Operator: Good day, and thank you for standing by. Welcome to the Q3 2026 Universal Health Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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.
Darren Lehrich: Good morning, and welcome to Universal Health Services' Q3 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 will 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 forecast 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 31 December 2025, and in our Form 10-Q for the quarter ended 30 June 2026.
Darren Lehrich: 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 in our supplemental materials on our website. With that, let me now turn it over to Marc for some introductory remarks.
Marc Miller: 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 Q3 reflected sequential improvement in several areas. Acute care demand remained favorable. Behavioral health volumes demonstrated an increase relative to recent quarters, and labor trends continued 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. Q3 results included certain items that were not reflected in the outlook we provided with our Q2 results in July.
Marc Miller: These items included the benefit from the expansion of existing Medicaid supplemental programs in several states, partially offset by other non-recurring litigation and transaction costs, which Steve will take you through in a moment. Against that backdrop, I want to highlight three 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 Q2 are expected to continue ramping through year-end. We also expanded our outpatient portfolio by opening one freestanding emergency department in the Q3 and another FED that recently opened during the Q4. In addition, our ambulatory development pipeline is expected to add several outpatient access points over the coming quarters.
Marc Miller: 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 17 August 2026 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 three 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.
Marc Miller: And three, developing more flexible market-based outpatient offerings, initially emphasizing a virtual intensive outpatient program or IOP, offerings 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. We will 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 Q3 financial impact was consistent with the assumptions in our updated July outlook.
Marc Miller: 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.
Steve Filton: Thanks, Marc. I will organize my remarks in four parts: reported results and 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 Q3 2026, representing a decline of 8% year over year. Q3 adjusted EBITDA less NCI was $625 million as compared to $671 million in Q3 2025. The net out-of-period DPP headwind in the quarter was $37 million when considering amounts recognized for the Washington, DC program approved in Q3 2025, netted against out-of-period amounts recognized in this year's Q3. To distinguish reported results from underlying performance in Q3 2026, three specific items not contemplated in our annual adjusted EBITDA less NCI guidance provided in July, produced a net favorable impact of $12 million.
Steve Filton: These items were $47 million of supplemental Medicaid benefits 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 at our acute care hospitals increased 4.9% compared with Q3 2025. Volume performance was broad-based geographically and also benefited from capacity additions at three hospitals during Q2 2026.
Steve Filton: Same-facility acute care emergency department visits increased 4.6%, while same-facility surgeries decreased 0.7% compared with Q3 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 Q3 2026 increased 4.7%. Excluding the impact of our health plan, same-facility acute care net revenue increased 3.1%.
Steve Filton: Acute care same-facility revenue per adjusted admission decreased by 1.7% during Q3 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 per adjusted admission decreased 2.3% over last year's Q3. Other operating expenses increased primarily due to our health plan, which experienced revenue growth of approximately 25% in Q3. Same-facility acute care segment EBITDA declined 4.5% in Q3 2026.
Steve Filton: Excluding the out-of-period supplemental program benefit from both periods, Q3 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 Q3 2026 from expanded funding under existing programs, primarily in Washington, DC, and California, compared with $55 million of out-of-period amounts in Q3 2025 related to the Washington, DC, program approved last year. For Q3 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 Q3 2025, accompanied by a similar increase in the number of self-pay volumes.
Steve Filton: At Palm Beach Gardens, our acute care de novo hospital remains in the early stages of ramping volumes across multiple service lines. Startup losses improved each month during Q3. While the ramp at this facility remains gradual, the progression supports our expectation for continued improvement as we enter Florida's seasonally busier winter period. In Washington, DC, 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 break even in H1 2027, compared with our prior expectations of Q4 2026.
Steve Filton: Taken together, Palm Beach Gardens and Cedar Hill are progressing, but their pace of maturation remains an important factor in the timing of margin improvements for the acute care segment. Turning to behavioral health, Q3 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 UK operations in July, offset by startup losses associated with two de novo projects and ongoing operating losses at Laurel Ridge while we work towards recertification. Given the mid-quarter closing, Talkspace's contribution to Q3 earnings was immaterial.
Steve Filton: In our behavioral health segment, the net out-of-period headwind related to supplemental payments was approximately $8 million in Q3 2026, due primarily to the new Washington, DC, program benefit in Q3 2025. For Q3 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 headcount growth. Turning to cash flow and capital allocation, Q3 cash generated from operating activities was $637 million, compared with $381 million during the same period last year. During Q3 2026, we spent $214 million on CapEx, and we anticipate CapEx to be slightly below $1 billion for the full year of 2026.
Steve Filton: As several large acute care de novo and expansion projects are now completed, we expect CapEx to moderate towards $800 million beyond 2026. During Q3 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 30 September 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, and leverage of 2.17 times. Total debt reflects the August refinancing of our September 2026 debt maturity and incremental borrowings associated with the Talkspace acquisition.
Steve Filton: As of 30 September 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 two to three times. Finally, turning to our 2026 outlook, we are reiterating the financial and operating forecast ranges issued with our Q2 results in July. Based on year-to-date trends through Q3 and the ongoing ramp of our acute care hospitals in Washington, DC, 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 would be pleased to answer questions at this time.
Operator: Thank you. We will now open the call to question and answers. To allow as many people as possible to submit a question, please limit yourself to one question and one follow-up. Our first question comes from the line of AJ Rice of UBS. Your line is now open.
AJ Rice: Thanks. Hi, everybody. I know it is early to be talking about 2027, but some of the companies are, so I will ask it of you. At least, how do you think about puts and takes for next year? I guess specifically I can ask you on DPP headwinds, supplemental payment headwinds next year, given some out of period recognition this year, and early thoughts on incremental public exchange headwind, if any.
Steve Filton: Yeah. So I would just remind everybody, AJ, that consistent with prior years, we plan to issue our full comprehensive 2027 guidance in February when we report our Q4 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 two acute care de novos that we mentioned in our prepared remarks.
Steve Filton: Cumulatively, these facilities are expected to contribute operating losses of $80 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 are making progress towards recertification and remain confident that we will achieve that in 2027, giving us a path to rebuild census in a deliberate 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 reductions to Medicaid supplemental funding.
Steve Filton: We also had a material amount of prior year DPP benefit in calendar year 2026 that will not repeat in 2027. As it relates to Medicaid supplemental payments, we estimate the 2027 headwind will be approximately $175 to $200 million. This primarily includes prior year amounts that we recorded in 2026 for DPP programs in Florida, Nevada, Ohio, California, and Washington, DC, as well as approximately $10 million of impact during the Q4 2027 from the initial provider tax portion of the OB3 funding cuts. As it relates to the exchanges, annualizing the H2 2026 run rate would create a $15 million headwind in 2027. Further changes in exchange enrollment could increase that number, and we will have greater insight into that following the open enrollment period.
Steve Filton: As it relates to Medicaid work requirements, it is difficult to provide an estimate on the potential impact because the implementation timing may lag up to six 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 is worth noting from a volume perspective, Medicaid volumes in expansion states represented approximately 15% of our total acute care segment adjusted admissions and 30% of total behavioral health segment patient days.
Steve Filton: 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.
AJ Rice: That is very helpful. Thanks for that. Maybe just a follow-up. You have had very strong volumes. Obviously, it has 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 has been strong on the medical side, and are you attributing the softness in surgery mainly to public exchange disenrollment or economy or something else?
Steve Filton: Yeah. I think from our perspective, AJ, the trend towards a slightly weaker surgical mix is an acceleration of existing trends that we have 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. We really see this in particular in certain service lines. GI, as an example, we have seen just an accelerated shift of procedures, both in and 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. Those included cardiology, neurology, and urology. But yeah, I think, again, in our minds, what we are just seeing is this accelerated shift of procedures into these alternative settings.
Operator: Thank you. Our next question comes from the line of Ann Hynes of Mizuho. Your line is now open.
Ann Hynes: Great. Thank you. Just the two acute facilities that are not ramping as you thought. What is driving that slower ramp? Is there anything structural or challenges that you face? I have been covering the company for a long time, and I do not remember a time where the new acute care hospitals are ramping below expectations. If you can just go into each market and what is driving the loss versus your expectations, that would be great. Thank you.
Steve Filton: Yeah. So, I will address Cedar Hill first. Cedar Hill in Washington, DC, opened in April of 2025. I think as we have 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. I think the reason for that primarily is a lack of physician infrastructure in that part of the Washington, DC, market. For years, and this is for those of you familiar with Washington, DC, and Ward 7 and 8, there was really a lack of quality healthcare, and patients were leaving Ward 7 and 8 to get their healthcare elsewhere in the city. As a consequence, doctors really were not locating in Ward 7 and 8, doctor offices were not.
Steve Filton: As we indicated in our prepared remarks, we have addressed that by working with a number of different physicians and physician groups to establish practices in Ward 7 and 8, within Ward 7 and 8, in the MOB adjacent to our hospital, et cetera. But those practices are relocating, and they are developing, but they are in different stages of development, and that takes some time. I think that has 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.
Steve Filton: The other nuanced comment that I will 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 are 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 have built and invested the hundreds of millions of dollars to build the hospital.
Steve Filton: 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 is 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 will reiterate the same comment.
Steve Filton: No, structurally, I think everything we 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.
Ann Hynes: Thanks.
Operator: Thank you. Our next question comes from the line of Justin Lake of Wolfe Research. Your line is now open.
Justin Lake: Thanks. Good morning. Just a couple numbers questions here. Steve, maybe you can break down the $80 to $100 million of losses between those three facilities and Laurel Ridge in particular. What were the operating profits there when it was open, so we can get an idea of what it could recover to. Maybe Marc can give us any timeline he thinks within 2027 when you are thinking that might come back online. Thanks.
Steve Filton: Yeah, we are confident that we are going to be back online sooner than later, but we do not have an exact date in 2027. We are 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 cannot give you an exact date. As far as the numbers go, Justin, when we first announced the loss of certification at Laurel Ridge, we disclosed that last year, the pre-tax income at that facility was in the $20 to $25 million range. We have talked about incurring since it has lost its 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.
Steve Filton: We have talked about Cedar Hill over the last several quarters, losing roughly $10 million a month.
Steve Filton: 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. It lost about $15 million in this quarter. Expected to improve a little bit in Q4 and then continue to improve gradually from there.
Operator: Thank you. Our next question comes from the line of Matthew Gillmor of KeyBanc. Your line is now open.
Matthew Gillmor: Hey, thanks for the question. You call out labor as a positive factor in the quarter. I was hoping you could elaborate what you are seeing in terms of wage growth or turnover or use of contract labor.
Steve Filton: Yeah. I think a little bit different story in the two segments. I think in the behavioral segment, we talked over the course of several quarters that we had sort of invested in, I am going to describe it as outsized headcount growth because we have discussed, I think for quite some time, that in some of our behavioral facilities and markets, our volume growth was muted because of a constraint in staffing, not enough nurses or therapists or the non-professional techs that are important to care in the behavioral segment. But as we have accomplished that, I think headcount growth has continued to decelerate. It decelerated in Q3. I think it rose by about 1.5%. I think going forward, headcount growth in the behavioral segment will largely be aligned with volume growth. That has been a benefit and an improvement in the behavioral health segment.
Steve Filton: I think in the acute segment, as your question sort of alluded to, we have 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. I think wage inflation has certainly come down from its heights during the pandemic to something in the 3%, 3.5% range in both segments.
Matthew Gillmor: Got it. If I could follow up on the Talkspace acquisition. It sounds like you will share more on the Q4 call about the integration and synergy opportunity. I wanted to see if you would be willing to discuss, will there be synergies that you think you will be able to pull through during the 2027 period, or is that a longer-term priority?
Steve Filton: 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 Q3 of next year, was that the transaction would be slightly accretive. There is a very small amount of overhead and cost savings, sort of duplicative cost savings as we combine two public companies. But the vast majority of synergies are revenue synergies. The opportunity that combining the lower acuity patient population that Talkspace has and the higher acuity patient population that UHS has really creates this robust continuum of care that really does not exist anywhere else in the behavioral space. That is the opportunity.
Steve Filton: As far as the timing of it, I think we will 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. As we, I think, noted in our remarks, I think we will be more specific about that and how much of that we have included in our guidance when we present guidance in February. But as Marc indicated in his remarks, we are certainly beginning to focus on those revenue synergies and create all the changes in policies and procedures and infrastructure and technology that we will need to execute on those synergies next year.
Matthew Gillmor: Great. Thank you.
Operator: Thank you. Our next question comes from the line of Stephen Baxter, Wells Fargo. Your line is now open.
Stephen Baxter: Hi, thanks. I wanted to ask about the same-store acute revenue per adjusted admission 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, not just the out-of-period components? How did that compare to your expectations, and how much of a pressure is the surgical decline putting on those metrics? Thanks.
Steve Filton: Yeah. So again, in the remarks, I think we called out three items that I think are putting pressure on that revenue per adjusted admission metric in the quarter. I think you ticked 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 med surg mix pressure, which we talked about. We think the med surg mix pressure probably reduces the growth in revenue per adjusted admission by about 100 basis points. We think if we adjust for all three 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.
Stephen Baxter: Okay. When you look at the improvement in acute volumes that you saw in the quarter, is there any meaningful difference in either geographic strength or different payer strengths you want to call out?
Steve Filton: 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 are both positive, but growing a little bit slower than the divisional average. We've seen an increase in self-pay or uncompensated 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 of a Q4 note, is that last year, we had a pretty soft Q4 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 Q4. Otherwise, the strength in acute volumes has been pretty broad geographically.
Operator: Thank you. Our next question comes from the line of Kevin Fishbeck of B of A. Your line is now open.
Kevin Fishbeck: Great, thanks. 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. It would be better to understand what's causing it.
Steve Filton: 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 those categories were procedures that had more than a two-midnight stay and appeared to us to be more acute than would allow them to really be transferred or evolved into outpatient procedures. 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.
Steve Filton: 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. 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. I think there's a bit of a compounding effect that as more and more of these 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 through our emergency rooms are being diverted elsewhere.
Kevin Fishbeck: Okay, great. Then I guess as one of the tailwinds that you mentioned in 2027, you just said the long-term growth algorithm. Can you just remind us that? I know that this year you are looking for 4.5% to 6.5% on acute and 3% to 5% on behavioral. Is that what you are talking about, or are you talking about something a little bit different?
Steve Filton: No, I think in the last quarter, we sort of laid out our growth algorithms for the two segments. In acute care, we are talking about 1.5% to 2.5% adjusted admission growth. For the year, I think we are 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 if you sort of adjust for all these exogenous factors, we are 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. I think we are running for the year in the 1.7% range, so kind of towards the higher end of that range.
Steve Filton: Then 2% to 3% pricing in behavioral, and I think we are running within that range in behavioral as well.
Operator: Thank you. Our next question comes from the line of Craig Hettenbach of Morgan Stanley. Your line is now open.
Craig Hettenbach: Yes, thank you. Just following up on Talkspace and understanding it is recently closed, but if you can just give some context of how that business is performing, growth rates you expect. As a follow-up on that, you mentioned 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?
Marc Miller: So this is Marc Miller. As we are integrating Talkspace, 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 settings or in our inpatient settings. Conversely, we have an opportunity now, and we are 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 are getting directly referred now to us within our own system here. So those opportunities did not exist on either end previously. They exist now. We are just starting to see some of that come to fruition.
Marc Miller: I cannot give you exact numbers yet, but we feel like we are 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 are only into this for a few months, but the teams are working very well together. So we are very optimistic going forward that this is going to make a real difference for us and for their business.
Craig Hettenbach: Helpful. Thank you. Then just maybe following on to that, as you think about what you have today, how you think about just organic in terms of the outpatient push and then maybe even other tuck-ins around virtual more broadly.
Marc Miller: You are talking about non-Talkspace?
Craig Hettenbach: Yeah.
Marc Miller: Yeah. Look, we have always had a robust outpatient business, especially with our intensive outpatients, some of our partial hospitalization programs, but we are trying to expand even those in some of our locations where we did not have it at all, or we did not have it as much. We are certainly focused on that. We also have, what we have talked about in previous quarters, Thousand Branches, which has been a newer effort in the last couple of years to expand into different areas in outpatient. That has been going well. We see further opportunities on the horizon to continue that expansion. As far as other tuck-ins, other acquisitions, we are constantly looking. We are contacted often about that, and if something makes sense price-wise, we will certainly pursue it. But right now, I think that we are moving in the right direction in the areas that I just mentioned.
Craig Hettenbach: Helpful. Thank you.
Operator: Thank you. Our next question comes from the line of Jason Cassorla of Guggenheim Securities. Your line is now open.
Jason Cassorla: Great. Thanks. Good morning. 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 behavioral would have otherwise been in line with revenue growth, or are there puts and takes there? Thanks.
Steve Filton: No, I think, Jason Cassorla, to a large degree you have answered your own question. 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 volume pricing perspective, I think we are running towards the high end of our range for 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 have been getting contractual price increases from payers, particularly Managed Medicaid payers, who had not given us increases for several years.
Steve Filton: Unfortunately, obviously, after several years of that, we have started to anniversary some of that benefit and the pricing, I think, has moved into that 2% to 3% range. But I think we are fairly confident that we will be able to sustain that, and as we go into next year, et cetera, those comparisons will become easier.
Jason Cassorla: Got it. Thanks. Very helpful. And maybe just as a follow-up, I wanted to ask about the $10 million Medicaid supplemental headwind that you flagged for Q4 2027. Maybe could you just expand on how you are 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 Q4 2027 headwind, and then any updates you may have around the potential SDP and provider tax headwinds from 2028 and beyond would be helpful. Thanks.
Steve Filton: Yeah. As far as the headwinds in 2028 and beyond, we have been disclosing those estimates in our SEC filings really since the passage of OB3. We will update those with our current filing. But they should not be terribly different from what we have been disclosing to date. As far as the $10 million specific headwind in Q4 2027, Jason, I do not have that detail in front of me, but happy to discuss that offline at some point.
Jason Cassorla: Okay, thanks.
Operator: Thank you. Our next question comes from the line of Andrew Mok of Barclays. Your line is now open.
Andrew Mok: Hi. Good morning. Just wanted to follow up on the acute dynamics in the quarter. Acute volumes were very strong, but med surg 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? Thanks.
Steve Filton: The answer, Andrew, is that is not a conscious swap on our part. We did not make a conscious decision to increase volumes but decrease procedural volumes. Most of our medical volumes, honestly, come through the emergency room. So those are patients who come to us. Procedural volumes tend to be more elective. We have done a lot of things to continue to build on procedural volumes, including investments in technology and things like robotics and things like OR capacity, et cetera. That has paid off in the service lines that we mentioned earlier. The other issue, I think is, and we talked about, 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.
Steve Filton: Attempting to do that as well. Again, I would just emphasize the fact that we are looking to do both, to grow volumes overall, but also absolutely to grow surgical and procedural volumes to the extent that we can. We are not making a choice of medical admissions over surgical admissions.
Andrew Mok: Thank you.
Operator: Thank you. Our next question comes from the line of Ben Hendrix of RBC Capital Markets. Your line is now open.
Ben Hendrix: Great. Thank you very much. As we get past the de novo ramp and the Talkspace integration, I think you noted that CapEx would normalize down to an $800 million range. It seems like that is 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? Would you be focusing on further build-out of behavioral capabilities versus acute service lines versus tech and AI development? How would you think about your priorities there? Thanks.
Steve Filton: Yeah. So I would just clarify a little bit, Ben, your comment. So as we go from $1 billion a year roughly that we have been spending on CapEx to $800 million going forward, that is largely because these large de novo projects that we have had over the last several years, the Palm Beach Gardens Hospital, the Riverside County, California replacement facility, West Henderson, we do not really have any full-scale de novo projects, and that is largely contributing to the decline. You characterized $800 million as maintenance capital. I think that is a bit of an exaggeration. We, 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 is another $400 million, $500 million, $550 million of expansionary capital in the $800 million. And that is new capacity, new beds, new ORs, new ERs, robotics in the acute care segment.
Steve Filton: And I think an emphasis on, and we have touched on this in other ways in our comments here, an emphasis on outpatient growth and outpatient access points in both of the segments. Yeah, 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 does not indicate an unwillingness on our part to continue to reinvest in the business strategically in the areas that we think will drive growth in the future.
Ben Hendrix: Thank you.
Operator: Thank you. Our next question comes from the line of Scott Fidel, Goldman Sachs. Your line is now open.
Scott Fidel: Hi. Thanks. Good morning. First question, just appreciate the details that you gave us on the anticipated state directed payments headwind. Would you be able to break that out between the mix of that between acute care and behavioral?
Steve Filton: Scott, I think what we've said historically is that the SDP payments are split pretty evenly between the two segments. I think the reductions are similarly split.
Scott Fidel: Okay. Then, just would be interested in an update on the health plan, the Medicare Advantage plan, which you guys have been growing it pretty impressively the last couple of years, and it's getting quite sizable. Can you just 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 first margins? Thanks.
Steve Filton: Yeah. 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 will be sort of the 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.
Scott Fidel: Steve, could you just on the margins, just where you view the MA pre-tax margin now after getting that $25 million improvement in the underlying earnings? That is it for me. Thanks.
Steve Filton: Yeah, we think that historically the plan has operated with either low negative single-digit margins or low positive single-digit margins. I think the improvement from last year is because the plan is operating in low positive single-digit margins, and I think that is our expectation that it will continue to do so over the next couple of years.
Scott Fidel: Thanks, Steve.
Operator: Thank you. Our next question will come from the line of Benjamin Rossi of JPMorgan. Your line is now open.
Benjamin Rossi: Hey, good morning. Thanks for taking my question. I have 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 for things like supplies. I know you are not 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?
Steve Filton: Yeah. Ben, look, I think you have 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 is Medicaid work requirements in 2027 and 2028 or the Medicaid supplemental reductions mostly in 2028 and beyond. A number of things that we are trying to address. Technology developments, we have talked in previous quarterly calls about the things that we are 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 18 months or so. We are 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.
Steve Filton: I think you alluded to this in your question. A lot of the outpatient emphasis in behavioral, whether that is 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 it also, as we build outpatient, we are really shifting our payer mix away from Medicaid and more to commercial and Medicare because that is 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 will provide more color on that in February. Stephen, I think we have time for one more question.
Operator: Thank you. Our last question comes from the line of Sarah James of Cantor Fitzgerald. Your line is now open.
Sarah James: Thank you. Just a quick clarification on exchanges, and then I have a question on Talkspace. On the exchanges, when you talked about at least a $15 million headwind year-over-year, that is just annualizing the H2. Wanted to clarify, does that mean that assumes flat exchange market size from 2026 to 2027? Is that what that $15 million is based on?
Steve Filton: Yeah. Sarah, what we have said this year is we expected an $85 million negative impact from the reduction in exchange coverage. $35 million of that was in the H1 of the year, $50 million was in the H2 of the year. We are assuming that at a minimum, the $50 million is the run rate into next year, so that is where the $15 million headwind comes from. 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 will not know that until some of that enrollment data becomes more widely available.
Sarah James: Got it. Then on Talkspace, what do you need to see in the first 12 months, just proof of concept-wise, to show that step-down capture is working? In the past, you have referred to currently capturing low- to mid-single digits and step down possibly reaching double digit over time. What is that timeline? Is that like a five-year goal, a 10-year goal? How do we think about that growth?
Steve Filton: Yeah. Sarah, I think the way it will be reflected will be an increase in outpatient activity at both UHS and at Talkspace. Today, our outpatient visits, I think in Q3 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 two platforms. That is, I think, what will provide the proof of concept. I think as we said earlier, 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 will start to see that benefit, and I think it will continue to be sustainable for many years beyond that.
Sarah James: Thank you.
Operator: Thank you. This concludes the question and answer session. I would now like to turn it back to Darren for closing remarks.
Darren Lehrich: 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.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
