Good day, and thank you for standing by. Welcome to the Q2 2025 Universal Health Services Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Filton, Executive Vice President and CFO. Please begin.

Thank you, and good morning. Marc Miller is also joining us this morning. We both welcome you to this review of Universal Health Services results for the second quarter ended June 30, 2025. During the conference call, we'll be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on Risk Factors and forward-looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2024, and our Form 10-Q for the quarter ended March 31, 2025. We'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the company reported net income attributable to UHS per diluted share of $5.43 for the second quarter of 2025. After adjusting for the impact of the items reflected on the supplemental schedule included with the press release, our adjusted net income attributable to UHS per diluted share was $5.35 for the quarter ended June 30, 2025. During the second quarter of 2025, on a same-facility basis, adjusted admissions to our acute care hospitals increased 2.0% over the second quarter of the prior year and surgical volumes were down slightly. Still, same-facility net revenues in our acute care hospital segment increased by 5.7% during the second quarter of 2025 as compared to last year's second quarter after excluding the impact of our insurance subsidiary. We note that West Henderson Hospital, which opened in late 2024, has had a certain cannibalization impact on the division's same-facility volumes and revenues. Meanwhile, operating expenses continue to be well managed. Other operating expenses on the same-facility basis increased 3.1% over last year's second quarter, again, after excluding the impact of our insurance subsidiary. For the second quarter of 2025, our solid acute care revenues, combined with effective expense controls resulted in a 10% increase in same-facility EBITDA. During the second quarter of 2025, excluding the impact of the Tennessee Medicaid directed payment program, same-facility net revenues of our behavioral health hospitals increased by 5.4%, driven by a 4.2% increase in revenue per adjusted day. Adjusted patient days were up 1.2% compared to the prior year's second quarter. Our cash generated from operating activities decreased by $167 million to $909 million during the first 6 months of 2025 as compared to $1.076 billion during the same period in 2024. We expect to collect the $58 million of Tennessee directed payment program receivables in the third quarter. The new hospitals in Las Vegas and the District of Columbia contributed $35 million to the receivable increase. In the first half of 2025, we spent $505 million on capital expenditures, 25% of which related to the 2 new/replacement facilities in California and Florida, both set to open in the spring of 2026. During the first half of 2025, we also acquired 1.9 million of our own shares at a total cost of approximately $332 million. Since 2019, we have repurchased approximately 34% of the company's outstanding shares. As of June 30, 2025, we had approximately $1 billion of aggregate available borrowing capacity pursuant to our $1.3 billion revolving credit facility. The recently enacted One Beautiful Bill Act includes several significant changes in the Medicaid program, including changes to state-directed payment programs and provider taxes. Beginning with the 2028 state fiscal years and primarily phased in over a 5-year period through 2032, these program changes will limit both the level of payment and the amount of provider tax assessment that states are permitted to utilize to finance the nonfederal share of their respective Medicaid supplemental payments. The legislation provides for different limits depending on whether states have previously expanded their Medicaid eligible population as permitted under the Affordable Care Act. We cannot predict, among other things, that this legislation will ultimately be implemented as enacted or if certain states may attempt to implement countermeasures to mitigate its impact. Our current projected 2025 full year net benefit from previously approved state Medicaid supplemental programs is approximately $1.2 billion. 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 state fiscal years, our aggregate net benefit will be reduced on an annually increasing and relatively pro rata basis by approximately $360 million to $400 million in 2032. Given the various uncertainties, including the evolving state-by-state interpretations and computations related to the legislation, our forecasted estimates are subject to change potentially by material amounts. Our future operating results potentially starting in 2026 may also be impacted by other factors which are more difficult to predict, such as the impact of Medicaid work requirements, which may decrease Medicaid enrollment and factors that could unfavorably impact insurance exchange enrollment such as the scheduled expiration of insurance exchange subsidies. I'll now turn the call over to Marc Miller, President and CEO, for closing comments.

Thanks, Steve. So based primarily on the increased DPP reimbursement, we are increasing our midpoint of our 2025 EPS guidance by 7% to $20.50 per diluted share, up from $19.20 per diluted share previously. Medicaid supplemental programs in Washington, D.C. and other potential programs that are not yet fully approved are not included in our revised guidance. We remain pleased with the performance of West Henderson Hospital, which produced a positive EBITDA in the second quarter. At the same time, we acknowledge the significant drag created by the recently opened Cedar Hill Regional Medical Center in Washington, D.C. Timing of hospital certification and other start-up issues proved a bit more challenging than we anticipated, but demand, especially for emergency services, has been very encouraging. Although recovery to expected results will continue into the back half of this year, we remain confident in the positive long-term prospects for the facility that prompted our development partnership with the District of Columbia. De novo growth continues in our behavioral segment. We recently opened a 96-bed Behavioral Hospital in Grand Rapids, Michigan, which is a joint venture with Trinity Health, Michigan and a 41-bed substance use disorder and dual diagnosis treatment center in Mount Pleasant, South Carolina. In addition, we are developing a 144-bed behavioral health hospital in Bethlehem, Pennsylvania, which is a joint venture with the Lehigh Valley Health Network and is expected to open later this year as well as a 120-bed behavioral health hospital in Independence, Missouri, which is expected to open in late 2026. In addition, we are also continuing to grow our Signet behavioral health network in the U.K., which has added 6 new facilities and 137 beds so far this year. At this time, we're pleased to answer your questions.

And our first question will be coming from Pito Chickering of Deutsche Bank.

I want to revisit the estimate of $360 million to $400 million in net impact for 2032 under the current law. I want to ensure those figures are accurate. Additionally, I'm interested in your thoughts on potentially losing $380 million in EBITDA during that timeframe. How do you plan to counteract that with core operations, and how do you see it affecting your core growth rate in light of those challenges?

Yes, Pito, those reductions won't take effect significantly until 2028, so we have time to consider how to strategically adjust our business approach, particularly in the behavioral sector. We can change the structure of our programs and may not need to focus as much on Medicaid-centric programs. Additionally, there could be new DPP programs approved during that timeframe. It's also possible that not all the proposed changes will ultimately be enacted. Some believe Congress might extend the cuts temporarily to allow for adjustments if needed. If the cuts do remain, we feel confident that we can implement various strategies, including shifting revenue sources in our behavioral division and pursuing cost-cutting initiatives. I want to emphasize that when the pandemic hit five years ago with little warning, we adapted rapidly with significant reductions in headcount and capital spending, among other measures, to address a drastic and unexpected decline in revenues. Given the notice and preparation we have now, we're confident in our ability to be flexible and adjust accordingly.

Let me just add that Steve outlined the worst-case scenario in his prepared remarks, and we want to be transparent about the current numbers. However, I don't anticipate that this outcome will occur for several reasons. Steve mentioned that there will be adjustments, and after discussions with various representatives in D.C. and the states we cover, it's clear they are beginning to realize that the current legislation cannot remain unchanged. The impact on healthcare programs in their states, including not-for-profit hospitals, could be harmful. They're already discussing necessary changes to prevent program closures and service reductions. I believe this baseline figure represents our current situation but will improve. We expect adjustments will be made as they are essential. While I view this as the worst-case scenario, I want to emphasize that Steve referenced 2028 and 2032, and we will take significant steps to ensure we avoid the numbers we've mentioned. I just wanted to provide some context and perspective on this.

Great. Then sort of a follow-up here, looking at the behavioral. Can you sort of talk about the split between the hospital patient days and behavioral versus outpatient sort of what you saw this quarter and what you assume for the back half of the year and kind of how you're going to be improving the outpatient side of behavioral?

Yes. So in the table towards the back of the press release, we disclosed year-over-year growth in ADC. And then, of course, in the body of the press release, we disclosed adjusted patient days. Adjusted patient days have grown faster in the second quarter than unadjusted patient days indicating that outpatient is growing faster than inpatient, which was not the case in Q1. We talked about that at some length in the first quarter. We talked about our focus on outpatient growth. And I think as we think about getting closer to the 2.5% to 3% adjusted patient day target that we've been talking about for some time, I think we believe that growth in outpatient is a significant opportunity for us. A number of the insurance companies, as they have been talking about their increase in medical loss ratios have pointed to the increase in spending on behavioral care. And while they don't provide this level of detail, we believe that a significant chunk of that increase is in outpatient, and we are determined to get a larger share of that, I'll call it, outpatient pie as we go forward. So focus on outpatient over, we've talked about this, I think, in our last couple of conference calls, is a significant focus of ours, made some progress in Q2 and anticipate making further progress in the back half of the year and quite frankly, years to come after that.

Our next question will be coming from Andrew Mok of Barclays.

Question on Cedar Hill. You called out $25 million of start-up losses in the quarter. Can you update us on the latest accreditation status of that hospital? What's baked into guidance for the back half of the year? And how are you thinking about the ramp to mature profitability now?

Yes, I believe we were overly optimistic about the speed of obtaining Medicare certification for Cedar Hill. Until a hospital receives deem status or Medicare certification, it can't bill or collect from Medicare, and many commercial payers typically follow suit. In Cedar Hill’s case, we have secured an agreement with the District of Columbia to reimburse us for services from the time they deemed us ready for the Joint Commission survey, which leads to Medicare certification. While we have started receiving reimbursements for Medicaid, we are currently waiting for the Joint Commission survey, which we expect to happen imminently, possibly this week or next. Once we obtain the certification, that will establish the effective date for billing. It will take time to process and collect those bills, but that date is crucial. During this initial phase, we are focusing more on emergency room services since we aren’t generating revenue from elective surgical procedures at this time. The emergency room has been busy, indicating strong demand for hospital services in this area. After we receive certification, we will start increasing our surgical and procedural offerings. We experienced a $25 million loss or EBITDA drag in Q2, and we anticipate another $25 million impact for the latter half of the year. While we expect some improvement, we acknowledge that a ramp-up will follow certification. By 2026, we anticipate the facility will be on a path to achieve divisional-wide profitability after an additional 12 to 18 months of operations.

Great. And maybe just a quick follow-up on that. Like outside of the discrete items related to state directed payments in Cedar Hill, the EBITDA guidance looks largely unchanged. One, do I have that right? And two, what are the offsetting positives allowing you to keep the underlying EBITDA intact despite the soft behavioral quarter?

Yes. If you analyze the numbers, there are about $185 million in new DDP revenues within the $1.2 billion I mentioned earlier from our last update. However, this is countered by approximately $50 million in the Cedar Hill impact, with 25% occurring in the second quarter and another 25% in the latter half of the year. Additionally, we've adjusted our projections for the latter half of the year due to falling short of the originally projected volume target. These are the main factors contributing to the guidance revision.

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

Maybe just a piggyback on the outpatient behavioral commentary. I mean, you were talking about getting a bigger share of the outpatient pie. I guess how would you see that unfolding? Is this more de novo build out? You've got less than 2x leverage ratio currently, you've talked about a number of de novo bells and JVs in your prepared remarks. I guess I'm just hoping you can give us any color on a pathway to grabbing more outpatient share.

We've discussed this in previous calls, but I'm happy to go over it again. Generally, we generate outpatient revenues in behavioral health in two main ways. The first is what we call step-down business, which involves patients who are discharged from our facilities and require ongoing, less intensive care. They often enter programs that we refer to as intensive outpatient or partial hospitalization, many of which we offer on our campus. We typically have the ability to refer a lot of these patients to our programs, although some do choose to go elsewhere. We aim to retain as many of these patients as possible, as we believe it benefits them clinically due to the continuity with our medical staff. Therefore, we can make improvements in managing that patient flow effectively. The second aspect of our outpatient revenue is what we call step-in business. This includes patients who enter the behavioral healthcare system through an outpatient program, often a freestanding one not located on the campus of an acute behavioral hospital. We've noticed that many patients are uncomfortable having their first experience with behavioral care at a hospital campus. To address this, we are expanding our presence with freestanding behavioral hospitals, which are typically not situated on the grounds of our existing facilities. The capital investment for these outpatient locations is relatively modest; they are usually leased properties, such as storefronts, with an average investment of about $1 million per facility. The bigger challenge lies in staffing these locations with therapists and ensuring a steady flow of patients. Our intention is to open 10 to 15 new outpatient facilities each year over the next few years to enhance our presence in both step-in and step-down services.

Okay. Got it. Helpful. And maybe just as a follow-up, for the acute care business, can you talk about volume growth trends across payer cohorts in the quarter? What type of volume growth you saw against for Commercial, Medicare, Medicaid, Exchange? And if payer mix was a benefit in the quarter. Would you expect that where your payer mix kind of came in this quarter? Would you expect it to persist at least through the remainder of this year? Or are there puts and takes there? Just any color would be helpful.

Yes. I would first mention that in our prepared remarks, I noted that acute care revenue, excluding our insurance subsidiary, increased by 5.7% year-over-year in the second quarter. This aligns closely with our expectations. We had anticipated U.K. revenue growth of 5%, 6%, to 7%, with a midpoint of 6%, and we're tracking right around that. Without the impact of revenue cannibalization from West Henderson at the same facility, we would likely be in the low 6% range. Overall, our performance is consistent with what we projected. In the second quarter, the growth seemed to lean more towards pricing rather than volume. The pricing advantage in Q2 was notably influenced by payer mix, as a number of our peers have indicated; we observed a slight decrease in Medicaid volume and an increase in Commercial and Exchange volume, which contributed to more favorable pricing. However, I will emphasize that we might have been somewhat cautious about the extraordinary growth rates in acute care revenue that we and others experienced in recent years starting to taper off. This has indeed been evident in the first half of this year. Therefore, we believe the acute segment is growing in line with our anticipations.

And our next question will be coming from Benjamin Rossi of JPMorgan.

So behavioral pricing continued to outperform during the quarter and growing just under 7% for the first half of the year versus your original growth range that you previously outlined in the 4% to 5% range. Is there any way to frame the breakdown here between rates, acuity and contributions from incremental supplemental payments? And then what does your back half guidance contemplate regarding growth as you progress towards your now revised goals on the volume side?

In our prepared remarks, I mentioned that if we exclude the impact from Tennessee, which we consider an incremental benefit for the quarter, we have to account for the other $43 million in directed payments this quarter. This is because last year, in the second quarter, we experienced an unexpected $35 million benefit from Washington and Idaho, which we believe offsets each other. Excluding the Tennessee directed payment, our revenues increased by 5.4%. This is comprised of a 4.2% rise in pricing and a 1.2% increase in adjusted patient days. As we indicated in our guidance, we anticipated pricing to fall within the 4% to 5% range, and we have generally exceeded that expectation. The growth moderated slightly in the second quarter, but we still believe that a 4% to 5% pricing growth is sustainable in the behavioral sector for the intermediate term. The 1.2% volume growth presents an opportunity for improvement, particularly on the outpatient side.

Great. Appreciate the color. And just as a follow-up, taking a look at your average length of stay in acute, seeing that down both annually and on a sequential basis. Could you just walk us through some of the drivers of that deceleration and maybe where you see room to bring that down further? And then are you seeing any variation in length of stay trends across your payer classes between Medicaid, Medicare and Commercial, particularly among your exchange populations?

Yes. I mean, obviously, length of stay peaked during the pandemic when it was driven much higher by the high acuity of COVID patients in particular, and it's been coming down steadily since then. I think we believe that there still is some room for length of stay to be further reduced. I think probably the biggest challenge we have in reducing length of stay further is placement of patients into subacute facilities that could be skilled nursing facilities, nursing homes, home health programs. Often there is a sort of a scarcity or a lack of availability in those programs. I don't know that it really varies by payer. I think sometimes it's an obstacle for us because the payers don't have all of the subacute providers in a geography in their networks, and that can be challenging. But yes, I mean, I think we continue to believe that length of stay has some room. I'm not going to say a material amount, but some incremental room to improve from where it currently is.

And our next question will be coming from Craig Hettenbach of Morgan Stanley.

Just following up on behavioral. And I know there's been kind of back and forth with the payers on kind of price and access. I'm just curious on just a longer-term basis. Do you think some of that normalizes in terms of the contribution between volume and price? Or how are you thinking about that?

Yes. So I think what we've consistently said is that the way we think about the long-term model of the behavioral business is that 6%, 7%, 8%, I'll call it 7% at the midpoint is the reasonably expected revenue growth rate and that would be made up of 4% to 5% price and 2.5%, 3% volume. And we've generally been hitting those price targets and, frankly, in most periods exceeding the price targets, it's the volume that has been the bugaboo for us. We've improved, as I said, from the first quarter, and expect improvement in the back half of the year. But again, I'll call it that 6.5%, 7% revenue growth skewed a little bit more to pricing than the volume as sort of being the model that we're expecting in the behavioral business for, I'll call it, the intermediate future.

Got it. And I appreciate all the color and detail on the One Big Beautiful Bill in terms of impact. When I think about potential offsets, how are you thinking about just kind of leveraging technology and AI? Kind of where are things today? And how could that kind of ramp as a potential offset in the coming years?

Certainly. Our aim is to be as efficient and productive as possible, and we are open to using technology, including AI, to help achieve that. The topic of AI could warrant a dedicated discussion on its own, but to briefly summarize, we are exploring AI applications, particularly in areas like revenue cycle management for tasks such as denial management and appeals. We recognize that payers have been utilizing AI for generating denials and changing patient statuses for some time, and we are developing strategies to counter that by utilizing AI in a more effective manner. Clinically, one of our initial experiments has involved using AI to follow up with patients regarding their post-discharge instructions. An AI system will contact patients to ensure they have scheduled necessary doctor appointments, filled prescriptions, and adhered to dietary guidelines. Early results indicate that this approach is well-received and efficient, allowing clinical staff, typically nurses, to focus on other responsibilities. Overall, we believe that AI and technological tools will play a significant role in enhancing our productivity over the coming years.

Our next question will be coming from A.J. Rice of UBS.

I have a couple of questions. First, the managed care space has experienced significant disruption over the past few years, culminating this year. I'm curious if you've noticed this affecting discussions with the managed care organizations regarding Medicare Advantage, commercial plans, or otherwise. Additionally, from both a behavioral and commercial standpoint, can you update us on where you stand? Are the rate updates consistent with what you are seeing in terms of the percentage of business being done this year, next year, and the year after?

A.J., I think our experience has been strong on the Behavioral side. We've seen significant increases from managed care over the last several years, mainly because payers are facing challenges with access to behavioral facilities. There's a particular shortage of inpatient behavioral beds that payers are struggling with. The impact of the managed care industry's challenges is most evident in our daily revenue cycle interactions with payers. We haven't noticed a significant rise in denials or changes in patient status. However, anyone working in our revenue cycle for either behavioral or acute care would tell you about the constant struggle against aggressive behavior from payers, including denials and appeals related to patient status changes. We've made substantial investments and conducted significant third-party consulting reviews of our revenue cycle practices to enhance our people, processes, and technology, allowing us to better address the aggressive tactics from payers in these areas. While it may not be materially different than in the past, this has been the situation for quite some time now.

Could you share any updates regarding labor in both lines of business, particularly concerning wage rates, use of contract labor, turnover, and similar factors? Specifically, for Behavioral, you've mentioned that staffing is a major challenge in reaching your growth targets. Do you have any new insights on that issue?

Yes, from a labor and wage inflation standpoint, wage inflation has slowed down significantly from its peak during the pandemic. It's not that it's fully decelerated, but it is rising at a much lower rate than it was at the height of the pandemic. This trend is evident in both of our segments, where we've seen a decrease in the use of temporary traveling nurses. However, you are correct in noting that we still face challenges in our behavioral business in certain regions and markets due to our struggle to hire sufficient staff. This often pertains to nurses, but it can also include therapists, as hiring therapists can pose a hurdle in expanding outpatient services. Additionally, we sometimes face challenges with nonprofessional staff, such as mental health technicians. We've made significant efforts over the past few years to enhance our recruiting, but perhaps more importantly, we’ve focused on improving retention to ensure that when we do hire individuals, they feel adequately trained and confident in delivering care. This is crucial for encouraging longer tenure among employees. Nevertheless, we continue to invest in these initiatives as it remains a challenge in a tight labor market. While staffing issues are not as widespread as they were during the peak of the pandemic, they still persist in certain markets and areas.

Okay, maybe I can ask one more question. In your comments about DPP, some states are still trying to secure credit under the Big Beautiful Bill before the deadline in Washington, D.C. That was a significant issue for you that was still unresolved. Do you have any updates on that? Also, regarding the long-term impact of the Big Beautiful Bill, you mentioned a $380 million exposure. Can you provide a breakdown between acute and behavioral exposure?

Yes, the $380 million represents the midpoint of the range we provided, with approximately 60% attributed to behavioral and 40% to acute. Regarding your question about other programs, the DC program has been awaiting approval for several months. We don't have any insider information, but we periodically receive updates from the District, which shares them with the hospital association. They indicate ongoing discussions with CMS, which is fairly typical. CMS has asked questions and requested data, and we have assisted in providing that information. The District believes that the program they submitted meets CMS criteria based on previously approved programs and they still anticipate approval, although they cannot specify a timeframe. Other states have either submitted or plan to submit new programs. It's important to note that the bill does not prevent new programs, but any new programs initiated after its passage will be subject to the caps outlined in the bill, whether related to provider taxes or reimbursements. Therefore, it remains possible for states to submit new programs even after the bill has passed.

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

Steve, you made a comment about West Henderson cannibalizing some of the same-store growth on the acute side. Are you able to quantify what that impact would be? Or just give us some sense for the drag on the same-store?

Yes. Hard to do in an absolute precise way, Matthew. But I think the way we look at it is we look at the ZIP codes that West Henderson is getting patients from and sort of try and triangulate and say, these are the likely ZIP codes that prior to West Henderson opening would have gone to either Henderson Hospital or one of our other hospitals. We think that, that impact is maybe 50, 60 basis points from an adjusted admission perspective and kind of a similar impact on revenues. So again, best guess, that's not a perfect or completely precise estimate, but that's our best guess.

And then following up on some of the expense management discussion. I wanted to see if there was anything to report with respect to professional fees and physician expenses. I think you had most recently said that you were expecting that to be up 5%, and it was stable. But just curious, are there any progress there or sort of incremental pressures with certain specialties?

Yes. As you mentioned, in our guidance, we assume that after significant increases in physician expenses over the past couple of years, our expectation for 2025 is that they would rise in line with the overall inflation rate, around 5% or 6%. This has generally held true. We are still experiencing pressure from various physician groups across the country. Many of our peers have indicated that while the initial pressures came from ER doctors and anesthesiologists, we are now seeing an increase in requests for subsidies from radiologists, which we haven't encountered in years. We have observed this trend as well, but we have managed to maintain our operations within the 5% growth range, and that situation has not changed significantly.

And our next question will be coming from Sarah James of Cantor Fitzgerald.

You've talked a lot about the opportunity for growth in outpatient behavioral. Given what that implies for mix, is 2.5% to 3% adjusted admissions for behavioral volume still the right long-term target or the right target for '25 given year-to-date performance? And can you speak to how inpatient behavioral specifically has been doing year-to-date versus your expectations?

Yes. What we're observing is that payers are increasingly trying to move patients from inpatient to outpatient settings. This trend isn't new; it's been happening in the acute space for a decade or two, and it's also becoming more pronounced in the behavioral health sector. Historically, our business has primarily focused on inpatient care, although we always maintained some outpatient services. However, our emphasis on outpatient care is intensifying, partly to capitalize on this shift. One challenge we've faced in achieving our 2.5% to 3% growth target is that this move to outpatient care has made it harder for us to capture our fair share of business in that area. Our strategy is evolving, and we've started to see improvements from Q1 to Q2 in overall adjusted patient days, particularly in outpatient care. We believe we will continue to see progress throughout the year and maintain that the long-term growth target of 2.5% to 3% for adjusted patient days is attainable. The demand exists; we just need to ensure we're equipped to meet it in the appropriate setting with the right team.

And our next question will be coming from Ryan Langston of TD Cowen.

I appreciate your commentary on the West Henderson Hospital, but maybe can you just more broadly give us an update how Nevada and the Las Vegas markets are doing in terms of volume trends, payer mix, any other data you're able to share?

Yes. I mean I think we've seen a little bit of slowdown in our Nevada volumes. There's been, I think, a great deal written in recent months about the overall Nevada economy and the Las Vegas economy slowing down a bit. We're seeing some impact from that. But as I said, even if you exclude the cannibalization from West Henderson or just exclude West Henderson's ER volumes, like our overall ER volumes are up slightly, not by a great deal. But yes, I mean, Vegas' performance while still very solid and while West Henderson's performance is extremely positive, we are seeing a little bit of pressure from some of the economic softness in the market.

Okay. Great. And just one follow-up. Net leverage continues to come down even with the increases, at least year-over-year in share repos and capital spending. I guess, can you remind us how we should think about capital deployment strategy and if we should maybe just expect this to continue to come down through the back half of the year?

Yes. So in our initial 2025 guidance, we guided to a share repurchase number in the $600 million to $700 million range. And that was really the free cash flow that we were anticipating in that original guidance. Obviously, the revised guidance presumes a higher level of free cash flow. And I think it's reasonable to assume that, that incremental free cash flow will likely be dedicated to an elevated level of share repurchase. It's possible that as we evaluate what we think to be a pretty compelling share price at the moment that we'll decide to be even more aggressive from a share repurchase perspective. But again, at a minimum, I think it's at least safe to assume that as our free cash flow increases, that incremental amount will be dedicated to additional share repurchase.

Our next question comes from Michael Ha of Baird.

Just sort of a follow-up to Pito's question. So it sounds like you're very confident in finding the offsets to the DPP headwinds after 2032. I just wanted to fully clearly confirm that we should be thinking about behavioral health long-term margin targets as unchanged. All that recent strength in behavioral margins pricing should remain resilient and durable even in the face of this gradual headwind? And basically, do you still believe, over time, you can get back to those sort of high 20s margin from a decade ago. And I know there's no immediate rush, but curious if you have any early sense on online when you look to have the mitigation plan with all of the offset leverage fully fleshed out?

Yes. I believe people are asking very specific questions about a future period that starts in three years and ends eight years later, which makes it difficult to project. What we've communicated is that, especially regarding behavioral matters, we can adjust our programming and targeted patient initiatives in specific locations where the DPP impacts are most significant. We have ample time to make these adjustments, but timing is crucial. For example, we won't see reductions for several years, so it wouldn't be sensible for us to abruptly exit Medicaid-centric programs when reimbursement levels will remain stable for the next several years. We need to manage this timing carefully. Our peers have also highlighted that as for-profit providers, we have shown a capacity for adaptability in response to significant challenges like the pandemic. We are confident that with the time we have to prepare, we can navigate this situation successfully as well.

Got it. And just a follow-up question, sorry, another policy one. But as it relates to work requirements in 2017, just given the outsized procedural disenrollment that we've seen from redeterminations, but with work requirements. I know MCOs are very focused on it. But from a provider perspective, this lives weren't drop off, and they're ineligible for subsidized marketplace coverage that prevents an offsetting catches to the extent that actually end up driving up the uninsured and provider bad debt over the coming years. I'm just curious, high level, how you're thinking about the potential ripple effect of Medicaid work requirements onto UHS. And are there any things that you guys can do as a provider to maybe even help sort of bridge that gap, proactively engage your own Medicaid patients to sort of improve member retention?

Yes. There are various estimates regarding the number of patients who may be removed from Medicaid due to work requirements, and it's unclear who exactly those patients are. The narrative around the legislation suggests it primarily affects young, healthy males. If this is indeed the group being impacted, I’m not sure it includes those who have frequently used our services. Most of our Medicaid patients come through emergency rooms, similar to our uninsured patients. While there are ways to manage this business more effectively, we generally have to serve the patients who arrive at our facilities. On the behavioral health side, we have more options in selecting the patients we accept. Typically, uninsured patients seek care in other settings rather than our hospitals, which is reflected in the lower volume of uncompensated care in behavioral services compared to acute services. We have the flexibility to target patient groups that are more aligned with our interests, and we intend to do so as this situation evolves. However, predicting the exact number of affected patients and their characteristics moving forward is challenging.

And our next question will be coming from Kevin Fischbeck of Bank of America.

Great. I just want to try to get a little more color on the weakness in the behavioral business because it sounds like you're saying or not getting your fair share. So is there competition out there? Is that what's driving the weakness in volumes? Or is it still more of the staffing and other issues that have historically kind of been the issue there?

Yes. What I was trying to convey earlier, Kevin, is that we do capture a significant number of step-down patients that we discharge, but there are still many who go to other facilities. We believe we can improve our control of these patients because the care and continuity they receive at our facility will be better than elsewhere. Regarding what we refer to as the step-in business or freestanding business, there are many other providers, both large and small, offering those services, and we haven't competed aggressively in that area historically. However, we plan to do more in the future. We have certain advantages, such as strong relationships with payers and referral sources that some newer and smaller providers lack. Staffing and therapists also pose a challenge, as many therapists have been working remotely in recent years, leading to intense competition for them. There isn't a single reason why our outpatient service hasn't grown as much as we would like, but most importantly, our focus on this area will allow us to grow more rapidly in the upcoming periods compared to previous ones.

Yes. I guess maybe if you could just expand on that because I guess like staffing and things are things that you kind of should have had, I guess, had a view on as to where you would be at this point this year. So if we think about the guidance reduction itself and kind of what you thought coming into the year now, what you think volumes will look like. Is it that it has incrementally been harder to staff or something going on there? Or has it been the competition or maybe slower progress on some of the initiatives that you were thinking about doing? And then to that and whatever the answer is, what, if anything, are you doing differently for 2026 to try and get that back to 2 to 3?

Sure. I feel like it's a little bit redundant. I think we've addressed this. Yes, I think it's all those things. I think we're building and creating more capacity, which we didn't have. So that's new capacity. We're focused on our sort of discharge and referral processes for patients who are being discharged from our facilities. We're trying to focus more on recruitment and retention effectiveness, doing all those things and that are challenging, but did improve quarter-over-quarter, and we expect will improve further in the back half of the year.

And our next question will be coming from Joshua Raskin of Nephron Research.

I know you briefly mentioned this earlier, Steve, but I'm interested in the AI and technology you're implementing in the RCM area. Are these investments made internally, or are you increasingly relying on external vendors? Additionally, is this affecting the coding and patient acuity, perhaps explaining the changes in pricing or revenue per admission?

Yes, I believe it's a mix, Josh. We've made our investment in Hippocratic AI public; this company focuses on developing AI applications in healthcare. We've also utilized some vendors for coding, including an AI vendor for coding in our emergency rooms. While this hasn't necessarily led to increased coding levels, it has improved efficiency by automating a routine task. So, it's a combination of seeking outside assistance and engaging with a company to develop new AI technology, alongside our own initiatives. Additionally, we've been exploring technologies like patient rounding, which, while not strictly AI, resembles devices like an Apple Watch. These devices help us monitor patients more closely, improving the frequency of check-ins and tracking their locations. All of these efforts contribute to enhanced efficiency, patient safety, and a higher quality of care.

Yes. Perfect. And then just last quick one. I know we talked about this last quarter as well, but tariffs, any updated thoughts on potential impact from tariffs?

Not really. We haven't seen any sort of material impact from tariffs and have not necessarily sort of been told by our GPO or even by any significant vendors that significant increases in supply expense are on the horizon. So obviously, the tariff, the negotiations at the highest levels continue, and we'll have to see how that all sorts out, and it has had little impact on our business to date. And operator, we're going to have to make this our last question. We have another commitment at the top of the hour.

Certainly. Our last question will be coming from Raj Kumar of Stephens.

Just one from the policy perspective. Just kind of thinking about the proposed elimination of the inpatient-only list. Maybe kind of walk us through the puts and takes for UHS and then kind of maybe what your view is on the potential impacts from an inpatient admissions growth perspective and overall rate growth perspective over the next few years as that policy gets potentially phased in?

Yes, difficult to say. I mean, I think what you're referring to is there's a number of the site neutrality proposals and they differ and the devil is always in the details. The industry broadly, writ large is lobbying hard in making the point that it's been subject to some pretty significant cuts, many of which we've already discussed at some length. So we'll see. I mean, I think it's difficult for us to sort of project what the impact is until we know what the details of the specific deal would be. So I'd like to thank everybody for their time, and I look forward to speaking with everybody again next quarter.

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