I think it's worth noting that outpatient revenue in behavioral tends to be much less Medicaid-centric and much less commercial -- or excuse me, much more commercial and Medicare centric. That's true for Talkspace as well as for our own outpatient revenues, et cetera. In most states, Medicaid does not pay for outpatient services. So one of the additional advantages of building out the outpatient business is not only we believe capturing demand -- faster growing demand for outpatient services, but also diversifying our payer strategy, reducing our reliance on Medicaid over the next several years when there will be some Medicaid headwinds from OB3 and other factors. So yes, I mean, the focus on outpatient has, I think, kind of a dual focus of both volumes and payer mix diversification.

Got it. And I want to weave in just capital allocation to the Talkspace discussion. If I think about an enterprise value of $835 million, so it was an important strategic deal, but there's also debates around using that money to buy Talkspace versus buying back your stock. How did you approach it in terms of the returns you expect to see in this business and what it means?

So I think it's worth noting and putting into context that while certainly, we view the Talkspace acquisition as a significant one, probably the most significant acquisition we've done since the acquisition of Psychiatric Solutions, which was almost 15 years ago at this point. The $835 million represents less than 1 year of our free cash flow. It represents -- even though we levered up a little bit to do the deal, it's about 1/4 of a turn of leverage increase as a result of the Talkspace acquisition. Our overall leverage today post Talkspace is in the low 2s. I think we've talked generally about targeting leverage levels in the 2 to 3 range.

So the point -- and now I'm going to try to be responsive to your question, Craig, is not that I think we ever viewed the Talkspace acquisition as sort of an either/or in the context of, well, if we did Talkspace, we wouldn't be able to be as aggressive and as active as we have been in share repurchase and return of capital to shareholders. I think we continue to believe that -- particularly our current share price represents a fairly significant dislocation in the price. We've been a very active acquirer of our shares for a long time now. We've repurchased about 40% of the company's shares in the last 10 years. We continue to be an active repurchaser. We'll continue to be an active repurchaser after the Talkspace acquisition.

So again, not either/or. And I think the other point worth making is we'll continue to look for other -- we have not been terribly acquisitive in the last several years because we've not found a great many compelling acquisitions, but we still have the flexibility to do one if we find one.

And I think the one other comment that's worth noting about our capital deployment is our CapEx has been somewhat, I'll call it, exaggerated or inflated over the last several years because it's included or reflected a number of very large acute care hospital de novo projects.

So we've opened 3 de novo facilities in less than 2 years, Henderson Hospital in Las Vegas, Cedar Hill Hospital in Washington, D.C. and a replacement facility in Riverside County, California. We don't have any of those large, again, whole hospital de novo projects in the pipeline for the next several years. So I think CapEx will kind of naturally start to come down over the next several years as well, again, just allowing us greater flexibility for share repurchase or for any other uses that we may deem to be appropriate and earning a return.

And I'll just -- one more comment before you get to your next question, Craig. We had sort of talked about returns. The price that we paid for Talkspace was definitely on the pricey side when you look at their current earnings. But what really drove our analysis of the deal and our thinking and strategic thinking about the deal is this opportunity to, what I call, sort of revenue synergies to take Talkspace's lower acuity patient population and find ways to -- where they need appropriate treatment, higher levels of in -- more acute treatment and to take our more acute patient population and find ways for them to be treated by the virtual therapists or the virtual therapy programming that Talkspace has.

And so we thought that within a couple of years of being able to recognize those revenue synergies that the adjusted multiple for Talkspace would be more in the high single-digit multiples, which I think is sort of much more what we would look to as a target.

That makes sense. Maybe we can switch gears just to the acute side of the business. You're targeting kind of 1.5% to 2.5% adjusted admissions this year. We'll get into maybe the ACA in a little bit. But if I put that aside, how would you characterize the demand environment today? What are some key puts and takes into the back half?

Yes. I mean, so we did, as part of our revised guidance after Q2, lower slightly our acute care volume projections for the year by about 50 basis points at the midpoint. So we're now predicting generally sort of 1.5% to 2.5%, 2% at the midpoint. And that really was really just a reflection in our minds of the weaker volumes that we saw in Q1, which I think had a number of reasons behind them, including some weather issues, et cetera, but it would be difficult to get to that 2.5% midpoint just mechanically, given the softer volumes in Q1.

But when you look back at our acute care adjusted admission growth over the last decade, I think it has averaged between 2% and 2.5%. So that sort of 2% midpoint that we've set for ourselves this year is fairly consistent with that. I think we think the demand environment or we view the demand environment in acute care as relatively solid and feel pretty enthusiastic and bullish about our particular markets, both kind of the patient population growth in our markets and the demand. So yes, we're generally feeling pretty bullish about acute care volumes and feel like they're very much in line with historical norms.

Got it. Anything you would call out on the acuity side or surgeries in terms of things you're seeing in the market?

Yes. I mean, I think as most of our peers have indicated, surgical volumes have been a little bit softer in the last few quarters. In Q2, I think our overall surgical volumes were down 0.8%, but that was actually an improvement over the previous couple of quarters. And I think we were encouraged by the fact that inpatient surgical volumes were actually up last quarter. We highlighted some service areas where they were particularly strong, including cardiology and neurology and urology. And not surprisingly, these are service lines in which the acuity of the patients tends to be higher.

And I think we've been able to grow our surgical procedures in those areas, in particular, partly because of the investments we are making in OR capacity and OR technology, robotics, et cetera. And the places where I think we see our surgical volumes a little bit softer tend to be in areas like GI and ENT. These lower acuity areas where not just for us, but I think collectively for the industry, the vast majority of those procedures over the last several years have moved out of the hospital setting and into either ASCs or physician offices, et cetera. But yes, I mean, I think our view is that with the continued investment and focus on these higher acuity procedures, we think the demand in those service lines will continue to be strong.

Got it. And you touched on before the elevated CapEx for some new hospital systems. So if I think about West Henderson, Cedar Hill, you have the Alan B. Miller Medical Center. Can you just touch on kind of where you're at with these systems and really the implications for kind of the growth and margin trajectory as they continue to ramp up?

Yes. So, thank you for mentioning the Alan B. Miller Medical Center. I forgot to mention that in my talking about the facilities that we opened. So yes, if you think about the facilities that we've opened in the last several years, West Henderson Hospital in Las Vegas. And I think we made the point that, that opened in December of 2024, and it was profitable within its first quarter or so of operation, which is really extraordinary for a new hospital, although somewhat consistent with our experience in Las Vegas, where we're the #1 market share provider and it's been a fast-growing market, et cetera.

The Cedar Hill Hospital, which is our second hospital in the Washington, D.C. market opened in April of 2025. That was an arrangement, and I think a different sort of arrangement with the District of Columbia. The Cedar Hill facility is in an underserved part of the district and underserved from a health care perspective. The district was extremely anxious to have this facility. They're the ones who funded it. They built the facility. We have a long-term management and operating agreement. That facility has been somewhat slower to ramp up. We've certainly talked about that in our quarterly calls.

It's been very busy from an emergency room standpoint from essentially the day that it opened, but we really need to find a better balance of emergent and elective procedures. Elective procedures have been somewhat lagging. And I think it's because there's a lack of both primary care and specialty physicians in the market because there really hasn't been high-quality hospital provider in that part of the city. Physicians, for the most part, have not located there. They don't have their offices there. We're changing that. I think we're changing it relatively quickly.

We're recruiting new physicians. Physicians are being drawn there by the busy emergency room, et cetera. But that will take a little bit of time to ramp up. I think it's worth noting that because the district has really been the one that built the facility and our CapEx investments in the facility are much less than they have been in a normal, I'll call it, a de novo facility, we don't have to get to the same sorts of margins that we would need to get to at, I'll call, an average hospital to get to our sort of normal hurdle rates of return. So we've talked about that hospital breaking even by the fourth quarter this year, and we would think that would continue to grow after that.

The Alan B. Miller Hospital is our new hospital in Palm Beach Gardens, Florida. That hospital opened in July of this year. And as we're expecting and with -- again, with most new hospitals outside of Las Vegas, we will be a bit of a drag as it works through. Most of our brand new de novo hospitals usually get to average divisional margins within about 18 to 36 months. That would be -- as I said, our West Henderson facility got there much, much faster. Cedar Hill is probably taking a little more time. The ABM, or Alan B. Miller facility, we would hope would be more in the norm of those that 18- to 36-month ramp-up.

That's helpful. And then just last one on the acute business, if I think about access points and freestanding ERs have been an important part of that strategy, kind of where things stand today and what that means for some of the growth and margin trajectory of the business?

Yes. We've talked already about how on the behavioral side, there's been a continued and I think an accelerated shift into more outpatient settings. That shift has been taking place on the acute side, quite frankly, for, I think, a decade or longer. And we've participated in that on the acute side, I think, more aggressively than we have on the behavioral side. You mentioned freestanding emergency departments. We have 35 of those around the country. We have them in virtually all of our markets. They're a very convenient access point for patients. We find that patients who are not generally that acutely ill, prefer to be treated in that setting. They can generally be treated more quickly, more conveniently, more safely, et cetera, without the long wait times, et cetera.

So they've been very successful. We've also got about a little more than a dozen ambulatory surgery centers around the country with the hopes of adding another one in every one of our markets over the next several years. And finally, we've probably got a couple of hundred physician practices around the country that also obviously help to build our outpatient business. So yes, we have this, I think, a very comprehensive approach to outpatient that includes the FEDs that I think were the crux of your question, but other elements of it as well.

Great. Maybe we can switch gears just to technology in terms of how you're deploying tech and AI. And if I look at it through the lens of there's applications like revenue cycle management, there's things on the clinical side that are maybe a little bit more longer dated, but just where are you seeing it have the biggest impact on your business today?

Yes. We've talked -- you mentioned revenue cycle, and we've talked a lot about that probably being the area that we most kind of aggressively started adopting AI technology from the perspective of denial appeals and the completeness of our billing packages that go out. Some of our medical records coding, our emergency room coding has been using an AI application. And we just generally think that revenue cycle broadly is well suited for artificial intelligence applications because there's thousands -- frankly, hundreds of thousands of transactions, they're recurring. They generally set a particular pattern, et cetera. And I think that's well suited for AI applications.

We've also been, I'll call it, dabbling, if you will, with clinical applications. I think originally, I'll call them sort of peripheral applications like, for instance, using AI technology that's been developed by Hippocratic AI, which is a company that we've been a shareholder and an investor in to -- instead of a human being, a nurse making a post-discharge call to a patient finding out how they're feeling, finding out if they filled their prescriptions, finding out if they've made their, follow-up physician appointments, following up on whether they're in pain, those calls are now being made in many cases by an AI agent. And I think the latest data suggests that 50% of the people who pick up the phone and have an AI agent identified on the other end will continue the conversation. And I've listened in on a bunch of those conversations. They're really quite fascinating and people are very comfortable sharing and the information that's being gathered and being imparted is really valuable, I think, helps to reduce readmissions, helps to make sure the patient is doing well. That's another example.

Also using AI technology, I'll say, kind of pseudo clinically to help us project diagnoses and project length of stay so that we can better manage length of stay, which is a significant way for us to control expenses. So yes, I think we've got -- what I think, in some ways, is the biggest challenge from an artificial intelligence perspective today is managing and prioritizing the opportunities, really focusing your resources, choosing the projects you're going to do based on what's likely to have the most significant fastest return, et cetera. We've got kind of a whole structure in place oversight committee, et cetera, to try and do that very effectively.

Got it. And when you think about the financial impact, is this something that just kind of gradually over time accrues to the business? Or is there a tipping point? Like how do you see it as we go forward here?

No, I think it accrues. Maybe that's a good word, and I think it compounds. And I think when we're asked sometimes about how we think about some of the headwinds that particularly we'll face over the next years as a result of Medicaid challenges in OB3 and in other ways, I think we think about the efficiencies that AI can help us generate and help us realize as being a significant way that we're going to be able to offset some of those headwinds over the next several years.

Got it. Well, as we wrap up here on time, just quickly on the headwinds. You mentioned OB3, the exchange marketplace. Any change in terms of your expected headwind that you're seeing in the business or how things are playing out?

I think the exchange dynamics have largely played out the way that we expected. We did -- we originally projected the impact from the exchange -- the loss of exchange patients would be about $75 million this year. We upped that estimate a little bit to about $85 million -- to $85 million in the second quarter revision. But other than that, I think it has largely played out the way that we expected. I think we envisioned that '26 would be the big cliff for the dramatic decline in exchange patients. We'll see what happens next year, but not expecting that number to increase other than perhaps incrementally.

Got it. Okay. We're right at time. So, Steve and Darren, thank you so much for your time.

Thanks to everybody.

Hi, everyone. Thanks again for joining us at the conference. We're really pleased to have Universal Health Services with us today. UHS is a provider of Acute Care and Behavioral Health services. So with us from the company are Steve Filton, CFO; and Darren Lehrich from Investor Relations. So thanks again for being here.

Would you guys like to start with any kind of intro comments? Or would you rather just kind of hop right into Q&A?

I'll make a few introductory comments and then turn it over to you, Steve. It just feels like ages ago at this point, but I have a quick recap of Q2. I think we were pleased in Q2 with the rebound in volumes in both of our segments, solid expense control in both of our segments. We have the benefit of the Florida DPP program, the 2025 calendar year program that was approved, and we recognized that benefit in the second quarter. We had also some unfavorable discrete items, which I'm sure we'll get into in the Q&A. As a result, we lowered the midpoint of our EBITDA less NCI guidance by about 3% at the midpoint, which now leaves us with a projection growth for the year compared to the last year of about 3% EBITDA less NCI line.

The other significant developments, I think, post second quarter were we closed the Talkspace acquisition and we completed a $1.1 billion bond issuance both in mid-August time frame. We've talked about Talkspace at some length, but I'll just remind people, I'm very excited about the opportunities that Talkspace creates for us. And again, I'm sure we'll get into more of that. But the Talkspace will add about $250 million of annual outpatient revenue to our Behavioral results. We have said previously that in the first 12 months, we expect the Talkspace results to be slightly accretive. I think for the balance of 2025 [indiscernible] likely be immaterial.

We're very excited about the Talkspace acquisition. The access to their panel of 6,000 therapists, I think, really creates an accelerated opportunity for us to grow our outpatient business, which has really been a focus of our Behavioral division for certainly the last several years and really creating the first sort of end-to-end continuum of behavioral care for -- that really exists in the industry. It's really unparalleled.

So I'll pause there, Steve, and answer whatever questions.

Okay. Yes. Well, maybe we'll start and try to keep it on the Acute side of the business, and then we'll -- kind of Behavioral for maybe the second half of the conversation. So you mentioned that you're pleased with the improved volumes in the second quarter. I think second quarter adjusted admissions were 2.9%. In the first half of the year, it was 1.4% overall. You trimmed the guide a little bit. I think now you're looking for the full year is 1.5% to 2.5% on the volume side. I guess how are you thinking about the back half volumes at this point in time and how you approach adopting the guidance there?

Yes. So as part of our second quarter commentary, we reduced slightly the volume guidance for both segments by about 50 basis points. So the midpoint of our acute volume projection growth, adjusted admission growth went from 2.5% to 2%. And really, as I think your question suggests, in our minds, it was just an acknowledgment and sort of a clarification of the fact that with adjusted admissions in the first half of the year growing by 1.4%, even though the second quarter was stronger, 2% seemed a more reasonable sort of target for the full year.

Generally, we feel like volumes are pretty solid and in line with historical volumes. I'd make the point that over the last decade, our acute care adjusted admissions have grown between 2% and 2.5% on average over a 10-year period. So adjusting to the 2% is still well within range. We like the markets we're in. We like the overall demand environment and feel pretty good about it.

Okay. And then when we think about the composition of that volume growth, I guess, how should we think about how that breaks across the different kind of insured profiles? Like how does it compare for commercial, Medicare, Medicaid, I guess, like self-pay to the degree you can comment on that?

Yes. I mean we have not -- putting the exchange dynamics to the side, which we'll probably talk about separately. But I think outside of that, there haven't been significant changes to payer mix. I think in the first half of the year, we saw a bit of an increase in Medicare and managed Medicare, a bit of a decrease in Medicaid and managed Medicaid, and commercial volumes fairly stable. We didn't really sort of guide -- have a specific guide in the back half of the year to payer mix dynamics, but expect them to essentially be relatively consistent with what the trends we've been seeing.

Okay. And then on the surgery side, I think remained a bit soft. I think you were down kind of approaching 1% in the second quarter. I think inpatient was up and outpatient was down. I think there's a lot of questions just about how kind of more broad-based elective trends are maybe holding up versus things like emergency surgery. Could you expand a little bit on sort of like the surgical experience you've had in kind of the early part of the year and how you're thinking about that and how schedules might look for the back half of the year?

So I think, as you noted, our overall surgical volumes were down 0.8% in the second quarter. And that was actually an improvement over the prior period -- sequentially, an improvement over the prior period. And we were pleased, as you suggested or noted, that inpatient volumes were up in the more sort of acute procedures. And I think we feel like that's potentially a reflection of the investments that we've made in inpatient surgeries, whether that's robotics or other equipment upgrades, et cetera. We have not historically sort of disclosed elective versus nonelective or parsed surgical growth out between elective and nonelective, but we do keep track of it and have not really noticed any significant issues in that regard.

Okay. And just in terms of, again, I guess, what you assume in the back half of the year is this relatively similar to like a continuation of the second quarter trends? Or any reason to think that's any different than maybe the exit rate on the quarter?

No. I think, as I noted before, we've scaled back our overall volume growth projections for acute care by about 50 basis points. And I think have taken into account the fact that surgical volumes have been a little lighter than maybe we anticipated at the beginning of the year, but not, so I think that's been taken into account in our guidance revisions.

Okay. And then another factor that's been discussed around some of the new facilities that you've opened would be the pushout of breakeven profitability at Cedar Hill. I guess how do we think about the factors driving kind of the pushout of the ramp? I guess how much of it -- I guess, if you wanted to kind of characterize it as things within the company's control, whether it's like the cost side and things that might be a little bit harder to control, like the pace of volume ramp, like how would we think about the balance there? And what's a reasonable time line do you think generating more like company like margins at that facility?

Yes. So just to remind people, Cedar Hill is the new facility that opened in Washington, D.C., in April of 2025, our second facility in that market, the first being George Washington University Hospital. And I think what we've found at Cedar Hill from its opening was that its emergency business, the emergency room activity, has been fairly busy and encouraging.

What has been somewhat less busy is the elective procedures. And I think we attribute that to a bit of a scarcity of physicians, both primary care and specialists in the market. And I think that's been the sort of delay in the ramp-up at Cedar Hill. We have been actively recruiting physicians to the market. And honestly, a busy emergency room in and of itself will attract physicians. It just takes some time for them to open offices and groups to branch out and have a presence in what has historically been an underserved from a healthcare perspective, an underserved part of the D.C. market.

Just reminding people about the structure of that facility or that arrangement, the district put up the capital or funded the capital for that hospital, and we have a long-term operating agreement there. And so I would just remind people that as a consequence, it usually takes us between 18 and 36 months for a new facility, depending on its location, to ramp up to divisional margin averages. In the case of this hospital in D.C., because we didn't provide the CapEx for the hospital, we don't necessarily have to get to those same margins to earn our hurdle rate of return. So I think it's an important distinction.

So we, in our revised guidance, have talked about anticipating that we'll get to breakeven at Cedar Hill by the fourth quarter of this year, obviously, to a greater level of profitability next year, and I think we'll continue to grow, albeit the ramp-up has been somewhat slower than we anticipated.

Okay. And then as part of the overall D.C. market, you're also taking control of a physician group there that's had some financial struggles. I guess, first, what's the strategic rationale for doing this? I guess like what was the company's thought process about why this was necessary? And then it does seem like there's a lot of moving parts financially. I think you're getting some interim support to kind of subsidize some of the financial performance of that asset. I guess how should we think about how that impacts the model over the next couple of years and how to build that in?

So just to level set, we, in the July time frame, transitioned a 350-physician multi-specialty physician group from the university to our ownership. And as you point out, Steve, there's a lot of moving parts in the sense that historically, we had what we described as an academic affiliation agreement with the university in which we paid the university a significant subsidy to help fund that physician group. By taking the group over, essentially having them transition to our ownership, we feel like there's better alignment between their interest and the hospital's interest and our ability to provide quality care from the physician group to the D.C. population. As far as the economics work, the payments that we've been making to the hospital cease, number one.

You referenced the fact that the university will actually make some subsidy payments to us to help subsidize the performance of the physicians as well. And we also believe that given our experience with nonacademic physician groups, we'll be able to implement and effect efficiencies, which will make the physicians more productive, allow them to see more patients, allow them to do it more efficiently. And so with all those dynamics sort of at play at a minimum, we expect the transaction to be economically neutral and with greater alignment. So we view it as a plus.

Okay. And then one focus in the second quarter, I think, was that you're increasing same-facility bed count a pretty good amount, I think, like maybe 2.5%. I'd love to hear a little bit more about like the markets where you're making these bed investments. I guess, like where does utilization and capacity sit in those markets? And I guess, how quickly do you think the occupancy of those new beds could start to translate into incremental volume for the company?

So the 177 beds that you referred to have been added at 3 different hospitals in the portfolio. One is Lakewood Ranch in Florida in the greater Sarasota market, where we built a new tower. One is Henderson Hospital in Las Vegas, which has been very busy since its opening 5 or 6 years ago, and we've built out a sixth floor at the Henderson facility. We historically have done a tour in connection with another bank conference in Las Vegas. So some of you may have been to Henderson. And if you've ever been to Henderson, you will know that if you walk through the emergency room, we are historically holding patients in the emergency room and dozens of patients at a time because we don't have available beds. So that was the impetus to building -- we're building out the sixth floor and adding 35 or 40 new beds.

And then finally, in Southern California, in our Riverside County market, we built a replacement facility for our Inland Valley facility, which was about 35 or 40 years old. So in each case, to your point, the capacity additions were done because there was documented and demonstrated need for that additional capacity. So we think they'll ramp up relatively quickly, takes some time, takes some time to get to peak margins because you've got to hire and et cetera. And so there are some challenges to opening the new capacity. But I think the capacity will generally be filled and will help us get to our targeted adjusted -- same-store adjusted admission growth in the acute business.

Okay. And yes, to your point earlier, we've now reached the exchange part of the discussion. So when you talk most recently about the exchanges, I think you're expecting the exchange EBITDA headwind to now be at the upper end of the initial guidance that you provided. I guess how should we be thinking about the underlying components of how that's going, whether it's volumes and coverage transitions, maybe other forms of coverage? And I guess how you're thinking about the impact as you move from Q2 and whether that builds or not in the balance of the year?

So again, probably worth quickly reminding people what our original assumptions were for the impact of the decline in exchange enrollment. We assumed that there would be a 25% to 30% decline in exchange enrollment as a result of the exchange subsidies lapsing. We assumed that 10% to 20% of the people who lost coverage would replace that coverage with something we generally felt it would likely be commercial coverage through their employers. And we also assumed that there would be a shift in metal tiers, particularly from silver to bronze, and tried to take all those items into account and projected a $75 million unfavorable impact. I think through the first 6 months of the year, the actual impacts have played out largely the way we anticipated. We did, as I think you know, increase our full year projection of the impact from $75 million to $85 million as part of our guidance revision.

And I think that revision was really the one assumption that I think we have tweaked is it turns out that rather than seeing some of the folks who lost their exchange coverage converting to other commercial coverage, it really felt like there was almost a one-for-one exchange between those who lost their exchange coverage and increased uninsured or uncompensated volume. And so the slight increase and uptick in our impact projection, I think, was a result of sort of tweaking that aspect of the assumptions.

So what we have is $35 million impact in the first half of the year. We're expecting a $50 million impact in the back half of the year. And I think that's a function of just the progression of people losing their coverage. I think some people might have paid premiums for several months and then stopped, not everybody stopped paying premiums in the first month. Honestly, to some degree, we didn't necessarily know when people stopped paying their premium. So it took us a bit of time to factor that in. So roughly, I think we think there'll be about a $50 million unfavorable impact in the back half of the year. And that, I think, essentially becomes sort of the run rate then for 2027.

Okay. And then you mentioned this as part of the planning process. But for the exchange volumes that remain, obviously, there's been a big shift in metal tiers. In some markets, it's more pronounced than others. I guess could you explain a little bit like what you plan for inside of the headwind related to that? And I guess when it comes to having patients with much higher co-pays and deductibles as they use services, like how do we think about the collection time line on those dollars and when you might have good visibility to them? Or just maybe characterize your level of visibility to those collection trends now.

Yes. So as I said, I mean, I think we tried to take that into account. I think we assumed that there would be something around like a 25% shift from -- particularly from the silver to the bronze metal tiers. And that seems to generally be tracking our experience. And generally, what we find is that the more of the ultimate bill that is the responsibility of the patient, the higher the level of uncollectibility is. Again, that's not anything new. We have factored that in, et cetera. Like I said, the biggest change, I think, in our viewpoint was this idea that rather than some people losing their exchange coverage and converting to commercial, it's really almost been a one-for-one exchange between exchange coverage and uncompensated care, and people that are pure uncompensated care have a very low collection rate generally.

Okay. And maybe we'll switch a little bit more to the Behavioral questions at this point. So you mentioned a little bit off the top about the Talkspace acquisition and some of the strategic rationale for it. I guess how do we think about the first couple of weeks of integration, how that's going, like what the key integration milestones are going to be? And I guess, how do you think about the KPIs and disclosure we might get on this business over the next few years?

So first of all, and I think I said this earlier, I'll just repeat that our expectation is in its first 12 months -- or our first 12 months of ownership, the impact of the Talkspace acquisition will be slightly accretive. I think for the 4.5 months of 2026, it's likely to be an immaterial impact. But over the longer term, I expressed great enthusiasm about the Talkspace acquisition. I think that the most significant impact in the short term, what I'll call maybe the short and intermediate term, is that on our -- what we described as step-down patients, our inpatients or our patients who are discharged from our inpatient facilities but require follow-up care, very often, our ability to keep that, if you will, follow-up care sort of within, I'll call it, the UHS family has been limited historically.

I think for a couple of large reasons. One is geographic. So when we talk about follow-up care, we talk about programs that are described as partial hospitalization or intensive outpatient. And what distinguishes these programs from what I'll call sort of traditional outpatient where you're seeing a therapist once a week or twice a week for an hour or so, these are patients who are seeing -- coming and getting therapy, both individual and group therapy 3 times a week, 4 times a week, 5 times a week, sometimes for 4 hours a day, 5 hours a day, 6 hours a day. And historically, we lost patients who didn't live close to our facilities. Maybe they were willing to drive 2 hours to become an inpatient or to be admitted as an inpatient, but now that we're asking them to come back 3, 4, 5 days a week, they really didn't want to make that same drive.

Also, we didn't always have -- we've been a very inpatient-centric base business, haven't always had the same number of therapists on the outpatient side. As I said, one of the great attractions of Talkspace is a panel of 6,000 therapists who can provide and have capacity to provide that intensive outpatient partial hospitalization care that we weren't always able to provide. And just really having that virtual component and virtual alternative and virtual option is, I think, going to be a huge benefit for us.

But when we think beyond that and think about other opportunities, I think they're just, obviously -- overstating if I would say, limitless, but there really are just a significant number of other opportunities, one of which -- and I don't think I could cover all of them in this setting, but one of which is some integration with our acute care business. So we discharge patients from our acute care hospitals, many of whom may require some level of follow-up psychiatric care. So if you think about -- been a lot in the news in the last week or so about women with postpartum depression as an example. So a woman who is showing evidence of postpartum depression after delivery, might benefit -- extremely benefit from sort of Talkspace follow-up. Somebody who's just received a cancer diagnosis is often devastated, et cetera, working through that from a mental health perspective, again, that sort of opportunity.

We have a long-standing relationship with the military. We have what we call our Patriot Support Program, again, largely designed to provide inpatient support for active military, et cetera. But if you think about, again, some of the news coming out of the USS Lincoln, et cetera, again, lots of opportunities, I think, for that virtual alternative to really be helpful to active-duty soldiers who are suffering from PTSD or addiction issues or whatever. So again, very, very upbeat about the opportunities for Talkspace in 2027 and beyond.

Okay. When we think about the demand environment for kind of the base behavioral business, I guess how would you characterize that where we are kind of coming out of the first half of 2026? Obviously, you mentioned earlier, you trimmed the volume outlook there a little bit. It seemed like labor and the investments you've made that like labor is a bit less of a gating factor than maybe it's been in the past. I guess how do you think about what would be needed to really see an improvement on the volume side?

Yes. So if you go back and you look at it, our adjusted patient days in Behavioral grew by 0.9% in 2025. They -- in the first half of this year, grew by 1.5%. So they are accelerating. I think we have historically, I think, or at least over the last several years, kind of had this 2% to 3% growth target. I think in retrospect, that's proved to be a little bit aspirational. So we've scaled it back to more like 1% to 2%. We're sort of smack in the middle of that in the first half of this year. And that's why we scaled our projection back to that 1% to 2% range.

Again, what I would say, and it's not exclusively a result of the Talkspace acquisition, but I would suggest that where the accelerated growth in Behavioral demand will occur over the next several years is on the outpatient side, a better and more efficient capture of those step-down patients on our part, more dedicated focus on capturing those patients. The Talkspace alternative certainly helps. We've also talked quite a bit in the last year or 2 about what we describe as our Thousand Branches initiative. These are freestanding outpatient facilities that we're building and standing up around the country.

One of the things that we have found is that as patients enter the healthcare system, if they're entering the system in an outpatient program, very often, they're reluctant to do so on the campus of a behavioral -- an inpatient behavioral facility. And so having these freestanding outpatient centers as an alternative, again, I think we think is another efficient alternative. And again, it really sort of -- we can really now meet patients where they want to be treated, where their employers and payers want them to be treated. In some cases, that can be in a virtual setting. In some cases, it can be in a freestanding setting.

And in some cases, if patients are comfortable, it can be on the campus of our hospitals, our inpatient facilities. But the point being that we're really building out our outpatient capacity so that we really can offer patients, again, the most efficient and most comfortable setting for them.

Okay. And you mentioned with the second quarter, some discussion around the San Antonio facility in the Behavioral business that's right now dealing with some CMS certification challenges. I guess how are you thinking about like what might be a reasonable time line for getting certification back, like how that's kind of played out in the past? And maybe how you're thinking about the opportunity to like recover business in that market over the next couple of years if that occurs?

Right. So as we've noted, the Laurel Ridge facility in San Antonio has continued to operate, albeit with a much smaller patient complement. And the reason for that is we have been going through the process of going back to CMS and getting recertified and they require that you have patients in order for them to come back and survey, et cetera. And so we expect that -- we've completed, I think, the first several steps of recertification. The next several steps involve some regulatory visits and surveys, et cetera, which we hope will take place over the next few months. And that ideally, we would hope to be back in business and sort of ramping back up in early 2027.

That sort of ramp-up is a little bit -- not, I think, perfectly analogous, but a little bit like opening a de novo facility. We obviously do have established referral relationships in that market, et cetera, which should help us ramp up more quickly. But I think, again, as we get to the third and fourth quarters, probably more likely the fourth quarter, we'll have, I think, hopefully, greater visibility on when we can actually get our certification back, when we can start taking patients, at what pace, et cetera. And so when we give our 2027 guidance, I think we'll be more specific about it.

But I think suffice it to say that our focus right now is on getting recertified where we've been already working closely with the regulators, cooperating, et cetera. So feeling good about that process, but difficult to predict exactly the pace and how it will go at this point.

Got it. Okay. And then kind of more of, I guess, an overall question for the enterprise. It would just be, you've seen a pretty big increase in professional and general liability expense. I guess we'd love to just understand a little bit better what's the absolute level of that expense that's now running through the P&L. And I know a lot of it is based on like actuarial experience and things like that. But like what's a reasonable way to think about what the expense profile and the growth of that expense could be over the next couple of years?

Yes. I mean, look, it's worth noting, and I'm sure, obviously, the reason you're asking the question is that, that expense has been growing, I think, faster than the rate of inflation certainly over the last several years. I think that's honestly true for us as well as other healthcare providers. Honestly, we've seen that from providers outside of the healthcare space. There's just greater litigation activity. And there's some element -- I think one of our peers uses the term social inflation. Juries willing to render verdicts that are higher than they have been in the past, et cetera, which tends to increase the overall expense.

I think it's worth sort of putting in context. I mean, our malpractice expense generally averages about 1% of revenues, which puts it for us in the kind of $175 million to $200 million annual range. That's obviously not an inconsequential number, but certainly one of our smaller expense numbers compared to things like salaries and supplies, et cetera. I do think it's likely that malpractice expense continues to grow faster than inflation. So instead of growing at 4% or 5%, maybe it grows at 10% to 15%. Unlike most other expenses, we tend to recognize it in real time as best as we can through the help of third-party actuarial reviews, which we do twice a year.

So it's a little bit harder to predict and project. But yes, I mean, again, what I would just say is I think -- I don't think we'll vary tremendously from that sort of 1% of revenue range, but it certainly may increase somewhat faster than the inflation rate.

Okay. And then when we think about the guidance revision that you touched on with the second quarter, it looks like there's a bit of an acceleration required in the second half. I know the concept of core growth kind of differs a little bit from analyst to analyst and investor to investor, but it looks like core growth needs to be a little bit better in the back half of the year than where we think maybe it was in the first half of the year. Would love if you could just walk us through the factors contributing to what we perceive to be that ramp-up and how the company is feeling about it at this pace.

Yes. I think we've touched on several of the more significant elements. We -- the Acute capacity that we added and all those 177 beds and those 3 projects that I alluded to earlier, all opened in the second quarter of this year. So we think they'll continue to ramp up in the back half of the year, and we'll get a benefit from that. We talked about the continued improvement at Cedar Hill. And so I think that should and will do better in the second half of the year than it did in the first.

We talked about growth in Behavioral. While I don't think we'll get significant growth from the Talkspace acquisition itself, I do think we'll get growth from some of our own outpatient initiatives in the back half of the year. So yes, I think all those things combined lead us to believe that we should -- meeting that accelerated sort of uptick in earnings in the back half of the year, which is embedded in our guidance, is definitely achievable.

Okay. And when we think about the policy headwinds are obviously in kind of material focus at the moment. I guess how are you thinking about what you might see in 2027, whether it's the potential for the exchange market enrollment to take another step back or whether there could be some challenges in your business from things like Medicaid work requirements?

Yes. As we talked about before from an exchange perspective, I think our expectation is that the biggest disenrollment activity has already now taken place. Might there be an incremental step-up next year? That's possible. But I think, as I was saying before, what we'll see is because the impact of the exchange disenrollment has progressed and gotten larger as the year went on, not by a huge amount, but like I said, $35 million in the first half of the year, $50 million projected in the back half of the year, it will continue to increase next year, we think, at that sort of exit rate for the back half of this year. So that's a little bit of a headwind into next year.

The other major issue, which you've alluded to, Steve, is Medicaid disenrollment. I think most providers, both public and private providers, have been reluctant to really precisely try and size the Medicaid work requirements and the potential impact on Medicaid disenrollment. As we all wait to see, I think a lot of the specifics of how this is going to play out remain to be seen. There's been, I think, estimates from like CMS that somewhere around 4% of Medicaid enrollees could lose their coverage. But not exactly sure who those enrollees are, whether they're major utilizers of the system, et cetera, that remains to be seen. How different states implement the Medicaid work requirements, at what pace, remains to be seen.

Some states are actually challenging the work requirements in court. We're also seeing debate about how there are exceptions for medical frailty in the bill, in the OBBB. And we think a lot of behavioral coverage, as an example, may well qualify for the medical frailty exception. So we'll have to see how that plays out. So yes, I mean, the expectation is that Medicaid work requirements and the disenrollment coming from them could be a headwind to next year, but probably just too early to be precise about what that could be.

Okay. Well, thanks for your time today. I think that's where we'll have to leave it. Appreciate it.

Okay. Thank you.

Good day, and thank you for standing by. Welcome to the Q2 2026 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker for today, Darren Lehrich. Please go ahead.

Thank you. Good morning, and welcome to Universal Health Services Second Quarter 2026 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then we will open it up for Q&A.

During today's conference call, we 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, we recommend a careful reading of the section on Risk Factors and Forward-Looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2025, and our Form 10-Q for the quarter ended March 31, 2026.

In addition, we may reference during today's call, measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI and adjusted net income attributable to UHS, which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in yesterday's press release and our supplemental materials on our website.

With that, let me now turn it over to Marc for some introductory remarks.

Thanks, Darren. Good morning, and thank you for joining today's call. I'm pleased to share some operational and strategic highlights from the second quarter before Steve discusses financial highlights.

Overall, our second quarter of 2026 featured a rebound in Acute Care volumes, Behavioral Health volumes that were consistent with recent trends, continued expense management and exchange trends that progressed in line with our expectations. During the quarter, we also benefited from the approval of the Florida DPP program for 2025, which was not contemplated in our original outlook.

From an operational perspective, I want to highlight the investments we are making to expand capacity in the communities that we serve. We continue to see favorable demand trends across our markets, supporting confidence in the long-term need for capacity in both inpatient and outpatient service lines in our Acute Care and Behavioral Health segments, allowing us to extend our footprint with access points that are convenient to our patients and help further align us with physician stakeholders.

In Acute Care, we added 177 licensed beds in 3 hospitals during the second quarter. These new beds represent a 2.5% increase to our same-facility bed capacity and position us to respond to strong demand in these communities. In May, we officially opened the Alan B. Miller Medical Center in Palm Beach Gardens, Florida, and we are very pleased to have achieved joint commission accreditation for this de novo hospital in July, reflecting sound execution by our local team. We've experienced a strong reception from the Palm Beach Gardens community, and are excited to serve this fast-growing area of Florida with the newest and one of the most advanced medical campuses in the region.

Within our Behavioral Health segment, we continue to make strong progress in our integration planning for the pending Talkspace acquisition, which we expect to close in mid-August of this year. Talkspace represents not only a unique opportunity for us to accelerate our presence in the outpatient market, but also creates the nation's first end-to-end continuum of behavioral health care services, from acute inpatient and residential services, inpatient, in-person, outpatient care and soon with Talkspace virtual services nationally.

As Steve will detail shortly, we've increased our professional and general liability reserves and now assume higher anticipated operating losses at our de novo hospital in Washington, D.C. as well as San Diego -- I'm sorry, San Antonio, Texas behavioral hospital that we are in the process of recertifying in order to reestablish much-needed mental health services capacity in that region of Texas. Accountability and delivery of high-quality care are at the core of our purpose. We are deeply committed to excellence and to addressing any instances that fall short.

Overall, the broad portfolio continues to perform well operationally and clinically, and we have a 46-year track record of strong quality and safety performance across both our Behavioral Health and Acute Care divisions.

Before passing it over to Steve, I want to make a brief comment about our share repurchase activity during the second quarter, which accelerated to $320 million as compared to $127 million in the first quarter of 2026. The recent dislocation in our share price represents a compelling opportunity to deploy capital and retire UHS shares at heavily discounted levels. Given the strength of our balance sheet and the confidence we have in our ability to generate cash flow, we intend to remain highly active with our share repurchase program at these levels.

In closing, I want to thank the UHS team for their focus on quality patient care and for their ability to adapt in such a dynamic 2026 operating environment. I want to emphasize that our strategy remains steadfast: to invest in high-growth markets, expand access to care, operate efficiently and create long-term value for patients, employees and shareholders. I remain very optimistic about our long-term outlook, given the quality and strength of our portfolio, the experience of our management team and the underlying demand characteristics of the markets that we serve.

With that, I'll now turn the call over to Steve Filton for more details on the quarter.

Thanks, Marc. I will highlight a few financial and operational trends before opening the call up to questions.

The company reported adjusted EPS of $5.98 for the second quarter of 2026, representing growth of 12% on a year-over-year basis. Second quarter adjusted EBITDA less NCI was $678 million, representing growth of 5% on a year-over-year basis. When excluding the $100 million out of Florida -- out-of-period, Florida DPP benefit not contemplated in our guidance, our Q2 adjusted EBITDA less NCI fell short of our internal expectations, primarily attributable to 3 items: approximating $63 million, including $28 million attributable to higher professional and general liability reserves; approximately $20 million attributable to the San Antonio behavioral facility; and approximately $15 million attributable to a continued slower ramp-up of our Cedar Hill Medical Center de novo facility in Washington, D.C.

At the segment level, on a same-facility basis, adjusted admissions in our Acute Care hospitals increased 2.9% as compared to the second quarter of 2025. Volume performance improved sequentially from the first quarter of 2026 and was broad-based geographically. Same-facility Acute Care emergency department visits increased 4%, while same-facility surgeries decreased 0.8% as compared to the second quarter of 2025. Although surgical volumes continue to be somewhat muted, the trend in the second quarter improved slightly compared to the past several quarters.

From a service line perspective, we experienced positive trends in certain higher acuity inpatient service lines, notably urology, neurology and cardiology as compared to last year's second quarter. Payer mix trends remain consistent with recent quarters with stronger growth in Medicare and Managed Medicare, modest growth in managed care volumes, excluding the exchanges, and slightly lower Medicaid volumes.

Year-to-date, facility -- year-to-date same-store facility Acute Care adjusted admissions growth through the second quarter of 2026 was 1.4%, and we believe it's appropriate to fine-tune our volume guidance for the full year to a range of 1.5% to 2.5% or 50 basis points lower at the midpoint of our prior range to reflect the year-to-date trends. On a same-facility basis, net revenue in our Acute Care segment during the second quarter of 2026 increased 8.2% and increased 5.9%, excluding the impact of our health plan. Acute Care same-facility revenue per adjusted admission increased by 3.0% during the second quarter of 2026 on a reported basis, and increased 2.7% after excluding net out-of-period Medicaid supplemental benefits from both periods. Acute Care rate growth continues to track in line with our expectations overall.

Operating expenses were well managed across labor, supply and other expense categories. Same-facility Acute Care salaries, wages and benefits expense for adjusted admission increased 2.7% and supply expense per adjusted admission decreased 2.5% over last year's second quarter. Contract labor was 2.5% of Acute Care segment revenue or 20 basis points lower year-over-year. Other operating expenses increased primarily due to our health plan, which experienced revenue growth of approximately 35%.

For the second quarter of 2026, our Acute Care performance resulted in 8.2% same facility segment EBITDA growth. Excluding the out-of-period supplemental program benefit from both periods, second quarter 2026 same-facility Acute Care segment EBITDA increased 6.3% on a year-over-year basis.

In our Acute Care segment, the net out-of-period benefit related to supplemental payments was approximately $7 million, comprised of approximately $23 million in the second quarter of '26 from the Florida program as compared to approximately $16 million of out-of-period amounts in the second quarter of '25 related to other state programs.

With respect to health insurance exchange trends during the second quarter of 2026, we estimate an impact of approximately $20 million, which was in line with our expectations.

Exchange volumes declined approximately 15% as compared to the second quarter of 2025. The reduction in the number of exchange volumes corresponds to the increase in self-pay volumes during the second quarter. Based on the trends during the first half of 2026, we expect the full year pretax impact to be within the upper half of our originally contemplated guidance range or approximately $85 million. While the first half decline in exchange volumes was below the 25% plus range in our original forecast, we believe our impact estimate is supported by the trends we have observed year-to-date in our business and other dynamics such as shifts in the metal tier that are playing out within the exchange market.

As it relates to our Acute Care de novo hospitals, our Palm Beach Gardens facility opened in May and second quarter start-up losses at this facility were in line with our expectations. In Washington, D.C., Cedar Hill Regional Medical Center entered the same-facility hospital group in the second quarter and continue to ramp at a slower-than-expected pace. Second quarter performance at Cedar Hill represented an improvement of approximately $15 million year-over-year, although results there were similar to our first quarter.

Turning to our Behavioral Health segment results. During the second quarter of 2026, same-facility net revenue increased 7.4%, supported by a 6.1% increase in same facility revenue per adjusted patient day and a 1.4% increase in same-facility adjusted patient days as compared to the second quarter of 2025. Year-to-date, same facility adjusted patient day growth through the second quarter of 2026 was 1.5%, and we believe it's appropriate to fine-tune our volume guidance for the full year to a range of 1.0% to 2.0% or 100 basis points lower than the prior range at the midpoint to reflect year-to-date trends and an outlook for second half volumes to be similar to Q2 performance.

Same facility Behavioral Health segment EBITDA increased 9.0% in the second quarter of 2026. Excluding the net benefit from out-of-period supplemental payments, same-facility revenue per adjusted patient day increased 5.3% and same facility segment EBITDA increased 5.7% on a year-over-year basis.

In our Behavioral Health segment, the net add of period benefit related to supplemental payments was approximately $18 million, comprised of approximately $77 million in the second quarter of 2026 from the Florida program as compared to approximately $59 million of out-of-period amount in the second quarter of 2025 related primarily to the Tennessee program.

For the second quarter of 2026, Behavioral Health segment facilities, salaries, wages and benefits per adjusted patient day increased 4.8% on a year-over-year basis, showing improvement on a sequential basis as head count moderated further to 2% growth. In California, based on our success in hiring and training, we remain on track with the $35 million impact that we contemplated in our original 2026 outlook with respect to the state's nurse staffing ratio requirements that went into effect June 1.

As it relates to our Behavioral Health hospital in Texas that is in the process of getting recertified, we stopped receiving reimbursement at the end of April and do not expect to receive reimbursement from government or managed care sources until we regain certification, which we anticipate in 2027. The facility will operate, in the meantime, with limited patient census and therefore, we will incur operating losses and will be excluded -- and the facility will be excluded from our same facility performance.

During the second quarter of 2026, pretax losses at this facility totaled approximately $10 million, including staff severance costs. We expect operating losses to run between $5 million and $10 million per quarter for the balance of 2026. During calendar year '25, this facility's EBITDA was approximately $25 million.

Moving on to cash flow and balance sheet highlights. Second quarter cash generated from operating activities was $44.3 million as compared to $549 million during the same period last year. During the second quarter of 2026, we spent $228 million on capital expenditures, reflecting the de novo hospital opening and bed capacity expansions Marc referred to earlier.

During the second quarter of 2026, we acquired 1.89 million of our shares at a total cost of $320 million. As of June 30, 2026, we had $978 million of repurchase authorization available pursuant to our stock buyback program, and we expect to remain active with share repurchase throughout 2026.

From a balance sheet perspective, we ended the quarter with cash of $139 million, total debt of $4.85 billion and net leverage of 1.8x. As of June 30, 2026, we had $1.27 billion of additional borrowing capacity available pursuant to our revolving credit facility.

Turning to our outlook for 2026. We are updating our financial operating forecast to reflect year-to-date performance and recent developments. The components of our updated 2026 guidance compared to our previous forecast can be found in our second quarter earnings press release and our supplemental earnings material.

Our updated guidance represents approximately 7% revenue growth, 3% EBITDA less NCI growth and 6% EBITDA -- EPS growth at the midpoint. Focusing my remarks specifically on adjusted EBITDA less NCI, our updated 2026 forecast is in a range of $2.61 billion to $2.72 billion, representing a decrease of approximately $50 million from our prior outlook at the $2.66 billion midpoint.

At a high level, we include approximately $150 million of additional Medicaid supplemental net benefit for the full year that is offset by approximately $200 million of adverse items not originally contemplated in our outlook. The primary drivers of these factors are as follows: First, we now expect the net benefit from Medicaid supplemental funding to be approximately $1.5 billion for the year or an increase of approximately $150 million from our prior outlook. This $150 million is comprised primarily of the $100 million net benefit from Florida recognized in the second quarter, growth in other programs during the first half of 2026 and approximately $25 million related to the Texas Atlas program that we expect to record in the third quarter. It is worth noting that more than 1/5 of the $1.5 billion total is derived from state-based programs not subject to the reductions in the OBBA legislation.

Second, we now include $50 million of impact associated with the Texas behavioral health facility that is in the process of being recertified. This includes the loss of approximately $30 million in earnings originally budgeted for this year and approximately $20 million of operating losses assumed for the full year while we work towards recertification. Approximately $20 million of this impact was in the second quarter and the remaining $30 million is expected to impact the second half of 2026.

Third, we are adjusting the year-over-year tailwind related to Cedar Hill Regional Medical Center in Washington, D.C. from $50 million to $20 million. Our original guidance assumed Cedar Hill would be breakeven during the first half and have positive earnings in the second half of 2026, which would have yielded a $50 million de novo tailwind net of anticipated start-up losses at the Palm Beach Gardens de novo hospital. The $50 million difference in our guidance now assumes Cedar Hill will reach breakeven during the fourth quarter and therefore, approximately $20 million of start-up losses at our Florida hospital will not be contained by second half operating gains at Cedar Hill as originally contemplated in our prior -- approximately $20 million of this impact was in the first half of 2026 and the remaining $30 million is expected to impact the second half of '26.

Fourth, we are increasing our professional and general liability expense estimate for the full year by approximately $50 million, of which $28 million was recognized during the second quarter of 2026, and the remainder represents increases to our quarterly expense going forward. It is important to point out that the increase to our reserve and additional expense for the balance of 2026 is split somewhat evenly between our Acute Care and Behavioral Health segments and reflects industry-wide trends generally associated with higher claim severity across all health care settings. The PLGL adjustments are in connection with our semiannual third-party actuarial review process conducted during the second quarter.

Finally, we are fine-tuning other aspects of the 2026 outlook, including the same facility volume assumptions for both segments, which resulted in EBITDA less NCI impact of approximately $50 million. As mentioned earlier, we now expect Acute Care adjusted admissions to be in a range of 1.5% to 2.5% and Behavioral Health adjusted patient days to be in a range of 1% to 2% as compared to our prior range of 2% to 3% for both segments. We believe centering our same-facility volume outlook at approximately 2% for Acute Care and 1.5% for Behavioral Health still reflects a healthy demand environment, while being respectful of our more recent performance.

Operator, that concludes our prepared remarks, and we're pleased to answer questions at this time.

[Operator Instructions] Our first question today will be coming from the line of Ann Hynes of Mizuho.

Sorry about that. I was on mute. Just -- my question is focused on your Acute Care volume change. Is that non-ACA-related, meaning you're seeing some pressure just in your base business? And if that's the case, to you, just provide a little bit more detail on what you think is happening.

Yes. So I think as we said, Ann, in our remarks, we're just trying to be practically reflective of our first half performance. Acute Care volumes sort of trended in that 2% adjusted admission range for the first half. I think we're seeing continued shift of certain elective and outpatient procedures into alternate site settings, ASCs, freestanding imaging, et cetera. And I think that's the primary contribution. But we're pleased overall with our Acute Care volume growth in Q2, pleased with the surgical volumes in Q2, which both overall volumes and surgical volumes rebounded in Q2. So we feel good about that, but felt like we were being, I think as our comments indicated, sort of respectful of the first half performance by slightly lowering the midpoint of our admission growth for the back half of the year.

Next question. And our next question is coming from the line of Andrew Mok of Barclays.

When we contemplate all the puts and takes to the guidance revision for this year, it looks like underlying EBITDA growth accelerates several hundred basis points in the back half. Can you walk us through the drivers of that back half acceleration?

Sure, Andrew. I think as we contemplated the revised guidance, we felt like we identified a number of positive developments that should occur during the second quarter. One, which we referenced in our prepared remarks, was the new capacity. We added 177 beds across 3 markets in our acute facilities during the second quarter. Those projects will continue to ramp up as the year goes on. The initial openings of all 3 of those projects, I think, indicated strong demand. And so we're very positive about that. And those beds, again, I think as Marc mentioned in his comments, represent about a 2.5% increase in our bed capacity. So that's one item.

I think -- both Marc and I mentioned that Cedar Hill -- that benefit will continue to grow as the year goes on. If you recall, we lost $25 million in the third quarter of last year at Cedar Hill. We're expecting Cedar Hill to be at breakeven this year. So that's another positive swing there.

In Behavioral Health, I think I said in my comments, that our head count growth was 3% in the first quarter, moderated to 2% in the second quarter. We expect the head count and labor cost growth to continue to moderate during the second half.

And finally, our comparison in the second half in Nevada, particularly in the fourth quarter, had seasonally softer trends during 2025. And we continue to see more normal growth trends in Nevada during 2026. So that's another opportunity for accelerated growth in the back half of the year.

And our next question will be coming from the line of Matthew Gillmor of KeyBanc.

For the Florida DPP program, I heard that you booked the [ '25 ] portion in the second quarter. If this program is renewed for fiscal '26, with the sizing of the '26 program be about the same? And I think bigger picture, I just wanted to better understand if there are more opportunities with DPP to be recognized during 2026?

So I think the answer, Matthew, is we're not certain what the impact of the 2026 approved program would be, which is partly why we have not either recorded any benefit in '26 or included it in our guidance. Obviously, if the program is approved, we will record it and we'll be benefited by that.

As far as other programs, there was a recent approval of a California program that we've been recording. I don't think we think that has a material impact on us. There are a couple of other states that are contemplating either new programs or expanded programs. I don't know that any of them at this point would be material and certainly none of them are included in our guidance.

Got it. And then as a quick follow-up, Steve, can you give us a sense for how we should think about the ramp of the facility in San Antonio once it gets the CMS certification back in 2027?

Yes. That's hard to do at this point, Matthew. Obviously, we don't know when the facility would or could be recertified. We don't know if it will be recertified with certain sort of conditions as to its ramp, et cetera. So as we go through the process of getting surveyed, of dealing with the regulatory environment as we learn more about it, we'll be relaying that to you all, both in terms of timing and ramp expectations, et cetera.

The one thing that I will say is just reiterate what Marc said and that is, we've had a lot of support from the broad San Antonio community. The [ beds ] at Laurel Ridge Hospital represent about half of the behavioral beds in the market. And so they are sorely missed in the community by the population, by referral sources, et cetera. So our hope would be -- and our expectation, that the demand will be there when and if we get recertified, and we would be prepared to ramp up relatively quickly and efficiently, but we'll continue to keep you posted on the timing of that.

Our next question will be coming from the line of Jason Cassorla of Guggenheim Partners.

Maybe -- just hoping you can discuss behavioral volumes, just how that 1.4% compared to your internal expectations, I guess, particularly after the head count increases you've had over the past few quarters. Anything changing on the demand front? Or is this very much like more of the same as you've flagged before around outpatient preference or outpatient shifts? Just any thoughts on the Behavioral Health volume demand environment would be helpful, too.

Yes. Jason, I mean, in the case of Behavioral, I think the 1% to 2% change to our estimated volume range is very consistent with what we have been running for now a number of quarters. I think we had originally anticipated a slightly higher growth rate, largely based on increases in outpatient demand. And I think to date, outpatient has been growing at about the same rate as inpatient. To your point, we've added some head count in order to allow us to accommodate more outpatient capacity. I think it's just growing a little bit slower than we originally imagined.

As we, I think, talked about in the last couple of calls, we do expect the acquisition of Talkspace to be a significant accelerant to our outpatient growth, really providing our patients this virtual option for outpatient treatment and outpatient care that we really weren't able to offer before in any sort of sizable way. So obviously, the Talkspace acquisition won't be completed till August. It will take a little bit of time to complete that integration fully. But I feel like at that point in time, we may revisit our outlook for -- particularly for outpatient growth. But yes, I think the change that we made was largely really just to recognize that that's kind of the environment that we've been operating in for some time.

Got it. Very helpful. And then if I could follow up, I just wanted to ask about the malpractice reserve headwinds. It looks like increases to those reserves have had like a 2% to 3% annual EBITDA headwind over the past few years. I guess just stepping back, do you think these types of hefty increases will be like simply structural moving forward? Or are there any developments that could give some sort of visibility into a deceleration in those costs? Or any thoughts around that would be helpful.

Difficult for us to predict, Jason. What I would say is we include in our guidance and in our budget, the amounts from our third-party actuaries. We don't independently come up with those numbers. And then, of course, we have, on a twice a year basis, a third-party actuarial review of where our expense and reserves stand. And to your point, they've been increasing. As we said in our prepared remarks, I think the main reason they've been increasing has been an overall increase in the severity of claims across health care providers of all sorts, including Acute and Behavioral. I don't think this is anything UHS-specific.

In terms of the things that we do to control that, obviously, internally, we have significant risk management programs to reduce the number of negative outcomes, et cetera, and are very focused on that. But in terms of the broader sort of environment where cases are just worth more, both in settlements and in verdicts, difficult for us to control that. There is a significant amount of lobbying going on by the industry for malpractice and [ tort ] reform at both the state and federal levels, but very difficult to predict how that will turn out.

And our next question is coming from the line of Pito Chickering of Deutsche Bank.

A question on surgical volumes. Can you talk about the emergent versus elective surgeries that you saw in the 2Q and split out between inpatient and outpatient? And what do you think the demand set up is for that in the back half of the year?

So Peter, we don't necessarily track elective versus nonelective surgeries. What we said in our prepared remarks was overall surgical volume was down 0.8% in the quarter. That's a bit of an improvement from the first quarter sequentially. On a blended basis, it reflects an increase in inpatient surgeries and a slight decline in outpatient surgeries.

What I would say is that surgical performance or our surgical volumes seem to be a little bit better than some of our peers. Always hard to know exactly why that is. I will say that internally, we've been very focused in the last several quarters, maybe the last year on -- in an environment where we are otherwise, I think, trying to be very tight on expense control and capital spending. We've been very focused on investing in those equipment and other investments that will be revenue producing, whether that's robotics, whether that's more advanced imaging equipment, et cetera. And it feels like that is having some impact -- some positive impact. So we're pleased with that.

Then a follow-up there. I mean, I guess, are there any areas within specific -- or weaknesses because you don't track emergent versus elective. I guess, just overall, are there any sort of categories that were sort of stronger or weaker within the quarter?

And then you talked about this in the script, but how should we think about the continued focus from CMS to push outpatient procedures into the ASC and kind of how do you guys combat that? And how do you view, I guess, sort of medium-term outpace and surgical growth?

Yes. So we didn't necessarily comment specifically on surgeries, but having talked about service line growth in areas like urology and neurology and cardiology, I would suggest that those are areas where procedural volumes were strong as well.

Obviously, the shift to outpatient is nothing new, as you know, Pito, I think we combat that in a number of ways. We continue to invest in ambulatory surgery centers where they're appropriate and where they make economic sense. We certainly have at least one ASC in every single one of our markets, and in many cases, multiple ASCs. We continue to expand. And like I said, invest in our own outpatient surgical capacity, whether that's physical capacity, building more OR suites or whether that's investing in equipment, responsive to the needs of our procedure list. And we continue to do that. And I think, obviously, based on the second quarter performance, I would say, do it effectively. But the shift to outpatient certainly is going to continue, and we'll continue to pursue the initiatives that we've been pursuing to counter that.

And our next question is coming from the line of Ryan Langston of TD Cowen.

Sounds like you had fairly strong same-store ED volumes, Steve, I think I heard you say around 4%, but a little less growth in inpatient admissions and surgical procedures. Anything in particular driving that sort of slightly lower ED conversion to inpatient rate?

No. I think, Ryan, that's -- again, that's not a new phenomenon. I think the issue is that for a good portion of the population who don't have their own primary care doctors, they use hospital ERs as their primary care doctors. And as a consequence, those visits are not necessarily sort of traditionally emergent. And so we can -- while we continue to see a lot of acutely ill patients in our ERs, we also continue to see patients who are coming there for what traditionally have been more like a PCP visit.

Got it. And then just a quick follow-up. I appreciate the comments on the share repurchase and prepared remarks. Any way to size how much of the 978 million authorization you may use through the rest of the year and maybe how much you've repurchased quarter-to-date?

Yes. So we're not in the practice of sort of reporting share repurchase on an intra-quarter basis. I think we went into the year with the notion that we've repurchased somewhere in the $800 million to $900 million worth of shares. We'll certainly meet that, if not exceed that. We don't have a specific plan, but we'll continue to monitor the market.

As Marc indicated in his comments, we view the current share dislocation price as a compelling opportunity. We'll continue to be active. We'll continue to evaluate it against other capital deployment opportunities we might have. But again, in this environment, what we certainly are committed to remaining an active acquirer of our own shares.

Next question is coming from the line of A.J. Rice of UBS.

First, this is something we get asked a lot about, so I'll throw it out. I know it's out there. But you sort of sized your EBITDA from supplemental payments. Obviously, in 2028, they'll start to ratchet down somewhat because of the One Big Beautiful Bill. Are you doing anything to sort of think about that? I know there's a chance that Congress could ask -- act and delay it, the implementation. But how do you think about how that might impact your long-term growth rate? And I know there's technology investments you're doing and other things like that. Just wondering how you think about that? And are there things you're doing now to prepare to offset that?

So A.J., that's a pretty comprehensive question. I'm going to try and answer it at a high level, probably can explore it in more detail in some other setting. So one, I think Marc talked about the fact that -- and my comments as well, that there was, I think, strong -- from our perspective, strong expense management in the quarter. A number of initiatives to control productivity, make it more efficient. Supply expense on the acute side on a per adjusted admission basis was actually down in the quarter. All those initiatives leading to that, I think, strong expense outcomes will continue, and we'll build on those and compound those.

I think in previous calls, we've talked about a significant amount of investments in technology, both AI and non-AI technology, that is leading us to productivity improvements to improvements in our revenue cycle management. We've undertaken a significant review of our entire revenue cycle management on the Acute side with the aid of a third-party consultant. That has yielded some, I think, significant and measurable results and improvements. We're currently just beginning a similar process on the Behavioral side, where I think there are equal opportunities.

And then I think the third very broad piece is as we think about the OBB pressures, which are largely on the Medicaid revenue reimbursement, I think particularly in the Behavioral business, we are looking at a lot of different ways to manage our exposure to Medicare. I think the emphasis on outpatient growth in Behavioral is a result of an acknowledgment that, that's where the demand is growing, and we want to treat people where they want to be treated and where their insurers want them to be treated.

But also, we acknowledge that outpatient revenue in Behavioral tends to be much more Medicare centric and managed care centric than Medicaid centric. So all those issues, all of them consume a fair amount of focus and time, are ways in which where anticipating and trying to stay ahead of those OBB reductions that are scheduled to start beginning in 2028.

Okay. And maybe just a follow-up, a more specific question around results. You gave some comments about your payer mix, and it doesn't sound like the public exchange impact is as materially different as we saw for some of the other peers. Are you seeing any uptick? You didn't really mention uncompensated care in your comments on payer mix. Are you seeing any meaningful shift in your uncompensated care burden?

What was fairly apparent in the second quarter, A.J., was that the decline in exchange volumes was offset almost on a direct one-for-one basis to an increase in self-pay volumes. So it felt like virtually everyone who lost their exchange coverage became an uninsured patient. We had assumed in our original assumptions that a small percentage of those folks, maybe 10% to 20% of them, would replace their exchange coverage with other commercial coverage. We felt more likely, coverage through their employers. That didn't seem to be true. And probably that phenomenon is what gave rise to the $10 million increase in our exchange impact projection from $75 million to $85 million. But yes, that's been the primary sort of observation about self-pay and its relationship to the exchange subsidies lapsing.

Our next question is coming from the line of Craig Hettenbach of Morgan Stanley.

Just following up on the comments of the kind of advanced integration planning of Talkspace ahead of that closure in a few weeks here. Anything else you would add in terms of things that you think you'll be able to kind of hit the ground running? And how are you thinking about kind of that outpatient ramp next 12, 18 months?

Yes. I mean what we've talked about, I think, in previous calls, Craig, is that one of the things that -- or maybe a couple of things that limit our ability to capture, particularly the step-down business, that is the business that's created by patients who are discharged from our inpatient facilities but require certain amounts of follow-up care. There are often limitations that prevent them from getting that care from us, and they tend to be -- really fall into 2 categories.

One is geographic. They may live 2 hours from our facility. And while they were willing to come there as an inpatient, making that track 2 days, 3 days, 5 days a week as an outpatient is more difficult. So that if we can offer them a virtual alternative or even another in-person alternative through our 1,000 branches initiative, that's helpful to us.

The other is simply, oftentimes, we just don't have the available therapist capacity to offer those follow-up services. And one of the great advantages of Talkspace is that they have a panel of over 6,000 therapists that can be available to our patients once the acquisition is completed. So I think those 2 items really is -- kind of cemented our view that the Talkspace acquisition should help accelerate our growth in outpatient.

Got it. And then just following up on the Acute side. You mentioned kind of the new capacity, 177 new licensed beds. Any update on the freestanding emergency rooms in terms of investments there? And you also kind of talked about ASC, kind of at least one in each market. Just curious about the outpatient investments that you're making.

Yes. Our investments in freestanding emergency departments have really been among our best investments in the last, I'm going to say, 5-year period. We have -- unfortunately, I don't have the data right in front of me, but somewhere around 40 FEDs currently operating with probably another 5 to 10 on the -- in some form, stage of development. And again, I think those facilities are -- just as I talked about in the sense of behavioral outpatient, we're treating patients where they want to be treated in the most cost-efficient setting. And again, we have found that patient demand for these freestanding EDs is significant. Payers are receptive to them. Care is being delivered more efficiently. And again, as I said, one of our best investments over the last decade or so.

Next question is coming from the line of Ben Hendrix of RBC Capital Markets.

We've heard some of your peers talk about higher professional fees, specifically, higher subsidies related to radiology and anesthesiology, hospitalist, et cetera, amid service line mix shift. I was wondering if you could elaborate on kind of what you're seeing in that department?

Yes. The comment that we've made about professional fees, both in our guidance and our actual results, is that we did see significant increases in professional fees, I think, as did many of our peers in the back half of 2023 and into 2024. I think beginning in '25 and now into '26, what's embedded in our guidance is generally an inflationary maybe slightly higher than inflationary uptick in professional fees, so maybe something in the 7%, 8%, 9% increase range annually. That's, I think, relatively reflective of our experience in '26 and I think what we would continue to expect to see.

I will say, we're getting that pressure and we feel that pressure. We're responding to it in many different ways, in some cases, by hiring the hospital-based physicians, in putting those contracts out to bid and trying to control the amount of locums coverage we have to use, which is very expensive. So it is a challenge for our operators, but I think they have responded well. And as I said, are keeping the increase to a manageable level in the upper single digits.

And our next question comes from the line of Andrew Cooper of Raymond James.

A lot covered already. So maybe just one, I want to touch on Cedar Hill. If you could give a little bit more color on what the drags are, whether it's demand versus cost, just kind of the friction of getting up and fully running. And then what does that mean for the way we think about -- I know new bed additions are different, but how we think about the ramp for these 177 beds you talked about adding and maybe a little bit more color on where those are geographically?

Sure. So as far as Cedar Hill goes, I think the issue is we -- in partnership with the District of Columbia who built the Cedar Hill facility, the notion was they built it in an underserved area of the district in Ward 7 and 8. We thought, think and they thought that the demand there would be significant, and it has been, I think, as reflected in our emergency room volumes. Almost from the outset from the day we opened, we had a busy emergency room.

What I think has been lacking in the Cedar Hill region is an established physician base, primary physicians, specialists, et cetera, who just have generally been treating those patients in other facilities across the district. And we've been building up the physician component in that region. It takes some time and then patients have to sort of reorient [ bare ] utilization practices, et cetera. But that's occurring, and that's why I think we have the view that by the end of this year, the facility will be at breakeven, just taking a little bit longer than we thought. I think our long-term view of the prospects of that hospital remain quite positive because we believe that, that population really needs a hospital facility, and we'll use it fully as all the physician components are in place.

As far as it's sort of comparison and relevant to the 177 beds that we added, I think it's really not related. The 177 beds we added at Lakewood Ranch Hospital in Florida and Henderson Hospital in Las Vegas and the inland Rancho facility in Southern California are all additions to existing facilities where there was already demonstrated demand. And it just really requires sort of a ramp up hiring of staff, et cetera. But I think the ramp-ups and the opening of [ beds ] will occur much, much faster.

Okay. Great. That's helpful. And maybe somewhat related, and it's been touched on a little bit, but curious if you could give a little bit more on the way you're thinking about capital allocation and how it's changed? When you look at the current environment, some of the potential challenges in the state Medicaid supplemental programs and work requirements next year, et cetera, does that change the focus from whether it's acute facilities that are de novo versus bed additions, outpatient in the freestanding EDs? Just kind of what's the latest thinking on where the best use of the dollar is today?

Yes. I mean I think if you look at the way the capital has been allocated over the last several years, for us, it's had an emphasis on organic capital spending versus, let's say, M&A, we have not done, especially prior to Talkspace, a lot of external M&A. Obviously, the focus has shifted more to outpatient. I think we're doing more investment in outpatient. We've already talked about some of those things on the call, freestanding EDs on the Acute side of the business, freestanding outpatient Behavioral clinics, we describe as our 1,000 branches initiative on the Behavioral side. So there's been that shift. And we've been a very active acquirer of shares as well because that's been a compelling investment for us. So I don't really see it changing dramatically or changing dramatically in response to OB3 or any of the other sort of regulatory changes other than what we already discussed, which is emphasis on outpatient, emphasis on services and service lines that are probably somewhat less Medicaid-centric perhaps than we've invested in historically.

Our next question is coming from the line of Benjamin Rossi of JPMorgan.

Great. Sticking to the de novo discussion, just this time on the Florida facility. You previously mentioned that facility would carry start-up losses that offset the improvement to Cedar Hill. For Florida specifically with the changes in Cedar Hill, where are you today on your initial census trajectory, the staffing readiness and ability to ramp with expectations? And then is that facility eligible for the Florida DPP under the approved program for 2025? And does that at all change your thoughts on that ramp?

So the Florida DPP program, as you said, was a 2025 program. The new hospital was not opened in 2025. So that's sort of a moot point. I think we said in our comments, the hospital's drag in Q2 was about $15 million. That was very consistent with our expectations. The hospital got its Medicare certification, in, I believe, late June, opened in July. We're seeing patients, the volumes are building. We have every expectation that -- and our guidance presumes that it will perform consistent with our initial expectations and the expectations in our original guidance.

Great. And just a quick follow-up on denial trends. How did denial rates and net yield trend during 2Q? And are you expecting these denial trends to improve or worsen during the back half of the year?

Yes. I mean I think as we've said in previous quarters, I'm not sure we're seeing any significant change in denials, payer behavior, patient status changes. Payers continue to be aggressive in the way that they approved treatments and that they process claims. But as in my comments previously indicated, we've been pretty aggressive in investing in our own revenue cycle initiatives, both people or all people, process and technology. So feel like we're at least trying to stay even with the payers. And again, not as reflected in things like denials and patient status changes, not seeing huge changes.

That does conclude today's Q&A session. I would like to turn the call back to Darren Lehrich for closing remarks. Please go ahead.

Yes. Thanks, everyone, for participating in the call today and for your interest in UHS. Have a great rest of your day.

This concludes today's program, and thank you so much for joining. You may now disconnect.

Good morning. My name is Sarah Conrad, and I'm part of the health care services team here at GS. Today, I'm joined by UHS with CFO, Steve Filton; and Darren Lehrich, who's VP of IR. Thank you guys so much for joining us.

So I guess I want to start off on the volume and demand environment, which I think has been super topical after peer report last week. So on your recent 1Q '26 earnings call, you reiterated a 2% to 3% 2026 volume growth framework.

And then at recent conferences, you've articulated that 1Q volume is roughly in line with the low end of the range after adjusting for flu and weather. Can you help us frame any emerging industry dynamics in the second quarter that we should continue -- that we should consider that could influence how acute volumes are trending in the second quarter and into the second half of '26 relative to full year guidance?

So there, I think sort of consistent with our policy in the last several quarters, we really haven't been commenting on intra-quarter volumes, and I think we'll continue to sort of stick to that policy.

And just are there any inputs that you can share that you have the highest conviction could drive increased acute volume growth for UHS from here, including like added capacity, market growth, physician alignment, any other factors?

Yes. I mean we did talk in our first quarter call and at conferences subsequent to that about the fact that we've added a significant amount of acute capacity, I think, 178 beds in 3 distinct projects or discrete projects in the second quarter, a tower in our Lakewood Ranch facility on the West Coast of Florida, new floor in our Henderson facility in Las Vegas and then a replacement facility in Riverside County, California that adds some incremental beds. It's a replacement facility that adds beds.

So those are projects that because they're at existing hospitals should ramp up more quickly than de novo project. We also talked in our first quarter call about the continued ramp of the Cedar Hill Hospital in Washington, D.C., which we acknowledge got off to a bit of a slow start, but we think whose both volumes and earnings are sort of more weighted to the second half of the year.

That's super helpful. And then I guess as we think about the previous acute margin path, you had previously outlined a path back towards 16% to 16.5% acute margins, but we've seen some shifting industry dynamics. Is it reasonable to assume that your thinking may be evolving on the appropriate long-term margin target? And can any of these headwinds be offset by potential AI or productivity improvements?

So that margin commentary was made as the industry and we were emerging from COVID when margins had been diminished fairly significantly. And I think if you look at our 2025 margins on a same-store basis, taking out the impact of the de novo facilities, I think we were at 15.8%. So pretty close to that target that we had set.

And I think we effectively had recovered from the COVID pressures with moderating labor costs and lower acuity patients, eliminating those COVID patients who were a significant profitability drag. Obviously, now as we look forward into the next several years, there are some new headwinds, all of which I think have been discussed at great length. This year, there were the ending of the exchange subsidies. And next year, we have the Medicaid work requirements and then 2028, we've got the beginning of supplemental payment reductions.

We certainly have every intention of trying to counter the impacts of those. And to your point, I think technology plays a significant part in that. We have talked a lot about our recent technology investments, AI and otherwise in the revenue cycle. And I think we suggested that those improvements broadly added maybe 50 basis points to revenue per unit in 2025 for the acute division.

We're undertaking a very similar third-party consulting review of our behavioral revenue cycle this year and into next year, also beginning to implement some clinical applications, AI applications that I think should serve as an aid in reducing length of stay and increasing productivity, et cetera. So yes, there's any number of headwinds as we look into the next several years, but I think there's also a significant number of opportunities to offset those.

I think at our recent headquarters visit a few weeks ago, we talked a lot about the AI productivity, which was driving revenue per adjusted admission. Can you give us just a little bit of framing there as we should think about the benefit in 2025 and then into 2026?

Yes. So again, I think in our 2025 quarterly releases, I think, estimated that we were enjoying maybe a 50 basis point increase in revenue per adjusted admission as a result of some of the improvements made in the revenue cycle. And these, I think, included more accurate coding, both ER and inpatient coding, more effective denials management and denials appeals and that sort of thing.

It's a little bit hard to parse it out exactly because it's kind of a fluid environment, and we know that the payers are also increasing their investment in technology and they're being more aggressive. Clearly, they've seen improvements in their medical loss ratios in the last several quarters.

So I think we feel at a minimum, we're keeping pace with what's happening on the payer side, but it's sometimes hard to parse out exactly what's due to the revenue cycle improvements, what's due to other changes we might be making.

And then I guess one more acute follow-up from our visit. You had talked about the growing emphasis on growing your acute adjacent outpatient assets, including ASCs. Can you frame where you are in the process right now? And just any color you can give us around this initiative?

Yes. I mean, like everybody else, we certainly have acknowledged that certainly over the last few years and maybe even for longer than that, there's been a continued shift to outpatient. That is certainly a payer preference. They continue to view outpatient, whether it's ASCs or freestanding imaging or whatever as lower cost settings of care. And are encouraging patients or maybe more than [indiscernible] patients or incenting patients to use more outpatient facilities.

I think patients prefer generally to be treated in an outpatient facility if it's clinically appropriate. And we've certainly tried to participate in that. Probably the most success we've had on the acute outpatient side is in freestanding emergency departments. We've got, I think, at last count, 35 freestanding EDs. We'll have another several more by the end of this year. And these serve a great many purposes. They're just another very convenient access point for patients. They've allowed our ED volumes to grow. Patients like the convenience. They tend to be sort of a more pleasant experience for the less acute, less emergent patients.

We also have about a dozen ASCs in our various markets. I think we have at least one ASC in every one of our larger markets, but plan over the next several years to double or even triple the amount of ASCs that we have. And I think in both segments, we view the likelihood that outpatient over the next several years will grow faster than inpatient. And we want to make sure that we participate in that growth, having the appropriate number of facilities and geographically -- properly geographically dispersed, et cetera.

Okay. I want to pivot over to the behavioral segment. So you recently highlighted that the key drivers to move more deeply into that 2% to 3% growth range are the increased labor investments, ongoing shift to more aggressive outpatient strategy. As you think about those 2 variables, what do you think is more important on accelerating behavioral health volume growth? And what would be the operational milestones that would give you confidence that the BH segment is moving to a sustainably stronger volume growth tempo?

Yes. I mean I'd repeat the comment that I just made about the acute segment. And maybe this is, I think, a slightly newer development on the behavioral side that is the shift to outpatient, which I think has been underway for probably a decade or more on the acute side, I think, is a more recent development on the behavioral side.

But clearly, we've seen, I think payers are reporting increased demand for behavioral services on the outpatient side. And in fairness, we have historically been an inpatient-centric company and I think have only participated and enjoyed this growth in outpatient demand to a limited degree. And I think we feel like we've done a great number of things in the last several years to really increase the focus on outpatient growth in behavioral.

One is, I think we've reorganized to a significant degree. We've created dedicated outpatient personnel, meaning these are folks who are focused exclusively on growing outpatient. They're incented, they're held accountable exclusively on growing outpatient, focusing on those patients who we create, if you will, these are patients who are discharged from our facilities as inpatients, but who need further care, either what we would describe as the most acute level of care, which we would describe as partial hospitalization or something a little bit less intense and we call intensive outpatient, somewhere between, I would say, high single digits, low double-digit percentage of our patients require that sort of care, but we only capture a small portion of those patients.

And sort of to your point, what the hurdles there or the obstacles are often geography. Patients may live far away from the hospital. And while they were willing to make that drive or the trip for -- to be an inpatient, they're not willing to do it every day or 3 days a week to be an outpatient. So geography makes a difference. And sometimes we just don't have the appropriate number of therapists to do that.

And that's why we were so enthusiastic about the Talkspace acquisition because what the Talkspace acquisition when it's closed, hopefully in the third quarter will allow us to do is to offer much more of a virtual alternative so that if a patient wants to continue in our system and have that continuity, they now have a virtual option that, quite frankly, they probably didn't have before. We had some limited amount of virtual, but not many.

And then the other piece is Talkspace had this panel -- or has this panel of 6,000 therapists. Again, this has been an issue for us. They believe strongly that those 6,000 therapists have a significant amount of incremental capacity to treat more patients. That's very helpful. But they also have this infrastructure to recruit more therapists in a way that probably has economies and effectiveness beyond what we have. So yes, I mean, I think focus on outpatient, we are building through our 1,000 branches, branded freestanding facilities, more access points for patients that are not necessarily associated with our hospitals either geographically or even sort of on a branded basis.

And then I think the opportunity with Talkspace to really build this continuum that goes from sort of the lowest acuity virtual offerings to the highest acuity inpatient that we've been for many years and then everything in between, which I think is really that in-between space is really perhaps the most significant opportunity.

Yes. And then as we talk a little bit more about the Talkspace acquisition and the 1,000 branches program, I think one of the more interesting points from our headquarters visit was that only a low single-digit percent of discharged patients transition into UHS is own step-down programs today. So what are the biggest barriers to improving conversion? And where do you think we could go?

Yes. So I think this is what I touched on before. I think -- so when -- a couple of things are important. So when a patient is being discharged, number one, we've really got to be focused on that discharge planning. And I think historically, we may not have been as focused as we should have been.

We were so focused on the inpatient part of their stay and others stays. We didn't always necessarily focus on their, I'll call it, after care. We're, I think, way more focused on it today. That's part of it, just the focus part.

Secondly, we've got to make sure we have the therapists we continue to invest in hiring, but also, again, one of the, I think, exciting things about the Talkspace acquisition is this significant incremental availability of therapists that we'll be able to access once the deal closes.

And then just that virtual option that some patients prefer. There are some patients who actually prefer inpatient or face-to-face care. There are some patients who prefer virtual care. Having Talkspace sort of, if you will, under the UHS tent will allow us to really offer patients and offer payers to provide care in the setting that makes the most sense both clinically and financially.

Okay. So I want to pivot a little bit to the policy side. So this year, we had the expiration of the ACA enhanced subsidies. And you framed this ACA issue as more of like a payer mix collectibility issue versus volumes. I guess now that we are into June, can you give us any update on the volume progression that you've seen? And just as you look toward the market, can you frame like how important is the absolute like total volume of exchange patients versus that metal tier versus utilization of these patients and how we should be thinking about this transition?

Yes. So the reason we made the assumption that the lapse of the exchange subsidies was likely to be -- the impact was likely to be felt on payer mix, and I'll call it bad debt or uncompensated care rather than on volume is when we looked at that exchange population, they tended to behave in a way that we would say was very similar to our Medicaid population, that is they were very ER-centric, meaning most of the care that they sought was through the ER. That's sort of where they began their treatment process. They didn't necessarily have their own private physicians, et cetera.

And so our notion or our assumption was that even if they lost their coverage, they would continue to come to the ER in the same patterns and use the same utilization as they had before. The issue was now they would be coming without coverage and that would create an uncompensated or bad debt burden for us. And what we said in our assumptions was we thought that 25% to 30% of our exchange population would lose their subsidies, would lose their coverage as a result of the subsidies lapsing and probably 80% to 90% of them would not be able to get other coverage.

Like other providers, I think we commented in Q1 that we weren't seeing the loss of exchange patients at that rate, that full rate that we expected for the full year. And I think that was always our expectation in part because we have this view that we're going to continue to learn more holistically, I think, how many patients have really lost their coverage because we still have patients who come to the hospital with an exchange coverage card or whatever, but we'll find out later when we go to bill and we go to verify or whatever that the patients have not paid their premiums.

And as a consequence, they really don't have coverage. And so I think what we -- and I think our other peer providers said in Q1 was we still needed another quarter or 2 to really gauge whether we -- whether our assumptions were correct or not. I think at this point, we continue to believe our assumptions seem reasonable and that impact will sort of grow as the year goes on. But I think we continue to feel like we've estimated it reasonably accurately and shouldn't be materially short in any event.

Okay. That's super helpful framing. I think the other thing we've been very focused on is regarding the Medicaid state directed payment reforms. There was a recently announced proposed rule where CMS expanded SCP reform to cover nearly all Medicaid services, including BH, and they sized total savings north of $700 billion. What's your initial interpretation of the proposal and how it impacts your business and the industry overall?

Yes. So we didn't really -- as we read the proposal, view it as containing anything terribly new or significant. When we estimated and we've been very transparent both in estimating what our benefit is from the DBP payments and how our benefit is likely to be reduced based on the provisions of OB3 beginning in 2028. And those assumptions have always included our behavioral hospitals and the DBPs that our behavioral hospitals are receiving.

So yes, I think in the context of how does this make us think about our overall DBP payments and the estimates that we've made about the reductions that begin in 2028, not significant. I think one of the more significant, what I'll describe as administrative or mechanical parts of the proposal are CMS is suggesting that the states and the payers really have to adjudicate these DBP claims on an individual claim basis, which they don't really do now.

That's, I think, an administrative burden that I think will be commented on, I'm sure, by payers and providers and the states pretty extensively in the comment process. But as far as sort of the ultimate impact, I don't think we felt like the rule had a significant different impact than what we had already been estimating.

And then I guess just staying on that SVP, you recently got visibility into the 2025 retroactive Florida SVP approval. You disclosed an expected approximately $100 million retroactive benefit in the second quarter. We're still waiting for that 2026 program to be approved. How should we balance thinking about this and the benefit to 2026?

Yes. So I think one of the challenges we've always had is predicting with any sort of accuracy or specificity when these programs will be approved. CMS kind of moves at their own pace, and it's difficult to predict. I think it's worth noting -- and I think generally, whenever we express a point of view about a program and its likely approval, we're really just echoing what that specific state has told its hospitals.

So in this case, Florida says, as we all know that the 2025 program has been approved. We believe that 2026 or they believe the 2026 program is -- will also be approved. We don't have enough knowledge of the specific element of the plan to know exactly what that impact would be on us or we certainly don't know when the timing would be, but have an expectation that at some point, we'll also be recognizing the benefit from a 2026 Florida program.

And then I want to talk a little bit about your AI initiatives. You've provided a lot of visibility into some of your AI investments and key initiatives. You cited roughly 2 dozen active projects and a further pipeline under evaluation. Can you talk a little bit about what you're most excited about in development or being deployed today? And then also relative to how the current market is thinking about your acute and BH businesses, where do you see the most upside opportunity from AI?

Yes. So I think we've talked about, as you said, a couple of dozen projects. I think we've been specific about several. We've used an AI application from a vendor for coding of emergency room patients. Coding for emergency room patients, as you might imagine, is a more or more streamlined, less complicated exercise than coding for inpatients. There are hundreds, close to 1,000 different DRGs for inpatients. There's a handful of essentially acuity codes for ER patients.

We've found that AI can code more accurately. We've gone through a significant sort of, I'll call it, parallel measurement period where we'll code manually and we'll code through the AI application, and we'll compare the 2 and find that the AI application is more consistent, more accurate. So that's been a benefit to us. We've talked about doing a number of things elsewhere in the revenue cycle.

We know that payers have been using AI to generate denials and denial letters, et cetera, for a number of years. We've started recently to use AI to write those denial appeal letters. And we find that now a nurse or another clinician who used to spend an hour writing an appeal letter now spends 5 minutes reviewing denial appeal AI-generated letter. So driving efficiency in that regard.

We have found on the behavioral side that AI is helping us in the intake process. So a lot of times, when we are referred to patient by an acute care emergency room or community mental health center, et cetera, they will send us over an extensive medical record. Sometimes it could be 10, 50, 60 pages long.

And historically, the nurse or psychologist or somebody is having to review that. Well, now we've got an application that is summarizing that in, I'll call it, sort of in an executive summary and now a clinician is reading page or 1.5 page, which is really accelerating the intake process and reducing the amount of time we have to spend on the intake process.

So again, just another example, we've been using AI to make follow-up calls. When a patient is discharged from an acute hospital, they'll generally receive a post-discharge call 24, 48 hours after they're discharged. They're going to be asked how they're doing, whether they've made their follow-up doctors' appointments, whether they filled their prescriptions, what their pain level is, and that has generally been an effective tool in reducing readmissions and increasing patient satisfaction, et cetera.

We found that now 40% of those calls are made by AI agents. Patients are notified upfront, but it's an AI agent on the phone. About 40% of them continue the call. And interestingly, those that do, for the most part, tend to be very satisfied.

The AI agents [indiscernible] have more patients, I think, sometimes than our own clinicians. They're willing to stay on the phone longer with the patient and the patients like that. And I think, again, just another example of how we're driving productivity through AI. I'll just offer one more because you talked about sort of productivity or we talked earlier productivity improvements.

One of the productivity improvements we see on the acute side in the next several years is continued reduction in length of stay. Length of stay in the acute business rose dramatically during the pandemic. It's come down significantly since then. But I think we believe there's still opportunity to improve it even more. And interestingly, historically, we sort of measured our effectiveness on length of stay post discharge, meaning we would look at what a patient's length of stay was compared to what was -- it's called the Medicare Geometric Mean Length of Stay.

But today, we've got an AI application that at the beginning of a patient's stay based on their diagnosis, based on their condition, et cetera, projects what their length of stay should be, and we can sort of measure our effectiveness in real time, how we're doing against that, et cetera. So there are those -- now again, all these things are sort of tied to other issues.

One of the challenges we've had with length of stay over the last several years is we've got patients who are being -- or need to be discharged to some other setting of care, skilled nursing, nursing home, rehab, et cetera. And often patients are sort of held in the hospital because there's not an available bed or capacity in one of those places. That's not something we can necessarily control. So that's a challenge.

But also, we've got -- in many of our emergency rooms, we've got a backup of patients who are holding, waiting for bed. And so to the degree that we can add capacity where it's appropriate, we talked about some of those examples earlier, we can help that throughput. And I think that helps length of stay as well because patients who are being held in the emergency room are probably not getting the same level of diagnostics, et cetera, that they'll be getting once they get to the floor.

And then you've been very careful to frame AI as a multiyear margin opportunity. You've noted a couple of areas we should be watching, including length of stay, and I assume revenue per adjusted admission as well. Are there any other important milestones that we should be watching to see these AI investments like trickle through the P&L?

Yes. I mean I think the other sort of obvious one that we touched on is labor productivity. So in a couple of the examples that I gave, the denials management, the preparation of denials appeals in the post-discharge calls, we're eliminating or at least reducing dramatically the amount of human time that has been devoted to that. So I think over the next several years, as we look to drive productivity to drive efficiency, a lot of that will be AI or technology generated or technology initiated.

And then I want to talk a little bit about capital deployment. So the Talkspace acquisition is expected to close in the third quarter of 2026. You've talked a little bit in this panel about continued investments in de novo and outpatient assets.

Just as we think about capital deployment, potential ongoing buybacks, how are you thinking about the relative returns from deploying capital into organic acute assets versus behavioral outpatient expansion, repurchases at today's valuation? Just any framing would be super helpful.

Sure. So once the Talkspace deal is completed, again, we hope in early Q3, our leverage level should be in the low 2s. It's still at the low end of a range that we've talked about for a long time in that 2% to 3% range. So we certainly have the ability to continue to deploy capital in all the ways that you suggested, including continued CapEx investment, which I think will be skewed towards outpatient in both segments, selective M&A where it makes sense and continued share repurchase.

Probably goes without saying, but we view our current share price as fairly compelling at this point. We've been a very active acquirer of our own shares for many years now. I think over the last 10 to 12 years, we've repurchased about 40% of the company's shares. I think we would anticipate continuing to be an active repurchaser. And I don't think our leverage levels I don't think they'll prevent us from doing that, but I think, honestly, they'll provide us an incentive to continue to be active.

And then I want to talk a little bit about the capacity ramp with your new Florida hospital that's now opening, additional beds are coming online. Can you talk about how we should think about the ramp of these assets towards your total company margins? What are some of the key variables that we should be considering?

Yes. Most new hospitals take somewhere between 12 and 18 months to ramp up to kind of divisional averages of occupancy and margins, et cetera. And I would think our new Florida hospital would be the same. I think the only time we've seen hospitals ramp up faster than that tends to be in the Las Vegas market where we found West Henderson was literally profitable in its first quarter of operation, which was really extraordinary.

But yes, I mean, we're very excited about the new hospital, which is about 2 hours north of here in North Palm Beach County in a very desirable demographic area, growing area, very well situated. And Darren and I both were at the opening of the hospital just a little over a month ago. So we're very enthusiastic about that. But we certainly know and I think embedded in our guidance for the year is the notion that this year, it will be a bit of a drag. But by -- we would think by the end of next year, should be sort of closing in on more like divisional performance.

Okay. We've got just about 1 minute left. So I just want to ask on 2Q volume modeling. In the first quarter, we had a few one-timers. We had flu. We had some seasonal dynamics, spring break timing. Are there any lapping dynamics or onetime items that we should be considering?

Yes. I mean -- so we aren't providing intra-quarter commentary. As Steve mentioned, I think from a seasonality perspective, the only thing that I think we'd want to just call out is what Steve was just talking about as it relates to the opening of our hospital in Palm Beach Gardens, Florida. So that did open in May as you would expect a new hospital de novo to have some drag on overall profitability as it ramps. So that will be in the Q2. But as it relates to your volume question, not commenting.

Yes. Had to try. And with that, we're out of time. Steve, Darren, thank you so much for joining us today.

Thank you.

Hello, and welcome to the Annual Meeting of Stockholders of Universal Health Services, Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Marc D. Miller, Chief Executive Officer and member of the Board of Directors of Universal Health Services. Mr. Miller, the floor is yours.

Welcome to the Annual Meeting of Stockholders of Universal Health Services, Inc. This year's annual meeting is being conducted completely virtually via a live audio webcast. I would like to introduce the other directors and officers of the company who are participating in today's meeting. The Board of Directors are Alan B. Miller, Executive Chairman of the Board; Nina Chen, Eileen McDonell, Warren Nimetz; Maria Singer; and Dr. Elliot Sussman. Officers of the company are Steve Filton and Chick Boyle.

In addition, Scott Hammond of PricewaterhouseCoopers, our independent auditors, is participating today and is available to respond to any questions. Harold Murphy of Computershare, our transfer agent, is participating today and will act as Inspector of Elections as to the Class B and Class D votes. In order to avoid any confusion, let me take a few moments to outline the format for today's data.

First, each company proposal will be made and seconded. The Board of Directors' position on each proposal is set forth in the proxy statement, which was made available to all stockholders eligible to vote. Next, we will tally the preliminary votes with regard to each proposal.

The polls on our virtual meeting website opened at approximately 9:50 a.m. Eastern Time this morning. Any stockholders who have logged into virtual meeting web portal using a 15-digit control number will be able to make or change their growth electronically until we declare the polls have closed.

For the record, as persons appointed in the official proxy, Mr. Filton and Alan B Miller have voted in accordance with the proxies received from stockholders. Once the votes on all the proposals have been tallied and the results announced, the meeting will be adjourned. After the meeting is adjourned, we will attempt to answer as many stockholder quarter questions as time allows. This meeting will please come to order.

I will act as Chairman of the meeting, and Mr. Steve Filton will act as Secretary of the meeting and Inspector of Elections as to the Class A and Class C votes.

Mr. Chairman, I present the affidavits of Computershare and this company with respect to the notification to the company's stockholders of the notice of the meeting, the annual report, the proxy statement and the forms of proxy, which were mailed to Class A and C and to Class B and D stockholders who requested to receive printed proxy materials.

I also present the affidavits of the inspectors of elections and the voting certification for the Class A and Class C stock prepared and certified by me as Secretary of the company.

The affidavit forms of proxy materials and voting certification are directed to be filed with the company records.

Mr. Chairman, I present the certified list of holders of the company's Class B and D common stock as of the close of business on March 23, 2026, the record date for the meeting. as prepared and certified by Computershare, transfer agent and registrar for Class B and D common stock and the certified list of holders of the company's Class A and C common stock, as prepared and certified by me as Secretary of the company, transfer agent and registrar for Class A and C common stock.

The list of stockholders are directed to be filed with the company's records.

Mr. Chairman, the transfer agent has computed the number of shares of Class B and Class D common stock presented by the official forms of proxy provided to the Class B and Class D stockholders and the number of shares of such classes present or represented here.

I have computed the number of shares of Class A and Class C common stock represented by the forms of proxy provided to Class A and Class C stockholders and the number of shares of such classes present or represented here. For purposes of voting for 1 director by the holders of Class A and Class C common stock, the holders of a majority of the voting power of the outstanding shares of Class A and C common stock are present or represented here.

For purposes of voting for 1 director by the holders of Class B and Class D common stock, the holders of a majority of the voting power of the outstanding shares of Class B and D common stock are present or represented here. For purposes of voting on each of the other proposals at the meeting, the holders of a majority of the voting power of the outstanding shares of common stock are present or represented here.

A quorum for all matters is present, and the meeting is properly constituted for the transaction of business.

As set forth in the notice sent to each of the stockholders, the business of this meeting includes election by Class A and Class C stockholders of 1 member of the Board of Directors and the election by Class B and Class D stockholders of 1 member of the Board of Directors.

Number two is to conduct an advisory nonbinding vote to approve named executive officer compensation. Number three is the ratification of the selection of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026; and number four, to act on a stockholder proposal to report votes based on UHS shareholder money at risk, if properly presented at the meeting.

Please note that after the proxy statement was issued, the New York State Common Retirement Fund withdrew its proposal to adopt a policy requiring Universal Health Services, Inc. to publicly disclose its workforce diversity. Therefore, there will be no vote for Proposal 5 held or announced at this meeting. The meeting will now proceed to, and we will accept the nomination for 1 director of the company to be elected by the holders of Class A and Class C common stock voting together as a single class.

I nominate Mr. Alan B. Miller for election by the holders of Class A and Class C common stock to serve as a director of the company for a 3-year term and until his successor has been elected and have qualified.

I second the motion.

Since there are no other nomination, the nominations are closed. The meeting will now proceed to and we will accept the nomination for 1 director of the company by the holders of Class B and Class D common stock voting together as a single class.

I nominate Ms. Nina Chen Langenmeyer for election by the holders of Class B and Class C common stock to serve as Director of the company for a 3-year term and until her successor has been elected and have qualified.

I second the motion.

Since there are no other nominations, the nominations are closed. The meeting will now proceed to and we will entertain a motion for approval of the advisory nonbinding vote on named executive officer compensation by the holders of Class A, C, B and D common stock.

I move for the approval of the named executive officer compensation.

I second the motion.

The meeting will now proceed to and we will entertain a motion for the ratification of PricewaterhouseCoopers as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026, by the holders of Class A, C, B and D common stock.

I move to ratify PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026.

I second the motion.

The meeting will now proceed to the stockholder proposal to report votes based on UHS shareholder money at risk. I now invite John Chevedden to present this proposal. Mr. Chevedden will have 3 minutes to present the proposal.

Hello. This is John Chevedden. Proposal 4, report votes based on UHS shareholder money at risk. Shareholders request that in addition to the usual way that Universal Health Services reports the annual meeting votes that UHS report annual meeting vote results for each item based on the money at risk that UHS shareholders have. This proposal advocates a best practice given that UHS officers and directors have only 16% of the ownership of UHS yet have 91% of the voting power. Long-term UH shareholders may have forgotten this detriment to UHS shareholder value.

To improve shareholder value, it would be a best practice for UHS to transition to a 1 share equals 1 vote structure. But until this is accomplished, the annual meeting voting results should be presented in 2 formats. Thus, the vast majority of UHS shareholders will then be able to see clearly when the votes of the UHS officers and directors are contrary to the votes of the overwhelming majority of UHS shareholders.

Dual-class stocks like UHS tend to create an inferior class of shareholders and hand over power to a select few who then are allowed to pass the financial risk on to others. With few constraints placed upon them, managers holding superclass stock can spin out of control. Insiders and senior managers can entrench themselves into the operations of the company regardless of their abilities and performance. Dual-class structures may allow management to make that decisions with a few consequences. UHS Shareholders should be aware that the current and equal voting structure where insiders have outlandish voting power compared to the money at risk can lead to long-term UHS underperformance.

UHS voting structure is similar to Ford Motor Company. Ford stock was at $16 in 2015 and is only at $13 today in spite of the robust stock market. Thus current UHS holders might consider selling their UHS stock when there is an uptick in its price and invest in a company where management has voting power consistent with management's company money at risk.

UHS stock was at $148 in 2015 and at only $170 now in spite of a robust stock market. Until UHS transitions to 1 share equals 1 vote as the best practice for UHS annual meeting voting results to be reported in 2 formats. Please vote, yes, report votes based on UHS shareholder money at risk Proposal for.

Okay. The Board of Directors has waived any requirements that the proposal be formally made and seconded, but that is deemed made at this meeting. The Board of Directors has recommended a vote against the stockholder proposal to report votes based on UHS shareholder money at risk for reasons set forth in the proxy statement.

There are no other matters, Mr. Chairman. If any stockholder logged in via control number would like to ask a question about the proposals, please do so now via the web portal.

There are none.

The polls are about to close. Any stockholder logged in via control number to our virtual meeting web portal who has not yet voted or would like to change his or her vote to do so now by clicking on a voting button on the web portal, and following the instructions there.

Stockholders who have timely submitted their proxies by mail, telephone or Internet or given their brokers voting instructions and do not wish to change their votes, do not need to take any further action.

[Voting]

Now that all eligible stockholders have had a final opportunity to vote, I declare that the polls for the 2026 Annual Meeting of Stockholders are now closed. Mr. Filton, do we have preliminary voting results?

As a person appointed in the proxy, I have voted in accordance with the proxies received from all the Class A and C common stockholders who returned the official form of proxy with respect to Proposal 1, the election of directors. 7,236,288 votes were cast in favor of the election of Alan B. Miller, and no votes were withheld. .

As a person appointed in the proxy, I have voted in accordance with the proxies received from all the Class B and D common stockholders who returned the official form of proxy with respect to proposal 1, the election of directors.

31,836,231 votes were cast in favor of the election of Ms. Nina Chen-Langenmayr, and 14,129,963 votes were withheld.

With respect to proposal 2, the approval of an advisory nonbinding vote to approve named executive officer compensation, 62,219,230 votes were cast in favor of the approval of named executive officer compensation, 228,600 votes were cast against and 1,996 votes abstained. With respect to proposal 3, the ratification of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026, 62,633,332 votes were cast in favor of ratification of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026, 77,514 votes were cast against and 1,586 votes were abstained.

With respect to Proposal 4, a stockholder proposal to report votes based on UHS shareholder money at risk, 2,917,981 votes were cast in favor of the stockholder proposal to report votes based on UHS shareholder money at risk, 59,513,156 votes were cast against and 18,688 votes abstained.

Based on that report, I declare the following: Alan Miller, Nina Chen-Langenmayr have been elected to serve as directors of the company for a 3-year term. The advisory nonbinding vote to approve named executive officer compensation has been approved. The ratification of PricewaterhouseCoopers as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026, as approved, and a stockholder proposal to report votes based on UHS shareholder money at risk has not been approved.

This completes our agenda. Thank you for listening through the legal formalities of the meeting. The Chair now entertain a motion for the adjournment of the meeting.

I move that the meeting be adjourned.

I second the motion.

All those in favor of the motion, please say Aye.

[Voting]

Aye.

Aye.

All opposed?

[Voting]

Motion is carried, and the meeting is now adjourned. The business affairs of the company were fully discussed in our shareholders' letter and the balance of the annual report. I will be glad to answer any questions which the stockholders may have concerning the business and affairs of the company. Thank you for your attendance and your attention.

At this time, the company would like to take any questions you may have for them today. [Operator Instructions]

Steve, any questions presented by stockholders today?

No, there are no questions, Mr. Miller.

Okay. We appreciate everyone's participation today at our virtual stockholder meeting. Thank you very much.

This concludes the meeting. You may now disconnect.

[Audio Gap] percent and same-store revenue growth in our behavior was up about 7%. And we've commented that there's a bit of a stronger contribution from pricing, and we had some seasonal factors that impacted our volume in the quarter. I think if you think about those seasonal factors, primarily weaker flu on the acute care side and then a little bit of weather disruption on the behavioral side. And excluding some of those factors, I think we were right in the 2% range from a volume perspective in both segments.

Pricing growth in the quarter included core growth. We put that at around 3% and the benefit of funding from some of the Medicaid supplemental programs that were approved last year. We had a a $133 million year-over-year increase in those payments.

So given all the sort of focus on the increase in those Medicaid supplemental payments, we've been getting this question a lot. What was the core growth. And I think just to sort of give you the headline, we would put it at around down $20 million or so, so down around 3% -- and that math exercise essentially is we had a $15 million headwind related to the exchanges that we -- it was part of our guidance that we reaffirmed.

We had about a $30 million impact split between behavioral and acute on the seasonal factors related to flu and respiratory. We had about a $5 million impact for the readiness for the California staffing regulation that begins in June. And then on a non-same-store basis, we have a number of de novo hospitals, and there was about a $15 million noncore type of headwind in the first quarter on that. So put all those things together, it kind of adds up to about a $20 million or down roughly 3% number. And obviously, we expect that to improve over the balance of the year.

Can you help us bridge then how that goes from Q1 for the rest of the year?

Yes. So I think there's really four components to that. So clearly, when your volumes have some pressure as we saw in the first quarter. You lose some operating leverage. And we do expect volumes to improve as we look at the rest of the year, reaffirm the 2% to 3% zone that we think we can achieve. Part of that is we have a bit of new capacity coming online and acute. We've got about 2% of new capacity growth coming online. Some of that you'll see in the second quarter, but certainly in the second half of the year. So as that capacity gets absorbed, you'll see some benefit there.

So operating leverage between both segments. The second piece is we've talked a lot about the investments that we've made in behavioral in terms of headcount. And really, those investments were made to better accommodate the demand that we're seeing and be able to grow our volumes a bit better.

And so in behavior, we expect there to be somewhat of a moderation in head count growth in '26. Headcount grew about 4% in '25 against 1% volume growth. We expect head count growth to be more closely in line with volume growth this year, so closer to that 2% level. It stepped down in the first quarter, it was about 2.5% or so head count growth in Q1. And as we kind of move down into the 2% range, I think that will contribute some positivity to the P&L.

And then two more things, Kevin, I would say, we don't talk a lot about our health plan. We've got a pretty high-performing, high-quality health plan in State of Nevada, particularly in Northern Nevada. We achieved 4 stars. So we went from 3.5 to 4 stars. That should be about a $25 million tailwind for the year, and we have been losing a little bit of money last year. We made some money in -- that's a positive. And then, look, we have talked a lot about our Cedar Hill de novo hospital. We've got $50 million built into our guidance of improvements. We lost $50 million and start-up losses last year. We expect to achieve breakeven for the full year, some gradual improvement as we move through the year should also help the underlying. That does enter our same-store group in the second quarter.

All right. Great. And then that 2% to 3% volume number that you guys outlined for both the acute and the behavioral it sounds like you're saying you think Q1 was essentially 2% if you kind of adjust for blue in both of those numbers? Like how do we think about the fundamental demand of both of those businesses right now like to get to that 2% to 3%? .

Yes. So I think, first, it starts with the markets, right? We have for a long time, really gravitated, especially in our acute care division, when you look at our footprint to markets with stronger than average population growth compared to the U.S. overall strong demographics.

And so those are key elements of the demand drivers in our business. So if you're in good markets and can grow at a higher rate because of the underlying trends in the market. We've also invested pretty heavily in our markets. So I talked about some capacity that we're adding in both divisions, both acute and behavioral, but in particular on acute, we've got a number of big bed tower projects that will be coming online here in the second quarter, and then we're opening our 30th hospital this month in Florida in a really attractive market, that will be a de novo, but worth mentioning just that hospital because it's in the Palm Beach Gardens Jupiter area, and that will be embedded growth as we think about future years, just given the strength of that market.

And then I think the strategies that we employ. So alignment with our physicians, investments that we make in outpatient, all the things that really contribute to volume, I think as it relates to the exchanges, the reduction in exchange volume that we've talked about is really more of a payer mix shift issue for us is the way we think about it than it is a volume drag. We think a lot of that exchange -- those exchange members that are losing coverage and not paying their premiums, ultimately show up at the hospital and Included in our $75 million exchange impact or headwind for this year is really the notion that the vast majority of those will convert to some form of uninsured as opposed to volumes, that's a lesser part of it.

Kevin, on the behavioral side, I think the last few quarters, we've exhibited much better momentum around volumes the last 4 quarters. You've seen sequentially improving volume. We talked about in the first quarter. We reported 1.6% adjusted patient day growth. Weather was a little bit more widespread and the behavioral impact, that was about a 50 basis point impact overall.

And so that would have come on straight into that 2% range. I think for us, the two big drivers of volume and behavioral that we think will get us more deeply into the 2% to 3% range are going to be, again, investing in headcount, which we've done most of that in '25 and then really focusing more aggressively on our outpatient strategy, which we're dealing with some capital with the Talkspace acquisition. You can certainly talk -- cover that one, but also some things that we're doing from an internal perspective.

And can you talk a little bit about the behavioral investment? Because it sounds like you added 4% to labor force, but it sounds like the volume hasn't been matching the 4%. Like did you get what you wanted to out of that lift? And why is it only 2% necessary going forward if you did 4% last year?

Yes. So I think if you look at the progression of our volume, we went from kind of negative in the first quarter to exiting the year around 1.5%. And so I would attribute some of that incremental progress to the investments that we made in headcount. So roughly 4% growth in headcount. There's obviously onboarding and training and things like that, that go into bringing those folks on. And we exited the year, as I said, around 3.5%, 4% headcount growth, and that stepped down a little bit closer to 2.5% in the quarter. So when we think about our ability to service the volume that we have, we have the capacity in many of our facilities. From a bed perspective, we're operating in the kind of low 70% with our occupancy rates. And now it's really just about matching volume with staff and being able to get the operating leverage from that.

Okay. And then you mentioned the Affordable Care Act being more of a payer mix issue, but it seems like Q1 was a little bit lower than kind of what the annualized number would have implied it to be, which is kind of what a lot of the companies are saying right now. So I mean, I think you indicated that it was going to ramp as the year goes on. Does it -- so I guess, a, what are you seeing there? But then b, if it's ramping as the year goes on, does that mean '27 is a bigger annualized cut than '26? Or is it something about the seasonality of that business that should always be lower in Q1?

Yes. No, I appreciate that question. So Yes. So exchange, health insurance exchange volumes, the observed trend in the first quarter was down 5%. And what we really did in the quarter was we had a $15 million impact in the first quarter, and more than half of that was an additional reserve that we took, which really kind of takes into account this idea that -- our fully-loaded exchange volumes will ultimately be down closer to 11% to 12% after we see kind of who pays premiums and who doesn't and the effectuation rate of those individuals that we serve that may not even have coverage at the end of the day.

So that's really what that impact was. And we did make the comment that the impact would steepen a little bit as we move through the year. And so there's a few things that go into that. First, we did have -- in 2025, we had a little bit of a buildup of our exchange volumes. So ended in the second half higher than what we were in the first half. So the expectation is that the year-over-year reduction in exchange volumes as a result will be a little bit steeper.

But I think we also built in the idea that there's some shift in metal tier. So some of the behavior may change in terms of utilization, certainly the out-of-pocket and some of the uncollectibles, we're in that $75 million number that we expect to build throughout the year. So I think it's a little early to say for sure exactly how the rest of the year plays out, we'll probably know more in the second quarter. I think it's fair to say there's probably a little bit of a headwind as we think about '27 just given the dynamic that we had a higher exchange mix last year and then the decline is a little bit bigger. I don't think it will be that much that material, though, as we think about '27.

Okay. And then when we think about the Florida SDPs, you guys put out an 8-K, I guess, last week, right, with the '25 approval, but we don't have the '26 approval. Can you just go through kind of where we are in all of that right now?

Yes. So certainly, a lot of questions in the Florida program now for several months. A lot of providers obviously have exposure to that market. And we were, I think, pleased to see the approval. It shows that even in this current administration, there's recognition that these Medicaid supplemental payments are part of the broader funding mechanism for providers and hospitals. In many states, Medicaid base rates are underfunded. And so that's why these programs were designed and we think they aren't going away. They'll continue to be there. There's obviously some things that the legislation last year that will change that a little bit in the future. As it relates to Florida, so we did note in our 10-Q filing last week that the program was approved. And it relates to the fiscal '25 program, so October 1, '24 to September 30 of '25, the incremental benefit that we expect relative to how we -- the previous program would be $100 million of incremental supplemental benefit, and we'll record that in our second quarter coming up here. The '26 program has not been approved. We fully expect it to be approved. It's just -- it's lagging the '25 approval. It remains to be seen if it will be approved in the same way, the same structure. And so we don't have an estimate on that yet. And at this point, the 25 is the known amount.

Is there a nuance that would make you think that it would be potentially noticeably different than the 25?

No. I think it's really just a reticence to provide an estimate on that program until it's approved and the structure is fully known. But I think our our general expectation is that it will be approved at some point this year and from a sizing perspective, likely to be similar in size to the 25 program that was just approved, but we'll have to wait for those details.

Okay. And then a number of companies have talked about major cost-cutting initiatives because of whether it's SDP cuts in the future or maybe more in the near term kind of Medicaid, pressure on enrollment, exchange pressure on profitability. What are you guys doing, if anything, to kind of like adjust and react to those funding pressures? .

Yes. So I think the -- so first of all, I would say we're always working on those things internally, and I think our teams have done a really good job on the cost side. In acute care, we've done a lot to improve productivity. And I think there's still a lot of opportunity there, not just this year, but as we think about into the future. So what does that mean? Driving improvements in length of stay and throughput in our hospitals, both on the inpatient and through the emergency departments.

So real opportunity there. In behavioral, we've talked to you a little bit about this, but we made a big investment over the last couple of years in improving our RCM on the acute care side and have yielded some real results from that initiative really over the last 4 to 6 quarters on the acute side. We're going through that same process on the behavioral side. I think that will be a bit more of a '27 tailwind for us as we think about revenue cycle improvements and behavioral, but those are real opportunities for us thinking about next year.

And then I think the other piece of this, and it's not necessarily cost related, but I think relevant to UHS as a company, we've opened a lot of hospitals and recent years, you were at one of our newer ones here in the market. We opened that hospital with 150 beds. We're staffing it to 120. But I think you heard from local folks that we've got plans in place to continue to grow as that market continues to grow in the southeast part of Las Vegas and West Henderson, and we've got de novo hospitals, one that we'll be opening this month. That will be embedded growth as we think about '27 and '28.

We've got facility in Washington, D.C., that's had some gradual improvement. More to go there, but that's embedded growth as we think about the opportunity to, to really get some earnings growth out of some of those newer facilities. We have two de novo hospitals on the behavioral side that one just opened and one they'll be opening in the third quarter. So again, lots of opportunity as we think about new facility and expansion.

Okay. And then can you talk a little bit about AI. It's a hot topic nowadays. Everyone seems to be talking about what the opportunity is? Where do you guys see the opportunity for AI? And is there anything that people are talking about that you feel like you're getting ahead of their skis on at all as far as the opportunity?

Yes. So I mean, I think -- so let's start maybe with the fundamental. Some industries are going to be disrupted in pretty significant ways and some industries are going to benefit a great deal from AI or other advanced technologies. And I think our industry is certainly in the latter. And so we're early in that journey. I think what I would say a few things.

First, there's a big focus internally on our AI governance process and making sure that we're making the decisions in a controlled way that we can scale them across our facilities and get the benefit, and know what the KPIs are that we're measuring against. And so those decisions are made in, I think, a very controlled way.

We've got a lot of projects that are in various stages of evaluation. It's a couple of dozen are all in flight. Probably half of those are scaled or mostly deployed. And a lot of it -- a lot of our start was on the revenue cycle side. We've talked a lot about but in acute care, as we went through our process improvement, it was both process and technology improvement.

And so from standpoint of how we manage denials and how we do claims appeals. There's a lot of automation that we brought in into that process with technology and AI being a big part of that and we'll continue on that journey with behavioral. As I said, we were an early investor in Hippocratic AI, which is one of the leading AI companies in health care and happy to partner with them in a number of projects.

We have one solution that's fully deployed. We've talked a little bit about how all of our patients that are being discharged from the hospitals typically get a call from the nurse while we've been able to automate many of those calls with the Agentic AI through a post-discharge follow-up. So being able to verify with the patient. They've got their prescriptions, they're following up on the DME or some of their post-acute care, et cetera. And there's few other projects with Hippocratic AI that we think will impact some of the other areas of the hospital.

And then with respect to your question about what people might be missing. I think this is going to be a more gradual process. I think we're -- we're kind of -- we think this is a multiyear process that should have some benefit to margin, but it's not going to show up overnight.

And then actually, you mentioned on the behavioral side, doing some things on claims denial side of things, similar to what you've done on the acute care side. Is there the same opportunity from like a revenue capture perspective there? Or did you start with the cube because that was going to be a bigger opportunity or is there a similar update both.

Yes. So I mean, I think we started with acute. I think the opportunity there really was built around the fact that we have fully deployed our EHR across our acute care division, we're still in the implementation process and behavior on that. And we expect to see some of the similar types of process improvements on behavioral and some of the technology that we've deployed, particularly around claims, denials management, those types of things, we think technology will play a big role in behavioral.

Okay. And then on behavioral, you've talked a lot about the shift to how patient, you guys seem to be investing a lot of money into that side of the equation. Can you talk a little bit about why that's so interesting now and what the opportunity is for you? .

Yes. So I think behavioral, just kind of at a high level, think about it as being roughly a little bit less than 10% of our total revenue and our behavioral business. And clearly, the outpatient side of behavioral has grown a little bit more rapidly than the inpatient side. And so our focus, our investment, our strategies have been really designed around the opportunity that we see over the long term to participate in a bigger way on the outpatient side.

People are accessing mental health care services, a stigma attached to Mental Health has sort of come down as a society and many people are comfortable kind of entering the mental health care system and kind of lower levels of care. And now we've got a full continuum of services to offer from inpatient to some of the step down levels of care that are adjacent or satellite to our hospital campuses.

We're opening outpatient -- freestanding outpatient clinics. We're making some investments there. And then we obviously -- we announced the Talkspace acquisition. We're really excited about that. That will be a virtual platform that really kind of fully closes out the full continuum of services and outpatient.

Is there a way to think about where outpatient can go if it's a little less than 10% of the behavioral, like, I guess, in acute outpatients closer to half. Like is there like a way to think about that?

Yes. Well, I think the idea is that -- we do think that getting more deeply into the 2% to 3% range from a volume perspective, outpatient is going to be an even more important part of that equation. I don't know that we have a target around where that can go. But with Talkspace, just the base business, that would add 300 or so basis points to the to the outpatient mix.

And then we have a number of programs that will be developing alongside Talkspace that are really more revenue synergies to get out some of the the step down levels of care where people are coming out of our inpatient facilities and need the continuum of services. And some of them really just don't want to go back to the inpatient campus or satellite campus location. They want to have these services on a virtual basis, and now we'll be able to offer those higher levels of care on a virtual basis with the Talkspace platform. .

Yes. And on the call, you talked a lot about how there were synergies between the 2 businesses. Do you view the synergies more as driving volume into Talkspace kind of leveraging it as a postop -- or do you believe the Talkspace can drive volume into the inpatient side. For one way than the other? .

It's by rational, but I would say the opportunity that we're going to really focus on heavily in kind of the early days of the integration will be in the step-down levels of care, where -- we know that people need those levels of care inpatient LP intensive outpatient services or the example we've talked a lot about and the opportunity to develop those on a virtual basis is something that we're excited to do with Talkspace.

There's other ways that I think Talkspace plays into our environment. On the residential side, where we have a lot of youth and adolescent having text-based therapy and some of the asynchronous types of therapy that Talkspace offers is going to be really appealing to that population, and we'll be able to create a more sticky sort of post discharge relationship with the patient. So it's really becoming more about the lifetime value of the patient as we follow them in their journey.

Great. And then since you are in Las Vegas, a little about Las Vegas market. I guess it's unusual to be hearing about Las Vegas being kind of a drag to the corporate. Like in Q4, it was down in Q1, it was better, but still a little bit below kind of the average. So like where -- what's been going on in Vegas and how do you think about that rebounding over the rest of the year? .

Yes. So we're pleased to see that the first quarter volumes improved a little bit after being a little softer in the fourth quarter. So we were up about 1.5% or so in Vegas, in Nevada broadly and feel good about kind of the overall market. We've been here for a long, long time. We've got a big footprint, not just here, but also in the northern part of the state with renew. And I think as we heard yesterday in the hospital visit, clearly, tourism volumes were down kind of high single digits last year, that was maybe a little bit of a drag overall.

But I think the good thing about what we're seeing in the market is unemployment has held steady. There are other, there's better balance to the Vegas economy now. We've got a lot of sports teams and a lot of the industry, particularly moving in the Henderson area, where we have two hospitals. And so feel good about our prospects here, our footprint, our market share or outpatient strategy. And then the northern part of the state, we've got this health plan that should exhibit some real improvement year-over-year as well.

And maybe last question we run out of time here, but can you talk a little bit about your capital spending? -- leverage. It's pretty low relative to where the competitors are operating. Is there -- are there deals to be had? Should we be expecting free cash flow to be done on hospital deals on adjacent deals like Talkspace? Or should we think about repo as capital deployment? .

Yes. So we've had $1.3 billion under our share buyback. And so I would start there because I think we made the comment in the first quarter earnings call that we'd be a little more aggressive in the second quarter on share buyback, just given the compelling value that we see in our own stock. We've got $800 million or so earmarked for Talkspace, which we expect to close in the third quarter, and that's on track. And then we'll continue to invest in our markets, be opportunistic with share repurchase -- and from an M&A perspective, in both segments, I think you'll see us continue to be opportunistic, particularly in the outpatient side in both segments.

All right. Great. I think that's all we have time for. Thank you very much. .

Good to see you.

Good day, and thank you for standing by. Welcome to the First Quarter 2026 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Darren Lehrich, Vice President of Investor Relations. Please go ahead.

Thanks, Daniel. Good morning, and welcome to Universal Health Services First Quarter 2026 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then, we will open it up to Q&A.

During today's conference call, we will be using words such as believes, expects, anticipates, estimate 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, we recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2025.

In addition, we may reference during today's call measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI and adjusted net income attributable to UHS, which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in today's press release.

With that, let me now turn it over to Marc Miller for some introductory remarks.

Thank you, Darren. Good morning to all participants on today's call, and thank you for your continued interest in UHS. The first quarter of 2026 feature significant acceleration in our Behavioral Health outpatient strategy with the announcement of the Talkspace acquisition and continued steady operating performance and cash flow generation in our core operations in the midst of a more challenging seasonal volume trends.

Revenue growth for the first quarter was 9.6%. Adjusted EBITDA net of NCI increased 8.4% and adjusted EPS increased 16.1% as compared to the first quarter of 2025. These results highlight the adaptability and financial discipline of our leadership teams and the benefits of our efficiency initiatives, which are driven by technology adoption and operational excellence.

Speaking first to the Talkspace acquisition announced on March 9. Talkspace is an established market leader in virtual outpatient Behavioral Health Care with a network of 6,000 licensed professionals serving all 50 states. We believe Talkspace is the best-in-class virtual platform in the behavioral industry with differentiated technology offering and strong brand recognition among patients and clinicians.

Talkspace's successful payer-driven business model aligns well with our strategy to increase access to a full spectrum of outpatient services and diversify our behavioral payer mix. Over the past 24 months, we focused significant resources to grow existing outpatient service locations adjacent to our hospital campuses and develop new freestanding outpatient clinic locations. We will continue to invest in these areas internally.

The addition of Talkspace's high-quality scaled platform accelerates our ability to create the industry's first end-to-end continuum of Behavioral Health Care Services that is strongly aligned to the demand trends and preferences of the market overall. This national continuum includes lower acuity outpatient and step-in services all the way to residential and inpatient services, where we've led the market for more than 4 decades.

We plan to share more details about the impact of the transaction after closing, but I'd like to highlight 2 primary benefits for the acquisition. First, from a strategic perspective, Talkspace represents a multi-year value creation opportunity, underpinned by access to new sources of outpatient revenue growth. This is supported first by the strength of the base, Talkspace business, which has a very strong outlook on a stand-alone basis and enhance further by the programs we plan to develop alongside Talkspace to complement each other's businesses.

For example, there is a significant opportunity for us to introduce Talkspace's 6,000 clinicians into our environment to develop higher acuity virtual offerings such as virtual intensive outpatient programs or IOPs. This will improve our ability to manage more patients stepping down from UHS facilities with a preferred virtual option.

The types of programs we build on a virtual outpatient basis will drive higher-quality continuity of care further downstream after our patients step down from higher levels of care. There are numerous other bidirectional revenue synergy opportunities we'll be working on post-closing that will improve access to outpatient virtual services for UHS patients and improve access to higher levels of care for Talkspace patients.

Second, from a financial perspective, we expect the deal to be accretive to earnings during the first 12 months post-closing, and we expect it to be increasingly accretive thereafter. By year 3 post-closing, we expect the effective EBITDA multiple for the Talkspace transaction to be in the single-digit range.

Moving on to the quarter. I'd like to highlight a few items before I turn it over to Steve to review the financials. From a growth perspective, we met our internal same-facility revenue growth and earnings objectives in the first quarter despite a more dynamic operating backdrop. This was accomplished through solid expense management and higher contributions from pricing in both segments due to more positive trends in rate. We expect same-facility growth to be more balanced between volume and pricing as the year progresses, as we believe first quarter volume performance was impacted heavily by seasonal factors consistent with what we highlighted in February on our fourth quarter earnings call.

From a technology perspective, our enterprise-level AI governance process remains very active and focused on 2 primary domains within our business, in the operational domain to impact quality and patient experience and in the administrative domain to increase efficiency. During 2025, we focused heavily on scaling solutions that reduce the burden of our routine administrative tasks. We deployed and scaled a total of 8 different use cases of AI solutions into our revenue cycle operations that are now yielding significant benefit on a go-forward basis.

For 2026, we are focusing more heavily on enabling solutions in our clinical operations to improve hospital-level efficiency and patient experience. Included in our 2026 road map are several new use cases being designed and built with Hippocratic AI, which is one of our key AI solution partners. It is too early to project the longer-term financial impact of the 2026 initiatives, although we expect them to be incremental to margins over time. And just as importantly, we expect them to have a real impact on quality and patient experience.

In closing, I am encouraged by our progress so far in 2026 and remain optimistic about our ability to deliver high-quality services in an efficient manner in the communities we serve. On behalf of our entire organization, we look forward to welcoming Talkspace employees into UHS in the coming months.

With that, I will now turn the call over to Steve Filton for more details on the quarter.

Thanks, Marc. I'll highlight a few financial and operational trends before opening the call up to questions. The company reported net income attributable to UHS per diluted share of $5.65 for the first quarter of 2026. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted EPS was $5.62 for the first quarter.

On a same-facility basis, adjusted admissions at our acute care hospitals were unchanged as compared to the first quarter of 2025. We estimate Acute Care volumes during the first quarter of 2026 were impacted by approximately 200 basis points due to weaker flu and respiratory activity and winter weather in certain markets.

Performance in the Nevada market rebounded slightly with adjusted admissions increasing approximately 1.5% over the prior year. Same-facility acute care emergency department visits increased approximately by 2%, and we also saw positive trends in certain higher acuity important service lines or inpatient service lines, notably cardiology, orthopedics and neurology.

On a same-facility basis, net revenues in our Acute Care hospital segment during the first quarter of 2026 increased 8.2% and were up 6.2% excluding the impact of our health plan. Acute Care same-facility revenue per adjusted admission increased 6.3% during the first quarter of 2026 on a reported basis and was up 4.9% after excluding approximately $30 million of prior period supplemental program net benefit related to the expanded 2025 Nevada program, which we contemplated in our guidance.

Operating expenses were well managed across labor, supply and other expense categories. Same-facility Acute Care salaries, wages and benefits expense per adjusted admission increased 3.1% and supply expense per adjusted admission increased 3.5% over last year's first quarter. Same-facility contract labor was 2.3% of Acute Care segment revenues or 40 basis points lower year-over-year. Other operating expenses increased primarily as a result of the growth in our health plan. For the first quarter of 2026, our Acute Care performance resulted in 11.7% growth in same-facility segment EBITDA. Excluding the prior period supplemental program revenue, first quarter 2026 same-facility Acute Care segment revenue would have increased 3.3% on a year-over-year basis.

With respect to health insurance exchange trends during the first quarter of 2026, we estimate an impact of approximately $15 million. Our exchange adjusted admissions declined approximately 5% as compared to the first quarter of 2025. However, due to our expectation that some of the exchange members treated at our Acute Care facilities during the first quarter will not sustain their premium payments, the impact to our Acute Care financials assumes an effective HICS decline that is higher than the reported trend. We are reiterating the full year $75 million pre-tax impact, which assumes the exchange declines will steepen somewhat as the year progresses.

Turning to our Behavioral Health segment results during the first quarter of 2026. Same-facility net revenues increased 7.3%, supported by a 5.8% increase in same-facility revenue per adjusted patient day and a 1.6% increase in same-facility adjusted patient days as compared to the first quarter of 2025. We estimate that the winter weather impacted first quarter Behavioral Health volume growth by approximately 40 to 50 basis points.

Same-facility Behavioral Health segment EBITDA increased by 8.4% in the first quarter of 2026. Excluding the net benefit from prior period supplemental payments, same-facility revenue per adjusted patient day would have increased 4.9% and same-facility's segment EBITDA would have increased 4.3%. For the first quarter of 2026, Behavioral Health segment same-facility salaries, wages and benefits per adjusted patient day increased by approximately 6% on a year-over-year basis moderating slightly from the 7% to 8% level we experienced during 2025.

In California, we are making good progress year-to-date with respect to the state's nurse staffing ratio requirements that go into effect June 1, and we remain on track with the assumptions contemplated in our 2026 outlook.

Cash generated from operating activities was $402 million for the 3 months ended March 31, 2026, as compared to $360 million during the same period last year. During the first quarter of 2026, we spent $217 million on capital expenditures.

In the Acute Care segment, we continue to invest in the 156-bed de novo hospital in Florida, scheduled to open in May, and in 2 bed towers and a replacement hospital project together comprising 178 beds that go online during the second quarter.

In our Behavioral Health segment, we opened a 144-bed de novo joint venture hospital in Pennsylvania in the early part of the first quarter and plan to open a 120-bed de novo hospital in Missouri later this year.

During the first quarter of 2026, we acquired 675,000 of our shares at a total cost of $127 million. As of March 31, 2026, we had $1.3 billion of repurchase authorization available pursuant to our stock buyback program, and we expect to remain active with share repurchase throughout 2026, including leading up to and following the closing of the Talkspace acquisition.

From a balance sheet perspective, in late April, we expanded the aggregate capacity of our credit facilities by $900 million to provide additional flexibility with the pending Talkspace transaction, other potential acquisitions and our continued prioritization of returning capital to shareholders through buybacks and dividends. As of March 31, 2026, we have $373 million of borrowings outstanding pursuant to our revolving credit facility, the borrowing capacity of which was recently expanded to $1.5 billion.

Turning to our outlook for 2026. We are reiterating the financial and operating forecasts that we established on February 25 in conjunction with fourth quarter earnings. Customary with our historical practice, we plan to reevaluate annual guidance as necessary in conjunction with our second quarter earnings planned for July.

Operator, that concludes our prepared remarks, and we're pleased to answer questions at this time.

[Operator Instructions] And our first question comes from A.J. Rice with UBS.

I appreciate the number you gave on the behavioral side of 4.3%, sort of the normalized core growth. I'm wondering if I could ask you that maybe a lot of moving parts in the acute business, on the negative, you had the impact from the weather and the flu, and on the positive, DPP variance year-to-year. Can you sort of parse those out and give us a sense of what the core grew on an EBITDA basis in the acute side, possibly?

Yes. I think it was in the low single-digit range, A.J.

Okay. All right. And then, obviously, interesting to talk about the AI use cases that Marc called out. And then, it sounds like there's some additional ones you're looking at. I wondered if you could pick out 2 or 3 that you're saying these are really meaningful and maybe delve in a little bit more on what you're seeing as an opportunity to deploy AI.

Yes. I mean, as I said, A.J., we're looking to do things that affect our administrative functions to increase efficiency and in clinical operations, so if we can impact patient experience, improve outcomes. So that's kind of where our focus has been. We're already seeing some of those things paying dividends. For example, right now, one of the things on the operating side, we've deployed and scaled a total of 8 different use cases of AI solutions into our revenue cycle operations. And we've already seen, like I said, significant benefits already, and I think this is going to continue and multiply going forward. So I think our efficiency is getting better, but we're also seeing it on the financial side in increased dollars, improvements with denials management and then hopefully increase revenue.

And then, we're also doing a lot of things that are touching the patient. So anything that we can do in those 2 areas are kind of where we're going to focus for now. We're not doing much in the clinical space yet. But I do think down the line, we'll see something there as well.

Our next question comes from Jason Cassorla with Guggenheim.

I wanted to check back in with the $46 million of combined Nevada and Ohio out-of-period Medicaid supplemental payments. I think we're counting somewhere around $120 million to $130 million year-over-year benefit from total Medicaid supplemental payments in the quarter. Is that a fair characterization? And then, if it's so, then could you help us bridge what would indicate a decent step-up in core EBITDA ramp for the remainder of the year to meet that 5% growth expectation? Just any color there would be helpful to start.

Sure, Jason. So I think that's accurate. And I also think it's worth noting that nothing that you enumerated was outside of our expectations. Everything that you suggested, the -- all the DPP that we recorded or the vast majority of it in Q1 was in our guidance. I think that if you exclude the $46 million of out-of-period DPP in Q1, you'll have a good run rate for the rest of the year, and that number is consistent with what we disclosed in our 10-K and will disclose in our first quarter 10-Q as our estimated DPP for the year. So we recognize that we would have this significant benefit in Q1, largely because we had a number of large DPP programs last year, if you could recall, Tennessee, D.C., that were not approved, and therefore, recorded and recognized until after the first quarter.

As far as the ramp for the rest of the year -- so I'm just trying to make the point that everything we recorded in Q1 was within our expectations. I think our overall results were within our expectations. And I think that implies that we expect a ramp in our earnings as the year goes on to get to that core level growth of 5% that's embedded in our guidance. That -- those assumptions include the continued ramp-up of the new facilities: Cedar Hill in Washington, D.C., which celebrated its first year anniversary this month; the opening of a new hospital in Florida; the opening, as I -- as we alluded to in our remarks, of 178 new beds in existing hospitals in California, in Las Vegas and in Florida. The continued improvement in behavioral, both in outpatient revenues, higher-margin outpatient revenue business and continued operating leverage from growth in volumes. And I think volumes were on the softer side in both acute and behavioral, and we expect them both to improve as the year goes on.

And -- finally, I think, as I also, I think, suggested in my remarks, we expect continued moderation in wage pressures in the behavioral business. We saw a significant investment in wages in behavioral in 2025, moderated a little bit in Q1 '26, but expected to moderate further as '26 progresses.

Got it. Great. Very helpful. And if I could just follow up maybe on the behavioral volume picture, excluding weather impacts, you still -- you hit the low end of your 2% to 3% volume target in the quarter. Maybe can you just talk about -- or talk a little bit more about the drivers of growth in the quarter? Maybe how much of that kind of step up or that volume acceleration ex-weather was a function of the higher headcount and increased labor supply? Or are you seeing anything different in the demand picture or throughput there? Just any thoughts around the volume environment for behavioral would be helpful.

Sure. I think there's 2 broad trends. And I think you touched on at least one of them, Jason. Again, we made the point in our year-end call that we invested heavily in beefing up our staffing in behavioral in 2025. And the point of that was to allow us greater flexibility and ability to take on greater patient demand. And I think that's beginning to affect itself or reflect itself.

And then also, we've talked at great length over several quarters about our continued focus on outpatient growth in a business where we're finding more and more of the demand. And we think demand remains strong for behavioral services, but more and more of that demand is shifting to the outpatient setting. And I think we're doing more -- a better job and a more focused job on capturing that demand. And again, I think we think that's an upward climbing trajectory, as I alluded to in my answer to your first question.

Our next question comes from Ann Hynes with Mizuho.

Can we just talk about bad debt reserve trends? I know this is a dynamic environment with some Medicaid disenrollment and also the expiration of the ACA subsidies. How is that trending versus your expectation? And can you remind us, does your guidance assume a deterioration of collectibility on the co-pays to deductibles?

Yes. Ann, so we addressed, I think, specifically kind of the HICS dynamic, as it relates to uncompensated care and bad debt in our prepared remarks. We saw a decline in HICS volume in Q1. But as I noted, we also recorded an additional reserve because we believe that some of those HICS patients who are presenting themselves as having HICS coverage will later be deemed not to have coverage because they fail to make their premium payments. So I think we've taken a reasonably conservative position in Q1.

We continue -- we'll continue to learn more about those HICS dynamics. But at the moment, we believe that our $75 million negative estimate for the impact of the HICS subsidies expiring is good. It will continue to get larger as the year goes on, but that was always our expectation. And that impact largely is reflected in higher levels of bad debt and uncompensated care. Other than that, I can't say that we saw any dramatic changes in our payer mix, slight increases in uninsured and Medicaid -- excuse me, slight -- yes, slight increases in uninsured, decreases in Medicaid utilization, slightly increase in Medicare utilization slightly, but no other big changes. No big changes in denials or patient status changes from the payers.

And I think we attribute a lot of that to the investments that Marc alluded to in technology and also in people and process in our revenue cycle. We've really been focused, particularly in the Acute Care segment on improvements in our revenue cycle efficiency. And I think that's allowing us to, at a minimum, keep pace with the payers, as they demonstrate more aggressive behavior. And as we've disclosed before, we're going to shift that focus or increase that focus to the behavioral segment in 2026 and our revenue cycle efficiencies in that segment.

Our next question comes from Matthew Gillmor with KeyBanc.

I wanted to follow up on the pricing comments. I think Marc had mentioned the positive contribution in rate, but expecting a more balanced outlook for the balance of the year. It seemed like that outperformance was above and beyond your expectations even excluding the SPP. So could you give us a sense for what drove the stronger pricing in the quarter? And what's behind your expectation for the moderation for the rest of the year?

Well, I think a little bit of it, Matt, is simply the mix with a lower sort of flu component, a significantly lower flu component this year rather than last year. By definition, the patients that we had this year were of a higher acuity. Most flu and respiratory patients obviously carry a fairly low acuity. So I think that's a big piece of it. But I did stress, I think in -- or one of us stressed in our prepared comments that we also saw reasonably healthy increases in some of the more acute service lines, including cardiology, orthopedics and neurology. So that helped as well with the acuity and the pricing in Acute Care.

Fair enough. And then maybe asking a follow-up on trends with professional fees. I heard the comments about the controlling costs, but I was curious if there's anything to report there, and give us a sense for what you're doing to try to alleviate some of that, particularly in areas like radiology.

Sure. So I think in our guidance for the year, we talked about professional fees rising at, I'll call it, inflationary rate in the single-digit range, maybe towards the high end of the single digits. And I think we're largely operating within that range. That's not to say that we're not seeing pressure in our markets from certain hospital-based physicians for higher fees. The way we're dealing with that is being more competitive in terms of going out for coverage with more RFPs, trying to reduce the number of locums physicians we use for our hospital-based physicians, which tend to be more expensive. And it's really just sort of a daily grind, but I think our operators have been fairly successful in keeping those professional fees at a level that is manageable, as I said, in the single digits even if it's in the high single digits.

Our next question comes from Kevin Fischbeck with Bank of America.

This is actually Joanna Gajuk filling for Kevin here. So maybe first, I guess, you talk about the decline in the HICS volumes, but I don't think I heard you talk about the changes in your uninsured mix. Can you talk about the payer mix a little bit more in the quarter?

Yes. Joanna, so what I thought I said before was, obviously, we saw a decline in HICS volumes. We saw a slight decline in Medicaid utilization, slight increase in uninsured volumes and a slight increase in Medicare volumes -- I'm sorry.

Yes. No, I was just saying, so it's a slight increase in self-pay or uninsured, sorry.

Yes.

Okay. That's helpful. And I guess, on the supplemental payment programs, right? So it sounds like there was nothing new that was approved that came through this quarter. And I guess, we're still waiting for Florida and California. So any update on these programs?

So as far as Florida is concerned, I think -- as a number of our peers have expressed, I think there is a high level of confidence amongst providers in Florida based on feedback that we've gotten from the state that their pending 2025 program is likely to be approved. We don't know the exact timing. It could be imminent. It could be in another while. But ultimately believe the 2025 program will be approved. And when it is, we'll record it in that period and revise our guidance appropriately at that time. We have been estimating that to be about a $50 million benefit to us. When we see the final approvals, we believe that benefit could be measurably higher, but waiting for the details from the state.

As far as California is concerned, we've been asked about this before. We think that the likelihood of a renewed or expanded California program is much less likely or much less certain, I should say. And we've done nothing to try and estimate the potential benefit there until there's further, I think, sort of consensus building between the State of California and CMS. But it is possible that if there is an expanded program, it could be measurably beneficial to us, but I think it's way too preliminary to make that judgment.

Our next question comes from Justin Lake with Wolfe Research.

Just wanted to follow up on core growth. I appreciate all the commentary about what's going to get better through the year. I think a lot of investors want to look at the hospital business right now given DPP is going to be winding down to some extent going forward on an ex DPP basis. And when I do that math, and I think about all the other moving parts, the headwinds you had on flu and weather, I get to about an $80 million benefit on DPP plus the headwinds versus your growth of about $50 million in the quarter on EBITDA. So it looks like core EBITDA was down $30 million or about 5%, 6%. Just curious if you can help us understand, was there anything in the first quarter last year that wouldn't have recurred, for instance, any good guys that we haven't thought about? Or anything else in the core that you think was driving that minus 5%, if I'm thinking about it right?

Yes. So, Justin, it's a little bit difficult to answer your question with precision. I don't have your calculation in front of me. But I don't dispute it. At the point that I think I made in an earlier response was simply all the points that you raised, all the points that were raised earlier are things that we anticipated, I think that were appropriately included in our guidance. We understood that there was a difficult DPP comparison for us in the first quarter. We understood that our earnings trajectory would have to increase over the year's progression in order for us to get to that core 5% growth that's embedded in our guidance. And for the reasons that I tried to enumerate before, I think we believe we can get there. But I acknowledge I'm not going to agree to all your numbers. I'm not suggesting they're wrong. I just don't -- I'm not able to do that off the top of my head. But I would suggest we get it that we're not at that core 5% growth, excluding all the DPP and other nonrecurring items in the quarter, but still believe that we're going to get there for the full year.

Our next question comes from Ben Hendrix with RBC Capital Markets.

Just wanted to follow up on the HICS trends real quick. You said a 5% decline in volume, though, and then that's excluding what you expect may not actually kind of effectuate in the quarter. And I just wanted to get your thoughts on that 5% versus the 25% to 30% of HICS patients in lost coverage that you kind of embed in your assumptions for the year. Anything changing with that or any kind of results that you saw in the first quarter that kind of informs your decision to renew that number or anything within that range for the 25% to 30% changing?

Yes. So I think what we tried to articulate then was that while we could identify a 5% decline in our HICS volumes in Q1, we had an expectation that some of the patients that we were recognizing as HICS patients will later likely be identified as not having coverage because they fail to make their premium payments. So the reserve on those patients that we recorded for the first quarter reflects sort of a higher level of HICS volume decline, probably something in the low double digits, 10% or 11% or 12%.

We continue to believe that, that number will increase as the year goes on. Our 25% to 30% estimate for the year, we believe we may still get there. Obviously, we were not there in Q1. But again, that was an expectation that we wouldn't get there right away. So we'll see. I think what all of our peers have said and I think providers have generally said is there's still a lot of dynamics in the movement of HICS patients and who's able to make their premiums and who's not that we're going to continue to learn for at least another quarter and maybe more. But I think we feel like from an accounting perspective and reporting perspective, we're being conservative in how we're thinking about it.

Our next question comes from Andrew Mok with Barclays.

Given that flu and weather were early quarter dynamics, can you comment on the progression of volumes throughout the quarter in each segment, including exit rates in March and April?

Well, what I would say, Andrew, is I think the flu volume comparison was more significant in January and February. I think flu season was largely over last year and this year as we got to the end of the quarter. So I think that was -- the significant sort of flu decline was felt more acutely in the first couple of months of the quarter. And then, the weather-related, really depended on the market, but we had storms in both January and February that affected, I think, both business segments. Again, I think March was, for want of a better word, a cleaner month, meaning no real flu impact and no significant weather impact. And I think March volumes were -- showed a more normative increase over last year.

Our next question comes from Raj Kumar with Stephens.

Maybe following up on the kind of March, April trends. I guess -- did you see a significant pickup in potential kind of deferred care that got pushed back because of the winter storms? And then maybe just also any kind of commentary on Acute Care surgical volume trends and just general acuity profile shifts year-over-year?

Well, what I would say generally is that what we find are elective procedures, and that's mostly in the acute segment that are scheduled and postponed because of the weather, tend to be rescheduled. But as we indicated, the bigger impact in Acute Care was the flu, which is not something you recover from. So I think we talk about maybe $5 million to $7 million of weather impact. And that's mostly in the D.C. market, where we had some burst pipes in one of our facilities and had to close beds for a period of time. Quite frankly, that's not something you can really recover from, the bed closure.

And on the behavioral side, same thing. You'll recover outpatient visits, et cetera, but inpatient trauma sorts of admissions are generally going to go somewhere else if they can't get to the hospital. So yes, again, I think that's something that we're not -- as I talk about, our recovery for the rest of the year or our growth for the rest of the year, we're not really counting on a tremendous amount of recapture of those deferred procedures.

Our next question comes from Craig Hettenbach with Morgan Stanley.

I wanted to go back to the strategy in outpatient Behavioral Health and the Talkspace deal. Can you maybe just touch on kind of 1,000 Branches? How that's been going? And how much that kind of informed this next step on Talkspace?

Sure. I mean, things are going well. It's been a little bit slower deployment than we would have thought just with various different situations state by state. But it didn't really inform us at all as far as being an impetus for Talkspace. We've known about Talkspace for many years. We obviously follow the landscape. So we know everybody that's out there. And we've talked a lot about our own outpatient deployment for many years now and wanting to become more proficient in outpatient. So 1,000 Branches is something we've been working on for a number of years.

But Talkspace happened because there was an opportunity that we didn't really create. And once that company indicated that they were interested in at least considering options, we began discussions and it got to where it got to. So I wouldn't say that one led us to the other. I would say that we've been studying that landscape for a long time. And we were pleased, and we are pleased, that we're able to go in both directions because I think that our current outpatient offerings and the ones that we're developing ourselves internally are only going to help us, as we combine with Talkspace and grow, as I said earlier, our whole continuum.

Got it. And then just as a quick comment, you mentioned kind of the effective multiple to be in single digits a few years out. Just what gives you that confidence in terms of what you're seeing in their business? And what you can do with it to drive that effect of multiple down?

Yes. I mean, you said it actually in the question. I mean, we have confidence now that we've had a full look at their business model, what they achieved just in the last couple of years and what their plans are, and we think they can achieve. I'll even say what they were going to achieve on their own in the next 24 months. Add that to what we think we can do to help them increase those achievements and earnings. That's what gives us greater confidence that a few years from now, we'll look back on this, and I think the multiple will be single digits because when you look at it now, we've had folks ask us about it. It's harder to understand the multiple if you just look at it from today's earnings. But in the next couple of years, again, they're on a great growth path themselves, and we're going to add to that once we combine resources.

Our next question comes from Benjamin Rossi with JPMorgan.

Just following up on the volume discussion across segments. Now that we're through the first quarter, what's your current outlook for Medicaid volumes for the year for both segments? And are you seeing any signs of volatility returning either through administrative churn or eligibility friction to start the year?

Yes. Ben, I mean, yes, as I've now said a couple of times on the call, we saw, I think, slight declines in Medicaid utilization in Q1. I think that's reasonably consistent with our expectations for the year. We're not expecting any other major changes, either in Medicaid, quite frankly, or in payer mix other than the HICS commentary that we've talked about a couple of times. So yes, again, I would describe the changes to payer mix outside of HICS in Q1 as relatively minor and pretty consistent with our expectations. And I think we think about that as being -- likely to be true for the rest of the year as well.

Okay. Just then -- as a follow-up then on the de novo side, can you just provide an update on your de novo hospitals? And how you're thinking about full year EBITDA performance across some of your recent openings in Nevada and D.C. and along with the Florida Hospital set to open up next month?

Yes. I'll just -- I'll remind people that as part of our guidance, we talked about the idea that the new hospital in Florida, which is really the true de novo for this year, would likely experience an operating loss for the year as with most new hospitals. We believe, and our guidance contemplates that, that whatever loss that it incurs would likely be largely offset by gains and improvements at our Cedar Hill facility in Washington, D.C. I think we would reiterate that guidance, although I think we are of the mind that the Cedar Hill improvement is likely more back-end loaded maybe than we originally contemplated. It's gotten -- it's had some issues with the weather and some of the other dynamics that we've talked about.

The other new capacity that we referred to in our prepared remarks, new towers in Las Vegas and in the West Coast of Florida and a replacement facility in California, these are in existing markets, and they'll all come online at some point during the second quarter, and we expect they'll ramp up relatively quickly because they're in existing markets and essentially just adding to our existing operations. So we believe that they will have a very positive impact on growth in the back half of the year.

Our next question comes from Ryan Langston with TD Cowen.

I just wanted to follow up and make sure I understood your comments on the denials activity. Are you saying you are seeing accelerating levels of denials, but you're just able to navigate them more effectively? And are you able to provide any further details on what you're seeing by payer clients?

So -- no, I don't think we're seeing an increased level of denials, Ryan, of any material amount. What I suggested I think is that because I think others have talked about maybe more aggressive behavior on the part of payers. And all I was trying to make the point that I think the investments that we've made in our own revenue cycle, particularly in the acute space, both from a technology perspective, but also from personnel and process perspective are allowing us to sort of keep pace with potentially more aggressive behavior on the part of the payers. And I've just simply also made the point that we expect to make similar investments over the next 12 to 18 months in our Behavioral Health revenue cycle functions.

Our next question comes from Scott Fidel with Goldman Sachs.

First question, would be interested if you could give us an update on just how you're seeing the sort of underlying trend in behavioral in terms of just the demand versus supply equilibrium, if there's -- relatively consistent with where we've been the last couple of years or just any type of incremental shifts you may be seeing on -- either on the supply or the demand side?

Scott, in that regard, I think we've been pretty consistent for several years now in suggesting that we think behavioral demand remains strong and probably our greatest challenge is then in meeting that demand. Probably the single biggest obstacle we've had in meeting that demand for the last several years has been inadequate staffing in certain markets, in certain personnel functions, sometimes that's nurses, sometimes that's therapists, sometimes that's mental health technicians, the unlicensed personnel in our behavioral facilities.

The only other, I think, comment that we've made about demand, particularly, I would say, in the last several quarters or maybe the last year, is that while the demand remains strong, I think we see it as shifting, not unlike the way it has shifted in the acute segment for a decade or more at this point to more outpatient delivery. And as Marc alluded to in his previous answer, we're trying to meet that demand in a number of different ways, building out our own freestanding -- ability to deliver care in freestanding facilities with our 1,000 Branches initiative, more focused on the step down of patients who are being discharged from our existing facilities, and obviously, through the Talkspace acquisition as well. So strong demand, although to a degree that demand is shifting more and more to the outpatient setting.

Okay. So if I could ask a follow-up around that, Steve, and around the outpatient strategy that's underway. And particularly, just as it relates to how that's informing your thinking right now on capital allocation. And specifically -- obviously, you have the outpatient clinics expansion going on, you have the Talkspace acquisition. I'm curious around how you're weighing sort of balancing buybacks relative to sort of continuing to invest more, allocating more capital towards continuing to build out that full capacity flywheel on the outpatient and digital side?

Well, I think the point that we've tried to make since announcing the Talkspace acquisition, we had a number of questions, I think, when we first announced sort of in the context of, well, this is a fairly large acquisition, how does -- is this an either/or in terms of share repurchase. And I think, again, as we tried to articulate in our remarks, we continue to find buyback of our own shares to be a pretty compelling investment and intend to remain active in that regard. I think we talked on our end-of-the-year call as having a buyback target in the $800 million to $900 million range, and I think that certainly remains a target for us at a minimum.

The Talkspace acquisition does not increase our leverage significantly. We go from a little under 2x levered to a little over 2x, but certainly, that leaves us plenty of space to consider, as we said in our prepared remarks, any other acquisitions that would come up that we found compelling as well as a continued aggressive CapEx program as well as continue being an active return of capital to our shareholders.

Our next question comes from Michael Ha with Baird.

Just quickly first following up on Justin's question. I understand you're not providing the core growth math at the moment, but I wanted to ask you about the inputs and to see if I'm missing any major components of this math. So far, I'm looking at net DPPs, the exchange subsidy headwind, California staffing requirement headwind, the flu weather impact. But then, how should we treat any Palm Beach Garden de novo costs, the Cedar Hill tailwind, which sounds more back-end loaded now? And is there anything else that we should consider, anything on first quarter last year that would not recur?

Yes. I mean, everything that you ticked through, Michael, are I believe items that we've discussed already. Again, I made the point earlier, and I'll just reiterate, none of those items were really a surprise to us during the quarter, and our overall results in the quarter were very consistent with our internal expectations. I think these were all knowns going into the quarter, obviously, other than the weather and the flu, although we certainly, I think, referenced both on our fourth quarter call.

Your question about Cedar Hill and the new hospital in Florida, again, I'll reiterate, we said in our guidance, we thought that would be a wash for the year largely. That continues to be our belief, although I made the point that I think the Cedar Hill improvement is probably a little bit back-end loaded. But -- no, I mean, I think we've covered all those items. Those were all well within our expectations, all included in our guidance.

Got it. And then, following up on Scott's question on Behavioral Health, I know you had implemented labor efforts focused on retention at year 1 hires since the turnover rate of post year 1 hires diminishes drastically. Wondering how those efforts gone? I know last time we spoke, the turnover rate was moving from as high as 50% down to at least 40% over the last half year. Curious where are you today on that turnover rate? Is it still in the 40s? And if you could remind us what your pre-COVID turnover rate was just to establish reference point, that would be great.

Yes. So again, I think, as we said in our prepared remarks, I reminded people that last year, our salary and wage expense in behavioral was up 8%, which included a pretty significant increase in the headcount. In Q1, it was more in the 6% to 7% range. So we saw some moderation in Q1. We expect to see further moderation as the year goes on. That's a function, I think, of any number of things. It is -- we're not hiring as aggressively in '26 as we did in '25, that's number one. Number two, I think we're seeing some moderation in wage increases. And -- again, I think we expect -- and as your question implied, we're also seeing some progress on turnover. Turnover remains high in behavioral. It remains high, I think, in all sub-acute industries, but we have clearly made progress and measurable progress on turnover in the last year or so.

I'm showing no further questions at this time. I would now like to turn it back to Darren Lehrich for closing remarks.

Thank you, everyone, for participating in today's call and for your interest in UHS. Have a great rest of your day.

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

Hi. Good morning. Welcome back to the Barclays Global Healthcare Conference. I'm pleased to welcome Universal Health Services. And joining me on stage here is Marc Miller, CEO; Steve Filton, CFO; and Darren Lehrich, Vice President of Investor Relations. Welcome.

Let's start with the acquisition of Talkspace that you announced yesterday. You characterized Talkspace as an accelerant to UHS' outpatient behavioral strategy. From your seat, what is the key strategic gap this deal fills? And why was now the right time to buy such an asset?

So we have been talking for the last few years about our intent to continue to grow outpatient services. We do a lot of outpatient now. But as compared to our inpatient portfolio on the BH side, not nearly comparable. So we've been trying to grow that. It's been a little bit slower than we would have liked. So in lieu of that or in addition to, we've looked to really partner with different companies and have been quite interested in who's been doing what in the market and certainly the better players. We had occasion to talk with these folks for a while about maybe different partnerships working together. They decided to go into a process. And so the timing worked out well in that regard.

We just think that this company complements a lot of what we want to do and really fills out the continuum for us because the types of intensive outpatient that we do, partial hospitalization programs, those are a lot of step-down programs from our inpatient.

What Talkspace does with their front-end lower acuity types of solutions is totally additive to what we have now. So we really think that it couldn't be a better fit. They're a very high-quality outfit, and they are really tech-enabled. The tech that they have already deployed, what they've been doing for a number of years is impressive. And the things that they're talking about doing in the coming years, equally, if not more impressive. So we're very excited about the opportunity there.

Right. And how do you plan to integrate and leverage that platform across the UHS system to drive that growth?

So again, I mean, there are a number of things, but I mean, just basically, they do things that we don't do and we do things that they don't do. So we think that there's going to be an opportunity on both sides where, for example, patients that they're touching on the front end who don't have a need, or many or most, who don't have a need for inpatient, some percentage will have a need for either more intensive outpatient or ultimately maybe inpatient. We had no purview to those patients previous to now.

So now we'll have a direct connection to possibly getting those patients into the UHS stratosphere. Conversely, they would never have seen any of the UHS patients. We're going to be able to directly introduce them to some of those as well. So we think that's going to be additive. But on top of that, it's going to be some of the things that they're developing, new relationships that they're already working on that we think we're going to be able to take advantage of.

Right. And understanding the different sort of modalities, how do the demographics compare of their customer base versus your customer base? Is this something that you see expanding the potential reach of your platform?

I think so. I mean, we focused a lot on their younger population. They have a younger population. We touch that population, but that's only one part of our overall. So I mean, they're certainly skewed younger. They're also skewed towards a commercial base. We touch a commercial base, but we treat everybody. So there will be some effect there as well.

Right. And you've highlighted Talkspace is, I think, 6,000 therapists and view that many of them have additional capacity, what's the plan to scale the volume while maintaining that clinical quality, especially given I think their model is largely independent contractors versus W-2s?

Yes. I mean, again, they are able to attract a great number of therapists all around the country because of the tech and the platform that they've created. And so we see it as a huge opportunity for us to tap into some of these folks that maybe have never thought to work anywhere else. They might have their own small practice. They work with a Talkspace type of a platform. And this might not be another opportunity for them to do other types of work that they've not seen previously. So we're not 100% sure what that will mean. But I think, again, it's greater opportunity.

Great. And moving beyond just outpatient behavioral, it appears you're leaning into the AI capability building through internal hiring, working with some external vendors as well as investments, including your stake in Hippocratic AI. Can you help us understand the key pillars of your strategy with artificial intelligence and how your approach may differ from -- in the behavioral business versus the acute business?

Yes. I mean, honestly, our approach is similar depending on almost regardless of which business. It's identifying what the needs are and trying to find the best fit to address those needs. So Hippocratic, you mentioned, is a company that we were an initial investor. There's a few health care investors for Hippocratic AI. We think that they have a terrific platform, and they continue to grow in a whole host of ways, mostly nonclinical facing. So it's a lot of back office. There are patient-facing items, but it's not in the operating room or things like that.

We think that's the right place to focus on the acute care side for the time being. But we're not limited to Hippocratic AI. We've got many relationships with different vendors who are utilizing different forms of AI for revenue cycle, finance, operations, really everything going on, on both sides of our business, we're looking to see if there are AI solutions that can help us into the future. And we're involved with some now, and we're looking at new ones going forward.

Right. So it sounds like there's some kind of tiered investments going on here. Is there a framework for how we should think about the timing and cadence of the benefits here in terms of which segment it accrues to and how it will materialize in the P&L?

I'll let you answer that.

Yes. I mean I think one of the challenges we have, Andrew, is that there are multiple opportunities. And we have an infrastructure, sort of an AI steering infrastructure, if you will, that tries to prioritize and identify the opportunities that are most impactful, can be realized quickly. And as Marc suggested, the different ways we can do that with a vendor relationship, developing it on our own, working with Hippocratic AI to do so. I think it's -- we're in the very early innings of this process, and I think it's difficult to quantify what the ultimate benefit could be.

But I think the way we look at it is we haven't spent a tremendous amount of money. We've invested $20-some-odd million in Hippocratic AI, which we think is actually -- we're going to earn a significant return on. We've entered into these relationships with vendors that I think, quite frankly, are more efficient than where we've been doing the tasks manually ourselves. And we've invested -- we've shifted some of our internal IT investment and IT expenditures more towards an AI focused. But I don't think we're ultimately incrementally increasing our IT spend dramatically. So our investment, not that great.

I think our returns are starting to build, and they'll continue to build incrementally. I think in an industry like health care and in hospitals, the development of AI is going to be just a significant net positive because it doesn't threaten our business at all. It doesn't threaten our demand, but it allows us to deliver a lot of the routine recurring functions that are a big part of what we do in a much more efficient way.

Right. And I think some of those functions, RCM fits into that category. revenue cycle management. That's become an increasingly strategic priority for hospitals. Which capabilities have driven the greatest benefit in RCM? And where do you see the greatest opportunity from here?

So we've talked about a couple that we've cited. I mean one is, again, using a third-party vendor to do emergency room coding, which is something that we used to do on our own. They use an AI application to do so. We tested it extensively in sort of a parallel fashion where we would code claims manually and compare it to how they coded and found out that they were coding more accurately and quite frankly, obtaining greater reimbursement because they were coding more accurately.

The payers have noted that, that broadly, the providers, I think, have gotten better and more accurate in their coding, not just in ER, but in inpatient as well. So that's an example where I think we've got an uplift of tens of millions of dollars annually just by coding more accurately, just by using a vendor who's using AI technology. Another example that we've cited probably before is using AI to appeal denials. We believe that the insurance companies have been using AI to generate their denials for several years now. And then they were doing so in a very sort of efficient nonmanual labor-intensive way.

We were replying to these denial letters with a nurse or other clinical professional having to go through the denial letter, having to go through the medical records, draft the denial appeals letter, et cetera. Now we're using a vendor to generate those letters and having the nurse spend 5 minutes to review each one just to make sure they're accurate and complete, again, just gaining that sort of efficiency. And like I said, I think we're just scratching the surface on these sort of opportunities. We'll continue to find more, and I think they'll continue to make us more efficient and more productive.

Great. Sticking with the hospital segment. We're now a few months into the year following the expiration of enhanced ACA subsidies. Is there anything you can share on how exchange volumes or patient behavior is tracking relative to your expectations? And related to this, what impact do you expect the shift towards bronze tier ACA coverage to have on utilization and acuity trends this year?

So just to remind everybody, we have framed an estimated impact from the lapsing of the HIC subsidies at about $75 million, primarily in our acute division. And it's really based on a couple of very high-level assumptions. One is that about 25% to 30% of the HICs volume that we currently have will lose their subsidy or lose their exchange coverage as a result of the subsidies lapsing. In the first couple of months of the year, we've seen a reduction, not quite at that 25% to 30% level.

I don't think we're surprised that we haven't seen us sort of reach that 25% to 30% level immediately because I think we'll find that as time passes, some patients will not pay their premiums and that sort of unsubscription level, if you will, will creep up. So I think that as an industry, we still have to experience more. We have to see how the next couple of months play out. We have to see -- you suggested another nuance that people may not completely lose their coverage, but they may shift from a gold tier to a bronze tier, and that could create some uncompensated pressure on us if they have a higher co-pay and deductible.

We've tried to factor all that into our estimate. And again, I think based on the first couple of months of experience, we're feeling reasonably comfortable with our estimate. It's certainly not expressing 100% confidence that we got the point exactly right. But I think feel like we certainly have in the ballpark on what the impact is likely to be.

Great. Sticking with the commercial coverage more broadly, there's been mixed data points on the strength of the U.S. employment market. What trends are you seeing across your core markets such as Las Vegas? And how are those showing up in volumes and payer mix so far?

Yes. I think employment trends remain pretty stable, and that's encouraging. There's been some attention to the Las Vegas market in the last year because tourist volume in the market is down. But I think one of the more encouraging things for us in that market is that the employment trends are actually quite strong, which I think suggests that the gaming properties themselves are expecting an improved year and improved tourist volume in 2026.

And I think we find whether you want to look at it from the perspective of employment trends or unemployment trends, that tends to have a bigger impact on our business than, let's say, tourist volume, that sort of thing. So it was a bit softer year in Nevada and Las Vegas, I guess, specifically this year for us.

I think that the Las Vegas market performed probably closer to the divisional average, the divisional acute average than it has in the past where it's generally been an outperformer. But it has not been a drag. It's not -- and I think that's our expectation for '26 at a minimum is, again, it performs at the division level. And if the employment trends and the employment data is accurate, I think it suggests that the economy in Vegas may be on the upswing.

Great. Let's turn to the fundamentals in the behavioral business. Same-store patient day growth improved throughout 2025, but finished at 1.5% growth and short of the 2% to 3% target. You've consistently pointed to labor as a constraining factor, but the labor backdrop does seem relatively stable. So what needs to go right operationally for that acceleration to materialize?

Well, we did disclose in our 10-K, and I think we discussed on our fourth quarter call that we increased headcount or full-time equivalent count in the behavioral segment by a little over 4% in 2025, and that was certainly in excess of how much our volumes grew at a little over 1%. And I think that was a conscious and intentional investment, if you will, in labor to position us better to be able to grow closer to that target. I think the other thing that gives us confidence is that we have been investing in outpatient growth, which I think clearly, outpatient demand in behavioral is growing faster than inpatient.

And that's why we've been focused on it, and I think we'll benefit from that. Obviously, the Talkspace acquisition will help that. I'm not sure it will have a material impact in 2026. But over the next several years, I think growing our outpatient at a faster rate than inpatient has been growing will help us achieve what has historically been a very achievable volume target of sort of 2% to 3% adjusted patient day growth.

Right. And today, I think your outpatient behavioral revenue is about 10% of the segment. You're clearly leaning into that category. As you scale that footprint, how do you ensure that new outpatient capacity is incremental to the system rather than cannibalistic?

Look, I think the truth is that you need to treat patients where they want to be treated and where payers want to treat them. If you think about the acute business, there's been this shift over time out of the hospital and into outpatient settings, whether that's ambulatory surgery or outpatient imaging or freestanding EDs. And we've shifted along with that. And some of that, to your point, is cannibalized business. Some of that is business that was performed on an inpatient basis. But there's no really resisting that. We've got to deliver the care where patients want to be treated and where payers are sort of demanding they be treated, and we'll do that on the behavioral side as well.

And we'll do that by focusing and dedicating people to growing that outpatient business. We'll do it by building out these freestanding outpatient facilities that we really never had a presence in before. And I think now we'll do it by taking advantage of the synergies with Talkspace over the next several years that will really kind of -- you used the term or repeated the term that we used in our press release that I think Talkspace is really going to help us accelerate that outpatient growth that is already underway.

Right. And as you look at those different avenues of investments, like where do you see the strongest returns between step-in and step-out services, particularly in the context of that Talkspace acquisition?

Yes. Again, I don't think it's kind of a linear sort of thing where we're choosing one option. I think broadly, margins in the outpatient space tend to be better than the inpatient space because I think, quite frankly, the payer mix tends to be better in outpatient. It tends to be more commercially and Medicare-centric and less Medicaid-centric. So I think, obviously, we'll make judgments about where the investments make the most sense. But investing in these freestanding centers, which require minimal capital, investing or continuing to invest in the Talkspace technology, which Marc alluded to before, is we find quite advanced and quite sophisticated is something we'll continue to do.

Again, I think this is all about creating this end-to-end seamless continuum. So a patient can be treated anywhere along what I'll call a UHS Talkspace continuum in the future, where it's most appropriate, where the payers are willing to pay, where they're going to be most satisfied. One of the things that interests us in Talkspace is they have very high levels of patient satisfaction as well as therapist satisfaction. And so building out outpatient should be economically and financially beneficial to us, but it should be really quite beneficial from an outcome and a satisfaction perspective for the patients and for those delivering the therapy.

Great. And on the pricing side, behavioral pricing, especially on the inpatient side, has been particularly strong in recent years. What are the primary drivers of that strength? And then I think you've more recently noted that started to moderate. So what's driving that moderation? Is it state budget dynamics, payer behavior, some combination of the 2, changes to the commercial side?

I really think it's just an outgrowth of the success that we've had in the last several years. We've talked a lot about one of the dynamics in the last several years is that because of a lack of capacity, not just in our own hospitals, but in the behavioral space broadly, particularly in terms of inpatient capacity that we've been able to go back to payers, particularly managed Medicaid payers for -- from whom we didn't necessarily have regular increases over the last several years and negotiate what we believe to be just fairer rates, not particularly outsized increases, et cetera.

But some of those increases that we got in '23 and '24 and '25 have now started to anniversary. And so as we anticipate what the year-over-year growth is in '26, it's not as great as -- we're not expecting it to be as great as it has been over the last several years.

Right. And Medicaid supplemental payments, I think, are a component, right, within that. Can you provide an update on the status of some of the larger pending programs such as Florida? To your knowledge, is the holdup related to the structure of these programs or some sort of administrative backlog at CMS?

Yes. So look, I think it's worth noting that CMS clearly is willing to approve new programs. We have acknowledged that at least 2 new programs CMS has approved in the first quarter that will record the benefit in the first quarter, one in Ohio and one in Nevada. So I think broadly -- and they've approved other new programs as well. So CMS continues to approve new programs. The Florida program, as your question suggests, has been delayed. What the state of Florida says is that there are some structural issues that CMS has objected to or at least questioned.

The state of Florida suggests that they're in what they, I think, describe as sort of constructive engagement with CMS and continue to imply that they're expecting approval. We don't know what the timing of that is. We don't know if that's weeks away or months away. And we've taken a conservative approach in terms of recording and not including in our guidance that Florida benefit until it is approved. But based on the feedback that we're getting from the state of Florida, still expect it to be approved.

Right. And policies in the One Big Beautiful Bill are set to phase down Medicaid supplemental payments starting in 2028. Marc, how are you positioning the organization to absorb those changes? And what sort of advocacy efforts are you making in D.C. to delay or adjust those policies?

Yes. So we've been spending a lot of time in D.C. I honestly think that it's unknown what's going to happen, come '28. We've gotten a lot of positive feedback, though, from moderates on both sides of the aisle that this won't stand as it is today. And they expect something to happen legislatively, probably in the next Congress. But if not this one coming up, then the one after in some way because we'll be able to absorb whatever we have to absorb. We'll adjust our operations. We've proven that we can do that. I think the 80% of the hospitals that are not-for-profit in the U.S., a lot of them are going to have a much harder time. And the folks in D.C. recognize that. So it's a wait and see. I can't really predict what will happen. I just think that it will moderate in some way, and we'll be in the forefront there, and we'll take care of that.

Great. And Marc, it's hard to believe it's already been 5 years since you've stepped into the CEO role. How has the company changed over your tenure? And how do you view the competitive positioning of the company today versus 5, 10 years ago?

Yes. I mean, overall, the company is similar. I mean I've been President since '09. So it's been 15 years. And we're pretty consistent in our approach. I did not come into this role really changing anything because it was a continuation of what I was already doing. I think the company is on a good track. I think this latest acquisition puts us in an even stronger position for the next few years and beyond. So we're very excited about where we are, where we're going. And again, our consistent approach continues. And so we have a very positive outlook going forward.

Great. Well, with that, we're out of time here. So let's end it, and thank you so much for joining on stage, and please enjoy the rest of the conference.

Thanks, Andrew.

Thanks Andrew.

Good morning. Thanks for joining us, everyone. I'm Whit Mayo. I cover health care providers and managed care for Leerink. This is day 2 of the Global Healthcare Conference. I'm joined with Steve Hilton and Darren Lehrich.

Steve, you've got an announcement this morning. Maybe we'll just start there and start with the acquisition of Talkspace.

Sure. Yes. So just a few minutes ago, we announced a definitive agreement to acquire Talkspace for $5.25 a share, which equates to an enterprise value of approximately $840 million. We're extremely excited about this acquisition and the opportunities it presents to us.

Those of us who follow us know that really for the last year or 2, we have really been focused on in our behavioral segment, especially building our presence in the outpatient space and have done a number of internal things to accelerate that. But we described in the press release the acquisition of Talkspace as an accelerant to that process. And I really like that term because I think it really is extremely apt in this case.

One of the things that I think has been a bit of an obstacle to growing the outpatient business is just access to therapists who are in great demand today. But by acquiring Talkspace, we're acquiring their cadre of 6,000 therapists, many of whom Talkspace believes have additional capacity as more demand is created, and we believe this acquisition will create more demand.

It is a sort of what I think about as a bidirectional sort of benefit in acquiring Talkspace. For -- again, those who've listened to us in the past, I described the outpatient business and behavioral as sort of having kind of two distinct phenomena to it. One is step down, which has been sort of our historic focus. When patients are discharged, when inpatients are discharged from our facility, they often require additional and continuing care that we call that step down. But some of the challenges in meeting that demand is sometimes the patients don't want to continue to receive that demand on our campus. They live far away. They're just not anxious about making -- they're traveling. So now we have this virtual option that we'll be able to offer, and I think that's a real benefit.

In the case of some of our patient population, particularly the adolescent or I would say, really teenage population, that's a population that I think is really drawn to virtual care. In many cases, I think they prefer that. So now having this option in a much more comprehensive way than we have it today is significant.

And the payer relationships that Talkspace brings, I think, are an extreme benefit to us. They are, as an example, a benefit to Tricare. So I don't know specifically, but if you're with one of the plans that Talkspace is aligned with, maybe Talkspace is on your membership card, et cetera. So if you have a behavioral need, just call a number and you're speaking with somebody and you're able to get assessed, et cetera. And now here's where I think the direction flows the other way. If people need more intensive outpatient, intensive outpatient, partial hospitalization or even inpatient care, Talkspace now has a partner that they'll be able to refer to.

So extremely excited about those opportunities, which are mostly revenue driven. A lot of times when there's an acquisition, people ask about the cost savings. I think there are some small amount of, I'll call them, public company cost savings to the extent we have duplicative public audit costs or SEC costs. Obviously, I think those can be eliminated. But for the most part, the Talkspace infrastructure and technology, which we think is quite an advantage will remain in place. Their team will remain in place. We're very impressed by both their technology and their personnel and their skills. So we're excited about that aspect of it.

The transaction we expect will close in the third quarter. We expect that the transaction will be slightly accretive in its first 12 months. And then as these revenue synergies are realized over the next several years, we'll continue to become more and more accretive.

Our leverage, which I'm often pointed out in these meetings is rather low, will increase by about 0.3x. And I think I take this opportunity. When asked about our leverage levels, I think we often respond that we are comfortable having a lower leverage level because it gives us the ability to respond to opportunities as they arise. This is certainly one of those opportunities. There may be others in the future. But we'll continue to be an opportunistic deployer of capital, meaning if other M&A opportunities arise, we'll evaluate them and respond if appropriate. We'll also continue to be an active acquirer of our own shares, which we think are a compelling investment at the moment.

I'm going to pause if there's anything I should have added. I'll ask Darren to add and then happy to [indiscernible].

Yes, Steve, no, I think you covered it well, Steve. I think the only thing I'd add just as it relates to the last point that Steve made, so leverage moves up by 0.3x. So that brings us to pro forma about 2.1x. That's the low end of the 2 to 3x range that we've been talking to you all about as our target. And I think on that point, it really is kind of a good example of how we're thinking about deploying our balance sheet and our capital to create new earnings streams as we think about the headwinds that we have in some of the out years that you all have been asking us about. And this is a really good example of how we're using that to deploy capital and replace some of those potential headwinds that are down the road and still have a really strong balance sheet position to be able to respond to other opportunities that are in the environment.

Whit, I'm sure you've got questions and I appreciate you letting us break the news here.

I appreciate you making the news here. How do I think about the potential revenue synergy opportunities over time? I know it's early, and there's a lot to evaluate, but any initial thoughts on what that could look like in the coming years?

Yes. I mean so just at the outset, I think Talkspace, their own projections for 2026 revenues were $280 million. So that is roughly a 3.5% increase in our behavioral revenue.

We've not quantified and I think don't intend to quantify the potential revenue synergies down the road. We've really explored them in great detail with the Talkspace team. We think they're significant. Obviously, I think we'll have more to say when the deal closes, when we give our guidance for next year, when they'll, I think, be much more firmly ensconced in sort of this partnership relationship.

But yes, I mean, I think -- and we've tried to walk through, I think, some broadly what some of those opportunities are -- but I think, again, I'll stress what I said at the very beginning, this focus on outpatient growth, which has really been a significant focus of ours, I think, is really accelerated or potentially accelerated over the next 6 months, 12 months, a couple of years by this acquisition.

Yes. And to be clear, there wasn't any consideration for unannounced growth within the guidance that you provided a few weeks ago, correct?

No, no, there was no contemplation of this transaction in our guidance from it a couple of months ago.

Okay. Is this an area that you think you're going to continue to make additional investments through M&A? Or is this a new platform acquisition. We're going to learn from this, we're going to try to grow this. Just how do I sort of square that against sort of the capital deployment thinking over the next few years?

Yes. I mean, so first of all, I think as we sort of often answer the question about acquisitions, generally, I think we are always open to ways in which we can enhance our existing strategy. What I will say about Talkspace is, it's really one of the leading companies in this virtual behavioral health care delivery space with a very nationally recognized brand.

There are 200 million people in the United States and Puerto Rico that have access to the tax-based product through -- mostly through payer relationships, but relationships sometimes with cities and that sort of thing. And we'll continue to invest. I mean, they're investing in technology and we're very supportive of those investments. So we'll continue to invest in their technology yes. So anyway, there may be other acquisitions, but I think we feel like we got the pick of the litter in terms of this virtual space.

Yes, pretty extensive reach. When I look at your legacy behavioral outpatient business today, I mean there is some telehealth virtual engagement. I don't think the percentage is a lot. Where do you think that, that could potentially go over time?

So historically, and when I say historically, I mean this obviously is really the last several years, and I think it was really kind of accelerated by the pandemic. We've used virtual or telehealth largely as a means to supplement the care that we provide in our inpatient facilities. So if we had an inpatient facility that was lacking a therapist or a psychiatrist in psychiatrist therapists from a different geography could Zoom in or Skype in or whatever and help assess patients and help create patient treatment plans and that sort of thing. So mostly what I described as sort of internal.

We did have some capacity to deliver virtual care and therapy on an outpatient basis. but it was relatively limited. And again, the Talkspace capacity really accelerates that to a significant degree. Hard to say again with precision, what the opportunity is, but I think we think it is measurable and one that will continue to realize the benefit for several years to come.

Remind me the kind of staffing model Talkspace, what percent of the therapists are actually employed versus being in their own independent practice and just to compensate presume per session per encounter per visit type of compensation model?

Yes. So the smaller number or a smaller percentage of their therapists are employed or W-2. The much larger percentage are independent contractors who, I think, as your question suggests, are probably either have their own practice or working somewhere else, et cetera.

But again, the perspective that they've offered to us is that they believe that I think many of their therapists have additional capacity to take on more demand if it is offered.

And beyond that, with 6,000 therapists there very adept at recruiting, evaluating, hiring therapists who quite frankly, I think, really like the flexibility of the kind of that more flexible discretionary model that Talkspace offers, you can kind of work when you want and they'll match you with the demand to patients, et cetera, which is a little bit different than, let's say, the inpatient model, which tends to be more restrictive in terms of hours and that sort of thing.

And I would just add to what Steve said. So we've assessed the capacity that they have and feel good about our ability to generate more virtual services as a result of the capacity of the 6,000 therapists that are part of Talkspace.

The overlap is very good in that they're in all 50 states, and so we feel good about that. And then as we've dug into the business and better understand it, therapist turnover is very low. So they have very good satisfaction, not just among patients and consumers, but within the therapists that are on the Talkspace platform. And that makes us feel really good about our opportunity to introduce that virtual access to care to the UHS enterprise.

Might just stop for a second and see if anyone has a follow-up question in the audience as it relates to the transaction. I put everybody on the spot, so I can keep going.

But maybe just to shift to the outpatient investments you have been making over the last number of years, it's been a pretty significant increase in the outpatient capacity. Just maybe talk about where you are in terms of the size of the number of outpatient access points and the growth that you've seen over the last few years?

Yes. So the last couple of quarters, we've been disclosing account of outpatient facilities in our behavioral segment roughly 120 or so. And to be fair, those are not all new. We've not historically reported all of them.

Historically, most of our outpatient facilities have been on the campus or very close to geographically proximate our inpatient facilities, and we have generally not counted those or disclosed those in our counter facilities.

We recently have sort of changed the way we count and report because we want people to know that we're very focused on this outpatient growth. At the same time, we've also talked about really developing kind of freestanding facilities, which is relatively new for us.

And one of the main reasons for that is that we find that people who are entering or what we'd call stepping into the behavioral system often don't want to receive their care on a hospital campus, branded with an inpatient hospital name. They have this I'll call it, fear angst, et cetera, being kind of swept up into sort of what I'll call the inpatient net. While I don't think that's really a legitimate fear necessarily, we acknowledge that it is the way some people feel and they much prefer to receive their care in a freestanding setting, et cetera.

So we've talked about the fact that in the last few quarters, we've talked about the fact that in the last couple of years, we've created this new freestanding segment of the business. We've branded it separately with this 1,000 branches brand we opened, I think, 10 new facilities in 2025, I expect to open another 10 a year for the next several years, and we'll continue to pursue that. I think there's -- we definitely see a need for that.

Again, the nice thing in my mind about Talkspace is now we offer this end-to-end continuum that really offers behavioral services almost of every sort and variety that you can imagine from inpatient to intensive outpatient to partial hospitalization to 50-minute therapy sessions to virtual assessments. There's really, I think, no other provider in the behavioral space that offers the continuum of services that we're now will be able to.

Yes. And you've always said historically one of the larger pain points that you've had and opening up an outpatient clinic has been the availability of therapist. So this sort of opens that up, okay. So I think I get the strategic element of the transaction. So congrats on the announcement this morning.

I wanted to shift to a topic and question that I think has sort of entered the picture of this earnings season for the acute care segment that it feels like many of your peers have cited perhaps a new earnings stream sort of coming into the picture with resiliency and cost initiatives. And I know that you have a lot of things underway. You may not have branded it or called it out as a specific program. But maybe just spend a minute talking about some of the technology, the AI, the things that you're excited about perhaps contributing to incremental growth this year versus prior years?

Yes. We, I think you framed it quite accurately. And I think on the fourth quarter year-end call, Marc, in particular, in his both prepared and responsive remarks, really try to address the fact that in our minds, driving productivity, driving efficiency is not something that just sort of has arisen as a result of the challenges that face us as a result of the Big Beautiful Bill. But it's something we've been ongoing. And I think particularly had ongoing really since the pandemic ended.

And if you look, I think, at our acute results since the pandemic ended, we've driven length of stay, particularly case mix adjusted length of stay to levels that are now below where they were at the beginning of the pandemic. We've really, I think, driven a number of productivity improvements. So if you look at the growth in our salaries and wages in the last couple of years, they've clearly been even less than sort of inflation, so suggesting that we're driving productivity increases. And we're going to continue to do all those things.

And then I think Marc tried to touch on, as your question sort of suggests the ability to use information technology, AI and other technologies to drive some of that productivity. And we've talked a little bit about specific examples of that. we're finding a number of examples in the revenue cycle space in terms of coding assistance, in terms of denials appeals in terms of ensuring that bills are going out has complete with complete documentation, et cetera. So all those things.

And I think there are many other opportunities. One of the things that I think we've reported on maybe in contrast to what others have said that they've seen an increase in payer denials and patient status changes. And just sort of complained about the heightened aggressive behavior from peers. And I'm not suggesting that we haven't seen that. But I think some of the improvements that we've made in the revenue cycle area and the investments that we've made in people, process and technology over the last several years, particularly in the acute space have helped us at a minimum, stay even with the payers because I do think they're getting more aggressive as they feel the pressure on their medical losses, et cetera.

We undertook a significant sort of third-party consulting review of acute care revenue cycle a couple of years ago. We've been implementing a number of improvements since then. And I think it's worth noting that we're undertaking a similar review in our behavioral space this year, and I'm sure that will carry over into next year as well.

Okay. Is most of the revenue cycle opportunity more on yield, improving yield? Or is it eliminating this friction, just the back and forth with the plans and the denials and everything?

So I think it really falls into a few different categories. I mean, one is the nature of revenue cycle processing in our space is it's complicated. It's -- but it's also sort of routinized, it's recurring, et cetera. And in my mind, that's sort of the perfect application for AI technology I'll go back to these denial letters. And again, this is a perfect example of I think where we're just effectively countering what the payers are doing because I think we've had some sense for a couple of years now that payers are generating denials and generating their denial letters through AI technology of their own. And what we've been doing is using a nurse another professional to look at the nil, go through the medical records, create a denial appeals letter get that process started. And on average, that was taking an hour or 2 of a nurse's time for every single denial of which there are many.

And now what we're finding is that AI generates the denial letter, a nurse spends 5 minutes reviewing it, making sure it's complete, making sure it's accurate. And so from a productivity standpoint, we're just doing better. We're using a vendor who uses AI technology to do ER coding. ER coding is much simpler, more straightforward than inpatient coding, which tends to be much more complicated. And again, we found that they're able to do it accurately. We've done a lot of parallel testing. They do it accurately, and they do it quite frankly, more productively than human beings are going to do it.

And so again, another example of that. So I think it does a number of things. It just -- I think AI helps us complete these routinized tasks in a more efficient, productive way. And I think the opportunity is to do that in other ways are significant, and we'll continue to -- one of the challenges I think we have in what I would sort of describe as the early innings of AI development and AI initiatives is prioritizing and choosing the applications that are most practical that can be developed the most quickly that are the most impactful.

And so we have sort of an AI steering committee that spends a lot of time and effort I'm just that aspect of it, making sure that -- because I think the number of potential uses is vast and you want to skinny that down to a manageable number and then sort of decide how you're going to approach it. So -- some of these things we're developing on our own with internal coding capabilities, et cetera. Some were using vendors for who have already developed these applications.

And in some cases, we talked on our call our year-end call that we've invested in a company called Hippocratic AI, which is the company dedicated exclusively to developing AI applications in the health care space. and we've used those as well. So it's a multi sort of tiered approach to really getting the best uses from AI.

Yes. Coming out of the fourth quarter, there was a little bit of noise within the acute care segment, a lot of out-of-period directed payment stuff in 3Q that didn't recur into 4Q. You had an ACO payment. A lot of stuff kind of obscured the growth. Do you want to spend a minute just sort of framing the 3Q to 4Q walk forward and sort of how you're looking about the growth quarter-over-quarter?

Yes. So I think particularly from an acute care perspective, we did get this question post the quarter that it appeared to some people that the sequential results in acute care were actually a sequential decline from Q3 to Q4.

That's not the way we saw it and we analyzed it. We did highlight a number of nonrecurring items in the third quarter, the most significant of which was the DPP program and the out-of-period DPP benefits from the District of Columbia that we recorded in the third quarter.

But I think we also mentioned an opioid settlement, we mentioned some revenue cycle benefits, including discrete settlement with a payer. I'm not sure that we called out precisely the magnitude of each one. But ultimately, when we sorted through it all, we generally view the acute care results between Q3 and Q4 is relatively flat.

Now to be fair, I think most people have expected historically there to be a bit of a step-up in Q4. And I think we attribute the lack of a step-up to relatively soft volumes, not only that we experienced in acute care in Q4, but it seemed to be sort of industry-wide. But otherwise, I think we generally view the Q3, Q4 acute care results is pretty flat and pretty stable.

No. Maybe just turn to the exploration, the subsidies. Maybe it's a little bit too early. I think you've talked a little bit about some of the activity you've seen quarter-to-date, a little bit of softness on HIX volume, and I don't think you can conclude whether or not the -- those patients are going to another payer class yet, but maybe spend a minute there and sort of how you think about the slope of the headwind this year as the year progresses?

So in our fourth quarter call and in our earnings guidance for next year, we have outlined the fact that we've assumed a $75 million headwind in effectively in our acute segment as a result of the expiration of the HIX subsidies. And the two biggest assumptions we made there were that about 25% to 30% of our HIX patients would lose their coverage.

HIX patients, and again, in our acute segment represent currently about 6.5% of our total adjusted admissions. So assuming that 25% or 30% of that is lost. We assumed a small percentage of those people, maybe 10% to 20% would get other coverage largely commercial coverage, either through their employer or potentially by stepping down from a gold plan to a bronze plant, something like that. Using those projections, we play that out based on the utilization patterns of that population, et cetera, and we come up with the $75 million number.

People have asked us appropriately, well, now we've got a couple of months under our belt in 2026. Are we sort of tracking those assumptions. And I think what we've said is the actual reduction in HIX patients is a little bit less than the 25% to 30%, but we expect that number to grow as the next couple of months progress because what we think will happen in a practical way is some people who are sort of believed or supposed to be still having HIX coverage will not make their premium payments or we'll stop making their premium payments, and that number will grow some.

I think it's too early, and I think other providers have made the same comment. A little too early to sort of precisely say, yes, here's where we are. Here's how our assumptions compare with the actual reality I think we'll all have, I think, more insight and more to say at the end of April when everybody reports the first quarter results. But at least at the moment, feel comfortable that the assumptions we've made seem pretty reasonable.

Should we think that this is potentially a headwind that recurs into 2027. I mean I don't know if you spent much time thinking through like beyond '26 at this point.

Yes. I mean that my gut, it is that if you can afford the HIX subsidies or the HIX payments without the subsidies in '26, you can probably in '27. But I mean that's a possibility. But no, I mean, not that we've given guidance for '27 and beyond, but I'm not sure we're necessarily assuming that this continues to compound.

You've had a number of new hospitals that you've opened in the last year or so in opening, particularly one in West Palm Beach. Do you want to maybe talk about how those are tracking versus internal expectations and what the incremental growth could be in 2026?

Yes. So I think as far as new hospitals go, the major assumption that we made is in the second quarter of 2025, we opened Senior Health Medical Center in Washington, D.C., our second hospital in that market, had a number of challenges in terms of delayed Medicare certification and some other challenges.

Lost about $50 million in 2025, lost about $25 million in Q2, $25 million in Q3, the facility pretty much broke even in Q4. We assume the facility will be profitable in 2026. I have encouraged people to think about it as whatever profitability we generate from Cedar Hill in 2026 will be offset by the startup costs and losses at our Palm Beach Gardens Hospital. But broadly, very excited about the Palm Beach Gardens Hospital. That's a very attractive demographic market. The hospital is extremely well located right off I-95 and while I think with most new de novo hospitals other than in Las Vegas will likely be a bit of a drag in its first year will continue to accelerate pretty significantly after that and looking very much forward to the ultimate contribution from that facility.

Okay. We've just got like a few seconds here left. I don't know if there are any questions in the audience.

Well, I think we can just wrap it up. 6 seconds to go. Thank you so much for coming.

Appreciate it.

All right. Well, thank you, everybody, for joining us here on day 2 TD Health Conference. My name is Ryan Langston. I'm the health care services analyst here. Very happy to have Universal Health Services with us. Up here on the day, we have Steve Filton, Executive Vice President and Chief Financial Officer; and Darren Lehrich, Vice President of Investor Relations. Thanks for being here.

So I guess real quick, UHS, one of the largest U.S. health care providers, 29 inpatient acute care hospitals, 340-some inpatient behavioral growing outpatient footprint, insurance offering, physician network, various related services, 39 states, Washington, Puerto Rico, U.K., I'm sure I missed something, but...

I think that's pretty...

Quite extensive. Okay.

All right. We'll jump right in. Maybe a good place to start fourth quarter, maybe help us a little bit with the sequential earnings pattern, certainly on the acute side between the third and the fourth quarter. I think typical seasonality, that's usually up. I think it was down around $45 million, if I have my numbers correct on the EBITDA line. A lot of moving pieces, DC, DPP, flu, other items.

So maybe just walk us through that sort of sequential move in the fourth quarter.

Yes. So I think there were, as you pointed out, a number of...good guys, positive nonrecurring items in the third quarter. When we adjust for those and adjust for any nonrecurring items in the fourth quarter, we come up with a relatively flattish sort of third quarter to fourth quarter performance.

You called out the District of Columbia Medicaid supplemental payment in the third quarter. That was close to $90 million. And I'm not sure that everybody has sort of properly included that. We had an $18 million legal settlement, which was a bad guy in the quarter, but we also had an accountable care organization payment in the $10 million range. I think we had a payer settlement that I'm not sure we even disclosed in detail, also I'm forgetting there that we -- I think we talked broadly about all these things in the third quarter, but I'm not sure we spiked them out.

Yes, that's right. And so to Steve's point, there were a number of good guys. I think if you kind of take those all together between the opioid settlement, some of the RCM improvements that included some other settlements, you've got about a $30 million benefit from those items. And then sequentially, we had about a $70 million sequential step down in supplemental payments. So altogether, about $100 million of earnings that didn't carry into the fourth quarter from the third quarter.

To your point, our EBITDA in the fourth quarter was down sequentially by about $45 million in the acute segment. But as Steve mentioned, the way we look at it, it was relatively flat, maybe even slightly up on an underlying basis. Normally, you would expect the seasonality of the fourth quarter to be a bit stronger. Volumes were, in fact, sequentially higher. But as we pointed out in the call, volumes for us in the fourth quarter in acute were a little softer than what our original planning was, and that was probably the biggest driver of the lack of general uplift that you typically see in the fourth quarter.

Obviously, in the fourth quarter, you set the guidance for the year for '26, included in that for both acute and behavioral volumes, 2% to 3% adjusted admissions for acute, obviously, APD for behavioral. I guess maybe just certainly on behavioral, that's been the focus in my conversations with folks. Maybe walk us through how you're getting to those numbers, what gives you sort of that confidence? I do know you disclosed, I think, 3.5% FTE growth on behavioral. So that probably sets you up nicely. But any other puts and takes that kind of gets you to that 2% to 3% between the two segments?

Yes. So I think in behavioral specifically, it's worth noting that our adjusted patient day growth in every quarter in 2025 increased, albeit incrementally, but we exited the year in the fourth quarter, about 1.5% growth. And so in our minds, we're now within shouting distance of that 2% to 3%. I think the idea of sort of what gives us the confidence that we can make that relatively small or bridge that relatively small gap. And we believe now I'll be the first to acknowledge that 2% to 3% has been an elusive goal for the last several years, but we're within shouting distance. And I think the two things that give us confidence that we can get there in 2026 are one that you mentioned.

We invested, I think, a lot in hiring and improving our staffing in 2025 because that has been a real obstacle for us over the last several years, not having all of our positions filled, nurses, therapists, mental health techs has limited the amount of volume growth that we could engineer. And we invested in hiring, and you alluded to it. We disclosed, I think, in our 10-K that our behavioral headcount, our FTEs increased by a little over 4% in 2025, even though our volumes only increased by a little over 1%.

And I think we were willing to make that investment because we think it positions us well for the 2026 growth. And I don't think our FTEs will -- or I think in 2026, our FTE growth will sync up much more closely to our actual volume growth.

And then the other issue, which we've discussed, I think, at length is continued emphasis on outpatient growth. We believe strongly that over the next several years, outpatient volumes and outpatient demand in behavioral will outpace inpatient demand and I think that's been the case probably certainly for the last year or 2, and I don't think we've necessarily enjoyed that growth, particularly that outpatient growth. But we've really focused on it. We've restructured how we're incenting our people, how we're organized for outpatient growth. We're investing in new freestanding facilities. And while I think some of these things will -- are a multiyear process and we won't enjoy the benefits immediately, but it will take some time.

I do think there'll be enough impact in 2026 that the outpatient growth will outpace inpatient and help us get broadly to that 2% to 3% adjusted patient day growth, which, by definition, reflects the outpatient side of things.

Yes. So is it fair to say maybe behavioral specifically, you think that generally, this has been sort of a staffing issue and maybe now with these FTE increases, kind of set up. Is that a fair way to get...

I think so. I mean we have cited other issues, I think, that more specific issues. But I think broadly, the single most sort of pervasive issue has been a staffing constraint that was really exacerbated during the pandemic, but even coming out of the pandemic in the last couple of years has been and we've always said it's not in every one of our facilities, but probably 1/4 to 1/3 of our facilities have had to limit the amount of patients they see because of a lack of sometimes nurses, sometimes therapists, sometimes the nonprofessional folks that we call mental health technicians.

Got it. On the fourth quarter, too, in the release, there was a fairly large gain -- unrealized gain in the P&L. I think that's related to AI investment that you have. I think you own about 3% of the company. Maybe walk us through that investment, and I'm sure you're leveraging that in your hospitals and your facilities. But maybe just walk us through what that investment looks like.

Yes. So Hippocratic AI is a company that was started by General Catalyst, a venture capitalist. And we were a seed investor, I think, at this point, close to 3 years ago, invest -- became sort of a 3% owner of the company and have kept that ownership percentage with additional investments. And Hippocratic AI, I think, was designed specifically to develop technology applications specific to health care, obviously, the name Hippocratic AI with the health care orientation.

And most recently, particularly AI applications, the gain that you referred to is the last round of funding that we participated in, based on the valuation of that round of funding, our sort of $20 million cost investment is sort of now worth about $110 million based on the latest funding and the instructions that we got from our outside accountants were that we needed to recognize that through the P&L.

So that's the nature of the adjustment. But sort of at its core, our investment in Hippocratic AI allows us to really be on the cutting edge of some of these really sort of recent and cutting edge developments in AI. The one that we talked about publicly and we've implemented and has been successful sort of at the outset is a thing called AI Agentic. It is these AI agents. So in an acute care facility when a patient is discharged within 24, 48 hours in their discharge, they have historically gotten a call from a nurse who we call it a post-discharge call who will say to them, how are you feeling? Are you in -- what's your pain level? Have you filled your prescriptions that you were given on discharge? Have you made the doctor's appointments you were given on discharge or recommended?

And generally, we have found that, that exercise and that process helps reduce readmissions, keep patients satisfied and healthy, et cetera. A number of those calls in the last several quarters are being made by AI agents. And we find that the AI agent identifies itself as such on the call and about 50% of the patients stay on the line, they have a conversation with the AI agent. I've listened to some of those calls, and I'm sort of an old school guy and yet the calls are very seamless.

And so essentially, what we've done there is we've been able to accomplish exactly what we were able to accomplish with a nurse. But now we've freed a nurse up to do something more productive and with still the same level of results. So that's the kind of application and use that I think will continue to be developed over the next several years by Hippocratic AI, by vendors that we use and have contracted with who have AI applications and as well as some internal AI development that we're doing on our own.

You sized the APTC expiration, I think, around $75 million for the year, talking about elusive, it seems to be -- current situation seems to be elusive for most companies. Do you have any insight into what is going on versus that $75 million currently or at least with your sort of building blocks to get to that number in terms of effectuation rates or just behavioral changes, volumes? Anything that you can give us currently on that particular situation? It doesn't even need to be necessarily financial.

Yes. I mean, so the two most significant assumptions that went into that $75 million impact estimate were we've assumed that about 25% to 30% of our current exchange population. And we frame that our current adjusted -- on an adjusted admission basis, a little over 6% of our acute adjusted admissions come from exchange patients. We estimate that about 25% to 30% of those people will lose their coverage. Those estimates are really based on kind of third-party estimates either from the CBO or in like organizations who've tried to frame this.

And then we assume that a small percentage, somewhere between 10% and 20% of those people will be able to get other coverage. Maybe they will go from a gold metal plan to a bronze metal plan. We believe most of them will get commercial coverage through their employer. But it's a relatively small percentage. And the largest percentage of people who will lose that exchange coverage, 75%, 80%, 85% of them will turn into uncompensated or uninsured patients. And we think that's the greatest impact.

So most of the $75 million estimated impact will come from people who've lost their coverage, continue to utilize the hospital, in particular, utilize the emergency room. We will treat them as we're obligated to do both legally and ethically, but we'll do so without any reimbursement. And what was reimbursed a year ago won't be reimbursed now when we convert it to bad debt or uncompensated care.

There's some element of reduced volumes that we've calculated in. But again, we think the greatest impact is on that uncompensated care. Your question is, I think, in January and February, what's our experience been? And what I would say is we've definitely seen a reduction in the number of exchange patients immediately in January and February. I don't think it rises to the 25% to 30% level. But I think we think it still will. And I think we've said and I think others have said that we need another couple of months at least of activity and experience because I think one of the things that everybody acknowledges will happen is that some people that the insurers are still saying are insured under the commercial exchanges will fail to make their payments, their premium payments and will be deemed to be uninsured.

So we think that 25% to 30% will ultimately be the number. But to be fair, we need another couple of months of data as I think does the entire industry to unpack it and to be more precise. But at the moment, we are comfortable that our experience in the first couple of months supports the $75 million estimate.

Got it. Fair to say you might have more commentary on the first quarter earnings call.

Yes. I think we should know more. I don't know that we'll be sort of 100% informed at that point, but I think another 2 months at that point of data will be very helpful.

So on the state-directed payments, I think you guided to a fairly nominal increase year-over-year. Obviously, there are some outstanding programs. You did have some insight last year into the D.C. program. I guess is there anything to comment on certainly in Florida, California, a couple of other states that are maybe more impactful for you?

Yes. So the Florida program, we've kind of identified the potential for that now for several quarters. We've framed the potential benefit is between $45 million and $50 million. And along with all the other providers in Florida, we've been waiting for the program to be approved. The state of Florida has, I think, repeatedly expressed optimism that the program will be approved. I think the fact that it's been delayed as long as it has, while other programs have been approved is an indication that there probably is some objection that CMS has. We don't really know what the specific conversations between CMS and the state of Florida.

We've obviously not included that benefit in our guidance. We've certainly not included in our actual results. And we'll do so if and when the program is approved, and we'll look for any further commentary either from CMS or from the state of Florida. The California program, we know that CMS has had very specific issues and objections to the California program. And as a consequence, we believe that in order for a new program in California to be approved, it will have to be revamped and altered significantly from where they are today.

And so we've made no effort, and I don't believe anybody has made an effort, any other provider has made an effort to quantify the potential benefit there. We think it could be material. It certainly could be beneficial to us. But until there's further clarification, we've been very sort of nonspecific about a potential benefit in California.

Got it. And I think you had talked about the California staffing issue that's going to impact not just you, but other folks. We had heard from a competitor of yours that I think the state association was potentially trying to work with the state to see if they could get some relief there. I guess, is that your understanding? And if so, do we think there's actually a potential that, that could come through at some point this year?

Yes. I mean, look, it's worth noting that the California Hospital Association has lobbied very hard to oppose these regulations. And by the way, it's not just the behavioral hospitals that have lobbied against them. Acute hospitals have been a strong voice against these regulations as well. The concern of acute hospitals is that if there is -- if these regulations result in any sort of capacity constraint in behavioral hospitals, that burden is going to fall back on Acute Hospitals and Acute Hospital emergency rooms. which will wind up having to house behavioral patients for longer than they view as appropriate, et cetera.

So I will say this, I mean, the regulations originally were supposed to be implemented on January 1, and the state agreed to postpone that until June 1. At the moment, however, we have every expectation that they'll be implemented on June 1, and that's what we're preparing for. We've begun to hire particularly RNs in anticipation of that. Obviously, to whatever degree, lobbying efforts continue and the state in our minds becomes more reasonable, we would welcome that.

But we're proceeding along. Obviously, we've included what we believe the negative impact to be in our guidance and are assuming that until we hear otherwise, that the regulations will be implemented on June 1.

On behavioral, you laid out your expectations for 2% to 3% pricing growth in 2026, but you've obviously been running well above that. That might strike some as a bit conservative, prudent, if you will. I guess remind us how maybe historically you've been able to sort of get those rates and maybe why you think at least at this point, the 2% to 3% is the right starting number?

So I think it's a couple of issues, Ryan. I mean one is, I think either you or Darren said that our overall projections for the increase in directed payment program reimbursement next year is relatively flat. I think it's up about $23 million. But it is up more in acute. I think it's up $58 million in acute and down $35 million in behavioral. And that accounts probably for about a 50 basis point boost in pricing on acute and a 50 basis point drag on pricing in behavioral. So that's a little bit of the softness contributor to behavioral next year.

But I think other than that, we've been saying for some time that pricing over the last several years has been stronger, higher than it has historically been in behavioral. And we've talked largely about getting increased pricing from managed Medicaid payers. And I've made the point over and over again that when we talk about increased pricing, in many cases, we're getting a 5% increase from a managed Medicaid payer. But that's after a period of no increases for 3 or 4 years. So I don't want to -- I'm hesitant to describe them as outsized increases. We think they were overdue increases.

But one of the things that we've made the point is if we got those increases in '24 and '25, those benefits would start to anniversary. And at some point, we would see a moderation of our pricing strength in behavioral. Honestly, and I think people who follow us closely know, it's taken longer than we thought. And we've been, I think, sort of conservatively saying we're likely to see that moderation a year ago, 2 years ago, et cetera. But I think finally, we're starting to see it in 2026. But I would make the point that the 2% to 3% pricing in behavioral and the 3% to 4% in acute beside the impact of the DPP, I think once you adjust for that, falls very much in the range of what the historical pricing increases have been in both of those segments.

On the acute side, just in terms of pricing, obviously, during COVID, those rates are not keeping up. Post-COVID, I think you and some of your peers were able to sort of garner a little bit of premium yield. We're sort of at that place now, I think, where some of those contracts or maybe the majority are starting to be negotiated. So the question becomes, are you able to sort of keep that, I'll call it, premium yield maybe versus pre-COVID? Or is that going to sort of normalize maybe over kind of a 2- to 3-year period?

So I think you described it properly. I think beginning -- towards the end of COVID, I'm going to say, late in '22 into '23, as we began to renegotiate acute care contracts at that point in time, I would say before that, during COVID, maybe pre-COVID, our average price increase in an acute care contract was in the sort of 3% to 4% range. Beginning '22, '23, maybe even a little bit into '24, I think that rose to about 4% to 5% on average as we were getting, I think, an acknowledgment from payers that inflation broadly had risen during that period and that wage inflation, I think, in particular, had risen and our rates -- renegotiated rates were reflecting that.

I think as we've begun to renegotiate those contracts, I think you framed the question as they begun to expire we've renegotiated them in '24, '25 into '26, I think we've progressed back to or moderated back to, again, I'll call it, 3% to 4% on average. And I think that's reflected in our pricing. Now we do get the benefit, again, of increased DPP. We get the benefit of steady, albeit small increases in acuity, maybe 1% increase in acuity every year, which boosts pricing, decent Medicare increases. So I think we're comfortable in that 3% to 4% pricing range for the acute business for '26 with all those sort of factors coming into play.

In our January hospital survey, we had a fairly large health system respond and saying that denials activity was really a drag for them on revenue accruals in January. So I guess the question is, what are you seeing in terms of denial activity, medical necessity, just UM maybe in general from the plans, maybe taking into the backdrop that obviously, the plans are sort of struggling, not in a great spot here for at least the last 1 to 2 years?

So I think it's worth noting that I'm going to say 1.5 years ago, we embarked on a process where we hired a third-party consulting firm to review our revenue cycle processes. We have spent a great deal of time and focus and dollars on improving across the board our revenue cycle, particularly for acute care, people, process technology. And to a degree, I feel like at best, maybe what this has done is kept us current or sort of on a level playing field with the payers who, I think as your question alludes to, have been more aggressive in terms of their denials and patient status changes and kind of delays and deferrals and payments.

So I think ultimately, because we've made a significant amount of improvements in our own processes, we haven't really seen a measurable increase in denials, patient status changes the way that some other providers have sort of talked about in the last few quarters or even like you said, as recently as the last couple of months.

And honestly, we're going to embark on a very similar process in 2026 in our Behavioral segment and their revenue cycle. So I think that's helping us to kind of stay even with the payers. But I certainly acknowledge -- I would say when ever anybody asked me this question, if one of our revenue cycle folks was sitting in this chair or -- and we ask them the same question. They would just describe a sort of ungodly kind of daily experience of this slog with the payers. And that is really true. I mean it really is a daily sort of back and forth with payers, et cetera. But I think it's -- when we look at the overall metrics, we haven't seen a significant increase in denials, patient status changes, those sort of leading indicators.

And then just sort of maybe looking into the future, I mean, obviously, the '27 rate update, at least the advanced notice is tepid more than people thought. It looks like the payers could continue to struggle at least a little bit here. I guess what's the expectation going forward? Could be use of AI for increased denials? And maybe just more broadly, where do you expect those relationships with certainly the national payers to go as we move through '26?

Yes. So look, I don't know that anybody -- I'm sure nobody does know this for certain, but I think there are at least some who expect that the final rate from CMS for the Medicare Advantage plans will be better than the initial proposal, which was, quite frankly, I think, disappointing for the MA providers or payers. I do believe that if the rate stands and if the payers are forced to make changes, they certainly will, I think, continue to be aggressive on the utilization management changes.

But I think the main initial way that they'll respond, and we've seen this, I think, to some degree in 2026 is with benefit plan design. And as you know, the way the Medicare Advantage plans have really competed with each other and competed for traditional Medicare Business is in expanding the sort of traditional benefits to include things like dental benefits and vision benefits and those kinds of things, which, quite frankly, don't generally impact us.

So to the degree that those benefits are eliminated in benefit plan design changes to make the product more price reasonable, if you will, for the payers, I don't know that it's going to have an immediate impact on us.

Professional general liability reserve has been a topic certainly in Behavioral. I think you alluded to on the last earnings cycle, a little bit more on the hospital side as well. Maybe walk us through what the accrual activity was in 2025, what's built into guidance for '26. And I think the general question becomes, is that pressure sort of still high but steady? Or do we expect that to be high and potentially accelerate over the next couple of years?

So specifically, I think in 2025, we said that we added about $45 million in expense to our malpractice reserves in 2025, about $35 million of that in the third quarter and another $10 million in the fourth quarter. And we make the point that we have a very formal actuarial review, a third-party actuarial review twice a year on our malpractice reserves and are looking at them even in real time more firmly. And I think it's been a pressure point, not as I think your question suggested, not just for us, but for the industry, I think both the acute and the behavioral industry.

So we've tried to stay ahead of the pressures on professional and general liability expense. I think have done a reasonable job of doing that. But it's going to be something that will be continue to be evaluated in real time. In terms of our guidance for next year, I would say that we've got malpractice insurance expense rising faster than the rate of inflation instead of, I'll call it, 5%, maybe by 10% or 15%. We think and hope that, that's adequate, but we'll continue to reevaluate that with our actuarial studies every 6 months.

Last minute or so, maybe touch on capital spending. I mean the leverage ratio, 1.7x, 1.8x, somewhere in that range. I mean, extremely low versus your competitors, to be fair. We get this question a lot. Obviously, you could buy back a pretty significant amount of shares if you felt you wanted to. There are some assets potentially out on the market. You could build some internally. So maybe last minute or 2, where do you look at capital policy now just given some of that backdrop?

Yes. I mean I think we view the sort of ideal leverage level in the 2x, 2.5x range. So we would acknowledge your comment that we're at a low level. We like to sort of keep the flexibility to respond to inorganic opportunities, M&A opportunities. I think particularly as we build -- in both of our segments, as we built out our outpatient footprint, looking to see if there are opportunities inorganically to help do that and trying to keep the flexibility open to do that.

You said we could choose to be sort of an active acquirer of shares. We've been -- I think we've chosen to be and have been an active -- a very active acquirer of our shares. Probably over the last 6 years, we bought back about 1/3 of our shares. So we consider that to be a pretty active level. And I think we'll continue to be an active acquirer of shares regardless of what other opportunities are out there. But to whatever degree there are opportunities, we want to be able to pursue those as well.

All right. I think we'll have to leave it there. It's all the time we have. Steve, Darren, thanks a lot, and enjoy the rest of day 2 at TD Healthcare Conference. Thank you.

Thanks, everybody.

Thanks.

Good day, and thank you for standing by. Welcome to the Q4 2025 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker for today, Darren Lehrich, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Universal Health Services Fourth Quarter 2025 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then we'll open it up to Q&A.

During today's conference call, we 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, we recommend a careful reading of the section on Risk Factors and forward-looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2025.

In addition, we may reference during today's call, measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI and adjusted net income attributable to UHS which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in today's press release.

With that, let me now turn it over to Marc Miller for some introductory remarks.

Thank you, Darren. Good morning, everybody, joining our call. Thank you for your interest in UHS. We closed out 2025 with strong results. Revenue growth for the fourth quarter was 9%, adjusted EBITDA net of NCI increased 10% and adjusted EPS increased 20% as compared to the fourth quarter of 2024. For the full year 2025, revenue growth was 10%, adjusted EBITDA net of NCI increased 15% and adjusted EPS increased 31%.

Our fourth quarter and full year performance were highlighted, in particular, by continued strong expense management in acute care, sequential volume improvements in behavioral health, solid pricing across both segments and significant share repurchase activity.

Looking back on 2025, I'm very proud of the progress we've made across the organization in several critical areas. We strengthened our growth agenda with the addition of new inpatient capacity, while also intensifying our focus in the outpatient arena through the addition of new service locations across both segments. We've demonstrated financial discipline by managing expenses well in the face of a dynamic operating environment. And we accelerated the pace of technology adoption to improve clinical outcomes and drive greater operating efficiency.

Speaking first to our growth agenda. Over the past few years, we've opened 2 new acute care hospitals and laid the groundwork for significant new acute care capacity to come online during 2026 with 3 inpatient expansions, totaling 178 licensed beds in Florida, California and Nevada, and a state-of-the-art 156 bed de novo hospital in Palm Beach Gardens, Florida that will open in the second quarter.

In our behavioral segment, we've taken a disciplined approach to new bed capacity during 2025 as we devoted more resources to accelerate our outpatient behavioral strategy. In 2026, we have 2 behavioral de novo projects totaling 264 beds, including a joint venture project with Jefferson Health System in Pennsylvania.

On the outpatient side, we operate 119 outpatient behavioral locations, including 10 new freestanding centers opened under our 1,000 branches wellness brand during 2025. We are on track to open at least 10 more branches locations during 2026. And our team continues to pursue opportunities to accelerate our outpatient behavioral growth rate and diversify our segment, payer mix and service offerings to sustain our leadership position as a provider of choice.

In terms of expense management, our acute care margins improved in 2025 due to reduced contract labor costs and strong supply chain management performance. Labor productivity also improved through a 2% reduction in same facility acute care length of stay, and this remains an area of opportunity for us in 2026.

In our behavioral segment, margins were stable in 2025 as compared to 2024, even as we made investments in staffing capacity to relieve some of our labor constraints that have held back our volume growth in certain markets. These investments position us more strongly for volume improvements during 2026.

Finally, from a technology perspective, we've deployed AI and advanced technologies in 2 primary domains within our business and our operations to impact quality and patient experience and in our administrative operations to increase efficiency. We have a strong team in place. We've demonstrated success in evaluating and deploying technology at scale across both acute care and behavioral health divisions.

On the operational side, we fully rolled out Agentic AI to improve post discharge care and reduce readmissions. In 2026, we are focused on rolling out new patient safety technology and behavioral health. And in acute care, we are deploying AI across several departments and functions [indiscernible] and outcomes.

On the administrative side, we enhanced our acute care revenue cycle operations by deploying AI-based solutions to improve documentation and streamline our claims appeals process. Over the next several quarters, we will be rolling out process improvements and new technologies and our behavioral health revenue cycle operations.

In behavioral health, we are also leveraging AI features in an existing digital tool to streamline the referral and intake process to improve response times to new referrals and improve volumes.

In closing, we are optimistic about the future because we continue to invest in our people, our facilities and in technology that will improve quality, patient experience and operating efficiency. With that, I'll now turn the call over to Steve Filton for more details on the quarter and our financial outlook for 2026.

Thanks, Marc. I will highlight a few financial and operational trends and outline our 2026 financial guidance before opening the call up to questions. The company reported net income attributable to UHS per diluted share of $7.06 for the fourth quarter of 2025. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $5.88 for the quarter ended December 31, 2025.

During the fourth quarter of 2025, on a same facility basis, adjusted admissions at our acute care hospitals were flat as compared to the fourth quarter of the prior year. Acute care volumes were impacted in part by softness in the Las Vegas market due to factors that we consider somewhat transitory in nature, including lower respiratory case levels on a year-over-year basis. Excluding the Las Vegas market, our facility acute care volumes would have increased by 1% during the fourth quarter.

Same facility net revenues in our acute care hospital segment increased by 6.9% during the fourth quarter of 2025 on a reported basis as compared to last year's fourth quarter and increased 5.2% after excluding the impact of our insurance subsidiary. Acute care same-facility revenue per adjusted admission increased by 5.4% during the fourth quarter of 2025.

Operating expenses continued to be well managed across labor, supplies and other expense categories. Excluding the impact of our insurance subsidiary, same-facility acute care salaries, wages and benefits increased 4.4% and supply expense increased 1.8% over last year's fourth quarter. Same facility contract labor was 2.4% of Acute Care segment revenue or 20 basis points lower year-over-year. For the fourth quarter of 2025, our solid acute care performance resulted in 10.4% growth in same-facility segment EBITDA and a 50 basis point improvement in same facility segment EBITDA margin to 14.8%. For the full year, Same Facility segment EBITDA margin improved 150 basis points to 15.8%.

Turning to our Behavioral Health segment results. During the fourth quarter of 2025, same-facility net revenues increased 7.2%, supported by a 5.6% increase in same facility revenue per adjusted patient day and a 1.5% increase in same-facility adjusted patient days as compared to the fourth quarter of 2024. Expenses in our Behavioral Health segment increased at a slightly higher pace than revenue due to growth in headcount in certain markets where volumes have been impacted by staffing constraints. For the fourth quarter of 2025, Behavioral segment headcount growth was 3.1%.

Total same-facility labor expense growth, including the increase in headcount was 7.3% per adjusted day in the U.S. Overall, we believe expenses were well managed during 2025, leading to total behavioral health segment EBITDA growth of 6.9% in the fourth quarter and 7.8% for the full year 2025.

Cash generated from operating activities was $1.9 billion for the 12 months ended December 31, 2025, as compared to $2.1 billion during 2024. Cash flows during 2025 were impacted by $50 million related to an increase in receivables at our 2 most recent de novo hospitals and $145 million related to the timing of payments for certain Medicaid supplemental programs.

During 2025, we spent $1 billion on capital expenditures, approximately 35% of which related to the de novo hospital in Florida and major expansions in Florida and California. During 2025, we also acquired 4.65 million of our shares at a total cost of $899 million, including 1.46 million shares purchased during the fourth quarter of 2025. At December 31, 2025, we had $1.425 billion of repurchase authorization available pursuant to our stock buyback program, and we had approximately $900 million in aggregate available borrowing capacity pursuant to our $1.3 billion revolving credit facility.

Turning to our outlook for 2026. We expect revenue to range between $18.4 billion and $18.8 billion, representing growth of 6% to 8%. We expect adjusted EBITDA net of NCI to range between $2.64 billion and $2.79 billion, representing growth of 2% to 8%. We expect adjusted net income attributable to UHS per diluted share to range between $22.64 and $24.52 representing growth of 4% to 13%. Our guidance assumes same-facility volume growth to be in a range of 2% to 3% for both segments for the full year 2026, although it's likely we'll be below this range during the first quarter due primarily to the winter storms, which we are currently assessing in our Behavioral Health segment and the Washington, D.C. operations of our acute care segment.

We expect capital expenditures in 2026 to range between $950 million and $1.1 billion, reflecting the culmination of spending for several large inpatient projects that will come online during the first half of 2026.

Our guidance includes several assumptions unique to the 2026 operating environment as follows: We assume an adverse pretax earnings impact of approximately $75 million related to reductions in the health insurance exchanges. We assume that exchange volumes will decline by 25% to 30% and approximately 10% to 20% of this volume will shift to other forms of coverage with the vast majority shifting to self-pay or uninsured. The exchange headwind is concentrated in our acute care segment based on historical utilization patterns. For the full year 2025, exchanges represented approximately 6% of acute care segment adjusted admissions and slightly less than 5% of the segment's revenue.

We expect a negative pretax earnings impact of approximately $35 million in our behavioral segment associated with the recently enacted California inpatient psychiatric hospital staffing regulations that will go into effect on June 1, 2026. The regulation is expected to increase labor costs due to the need to adjust the mix of licensed nursing staff at our facility. Our 2026 estimate includes a higher burden of recruiting and training costs and some short-term census disruption as our California operations ramp up to comply with the regulations. Beyond 2026, the ongoing costs are expected to be approximately $30 million after considering a full year of higher labor costs.

Our 2026 outlook assumes a total net benefit from Medicaid supplemental payments of $1.36 billion and includes a new Nevada supplemental program that was approved this month, but does not include any other new programs pending approval. As compared to 2025, we expect the net benefit from Medicaid supplemental payments to increase by approximately $23 million. Our 2026 outlook assumes approximately $50 million of favorability related to improvements at Cedar Hill. We assume that incremental improvements we expect to make at Cedar Hill beyond the breakeven level will be offset by start-up costs associated with our de novo hospital in Palm Beach Gardens.

Finally, we expect a favorable pretax earnings impact of approximately $50 million comprised of 3 smaller and discrete items, including a onetime legal settlement recognized in 2025 that we do not expect to reoccur. Operational improvements in our Nevada health plan with revenue growth at similar levels as in 2025 and modest contributions from behavioral segment M&A completed in 2025, primarily in the U.K.

In conclusion, we're pleased to share our positive growth outlook for 2026, which assumes core growth from our consolidated operations of approximately 5%, underpinned by the strength of our markets, continued expense management and ongoing efficiency opportunities.

Operator, that concludes our prepared remarks, and we're pleased to answer questions at this time.

[Operator Instructions] The first question for today will be coming from the line of A.J. Rice at UBS.

Two things. First of all, just to drill down a little bit more on the guidance for '26. I know you mentioned 2% to 3% volume growth across both the segments. Give us any flavor on what's embedded in pricing? Or is it more of the same what you saw this year across the 2 segments? Are you assuming any change in managed care rates or whatever?

Sure. So A.J., I mean, I think on the acute side, our guidance implies a 3% to 4% pricing increase that's in line. If you look at sort of the 10-year average of pricing increase in acute care, I think it's averaged right around 4%. And I think that continues to be -- that pricing is supported by a steady increase in acuity over that period that we expect will continue.

On the [ payroll ] side, we're expecting pricing in the sort of 2% to 3% range. And we acknowledge that that's somewhat lower than we've been running for the last several years. As you know, we've been expecting that price -- really strong pricing over the last several years would begin to moderate at some point as these increased contract prices began to anniversary, et cetera. And I think we're starting to see that evidence. So slightly lower pricing expected to do in behavioral compared to the last several years, but I think also, again, in [indiscernible] historical rates.

Okay. And I appreciate all the comments that Marc offered on the AI applications, and it does seem like hospitals and health systems are AI risk environment for opportunities. The question I get asked is not an easy one, but how do you think about how that translates into operating performance in terms of financial impact of those applications and over what time frame might we start to see that have an impact on revenues or margins, those type of things that you're calling out?

Yes. So I think as Marc described in his comments, A.J., we have focused -- and I certainly believe we, like most are in the early innings of this AI game. I think our initial efforts have really focused on administrative [indiscernible] efforts like within our revenue cycle management, I think Marc alluded to, claims appeals and coding. And we use that, I think, to great effectiveness. I think really, what we're doing and otherwise, I think you often referred to post-discharge activity. So historically, a nurse would make a post-discharge follow-up phone call with the patient to ensure they're being compliant with their medication and [indiscernible] and follow-up [indiscernible]. And now we're using an AI agent to make those calls in many cases.

And so in both cases, I think we're driving efficiencies. It allows us to reduce head count. It improves the outcomes as measured by revenue cycle metrics or reduction in readmissions, which I think Marc alluded to. So, I think it's impossible to precisely quantify -- either precisely quantify what we've been able to see -- certain precise -- difficult to precisely quantify what the opportunities may be, but we think they're significant.

And our next question is coming from the line of Ann Hynes of Mizuho Securities.

Great. Within our acute care volumes of 2% to 3%, can you let us know what you're assuming surgical volume versus medical volume? And then with the Nevada market, how does that market do in 2025? And how do you expect it to grow in 2026?

And so I think surgical volume in 2025 lagged our overall by a slight amount. It was positive. Our surgical volume growth in Q4 was positive over last year's fourth quarter. So we're encouraged by that. I think that our expectations for next year are somewhat similar that surgical volumes probably don't grow quite as fast as our overall volumes. But I think sync up pretty closely.

As far as Nevada goes, I think Nevada in 2025 has grown in line with the rest of the acute division, I think historically, that market has tended to grow faster. It was a little bit challenged in 2025. There's been much reporting of tourists, the volumes and tourist activity in Las Vegas being down in 2025. And that impacted us, I think, to a small degree. We don't get a lot of patient activity directly from the tourist population, but obviously, it has a cascading effect.

We're encouraged by the fact, however, that employment trends have remained quite stable in Las Vegas. And that historically has been the leading indicator of sort of how we're going to do and how the economy is going to do there. And so -- and the casino or gaming industry reports, I think, pretty bullish prospects for their 2026 convention and conference bookings. So we're assuming that the Vegas market experience is a bit of an uptick in 2026.

And our next question is coming from the line of Justin Lake of Wolfe Search.

This is Anna on for Justin. Can you share what you're seeing on exchange volumes so far given there are a significant number of members that haven't paid their premiums yet? And I know that in Feb and March, the plans don't have to pay the provider on members that don't pay premiums. Are you able to see this information from plans? And what's your level of visibility on the potential bad debt here?

Yes, Anna. So as I said in our prepared remarks, we're assuming a 25% to 30% decline in exchange volumes. That's largely based on CBO and other sort of public projections. We've seen -- we've already seen a decline in exchange volumes in the first couple of months of the year. I don't think quite to that extent. But I think as your question alludes to, we believe that some of the early reporting on how much exchange volume has been lost is understated because the insurance companies won't report exchange volumes down until people start to miss premiums, et cetera.

So, Yes, I mean, that's a challenge for us because we are in the position sometimes of verifying a patient's insurance with a payer and the payer verifying their insurance and then we build the payer, the payer comes back to us and says the premiums haven't been paid and they don't pay -- they won't reimburse the charges at that point. That has always been a risk for us. Obviously, it will be an increased risk in this period where there's a dramatic decline in exchange volumes. But we believe that we accounted for that in our assumptions.

But I think one of the things -- all of us, meaning all the hospital companies have made estimates about what's going to happen with the exchanges, et cetera. But the truth is we're going to need a few more months to really see how this sorts out what the real loss in volume is, how many of these people who lose their exchange coverage, can get other coverage, et cetera. So we've made our best estimates. We feel comfortable with the estimates we've made. But I think we're all going to become -- be able to be more precise over the next few months as we get more and more accurate data.

And the next question will come from the line of Andrew Mok of Barclays.

Steve, you mentioned the $35 million headwind from the new California behavioral staffing requirement for 2026, but also noted a $30 million annual ongoing impact. Can you give us a bit more detail on the nature of the headwind and help us understand why the headwind from the midyear implementation wouldn't annualize into a larger run rate headwind?

Sure. So Andrew, the task before us is that the new California staffing requirements don't necessarily require us to increase our headcount overall. I think actually, we have in excess of the head count that they're requiring. But it is a different mix of staff and is more heavily skewed to licensed professionals, particularly RNs. So we're going to have to change our staffing models in a number of our facilities. We will hire more RNs. We think that there is some sort of upfront investment in doing that, potentially start-up costs, increased recruiting costs, et cetera. There might be, I think, as I indicated in my prepared remarks, in the first couple of months, we may not have all the slots filled and therefore, we're anticipating potential short-term volume disruption.

But once we are fully staffed, which we think we will be at some point in 2026, then I think the ongoing costs are reduced, and we won't have those sort of, I'll call it investment in infrastructure investment costs duplicated in 2027 and beyond, which is why the annual impact in 2027 and beyond or the expected annual impact is actually a little bit less than what we're expecting for a partial year of the regulations in 2026.

The next question will be coming from the line of Ben Hendrix of RBC Capital Markets.

We've heard carriers talk a lot about accelerated behavioral trend for a while now, and it sounds like your outpatient development is addressing that. Can you talk a little bit more about where the demand is on the outpatient behavioral side in terms of the types of services and the types of services that are being offered in the development you completed in 2025 and what you expect for 2026. And then how should we think about the optimal behavioral business mix over the long term between the inpatient and outpatient?

Yes, Ben, let me answer. This is Marc. So our outpatient strategy continues to progress. Right now, outpatient services represent about 10% of our behavioral segment revenue. We expect that to continue to grow. As I said on the prepared remarks, we already operate close to 120 outpatient locations where we offer either step-down services or step in services. So for the step-down location, we have transitional services such as partial hospitalization, intensive outpatient following an acute care -- an acute psychiatric state. And we typically operate these locations and their satellite clinics under our local brand of our inpatient facilities, and they're often close to those facility campuses.

The step-in services are for patients entering behavioral system on an outpatient basis, so people that we've not even had yet as inpatient. The payers continue to look for in-network providers with scale to offer these types of step in services as an alternative in patient care. So we think our stepping model offers comprehensive outpatient services, which would include things like IOP, counseling, virtual care. And we think the demand for that is going to only continue to grow in 2026.

In a number of markets, we've now branded this under what we're calling 1,000 branches wellness. Thus far, we're in development, and we expect to open at least 10 of these branches locations in '26. So I think that we have a good ramp-up already planned, and we expect that there's going to be many more opportunities to expand in all of these areas going forward.

And our next question is coming from the line of Stephen Baxter of Wells Fargo.

Just wanted to follow up on California for a couple of points there. I guess as you're kind of building up to that long-term $30 million run rate impact, does that really just reflect the kind of the changes directly on the incremental staffing side? Or are you thinking that there could be any spillover impacts to your base wage structure potentially related to maybe your consumer or your competitors trying to maybe hire in the same way that you are? And then as you think about potential reimbursement in California, I know California budgets are not exactly flushed at the moment, but is there any prospect for potentially seeing any offset on the reimbursement side anywhere in the near future?

Yes. So Stephen, I think our, again, assumptions were the cost of replacing current staff with a higher license. And we acknowledge, certainly, as we went through this exercise that all acute behavioral facilities in California would have to be going through the same exercise. So we did our best to project what wage inflation might be and what might be required in terms of recruitment incentives and that sort of thing.

Obviously, this is new to all of us. And so we're making certain guesses and estimates. But we think we've been reasonably conservative in our approach. Again, acknowledging that others will be going through the same process as us. As far as reimbursement goes, your point is well taken. We will certainly make every effort to work with all of our payers, whether they be government payers, the medical program in California or our private commercial payers to get them to acknowledge this increased cost on our part. How that will sort out, ultimately, I don't know. We certainly have not forecast or budgeted anything for that, but we will certainly focus our efforts on that.

The next question is coming from the line of Jason Cassorla of Guggenheim Partners.

Maybe just stepping back for behavioral, you're expecting accelerating volumes, but a bit of deceleration in pricing growth. I guess if -- if you look at that 2% to 3% volume and 2% to 3% rate growth as the go-forward status quo, would you still expect that to translate into organic margin expansion? Or has that equation changed in terms of how you think about margin expansion for that business?

Yes. So obviously, those assumptions, 2% to 3% patient day or adjusted patient day growth, 2% to 3% pricing growth, result in 4% to 6% -- 4% to 6% revenue growth projection. We think generally that, that revenue growth level will -- the level of the increase in operating costs. I mean we made the point in our operating -- excuse me, in our prepared remarks that in 2025, our operating costs were a little bit elevated by kind of an investment in headcount and hiring and filling vacant positions in markets where that has been a headwind or an obstacle to reaching our targeted volume growth. I think that headcount increase will clearly moderate in 2026, and leave us at a point where I think wage inflation and other operating cost inflation should not necessarily exceed the growth in revenue, which will allow for margin expansion.

And then I would just also add, following on to Marc's comments about the growth in outpatient, generally, outpatient margins are better than inpatient margins. So to the degree that we're successful in growing the outpatient business faster than inpatient. That should also help margin expansion in behavioral.

Great. And if I could follow up just quickly, I wanted to ask about the acute length of stay opportunity. You flagged it a little bit in the prepared remarks. It looks like length of stay has been coming down a little bit, still slightly above pre-pandemic levels. Case mix has been rising, that probably offsets a little bit. But PAUSE -- maybe can you just help a little bit more unpack in terms of AI technology or other efficiencies that can bring that stat lower and drive better throughput? Just anything more on the length of stay would be helpful.

Yes. So a couple of observations, Jason. I mean, one is I think on an acuity adjusted basis, and I think that's the appropriate way to look at length of stay because the sicker patient is, the longer they're going to have to be in the hospital. But on an acuity adjusted basis, LA is -- LLS is actually below prepandemic levels, and I think reflects improvements that we've made. And you make the point. I mean there's all kinds of, I think, reporting opportunities their technology opportunities, better communication with our physicians. But honestly, I think probably the single biggest obstacle we faced in not reducing length of stay further is the supply of sub-acute capacity, whether that's in skilled nursing facilities, nursing homes, long-term rehab facilities, et cetera.

There's been, I think, a lack or a dearth of capacity in many markets in those areas. And sometimes, we're just holding patients waiting for an available bed or an available spot. We think that will improve over time and will continue to improve. So along with our own internal initiatives, we think the marketplace for self-acute capacity will also expand.

The next question is coming from the line of Matthew Gillmor of KeyBanc.

I wanted to ask about the Medicaid supplementals. We appreciate the transparency you all provide. For the programs that are not yet approved like Florida, and I think maybe California, do you have any sense for where those approval processes stand with CMS. And we were also curious if you had any visibility on the rural health transformation funding and what that opportunity could be?

Sure, Matthew. So our commentary on the Florida program has been pretty consistent, and I think it's been pretty consistent because the commentary from the state of Florida has been pretty consistent. They've submitted a program or kind of a program refinement, they're expecting it to be approved. I think it would be fair to say that it's taken longer to get approved than they expected or maybe than we expected, but they have not changed their view that ultimately, the approval will be forthcoming.

We've quantified the benefit to us as best as we could and to be in that sort of $45 million to $50 million range once approval is obtained. And we haven't recognized it, we haven't included it in our guidance, but would do so once that approval is forthcoming. As far as California is concerned, we've been also reasonably consistent in our comments there. We think that the California program faces more hurdles is not nearly as certain and it's likely to be approved. It may need to be modified in significant ways. And as a consequence, while we think if it is ultimately approved, it could be measurably beneficial to us. We've in no way try to quantify that or predict how successful California will be in working with CMS to get their program modified in a way that ultimately would lend itself to CMS approval.

Yes, as far as the rule program goes, we've lobbied hard and worked hard in -- structure of this program is largely up to the states, and we have worked with the states in which we operate. We think that there could be a potential benefit to us. We acknowledge that it's a relatively small percentage of our facilities carry either the rural or referral center designation. So we don't think that the benefit ultimately would be material. But obviously, to the degree that we could obtain any additional reimbursement, it would be positive, but not expecting it to be materially positive.

And our next question is coming from the line of Philip Chickering of Deutsche Bank.

Excluding the cash received during COVID, your leverage ratio is the lowest that I've seen for well over a decade. Is there any leverage ratio where you say enough is enough and you maintain the leverage and put the rest in the repo? Or do we end the year leverage down another 10% of turn or more?

So Peter, I mean, I think our ideal leverage is in the 2% to 3% range. And to your point, we've been at the low end of that for a while. We've done so with the idea that we wanted to keep ourselves sort of maximum flexibility to respond to any opportunities that might arise. We still think that's kind of a prudent position. We've been, as you know, a pretty active acquirer of our own shares, and will continue, I think, to be so. We think that investing in the repurchase of our own shares is a pretty compelling investment in the current environment. But don't necessarily expect to lever up dramatically in the absence of real compelling M&A opportunities. Don't expect our leverage to go any lower either. I would certainly make that point.

Okay. Fair enough. If I were to stay on that point, leverage keeps sort of coming down, except for sort of 1 large behavioral asset out there, you guys can buy almost anything out there in marketplace without needing to keep leverage is low. I guess, sort of follow-up on the question, I guess, why keep it this low unless there's some large deals that you're looking at?

Yes. I mean, part of the issue in terms of being prepared or having the capacity to do M&A is you don't know when those opportunities are going to arise. You don't know how big they're going to be, et cetera. So I'm not suggesting to you that we're keeping our leverage at a current level because of a 1 specific anticipated potential deal. But I think there are a lot of interesting assets in the marketplace. And as we think about how those assets could fit into our strategy, again, we'd like to keep that flexibility available to us.

Great. And then sort of a follow-up here on just AI. Look, this has been a huge focus for investors, obviously, in the last 90 days. A lot of people talk about rev cycle management and you talked about streamlining your full process. Can you give us like real examples about actual efficiencies in terms of timing, cash collections and efficiencies from cost savings that this stuff can actually achieve for you guys?

Let me jump in here. I mean, I think it's hard to pinpoint exact numbers for you on this. I would tell you that over the past several years, we've done a lot to accelerate our pace of the technology adoption. We were an early investor with hippocratic AI. And we think that they are doing some terrific things in this space. We're one of the primary health systems that they're working with. And so what we get is we get a look at -- at everything they're rolling out, we get an opportunity to pilot different things and give feedback for those different things and it will start to pay off in the coming quarters and years.

Some examples, Steve already talked about post discharge calls and the need ultimately for less staff to do some of these things, and that's certainly already paying off in decreased expenses for us. But I think that as they roll out their various AI solutions, we're going to have a front seat to a lot of those things. And we've just been very impressed with where they're going and what they're doing.

But other things that we're looking at right now, I mean, our entire rounding process that we -- is so important to improving quality, maintaining quality, maintaining safety. We're looking to revamp that with different types of technology that we're testing right now. That could have a significant impact on us going into the future, not just on cost savings, but on our increases in quality, hopefully, honestly, we would be able to impact positively our issues with no practice and some things like that. So patient safety technology is a big part of what we're looking at.

And then just other things like post-discharge, bringing people into the facilities versus with our intake process, especially in the behavioral division, so we think a lot of these things have great promise. It's just hard to pin for exact dollars at this point.

Our next question is coming from the line of Craig Hettenbach of Morgan Stanley.

Going back to the behavioral business, as pricing starts to normalize, I know you've done a lot of work on the hiring front, as you've outlined. Can you just talk about the confidence in terms of getting back into more of a steady cadence on the volume side of things?

Sure, Craig. So I mean I think if you look at the cadence in 2025, we find it encouraging. We've seen sequential incremental improvement in behavioral patient -- or adjusted patient day volume growth in each quarter of 2025. We exit 2025 within what we consider to be shouting distance of this 2% to 3% target growth range that we've set for ourselves for quite some time and have struggled to get there. But feeling confident, particularly when combined with the investments in staff and head count that we've made in 2025, and I alluded to earlier. I think that's what gives us the confidence that, that 2% to 3% target in 2026 is definitely achievable.

Got it. And then just as a follow-up from a capital investment perspective, any key highlights or areas for this year?

Yes. I don't think it's anything extraordinary, and we're [indiscernible] different, I guess, I should say, in the sense that, as we said in our prepared remarks, we've got several big new projects opening this year, a brand-new de novo hospital on the East Coast of Florida, a big tower on one of our Florida West Coast hospitals, a replacement facility in Southern California that will open in the next couple of months, a couple of new behavioral joint venture hospitals opening during the year. And then I think otherwise, we're invested, I think, as Marc indicated in his remarks, in building our outpatient footprint in both businesses, but also expanding the things that are very core and central to our acute inpatient business, which is emergency room capacity, surgical capacity, surgical equipment. None of that, I think, is terribly new or different, but it just continues to be a focus of us.

Our next question is coming from the line of Scott Fidel of Goldman Sachs.

This is Sam on for Scott. Just curious, could you give us an update on your overall assessment of the health care policy risk, including Medicaid work requirements and funding cuts, just your latest overall view?

Yes, Sam, I don't think any of the hospital companies have made an effort to [indiscernible] they haven't made an effort, but they haven't produced any estimates on what the impact of the Medicaid work requirements will be beginning in 2027, because I think it's difficult to do. We don't exactly know what the specific work requirements are going to wind up in every state. We have a sense that it's likely that the people who are eliminated from the Medicaid roles as a consequence of those requirements are likely to be less heavy utilizers of the system. But all those variables, I think, kind of remain unsolved at this point.

My guess is as the year goes on, the picture will get clarified and we'll all be able to make a better estimate. But at this point, I think it's not an accident that none of the hospital companies have really attempted to quantify with any precision what the impact of the Medicaid work requirements will be.

Our next question is coming from the line of Benjamin Rossi of JPMorgan.

Just following up on your 2026 outlook. How are you thinking about cash flow from operations this year. I know you mentioned some of the drag last year from the increase in AR related to the Medicaid supplemental payment programs. Is that just largely timing related with new programs or is this baseline simply becoming larger as you're receiving more from these programs? I guess just curious if there's anything more discrete we should be considering regarding cash flow generation this year?

Yes, Ben. I mean I think that if you go back and take a historic approach to this, historically, our cash flow from operations is equal to about 75% to 80% of our operating income less NCI. That, I think, would be our view for 2026. I don't think -- again, there are always sort of timing issues with receivable collection, et cetera. But I think using that measure consistent with the historical outcomes I think is a safe way to look at it.

Great. And just as a follow-up on supply trends. You have a nice percentage across supply spend as a percentage of revenue during 4Q. How would you characterize your current supply dynamics during the quarter? And then for 2026, I know you have a sizable degree of that supply spend in a multiyear fixed contracts, but do you see any additional room this year for any cost offsets across supply spend?

Yes. I mean I think as we indicated in our prepared remarks, supply costs were probably the most effectively controlled of all the expense categories in 2025. We're not necessarily anticipating significant pressure points. I think [indiscernible] turned out that tariffs, which were concerned potentially a year ago have not really impacted our industry in a measurable way. And I don't think we anticipate that they will. There's always opportunities for us to continue to be more efficient there on most of those opportunities. I would describe as opportunities to work with our clinicians and their supply preference, particularly for the high cost items. And so we remain focused in the area. But certainly, as we think about any potential areas of cost exposure in 2026, supplies are not high on that list.

And the next question will be coming from the line of Michael Ha of Baird.

On behavioral health, over the past couple of years, you've been very vocal about the benefit of DPP, how they made Medicaid volumes and behavioral held much more profitable. And because of that, there's been a strong emphasis on driving more of these volumes. We've seen it materialize for your seller behavior health pricing performance. I know today, you mentioned expectations of that to slightly normalize in '26. But that said, the DPP talent are still here. They don't come down until starting '28. So, no immediate shift. So looking forward, as we enter '28, can you talk about your thoughts on the durability of long-term pricing? Should we think about '28 sort of that starting year more incremental changes lower. Also, how might you plan to potentially shift your Medicaid volume strategy over that time? Could that impact your long-term 2% to 3% volume target? And would any of those declines maybe be met with and offset by your outpatient business, maybe more commercial mix through that end. Sorry, a lot of questions. Overall, how are you thinking about all these different pieces.

Yes. So it's a very comprehensive question, Michael. And I think in some respects, you answered some of the questions you asked. I will say, as you noted, that while reimbursement is scheduled to begin to be reduced in 2028. We still have several -- a couple of years ahead of us where the reimbursement remains intact. And as you know, those who follow our disclosures now has actually been increasing over the last couple of years as either new programs are being approved existing programs are expanding or Medicaid utilization is expanding. And so we intend to largely try and take advantage of that benefit while it's out there, while at the same time, thinking about and planning for a scenario in which that Medicaid business is not as profitable as it might be today.

And as you suggested, one of the major ways we will do that is on the outpatient side. I mentioned earlier in response to a different question that outpatient margins tend to be better than inpatient margins. And one of the reasons for that is the outpatient payer mix tends to be much more weighted to commercial than it is to Medicaid. So yes, as we continue to grow and focus on our outpatient initiatives, we both Marc and I have spent some time on describing, I think that will be a natural hedge to some degree against the DPP reduction risk that faces us in a few years.

And our last question will be coming from the line of Ryan Langston of TD Cowen.

Behavioral FTEs grew, I believe, 3.5% to 4% in 2025. You've talked in the past about particular job classes being more difficult to fill. I guess how should we think about that 3.5% to 4% growth in some of those more difficult categories of the growth rate and how that translates into the 2% to 3% outlook for behavioral health growth?

Yes. We've made the point in the past, Ryan, that the behavioral staffing challenges are really different in every market. And in some markets, we're challenged with hiring sufficient nurses in other markets, it could be therapists and in other markets, it could be the nonlicense professionals, the people that we call mental health technicians. It really varies. And frankly, in many markets, we're fully staffed and don't face those challenges. So I don't necessarily have a breakdown in front of me at the moment in terms of the headcount increase in 2025, exactly which staffing categories that involve -- my guess is it's sort of across the board because we hired where we needed to in each individual market.

But I think the important thing from our perspective is we made a conscious decision in 2025 to really ramp up the hiring in those markets where staffing vacancies were an obstacle to further volume growth and now having hired and filled not all, but many of those positions, I think it gives us greater confidence in meeting that 2% to 3% patient day volume growth target in 2026.

Thank you. And I would like to turn the call back over to Darren for closing remarks. Please go ahead.

Thanks, Lisa. Thank you, everyone, for participating in today's call and for your interest in UHS. Have a great rest of your day.

This does conclude today's conference call. Thank you so much for joining. You may now disconnect.

All right. Good morning. My name is Justin Lake. I cover health care services here at Wolfe Research. Very pleased to kick off the last day of our Wolfe Healthcare Conference with UHS. We've got the company's CFO, Steve Filton here. We've got the company's new VP of IR, Darren Lehrich as well. Before we jump into the Q&A, Steve, maybe you give us a couple of minutes of your reflections on the year-to-date positive-negative surprises and how you view the company's positioning into 2026?

Sure. So obviously, our third quarter earnings release just a few weeks ago. And I think from our perspective, things have been going largely as expected. I mean there were a couple of sort of nonrecurring items in the quarter. The biggest positive was the $90 million roughly of annual DPP payments from Washington, D.C. that we've been waiting for, waiting for CMS to approve for some time, offset by a couple of onetime expenses, malpractice expense and legal settlement, et cetera.

But I think in terms of the cadence and trajectory of our 2 businesses, largely performing as expected and as we expect going into 2026, I think -- we think that we are truly now in sort of a post-COVID environment in which the businesses are operating in accordance with models that are much more historically normative maybe than they've been for the last several years; revenue -- same-store revenue growth, mid-single digits. I think on the acute side, something in the 5.5%, 6% range, split pretty evenly between price and volume. On the behavioral side, maybe 6%, 7%, skewed a little bit more towards pricing. We've struggled, I think, in the last few years with our behavioral volumes or getting our behavioral volumes to the targets that we anticipated they could be at or should be at. We're now talking about adjusted patient day same-store growth in the 2% to 3% range, probably in the nearest quarters closer to the 2%, but longer term, maybe closer to the 3%.

So a little too early. I'm always hesitant when I appear anywhere in the fourth quarter before the holidays to really give any updates on trends because they can change pretty dramatically around the holidays. But again, I think the model or the metrics that I outlined, we certainly feel are achievable and will form, I think, the basis for our 2026 guidance, which we will, as we always do, give in detail at the end of February when we do our Q4 earnings.

Thanks, Steve. Before we get to the fundamentals, of course, we'll go through all of the DC-related changes. So maybe first off, you're the only company in, at least the hospital space that's talked about or put numbers around the potential impact of the exchange subsidy expiration. I think you've talked about $100 million in that ballpark of a headwind if that goes away. Maybe you could break that down for us, for instance, you've talked about 6% of adjusted admissions in the acute business being on the exchanges. What kind of a decline do you kind of build into that $100 million? Maybe you could bootstrap it for us in terms of what kind of decline in exchange admissions do you see? How many of them go to commercial, for instance? Let's start there.

Yes. So I think the biggest variable and assumption that companies have to make in estimating the impact, as you described it is how many of those patients who currently have exchange coverage would lose that coverage if the subsidies are not renewed in some form or fashion. As you suggest, and we've said our most recent data point is about 6%, 6.5% of our acute adjusted admissions are exchange patients. We have not given a number on the behavioral side. We think it's a much smaller, more negligible number largely because from the beginning of the ACA, the exchange products have always or have generally borne a pretty significant co-pay and deductible load that renders them a lot less relevant for behavioral admissions and behavioral coverage.

So then the question is, so if those people were to lose their coverage, what's going to happen to them? Some of them might be able to go on Medicaid or get Medicaid. Some of them might be able -- some of them are working and might just return to their employer plans. Some of them might be able to afford lesser metal plans going from a gold to a bronze or whatever. And the truth of the matter is nobody exactly knows how it's going to play out. We've never really experienced this before. We've assumed, and I think that seems relatively consistent with what some of our peers have sort of talked about is that roughly 1/3 of people would lose their coverage.

And as we've sort of looked into this and delved into the details on that exchange population over the last couple of years, I think we've largely determined that their utilization behavior is reflective of or more sort of, I'll call it, sympathetic with a Medicaid population than with a, I'll call it commercial or Medicare population, meaning that their utilization is very ER focused. They tend to use the ER when they have health care needs. They don't necessarily have private physicians. They don't do -- we don't do a lot of elective procedures in that population, et cetera. So we take that 1/3 of the business that we think would lose their coverage. We evaluate to what degree they use the emergency room, and we assume that they'll continue to use the emergency room and emergency procedures at the same rate and the same cadence, but now we won't get paid for them. And that's how we generally get to that number.

But I think we've stressed, and I think honestly, as you suggest, we're the only company that I think has really put that number out there. I think the first time we put it out, that was at your conference last year. And I stressed at the time that it really was a guesstimate. And I'll say that again. I mean I think we gave the number, and I wanted to give it last year because people were estimating numbers that were well beyond anything we were sort of contemplating, and I felt it was helpful to ring-fence it. And I still think that's true. I couldn't tell you that $100 million is a precise estimate, but I think it's a decent ballpark based on what we know.

Got it. And I appreciate the comments on the shift in utilization to the ER and Medicaid versus -- is there a rule of thumb that you would think about if an exchange person is using 1 unit of hospital volume. Does it go down by -- I think HCA was talking about something in the neighborhood of goes down by about 1/3 to 1/2. Is that a reasonable ballpark? Do you think it goes down more?

I just want to be clear, the point they're making is they're not -- they don't utilize the system as much as a Medicare commercial patient...

Meaning that the exchange patient when they lose their coverage will utilize less, like you said, it will be more ER related. We're just trying to think about what is the step down in terms of maybe a percentage basis that you think that...

And again, speculating here. But I think our view is people use the emergency room when they have to. And to the degree that whatever pace they're currently using the emergency room, they will continue to do so. Now it's true that some people use the emergency room for nonemergent procedures. And again, I think that's largely true in the Medicaid and exchange population. But the assumptions we've made is that they'll continue to use emergency procedures at the same rate that they had been.

Got it. And then the percentage of revenue that's tied to the exchanges, you said 6%, 6.5% of volume. Is it a little bit higher on the percentage of revenue?

Yes, not for us. And I know this is a little bit of a difference between what we say and what some of our peers say. So we find that our average exchange reimbursement is closer to Medicare. And I think what some of our peers have said is that their exchange reimbursement is somewhat better and maybe closer to commercial or at least somewhere between Medicare and commercial.

I think, and again, it's worth noting that the biggest chunk of this exchange population resides in a couple of states, it's in Florida and Texas. Our 2 biggest public peers, Tenet and HCA tend to have, on a relative basis, a bigger footprint in Florida and Texas than we do. And my guess is they probably have more negotiating leverage in those states, which is probably why their rates are somewhat better. But yes, so our view is that 6.5% -- 6% to 6.5% of volume is also reflective of their revenue contribution as well.

And just to put a bow on this, you talked about 1/3 of members -- 1/3 of the exchange membership loses coverage. You mentioned that some could go to commercial or Medicaid. Any thoughts on how much of that 1/3 does go to commercial and Medicaid that you've assumed in that 100?

Yes. So again, I think the way we've tried to do the projections is sort of assume that if 1/3 just loses their coverage and the remaining 2/3 have some sort of similar coverage. And again, now those are broad assumptions, and we acknowledge that. But I think we're, in my mind, sort of capturing the heart of the impact and the way we've done this.

And then moving over to the provider tax benefits. You talked about -- you talked about that picking up a bit. I think you talked about something in the $1.3 billion range in the current run rate. That was up about $140 million versus the previous. And again, you're the only company giving us an estimate on what you think the 5-year impact will be in terms of the cuts. We all appreciate that. I thought it was interesting that while the benefit was up $140 million, the cut was up a little bit less than half that, right? I'll call it half that, at about $65 million, $70 million. I'm curious in terms of why the cuts wouldn't go up by a similar amount, right, given this is going to transition off. And I -- the 2 things I can think about is, one, I know you've given us a 5-year window. And maybe there are additional cuts beyond that $65 million, $70 million incremental that go outside the 5-year window? Or you think that you're keeping some of it? And if so, I'd love to understand kind of the mechanics there.

Yes. So this is obviously a complicated issue. So I think it's helpful to sort of kind of frame it for everybody. So as you suggest, in our third quarter 10-Q, we have reestimated what we think our net benefit will be from Medicaid supplemental payments in 2025. That's the $1.3 billion that you alluded to. And we also give an estimate, which we've updated-- based on the OB3 cuts or proposed cuts to these Medicaid supplemental payments, which would begin in 2028 and then go over 10 years, we give an estimate that what would those cuts amount to in 2032, 5 years into the cuts. That's the $420 million to $470 million that you alluded to.

The cuts continue -- well, first of all, we assume that the cuts will occur ratably, so they'll begin in 2028, and they'll largely sort of progress ratably getting to, we'll call it this $450 million number, $445 million number in 2032. We don't project beyond that, because we don't really project anything beyond 2032. But the cuts do -- they decline, but they will go on beyond that.

The issue of why -- when there's additional benefit, why the cuts are not in the exact same proportion is really a function of the cuts by state are not proportional. They really -- the cuts are really driven by cuts to the provider tax rate in the state and cuts to the average reimbursement in the rate. And so depending on what the provider tax rates are in the state, depending on whether the state is an expansion state or not an expansion state, depending on what the average reimbursement is under the state's program, the cuts are varying. And so yes, I mean, any time there's going to be an addition to this, we'll likely update the impact of the cuts, but it's not going to always be exactly proportional.

Again, I would suggest that over time, the cuts are about 1/3 of our total in total. And I think if you want to think about it and model sort of ups or downs in the overall benefit, I think the overall cut would be in that sort of 1/3.

Got it. That's helpful, Steve. And then CMS put out a letter on provider taxes last Friday. I think everybody who's read it in this room and on this webcast has probably gotten multiple headaches, and I don't know that anybody has been able to figure out exactly what CMS was trying to say here. But there was a phrase there that a lot of people have kind of latched on to around provider tax programs that are enacted and imposed, right? I know you have a -- that's kind of the language they're talking about in terms of the -- of grandfathering, right, for these provider tax programs. So I know you guys have one of the smartest people on the street that I've talked to at least on the provider tax side. I know you've run this by them. How are you interpreting that? And how do you think that there is an impact at this point to your estimates on provider taxes?

Yes. So first of all, I think your description of the proposed rule is a fair one. It was not all that easy to interpret. It's not all that clear exactly what CMS is sort of trying to get at. I think our initial read is that of the $1.3 billion that we expect to get in Medicaid supplemental payments this year, we don't believe that this proposed rule will have any material impact on that. Again, I would stress the idea that it is a proposed rule and they will go through the rule-making process. And we would hope that in the final rule, some of the questions and some of the nuances that you've alluded to will be clarified.

And I really don't know what the clarification will be. But to your point, so -- if a state has passed or submitted a revised plan that has been approved by CMS, the notion, I think, from a provider perspective is that, that is a plan that would be grandfathered. Whether this imposed, enacted sort of language nuance means just passing it is not good enough, they have to have collected the tax or build the tax or we don't know. We don't really know what -- whether in fact, CMS really is trying to kind of parse the language and say that impose is something different than enacted. Again, the notion is, I think, that, that will be clarified in the final rule, I think what -- again, we would say at the moment is the $1.3 billion that we're projecting for this year, we don't think would be materially affected by the rule.

Got it. What did your provider tax guru, so to speak, have a view of what that might mean for stuff that's been proposed, but not either collected or approved by CMS? I'm thinking, think of Florida, for instance.

Yes. So I think it's more in the new programs, which, for the most part, any program that's been proposed that is sort of pending CMS approval, we've not included in our estimate in that $1.3 billion. Florida, probably maybe the most notable among those. And yes, so I think there would be an argument about whether the Florida program, which I think a few months ago, people assumed would be grandfathered. And I think we still assume may will be grandfathered is going to meet the CMS definition. And again, my sense is that CMS will have to clarify that in the final rule.

Got it. And just to put a bow on this, the -- in terms of provider tax programs that are out there, I think Florida, Georgia, Virginia, et cetera, can you give us an estimate of what that could be for the company outside of the $1.3 billion?

Yes. So if...

Everything proposed...

No, I understand. I was going to say if it doesn't give you a headache and you want to read through our 10-Q disclosure on the DPPs, I think we give a lot of that detail. We talk about Florida and have talked about Florida. Georgia is a moot point for us. Georgia, we only have behavioral operations in Georgia and the Georgia DPP program does not include behavioral.

So yes, I mean, I think we land -- the state, I think, that we often get asked about and that we don't provide a tremendous amount of detail is California. California has proposed an expansion of their DPP program. California has historically struggled with CMS approval. CMS has issues, structural and I think technical issues with California -- programs in California and New York, New York is relevant for us.

And so we've never tried to quantify what the benefit would be if the California rule is adopted or if it's changed and modified. But I think we do clarify the potential benefit from Florida in the kind of $45 million to $50 million. I think California could be a significant additional benefit, but we sort of prefer to wait and see how that gets resolved between California and CMS.

And if I just press you one time on that, if California -- would California be closer to Florida or closer to D.C.?

Yes. And I'll be absolutely honest, Justin, I mean honest -- not -- they feel pressed, I think the reason we've not tried to quantify it is we really don't know. We think the program would have to be modified to meet the CMS requirements. And obviously, not knowing how the program will be modified, it's very difficult for us to provide any estimate.

Got it. Appreciate that. So we'll close out that section of our Q&A here, and we'll talk a little bit about fundamentals. The -- you gave us a little bit of a view of how the quarter is progressing, right? Specifically, you talked about, I think, behavioral patient days were up about 1.3% in the third quarter. You thought you could get to the low end of that 2%. You've seen October kind of past by now, you're halfway through November. How is that kind of trajectory look versus that 2% target with the caveat that we know the holidays could throw a wrench in there?

Yes. I think the point that we tried to make on the call was that we thought that 2% to 3% same-store adjusted patient day growth in behavioral was a reasonable target in, I'll call it, the short to intermediate term, getting to the higher end sort of the more time passed. I don't think we were in any way sort of trying to guarantee or sort of strongly suggest that we can get to the 2% in Q4, we might. But as I said, I'm always often hesitant to give sort of intra-quarter updates, but always in the fourth quarter hesitant to do it because so much can change around the holidays, for better for worse. And obviously, it's the same every year, meaning we see these dips particularly in kind of elective and child and adolescent admissions on the behavioral side. But it can vary year-to-year based on timing, I think based on some other factors. So we'll see.

But again, I'll just reiterate that we're comfortable that, that 2% to 3% behavioral range that we gave is reasonable and not an overly optimistic projection in the, I'll call it, near to intermediate term.

Okay. And some of that more positive view and kind of confidence seem to come from a tick up on the employment side, you talked about on the third quarter call. I know you've given us some interesting metrics there in terms of turnover over time, new starts. How would -- maybe you could put some numbers around that employment change and how you think it benefits you?

Yes. So I think we've really talked about the upside potential in behavioral volumes. And again, we're not -- you've sort of run through the numbers. We're not talking about seismic increases in our ability to meet demand. We're talking about going from 1.3% in Q3 to something closer to 2% in the next couple of quarters. But we think the biggest potential for continuing that growth is making additional improvements and incremental improvements in our staffing. We still say that somewhere between 1/4 and 1/3 of our behavioral facilities struggle with filling all of their labor vacancies, that can be nurses in some cases, it can be therapists. And in many cases, it can be nondegree professionals, the people that we call mental health technicians or aides, who are sort of critical to the behavioral clinical process and care process.

And we continue to make progress. We measure that both in terms of hires. We measure it in terms of reducing turnover. And those metrics have been improving. But to be fair, they've been improving in a pretty incremental way, not as quickly as we'd like. It's challenging. But I think we're making progress, and I think we'll continue to make progress.

And then the other area that we've talked about, particularly, I think, in the last few quarters is, I think we've seen an uptick in the shift of patients from the inpatient setting to the outpatient setting in behavioral. This is not a new phenomenon. Obviously, we've seen that phenomenon in the -- on the acute side of the business literally for decades. But we're really seeing more and more payers, more and more government entities, really trying to move patients where they can to a more efficient setting of care, whether that's partial hospitalization or what we call intensive outpatient. And these are not sort of individual therapy sessions. People often, when we talk about outpatient behavioral care, people often think about the 50-minute session that an individual might have with a therapist once a week or twice a week. And while that's obviously an important component of behavioral care, it's not really the core of our business.

So when we talk about outpatient care, a lot of our focus is on, again, inpatient -- intensive outpatient, partial hospitalization. These are people who are getting 4, 5, 6 hours of therapy a day. They're just not staying over in a facility, and they may be getting that care 5 days a week, 3 days a week, but that's -- so in any event, we're doing a number of things to build up our sort of internal referral network. So as we discharge patients, we capture as much of that as is appropriate for patients who need continuing care and a lot of patients who do get discharged from an inpatient facility do need continuing care.

And we're also really starting an initiative of standing up these freestanding outpatient facilities, which really have not been a significant focus of ours historically because we do know that there are patients who require that sort of care, but don't want to receive it on a hospital campus and in a facility associated with a the hospital because they have fears, whether they're founded or unfounded that they're going to be sort of swept up in that sort of inpatient dynamic. So we've been talking about standing up 10 or 12 of these freestanding facilities a year for the next several years.

Got it. And what percentage of your behavioral revenue is outpatient right now?

Yes. So today, it's a pretty small percentage. I'm going to say it's in that 10% to 15% range. And again, as you know better than I do, you're more familiar with payer commentary, but a lot of payers have commented in the last few quarters that some of their increase in medical loss ratios and utilization is really coming from behavioral care. And a lot of times, they're citing outpatient and the growth in outpatient. And we just feel like historically, we haven't captured our fair share of that. And we have a lot of advantages that should allow us to capture more of it. We tend to be an in-network provider with most providers in most of our markets. We tend to have strong referral relationships with hospital emergency rooms and military bases and school systems and all those components should allow us to garner a significant share of that outpatient business, which historically, we just have not really focused on.

And what's the growth rate of that 10% to 15% of the business running versus the inpatient side?

Yes. So I don't give the exact numbers, but I mean, we made the point in Q3 that of our 1.3% adjusted patient day growth, clearly, outpatient grew faster than inpatient. And I would expect that will be the trend for the foreseeable future that we're going to see faster growth in outpatient than we do in inpatient.

Got it. Maybe we wrap up with a discussion of AI and how that's impacted your business, specifically on the revenue side. I think in the third quarter, you mentioned that maybe a 1% to 2% pickup in pricing came from better collections, right, on the acute side. And you mentioned the payers, right? They're all complaining that sepsis is up 50% or 100%, right, and that hospitals are utilizing AI to code better, right? No one is saying that the coding isn't correct, right? No one is saying it's fraud or anything. Just you guys are doing a better job of coding. So curious how that's impacted your business. Would you kind of attribute that 1% to 2% to AI? And what are kind of the initiatives out there?

Yes. So I would say beginning a number of years ago, we really began to focus particularly in our acute segment on improving our revenue cycle performance, basically our billing and collections. And to be fair, again, part of that initiative was really in response to the fact that we felt like payers were getting more aggressive, and they were using -- and when we think about it, when we think about these improvements, we think about it as people, process and technology, and I think I feel like we've been improving all 3. But again, in response, we think that payers have been using technology to generate denials, to generate patient status changes, whether a patient is an inpatient or an observation patient on the acute side, that sort of thing, in managing length of stay on the behavioral side.

And so we're responding to that. And so yes, we talked about, I'll call it, pricing improvement or revenue per adjusted admission in acute care being at 5% in the last quarter, whereas we think kind of a sustainable number is maybe in the 3% range. And I think a lot of that gap or a lot of the difference is some of those improvements that we've made. Some of it's in technology, making sure that when a bill goes out, it's clean, it's complete, that reduces delays, et cetera. It reduces the ability of the payer to sort of bounce claims, even if it's a temporary sort of kind of thing. We believe that payers have been using AI for years to generate denials. And now we're using AI to generate denial appeals, et cetera, making it more efficient, making it more complete.

So yes, I mean, I think -- and we'll continue to do that. I think in terms of some of the coding things, et cetera, honestly, I feel like we've been doing that for years in terms of having outside parties review our coding and doing some of that work that maybe the not-for-profits are just sort of getting into.

Got it. Do you think that -- I don't want to put a number around it in the quarter, it was 1% to 2%. But do you think that kind of tailwind is durable? Or do you think it's kind of going to bounce around and you're going to see -- I know there's all kinds of accruals around collections and when you recognize them. Do you think it's going to bounce around? Or do you feel like this is something that's durable and you feel like could be a tailwind for a year or 2?

Yes. So honestly, I think we've been getting that benefit. If you go back and look, our acute pricing has been strong now for quite a while. So I think we've been getting that benefit, which is why I think as we sort of suggest going forward, pricing probably moderates at some point closer to that sort of 3% range. But obviously, we're going to continue all this focus on all those initiatives. And honestly, we're shifting to do this now on the behavioral side, where I don't think there's quite as much opportunity because I think billing and collection on the behavioral side is not as complicated as it is on the acute side. But I think there are opportunities. We're just -- we're not nearly as centralized and I think as efficient on the behavioral side as we are on the acute side, and we'll get there in the next year or 2.

Got it. Steve, Darren, I want to thank you for your time. I appreciate you being here with us today, and thanks, everybody, for joining us.

Thank you.

Thanks, Justin.

Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to Darren Lehrich, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Universal Health Services Third Quarter 2025 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations.

With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then we'll open to Q&A.

During today's conference call, we 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, we recommend a careful reading of the section on Risk Factors and -- forward-looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2024, and our Form 10-Q for the quarter ended June 30, 2025.

In addition, we may reference during today's call, measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI and adjusted net income attributable to UHS which are non-GAAP financial measures information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in today's press release.

With that, let me now turn it over to Marc Miller for some introductory remarks.

Thank you, Darren. Good morning, everybody. Thank you for your interest in UHS. I also want to take this opportunity to welcome down to the UHS team. We look forward to having him in a dedicated Investor Relations function for our company. .

Turning to our third quarter 2025 results. We reported adjusted net income attributable to UHS of $5.69 per share representing a 53% increase from the third quarter of 2024. Revenue growth for the third quarter of 2025 was 13.4% year-over-year. Our third quarter performance reflects continued growth in our acute care operating environment, modest volume improvement in our behavioral health segment and solid pricing across both segments. The third quarter included $90 million of net benefit from the recently approved supplemental Medicaid program in addition of Columbia.

Steve will cover the details of this approval and other supplemental Medicaid program updates. Based on our operational performance year-to-date and the increased supplemental reimbursement in the District of Columbia, offset somewhat by additional professional and general liability reserves, we are increasing the midpoint of our 2025 adjusted EPS guidance by 6% to $21.80 per diluted share from $20.50 per diluted share previously.

During the quarter, we experienced progress in our 2 most recent acute care hospital openings, West Henderson Hospital in Henderson, Nevada and Cedar Hill Regional Medical Center in Washington, D.C. Specific to Cedar Hill, we achieved accreditation in early September. As a result, the financial drag from our certification timing delay and start-up issues began to subside during the third quarter, and we expect to exit this year at breakeven or better. putting us in a stronger position at this facility heading into 2026. We believe the long-term outlook for Cedar Hill remains favorable due to demand for services and strong support within the community. as well as our long-standing presence in the district at the George Washington University Hospital.

Our next de novo acute care hospital opening will be the Alan B. Miller Medical Center in Palm Beach Gardens slated for 2026 -- slated for spring of 2026. This project remains on track, and we are encouraged by significant interest in the new medical campus by members of the community and the health care professionals that serve patients within this fast-growing market. We have a long track record of expanding presence in core markets with new state-of-the-art hospitals and are excited to build on our existing presence on the East Coast of Florida.

Separate from these new hospital projects, we've also been active on the outpatient side within our acute care segment, where we operate 45 outpatient access points, including freestanding emergency departments, surgery centers and other ambulatory services. On a year-to-date basis, we've opened 4 freestanding EDs, bringing our total to 34 and we believe our [FDD] strategy is highly complementary to our acute care operations by allowing us to capture incremental higher acuity outpatient volume within our markets.

Within our behavioral health segment, we've taken a disciplined approach to new bed capacity growth which has allowed us to focus on the highest potential expansion and de novo projects while we increasingly devote resources to accelerate our outpatient behavioral strategy.

On the outpatient side of our behavioral segment, we operate approximately 100 access points, including step-down programs closely aligned with inpatient and residential operations as well as step-in programs that allow us to reach patients in convenient community settings. We are on track to open 10 of these step-in programs this year under local brands, as well as our new 1,000 branches wellness brand in a model that supports outpatient services through both virtual and in-person settings.

Our strategies are designed to accelerate our outpatient growth rate, diversify our payer mix and allow us to be the provider of choice within the behavioral marketplace that continues to have strong demand across the continuum. The behavioral health care we provide serves an important need within the health care system and our society more broadly.

With that, I will now turn the call over to Steve Filton, for a financial review of the third quarter.

Thanks, Marc. I will highlight a few financial and operational trends before opening the call up to questions. The company reported net income attributable to UHS per diluted share of $5.86 for the third quarter of 2025. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $5.69 for the quarter ended September 30, 2025.

We recognized approximately $90 million of net benefit during the third quarter of 2025 from the District of Columbia supplemental Medicaid program, which covered the time period from October 1, 2024, through September 30, 2025. Approximately $73 million of this benefit was recognized in our acute care results while the remaining benefit was recognized in our behavioral results.

During the third quarter of 2025 on a same facility basis, adjusted admissions in our acute care hospitals increased 2.0% and over the third quarter of the prior year. Acute care volumes were consistent with trends in the first half of 2025 with solid growth in both inpatient medical admissions and outpaced services during the third quarter and surgical volumes that increased slightly as compared to the prior year. Same facility net revenues in our acute hospital segment increased by 12.8% during the third quarter of 2025 on a reported basis as compared to last year's third quarter and increased 9.4% after excluding the impact of our insurance subsidiary and the prior period net benefit from the District of Columbia supplemental Medicaid program.

Acute Care same-facility revenue per adjusted admission increased by 9.8% during the third quarter of 2025 on a reported basis and increased 7.3% after excluding the impact of our insurance subsidiary and a prior period impact of the District of Columbia supplemental Medicaid benefit.

Operating expenses continued to be well managed across labor, supplies and other expense categories. We have not experienced any noteworthy impact from tariff trade policies. Total operating expenses per adjusted admission increased by 4.0% on a same facility basis over last year's third quarter after excluding the impact of our insurance subsidiary.

For the third quarter of 2025, our solid acute care revenues, combined with effective expense controls, resulted in a 190 basis point increase year-over-year in same-facility EBITDA margin to 15.8% after excluding the prior period impact of the District of Columbia's supplemental benefit.

Turning to our behavioral health results. During the third quarter of 2025, same facility net revenues increased 9.3% on a reported basis and were up 8.5%, excluding the prior period impact of the District of Columbia supplemental Medicaid program. Same-facility revenue growth was driven by a 7.9% increase in revenue per adjusted patient day as compared to the prior year.

Excluding the prior period impact of the District of Columbia supplemental, same revenue facility revenue per adjusted patient day increased 7.1% during the third quarter 2025.

Same facility adjusted patient days increased 1.3% as compared to the prior period's third quarter with volume growth modestly improving as compared to 1.2% in the second quarter and 0.4% during the first half of 2025. We expect further volume improvements during the fourth quarter, although we now believe a reasonable expectation for same facility adjusted patient day growth should be in the 2% to 3% range with our near-term expectations at the lower end of this range.

Expenses in our behavioral health segment continued to be well managed with relatively stable margins during the third quarter leading to a 7.6% increase in same-facility EBITDA as compared to the third quarter of 2024 after excluding the prior period impact of the District of Columbia supplemental benefit. We continue to experience labor tightness in some markets, although hiring trends have improved steadily throughout the year.

Our cash generated from operating activities was approximately $1.3 billion during the first 9 months of 2025 as compared to approximately $1.4 billion during the same period in 2024. We expect to collect the $90 million of District of Columbia supplemental payments during the fourth quarter of 2025.

During the first 9 months of 2025, we spent $734 million on capital expenditures, close to 30% of which related to the new hospital in Florida and a replacement facility in California. During the 9 months ended September 30, 2025, we also acquired 3.19 million of our own shares at a total cost of approximately $566 million including 1.315 million shares purchased during the third quarter of 2025.

Today, our Board of Directors authorized a new $1.5 billion increase to our stock repurchase program, bringing our total authorization to $1.759 billion, including amounts remaining under the previous authorization. Since 2019, we have repurchased approximately 36% of the company's outstanding shares and paid approximately $340 million in dividends to shareholders.

In the absence of compelling acquisition opportunities over the near term, we expect to continue to prioritize our excess free cash flow for share buyback and dividends. As of September 30, 2025, we had approximately $965 million of aggregate available borrowing capacity pursuant to our $1.3 billion revolving credit facility.

Turning to an update on Medicaid supplemental payment programs. Our current projected 2025 full year net benefit from various previously approved programs is $1.3 billion. This figure includes amounts recorded during the third quarter for the previously mentioned district of Columbia program and additional amounts related to this program that are expected to be recorded in the fourth quarter of 2025 and but it does not include programs pending CMS approval.

As we discussed during our second quarter 2021 earnings call the OB3 legislation includes several significant changes in the Medicaid program, including changes to state directed payment programs and provider taxes. At this time, assuming no changes to our Medicaid revenues or other changes to related state or federal programs, we estimate that commencing with the 2028 fiscal years, our aggregate net benefit will be reduced on an annually increasing and relatively pro rata basis by approximately $420 million to $470 million in 2032.

This cumulative impact range has been increased to reflect recent supplemental program approvals. Given various uncertainties, including the evolving state-by-state interpretations and computations related to this legislation, our forecasted estimates are subject to change potentially by material amounts.

Operator, that concludes our prepared remarks, and we're pleased to answer questions at this time.

[Operator Instructions] Our first question comes from Justin Lake with Wolfe Research.

Steve, appreciate all the details. I was hoping you could give us an update in terms of I know there's a couple of states pending approval, Florida, I believe, Nevada. Maybe you can give us some color on the potential DTP there. that could benefit the company if those are approved?

And then maybe give us a quick rundown on -- or an update on where the exchange contribution looks like? What's the kind of run rate on the exchange volume in revenue year-to-date. And any updated thoughts on if those subsidies expire, what do you think that estimate is?

Sure, Justin. So as far as any new potential Medicaid supplemental benefits, we've been disclosing for I think several quarters that there is approval of a pending plan or expansion of the pending plan in Florida that we estimate would result in about a $47 million annual benefit to us. As I said, that program remains pending CMS approval of the state of Florida seems confident that it will be forthcoming at some point.

Additionally, I think we learned this quarter, and we'll include this in our to be filed 10-Q for the quarter, that there's another maybe $30 million approximately of Nevada DPP increase, again, pending CMS approval. So on a combined basis, these 2 states would represent somewhere in the $75 million to $80 million range. To the best of our knowledge are no other material programs or approvals pending.

As far as your second question about exchange contribution, the percentage of our total adjusted admissions, acute care admissions that are exchange patients is in the 6% to 6.5% range. That number has been ticking up. Most of those patients are in 2 states in Texas and Florida. And so I think all the public companies have been reporting increases and we have a smaller footprint in those states than some of our peers, but our numbers have been picking up as well. We have previously given an estimate assuming that the exchange subsidies don't get extended about $50 million to $100 million negative impact on us annually.

Given the increase in exchange volumes, we're probably trending towards the higher end of that range. As far as, I think, sort of any prediction about how the exchange subsidy issue is to be resolved. I don't think we have any particularly pressing an insight into that and what we're watching how this develops in Congress, along with everybody else.

Our next question comes from Jason Cassorla with Guggenheim.

Great. Just wanted to check in on 25 guidance. You increased the midpoint by a little over $90 million. Can you just walk through the bridge to the updated guidance, how that's split between the 5 quarters of [indiscernible], the malpractice reserve increase, the legal settlement in the quarter and outperformance? And then you have about a $50 million guidance range at the low and high end, not significant range by any means, but just thoughts on what you need to see to trend towards the high end or the low end of guidance at this point.

Yes. So Jason, I think you largely captured the components of the guidance increase, as you said, at the midpoint in the $90 million to $95 million range. that's made up of $140 million of increased DPP. The biggest chunk of that, of course, is the DC number. That's $90 million that we recorded in the third quarter and another $25 million that we expect to record in Q4. So that's $15 million of new DPP. There's another $25 million of miscellaneous increases across a variety of space, none of which are singularly materials to get to the 140% increase in DPP.

And then we deduct from that the $35 million malpractice increase that we described in our press release and another $18 million in a legal settlement that we described in an 8-K that we filed a few weeks ago and that gets you to that sort of low to mid-90s number. effectively meaning that we're assuming from a core business perspective, the trends that we when we increased guidance last quarter, we'll continue when you talk about sort of what it takes to get us to maybe the higher end of that. We're talking about, I think the 2 businesses running same-store revenue increases in the 5% to 7% range. And what gets us to the higher end is if we land at the higher end of that range, either through volumes or pricing. So I think all that is pretty consistent with what we've said previously.

Okay. Maybe just as a follow-up, just checking in on managed care activity and state budgets in relation to your behavioral health business. I mean it looks like behavioral health length of stay continues to hold on. Pricing remains favorable. I guess are you seeing any different behavior as it relates to managed care at this juncture for behavioral. And we're hearing multiple states and acting budgets that are reducing behavioral rates just any thoughts on the state budget situation across your markets stepping into 2026 would be helpful.

Yes. I mean I think we have consistently found that managed care players are aggressive in their utilization management and their management of length of stay and their management of where patients are treated, meaning in inpatient or outpatient settings I don't know that that's changed materially. As you point out, our length of stay has remained fairly constant.

A lot of that is I think a function of our aggressive behavior in terms of documenting the medical needs of patients, et cetera, which we are very much focused on -- and so we, again, have not seen, I think, significant changes in payer behavior to date. We understand that payers are under -- or any number of payers are under some pressure, but we also understand that their subscribers do need behavioral treatment and I think given our market presence, given our clinical reputation, et cetera, we continue to be, I think, a preferred provider for many of those managed care companies.

As far as state budgets are concerned, the only state budget that I'm aware of where there have been actual Medicaid cuts is in North Carolina for behavioral. It's not a state that's material to us. I think about 2% of our behavioral beds are in the state of North Carolina. Other states have talked about state budget cuts for Medicaid, and we're sort of tracking that. But at the moment, I've not seen anything that affects us in any sort of material way.

Our next question comes from Whit Mayo with Leerink Partners.

I'm just curious how West Henderson less Henderson is performing now and any cannibalization of that on overall volumes within the quarter? And then my second question is just on Cedar Hills whether or not you think it can offset the headwinds. So if it was, let's say, a $50 million drag with start-up losses this year, that $50 million will reverse itself, but any thoughts on maybe the growth next year?

Yes. So I think as Marc commented in his remarks, West Henderson has been performing well. It's had positive EBITDA really ever since it opened, which is really quite remarkable for a startup hospital. It does, I think, affect our same-store numbers and particularly our same-store volumes that we've talked in the past that there's probably -- and again, this is difficult to quantify precisely, but we would estimate maybe a 50 or 60 basis point impact on our same-store adjusted admissions meaning without Henderson or West Henderson in the mix, our same-store adjusted admissions might be 50 or 60 basis points higher because of the cannibalization because some of their admissions or adjusted admissions are coming from our existing hospitals in the market. The West Henderson is doing well, and we would expect we'll continue to improve into 2026.

Cedar Hill, as we identified last quarter, lost $25 million in the second quarter, we projected they would lose $25 million in the back half of the year. They did lose that $25 million in the third quarter. And I think as Marc pointed out, we expect them to break even in Q4 and improve into next year.

So obviously, the $50 million loss that we incurred in 2025 should be a tailwind going into 2026, assuming that worst case Cedar Hill breaks even. We assume they'll do better than that, and they will be profitable in 2026, although I think our general sense and we'll give more detail on this when we give our guidance in February is that any incremental improvement over breakeven will largely help to offset any opening and start-up losses from the ABM Medical Center in Florida.

Our next question comes from Ben Hendrix with RBC Capital Markets.

I appreciate your commentary on your outpatient surgical initiatives. I was wondering if you could give us a little bit more color on what you're seeing in terms of surgical trends, both inpatient and outpatient. And what case mix is looking like in the quarter? And just how that's contributing overall to the volume growth for the acute care hospital segment?

Yes. So I think in our prepared remarks, we made the comment that outpatient surgical trends increased slightly over the prior year in the quarter, and that actually was an improvement over the first half of the year when I think they were actually down. So we're encouraged by that. And I think we've noted that I think some of the, call it, surgical softness or softness in surgical volumes I think it's been difficult comparisons with prior years where we were seeing some benefit from the catch-up of deferred and postponed procedures that have been deferred and postponed during COVID.

I think we're starting to anniversary that and we kind of get behind us. And it feels to us like surgical volumes are returning to sort of more normal levels. Again, I'm sorry, was there a second part to your question? Okay, case mix was up slightly in the quarter, not a big driver of improvement, maybe 30 basis points.

Our next question comes from Raj Kumar with Stephens.

Just on the BA side, maybe just trying to kind of understand overall supply/demand dynamic. You've seen kind of like SWB growth of high single digits on a same-store basis or while volumes have kind of been slightly negative to slightly positive throughout the year. So maybe just trying to understand what the dynamics are in terms of your kind of increasing staffing and we should expect kind of better volume growth kind of in subsequent quarters. Or is this kind of more just in order to maintain capacity that you're kind of push into these SWB trend?

Yes. Raj, I mean, I think that we talked at some length in previous quarters. If there are 2 broad sort of overarching dynamics that I think had muted behavioral volumes. One, as I think we mentioned in our prepared remarks, there's been a labor scarcity issue. It's not pervasive. I think it exists and maybe quarter to 1/3 of our hospitals where we struggle to fill all of our vacancies, whether that's nurses, whether that's therapists, whether that's nondegree professionals, the people that we described as mental health technicians, but I do think that in those specific facilities, volumes are often muted.

I think as we said in our prepared remarks, our hiring numbers are increasing incrementally albeit. And I think you see a little bit of that in the salary and wage data that you're referring to. I think the other piece of this is what we're finding, and I think we read through what a number of the managed care companies say is that behavioral utilization broadly and nationally, is up across the board. A lot of that seems to be on the outpatient side.

And I think that's being delivered in a very -- I'll describe it in a sort of fragmented way, meaning those that outpatient care is being delivered in all sorts of settings, including hospital emergency rooms and urgent care centers and retail pharmacy clinics and mom-and-pop operations. We think we can do a better job of capturing more of that outpatient activity through, frankly, better focus as well as new and additional dedicated outpatient facilities.

Obviously, that focus and those facilities require additional staff, and we've been staffing up for that. So to some degree, I think the increase that you're alluding to in salaries and wages is something that's preparing us to be able to treat and absorb more patient volume.

Great. And then maybe as a quick follow-up. You had a step-up in kind of acquisition spend in the quarter, and I'm assuming that's kind of more on the outpatient behavioral acceleration that you've kind of spoken to. So maybe what could we kind of expect forward from a capital deployment on M&A on that front?

Yes. So the acquisition spending that you referred to is actually mostly it's about $35 million or $40 million in the U.K. in the quarter, and that's mostly only on the inpatient side. I think we've talked about the fact on the outpatient side in the U.S. creating a greater presence in the outpatient space really doesn't require a tremendous amount of new capital. It's probably $1 million or $2 million on average to create one of the step-in outpatient clinics.

So again, I think the bigger challenge in those places is finding the appropriate number of therapists more than it is a significant capital spend.

Our next question comes from A.J. Rice with UBS.

Maybe a couple of quick things here. I think in your updated guidance, there's about $25 million of sort of miscellaneous DPP payments and it seemed like in the back half of the year that are incremental, is that more in the third quarter? Or was that something that will be booked in the fourth quarter? And on the litigation, settlement in Nevada, was that booked in the third quarter? Or is that going to be booked in the fourth quarter?

Yes. So the litigation settlement was recorded in the third quarter. and it's reflected in our non-same-store acute results. The additional DPP, I think, is spread pretty ratably between the third and fourth quarters. .

Okay. I know you -- your pricing on both businesses, actually, even if you ex out the DPP payments was pretty strong by historic standards. Anything to call out there? Any -- is that a sustainable level of year-to-year pricing gains? Any thoughts on that?

So taking it segment by segment. I think on the acute side, we said that our revenue per adjusted admission was close to 10% increase half of that, I think, is DPP related, which means 5% is sort of from core results. That's on the high side for sure. I think we think that sustainable acute care pricing is more in the 3, maybe 3-plus percent range.

I think the excess in the quarter is a result of some revenue cycle initiatives that we've undertaken to ensure that our billing is clean and complete that are denial appeals are as appropriate and aggressive as they should be dispute resolutions with a number of payers, all that sort of stack.

There's a few small onetime items in terms of an opioid settlement, and we've disclosed our accountable care organization profits, but yes, I think our general sense is that acute care pricing in the 3% range is sort of that sustainable level.

On the behavioral side, we've been in the 4% to 5% range when you adjust out I think the DPP impacts. We've been running that and probably in the quarter, we're again at the higher end of that range. because of, I think, some of the things we've discussed already, some pressure for Medicaid state reductions. I think we believe that the sustainable level of behavioral pricing is probably a notch below that, maybe 3.5% to 4.5%. But still it should continue to be quite positive and a good tailwind for that business.

Our next question comes from Craig Hettenbach with Morgan Stanley.

On the behavioral side, you mentioned kind of a slight improvement in hiring you just talk about more broadly how you think about capacity versus demand behavioral and kind of what that means for volume growth?

Yes. I mean we've said that I think we think a reasonable level of volume growth in the behavioral business in the intermedium and long term is sort of 2% to 3% adjusted patient day growth. We're still a little shy of that and feel like there's a chance we can get there exiting this year.

But if we don't, I think it's a reasonable target for next year, particularly at the lower end of that range. To get there, we need to continue to be able to fill our vacancies and reduce our turnover things that have been happening, and I think we can improve, but I think we can see that, that process has been somewhat slower than we expected, but we continue to make incremental progress and expect that we'll continue to make incremental progress.

Got it. And then just a follow-up on capital allocation on the back of the increased buyback authorization. Your net leverage is at kind of the low end of history. Just how you're thinking about that? And any targets there and how that might influence capital deployment going forward?

Yes. I mean we've been an active acquirer of our shares for a number of years now. We said in our prepared remarks that since 2019, we've repurchased more than 1/3 of our shares -- we continue to view share repurchase, particularly at the current stock price levels as a compelling use of our capital. We have seen an elevation in our activity in share repurchases largely, I think, tied to the increase in our free cash flow.

And I think our expectation is that at a minimum, we'll continue to devote most, if not all, of our free cash flow to share repurchase absent any other compelling opportunities. Might we choose to increase that and lever up even more to do that. We might -- it's something that will make that judgment as we move along.

Our next question comes from Kevin Fischbeck with Bank of America.

Great. Maybe I'll ask a behavioral question again, maybe slightly differently. I guess like when we've historically thought about this long-term supply-demand imbalance within behavioral, we set a competitor who is growing very quickly now. It seems like they're slowing, they're closing down capacity in certain locations. Is there anything else that you're seeing more broadly, because 2% to 3% isn't a herculean number, I don't think, but it also is easier to underwrite when someone else is growing much faster. Is there a competitive dynamic that's going on that's maybe skewing things [indiscernible] we don't see every day. or anything else that you would kind of point to that might say that the broader market is, in fact, growing faster than we can see from the outside?