美國醫院公司 (HCA) 2007 Q1 法說會逐字稿

Good morning, everyone, and welcome to HCA first quarter 2007 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Vic Campbell. Please go ahead, sir.

Shannon, thank you. Good morning to all of you on today's call, and also to those of you who are listening on our Webcast. With me this morning for the first quarter conference call is Jack Bovender, our CEO; our President and COO, Richard Bracken; Chief Financial Officer, Milton Johnson; and our VP of Finance, David Anderson; along with our Investor Relations Officer, Mark Kimbrough. Today's call will contain some forward-looking statements based on managements' current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those expressed in any forward-looking statements. Many of these factors are listed in our press release and in our SEC filings, which we encourage to you read. Also, many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict. In light of the significant uncertainties inherent in our forward-looking statements, you should not place undue reliance on these statements. The Company undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information or future events. And as you heard, this morning's call is being recorded, and a replay of the call will be available later today. Now I will turn the call over to Jack Bovender.

Good morning, everyone. My comments will be brief this morning, as our CFO, Milton Johnson, will give you the details on the quarter. Richard Bracken and I, along with other members of our management team, will be happy to respond to your questions later. I will mention just three numbers which I believe clearly show the strength of our first quarter. First, we reported adjusted EBITDA for the quarter of $1.276 billion. I believe this represents the highest quarterly EBITDA ever reported by HCA. Second, we repaid over $500 million of outstanding borrowings in our first full quarter as a private Company. And, third, we continue to invest significantly in our existing markets, approximately $334 million during the first quarter of 2007. Milton will expand on these numbers in his remarks, but in my mind, these are the three key financial indicators for the quarter.

Now following this call, several of us on the senior management team will be leaving for Kansas City to attend the opening ceremony for our new Centerpoint Hospital in Independence. This month marks the fourth anniversary of our entry into Kansas City through the purchase of Health Midwest. In those four years, we have grown EBITDA from about $40 million to about $140 million last year. This rate of growth, I believe is testimony to the success of our shared services strategy, coupled with the successful implementation of a market growth agenda. As more of our capital investment in that market comes on line, we expect this growth to continue.

All of you know that HCA is not just a collection of economic assets scattered around the country. Rather, our hospitals are valuable community resources and the citizens of those communities count on us to be there for them, not only for their ongoing healthcare needs, but also in times of disaster and tragedy. Unfortunately, this was never more evident than two weeks ago during the tragic shootings at Virginia Tech. As some of you know, it was our Montgomery Regional Hospital in Blacksburg and our Lewis-Gale Hospital in Salem that treated the majority of the wounded students and faculty from this tragedy. As you saw from the television coverage, our doctors, nurses and other healthcare professionals performed magnificently under very difficult circumstances. They deserve our appreciation and respect for what they accomplished.

As I thought about this, I couldn't help but reflect on how many times in the past our HCA hospitals have responded to horrific man-made and natural disasters across the country. You may remember it was our Tulane Hospital working with HCA resources from across the country that successfully engineered the rescue of all of its patients, staff and families, including many from charity hospitals, during the flooding of New Orleans resulting from Hurricane Katrina. It was our Rose and Swedish Hospitals in Denver that received the majority of the casualties from the Columbine shooting. And it was our Presbyterian Hospital that took care of many of the casualties from the Federal Building bombing in Oklahoma City. We have garnered more experience than we would otherwise wish to have. But these are reminders to us of how we must constantly prepare ourselves to take care of our communities. These also remind us of how indebted we are to our colleagues across the country, who everyday care for the sick and injured with skill and compassion. Thank you. Milton?

Thank you, Jack, and good morning to all. We are certainly pleased with the results of the first quarter. Generally, earnings performance was driven by a combination of favorable net revenue per adjusted admission and strong expense management, both in the field and at the corporate overhead level. Unfortunately, consistent with recent trends, we are still not getting much help from volumes. While volumes remain soft, our volume performance would look somewhat better excluding the impact of the Las Vegas market, where we recently repositioned our managed care payers. Although our volume metrics were adversely affected by this change, the Las Vegas market contributed to our growth in adjusted EBITDA this quarter. We are seeing a stabilization and improvements in our Eastern and Central Group markets. Aside from the international division which enjoyed a 24% EBITDA improvement over prior year, our Eastern Group has the greatest percentage of adjusted EBITDA improvement quarter over quarter, at just over 13%. Now, let me remind you that the term adjusted EBITDA is defined and reconciled in the Company's press release issued this morning.

Now we will summarize some of the key points of the first quarter. Revenues increased 4.1% in the first quarter to $6.7 billion. On a same-facility basis, revenues increased 6.7% in the first quarter. Adjusted EBITDA for the quarter increased 6% to $1.276 billion. HCA's adjusted EBITDA margin improved 30 basis points to 19.1% of revenues in the first quarter of 2007 compared to the same period of 2006. And on a same-facility basis, improved by 90 basis points over the prior year. Last year's results included $75 million from gains on sales of investments, and we did not realize any gains on sales of investments this year. Excluding last year's gains on sales from investments, the adjusted EBITDA margin improved by 150 basis points.

Same-facility revenue per equivalent admission increased 8%. Revenue per equivalent admission growth was the result of solid yields from Medicare, Medicaid and managed care. During the quarter we saw an increase in acuity, measured by case mix, which increased 0.8% over last year. Same facility charity and uninsured discounts totaled $672 million in the first quarter, compared to $520 million in the first quarter of last year. For the quarter, same-facility traditional Medicare revenue per equivalent admission increased 4.6%. Medicaid net revenue per equivalent admission increased 12.2% on a same-facility basis. Our Medicare -- Medicaid yield included the impact of certain payments related to UPL, or upper payment limit, funding in Texas. Managed care net revenue per equivalent admission increased 9% on a same-facility basis. Managed care yield benefited through a favorable business shift and a 1.6% increase in case mix.

Managed Medicare revenue per equivalent admission increased 4.2% over the prior year. Same facility admissions and equivalent admissions decline 1.3% in the quarter. However, we experienced growth in several high acuity service lines. For example, ICU/CCU admissions increased 6.1%, and orthopedic admissions were up 7.6% in the quarter. Same-facility traditional Medicare admissions declined 5.2%, while managed Medicare admissions at our hospitals increased approximately 20% over the prior year, as we experienced increased enrollment and conversions due to Medicare Advantage in our market. Managed Medicare admissions accounted for approximately 7% of our total admissions in the first quarter of '07. On a combined basis, Medicare admissions declined 1.8%. Medicaid admissions declined 1.9%, managed care same-facility admissions declined 2.6%. The termination of a managed care contract in Las Vegas had a meaningful impact on our admission growth. If you exclude Las Vegas from our same-facility admission calculations, our same facility admissions would have declined only about 0.9% in the first quarter. Finally, with respect to admissions, uninsured charity admissions increased 12.4%.

It's important that each of you remember that we continually experience varied growth among our markets, and have several markets that had solid admission growth in the quarter, such as San Antonio up 4.8%, Orlando up 4% and Central North Florida up 3%. The Las Vegas market had a significant negative impact on our surgical volume. If we excluded the the Las Vegas market, same-facility inpatient surgery would only be down 0.1% versus the reported decrease of 0.9%. And total same-facility outpatient surgeries would be down 0.9% versus reported decrease of 1.5%.

We were extremely pleased with the cost management during the first quarter. Expense categories generally improved on a year-over-year basis, with the exception of our provision for doubtful accounts, which increased 100 basis points to 10.3% of revenue. Labor costs, expressed as a percent of revenue, totaled 39.6%, an improvement of 110 basis points over the prior year. Wage rate growth was in line with expectations and historical trends, while productivity as measured by man hours per equivalent admissions, improved by approximately 1% over the prior year. Supply costs were 16.5% of revenues in the quarter, a 90 basis points improvement. Supply costs per equivalent admission increased 3.1% in the first quarter. During the quarter, we saw a same-facility drop of approximately 28% in drug (inaudible) costs, and experienced approximately a 2% decrease in same-facility pharmacy costs. Other operating expenses improved 60 basis points to 15.4% of percent of revenue, benefiting from reductions in insurance expenses, marketing and travel and entertainment.

With respect to bad debt, we continue to see increasing growth in uninsured admissions. As I have frequently mentioned, our same-facility uninsured and charity admissions grew 12.4% in the first quarter, up from the 8.7% growth rate experienced in the fourth quarter 2006. We continue to implement the QMP program, managing the cost to treat the uninsured and increasing the amount of point of service collection. Despite the increasing rate of growth in uninsured admissions, bad debt expense was below our internal expectations for the quarter. Now I will turn the call over to David Anderson, our Senior Vice President and Treasurer, to discuss the balance sheet and cash flow for the first quarter.

Thank you, Milton, and good morning. First of all, if you look on our balance sheet, you will see that our cash was reduced by about $225 million, from $634 million to $409 million. I can attribute that to, one, a reduction in overnight investments of over $100 million from year end. Our [HCI] reclass of cash was also down $100 million, which makes up the bulk of that change. In terms of debt repayment, as Jack has already mentioned, we have repaid over $500 million in this quarter, with total debt reduced from $28.4 billion to $27.9 billion. Some one-off sources of cash that helped in this debt reduction include debt reduction in cash of $100 million plus that I had previously mentioned. We also had $100 million equity contribution which was required under the credit agreement when the LBO was closed back in November. That was used to allow us to go out to additional employees to solicit their interest in participating in the LBO. That raised $40 million in cash. And then the sponsor group contributed the other $60 million for that contribution. We also had $150 million tax refund. And then the remainder would have been generated by our normal cash flow.

Our debt to EBITDA on a GAAP basis, improved from 6.36 at year end to 6.13 times debt to EBITDA. Looking at net cash flow from operations was basically flat with the first quarter of last year, at around $350 million. Our run rate on capital expenditures was also basically flat with the first quarter of last year at $334 million versus $342 million. But I believe you should still assume that we will spend approximately $1.8 billion on capital expenditures this year. In terms of the liquidity, we have available under both our cash flow revolving credit and our asset based loan, or ABL facility, a total of $2.4 billion. And I will turn it back over to Vic.

All right. David, Milt, Jack, thank you very much. Shannon, if you would like to come back on, we will entertain questions. And I do ask that each questioner hold your questions to one so everyone can get one in.

(OPERATOR INSTRUCTIONS) [Erin Blume], Goldman Sachs.

It looks like the outpatient surgery decline was a little better -- a little bigger than the inpatient. So this makes me wonder how the ASCs fit in strategically with the rest of the business, and how integrated they are? And then, do the high multiples that we've been seeing for some ASC businesses recently, does that tempt you guys at all to sell that?

All right. Milton? Do you want to address that?

Sure. Let me first walk you through outpatient surgeries. Really, the numbers that you are seeing and that I spoke about were same-facility. And there's a cannibalization going on of some of our hospital-based outpatient surgeries as we open new ASCs in certain markets. And let me give you an example. In the first quarter, we have got nine new ASCs that's not included in our same-facility count for ASC surgery, because they haven't been in operations in both periods during that whole -- during that, each time. But the associated hospital outpatient surgery cases are included in same-facility, because obviously those hospitals have been in our count in both periods. And the associated hospitals outpatient surgery cases decreased by almost 1,400 cases, while the related ASCs saw an increase of over 2,800 cases.

So if you would include those cases of both non-U.S. ASCs in our count, the negative 1.5% would actually convert to a negative 0.3%. And so -- and that does not take into account the Vegas situation either, so it would obviously be a positive number if you factored that in. think with your second question about would we consider selling or spinning our ASC division, clearly the answer is no. That's a key part of our strategy. It's growing. It's doing well. These ASCs are on our campuses or very close to our campuses, and don't see why we would we'd bring the opportunity to bring a competitor in to that high-margin service line for us.

Milt, thanks.

Lawrence Weiss, Citigroup.

Just one question on the same-facilities uninsured and charity admissions, those increased I think, what, 12.4%. You mentioned a couple of cities and states, specifically. I don't know if you did the work, but have you found any correlation to those states and cities that you mentioned to worse housing or economic situations? And do you feel that that could actually increase across the rest of your locations?

This is Richard. Let me just take a shot at that. We haven't done that particular study, so we really can't make that claim. Where we tend to see the higher number of uninsured is in the States of Florida and Texas and Florida, and that pattern has been pretty well established over the last several years.

Let me add something, too, on the uninsured. Although your number is right, 12.4% same-facility growth in uninsured admissions. But the first quarter of last year was really a low point for our number of uninsured admissions of just under 21,000. And we had 22,740 in the first quarter of this year, resulting in that 12.4% growth rate. But actually we are down about 100 admissions sequentially from the fourth quarter to the first quarter. So although it's 12.4% year-over-year, on a sequential basis actually we saw again, a very slight decrease in the number of uninsured admissions in the first quarter versus the fourth quarter of '06.

The actual number as opposed to the growth rate?

Yes, so you look at the actual number, we, for example, had 22,740 in the first quarter, we had 22,845 in the fourth quarter. So it's up over the prior year, but you look at the last three or four quarters, and it's fairly flat.

Have you seen it get better in any certain locations or get worse in any other ones, in terms of admissions -- ?

It's been basically the same markets driving it. Houston is a big uninsured market, of course, Houston is a big market for us. But it's a big uninsured market. And some Florida markets, also. It's been basically the same markets contributing to the uninsured growth.

Wonderful. Thank you very much.

Sheryl Skolnick, CRT Capital Group.

You commented that you had a number of one time items that contributed positively to your ability to repay debt and cash in the quarter. Should we expect that future debt repayments might come from, example, the transaction that you're contemplated with University of Miami and Cedars? Or will there be the ability to repay debt out of other items of cash flow? And in particular, if you are still going to spend $1.8 billion on CapEx, I understand why and you are sort of kind of generating $1.8 billion or maybe $1.9 billion in cash flow, I am curious about how much you contemplate further debt reductions this year?

All right. Sheryl, thank you. David? You want to take a shot at that?

I think your analysis is accurate as I sit here today, that debt reduction will be more of a function of asset sales, frankly, sales like what we've announced in Cedars in Florida, as opposed to probably cash flow, even though I think there can be on a quarterly basis some reduction in, for example, revolver balances.

Great. Thank you.

Wei Romualdo, Stone Harbor.

(inaudible) could you talk about that a little bit? And also just elaborate on the changing investment that generated $165 million of cash this quarter, what is that? And lastly, the $409 million of cash on balance sheet, how much is that at HCI?

All right. I did not pick up the first part of your question.

The first part of the question is, by my calculation, or my opinion is that the working capital -- the changes in operating assets and liability line in the press release, that seems a little higher than what I've been expecting. Was there any timing or accounts receivable, payables, any of those timing issues there?

No, the timing issues there with operating assets and liabilities would be just primarily normal course of business. The UPL program probably contributed over $100 million to this year that we didn't have last year. That might be one item that we have in '07 that we didn't have in '06.

Okay. And the second question on the changes in investments of $165 million, what was that?

We had previously paid a dividend of $165 million out of HCI in November. But fundamentally, the investments in HCI were relatively flat, as I recall, from end of year to March, with the exception of certain claims that would have been paid during the quarter.

I think, David, one item there was taxes on the HCI gains we had in the fourth quarter generated that in the first quarter.

On the taxes? I didn't quite hear?

HCI had to pay $140 million of taxes related to the gains generated in the fourth quarter of '06. And that payment was made in the first quarter of '07.

Okay.

So in other words, it reduced the previous liability.

I see. Okay. And then the $409 million of cash on the balance sheet, how much is that HCI?

$130 million.

Okay.

All right. Thank you very much.

All right. Thanks.

[Pearl Ching], SCM Advisors.

My question is just with respect to pricing. Obviously, particularly on managed care it was very strong this quarter. And I understand a big part of that I imagine is part of the case mix impact. I was wondering if you just could update us on your commercial pricing expectations for full year 2007? I think you previously talked about a 6% to 7% range?

Pearl, thank you very much. Milton, do you want to start with that?

Yes. When you look at our pricing negotiations, about a 6.7% is about our average price increase. That does not include any increase or decrease that could happen in our case mix index. And also it doesn't include any shift among different payers. For example, the situation in Vegas, where we are no longer under contract with a certain payer in that market, it was one of our lowest managed care payers. Now we are getting business from other payers in that market and, of course, that would have the effect of increasing the percentage increase for managed care. And so as we see other shifts in our business among our payers, we can have some obvious impact on our managed care net revenue per adjusted admission. In this particular quarter, case mix was a big contributor to that growth.

Great. And just your full year, you are still talking about 6% to 7% on the commercial side?

Yes, that's what I would be expecting. Again, it's hard to predict how case mix is going to move quarter to quarter, but I would generally expect somewhere 6.5% to 7%.

Great. Thank you very much.

Rachel Golder, Goldman Sachs Asset Management.

One quick question. Could you talk about what proportion of the year-over-year EBITDA improvement might have come from a reduction in insurance reserves or accruals?

Sure, actually we did not change our balance sheet reserves in this quarter. We did have a decrease in malpractice expense versus the prior year of about $29 million. Our current year malpractice expense reflects the recent trends we've had in 2004, 2005 and 2006. We've had some very favorable trends with respect to frequency and severity, as well. And those have been factored into our '07 expense calculation.

Okay. If you could just say what the reserve was taken a year ago, so I can compare the year-over-year?

The reserve adjustments we had in '06 occurred in the second quarter and the fourth quarter. We didn't have any reserve adjustment in the first quarter. We did accrue again, roughly speaking, about $100 million of malpractice expense in the first quarter last year, and about $71 million in the first quarter this year.

Thank you very much.

David Common, JPMorgan.

My question is regarding same-facility volume, off a little year on year. It's absolutely not a worry because the results I guess, reflect what's going on with acuity and your pricing strategies. My question really is, any comments on how long that negative volume phenomena may be around? Will it be sort of a one-year, two-year, any thoughts at all would be helpful?

It's a little hard to -- .

This is Richard Bracken.

It's a little hard to predict that. I think what's at the base of the question is what are we doing really to work on our growth agenda. And I mean fundamentally, there's a separate strategy at each and every hospital [and] in every market, and they are generally built around two or three major initiatives. We think that over the longer pull, the quality, performance and output of our hospitals is going to be an important driver of business, how we reach out to our physicians in terms of satisfaction, and our patients, and those sorts of things are very important over the long-term. As we think about the shorter term, we support it with very tactical strategies around physicians, sales, capital spending, a fully funded capital spending program, and physician recruitment. So we have a lot of tactics in place in each and every market, a lot of metrics that we are looking at, and we think these are the right strategies over the long pull. How long slower admissions environment stays in place is anyone's guess. We do think that, as I said, that the strategies we have are the right strategies, given our position in each of these markets.

Richard, thanks.

Thank you.

[Sudanta Wajaha], (inaudible) Asset Management.

You had mentioned that the bad debt expense continued to be a problem because of increased uninsured admissions. Do you see any abatement to that over the intermediate term? And is there any legislative efforts that are in place -- that are in discussions to try to resolve that issue?

Jack, you want to have that one?

Yes. No, we don't see any abatement in this issue, at least in the short term. This is a problem that not only affects us, obviously, but every hospital in this country. There are over 47 million people uninsured, which I've been very public about talking about. It's a National disgrace that a country as rich as ours hasn't really had a more active solution to this problem. Personally, what we are doing at HCA is that I, myself, with Vic, we are spending a lot of time in Washington talking to the new Democratic leadership. I think there are some very proactive plans out there. We prefer specifically the one from the Federation of American Hospitals that combines personal responsibility for having health insurance with government subsidies for the poor to make sure it can be afforded. And we've, I think gotten a very good hearing so far on Capitol Hill. Vic and I next week will be back up there for about three days talking to more of the leadership in both parties, both but Democrat and Republican. Bit I think it would be premature and certainly a false hope at this point to think that we are going to see some magical solution to this problem over the next year, or maybe even two. But I do believe there will be some solutions that will mitigate this problem on a longer run basis.

In the meantime, all of our people, and particularly our Patient Account Service Center operations, are working diligently on front end collections and follow-up collections for those people who, although they may be uninsured, may in fact have the resources to be able to pay part, if not all of their hospital bill. And obviously, we've worked also very diligently as we see these patients come into emergency rooms and maybe get admitted into our hospitals, to qualify those who can qualify for Medicaid in any particular state or the SCHIP programs that are out there.

Thank you.

Thank you for your question.

Ray Garson, UBS.

In answer to Sheryl's question earlier, you talked about potential debt reduction from asset sales. I was wondering if you could just give us some perspective for what other type of portfolio rationalization you might be looking at? And if you can give an update in terms of when you expect to have final terms on the Cedars sale? Thank you.

Jack?

We are not in a position, or ready to announce any other asset sales at this point in time. We obviously, as you know if you followed this Company for the last few years, we are constantly assessing our portfolio. And I refer to it as pruning the tree from time to time, of those assets that we think don't fit our ongoing strategy, and maximize the value of those through sales at any particular point in time. But we are not ready to talk about additional asset sales. You may recall that I have said to a lot of you in personal meetings, but also very publicly, that this LBO is not built upon an assumption of significant asset sales, 10% or 15%, as some people speculated when this transaction was first announced. But we will continue this process that we've been involved in, both as a public Company and now as a private Company, which is to, as I said, reassess our assets and decide which ones it makes sense to divest ourselves of at any particular point in time. The closing on the Cedars transaction, while I don't have a permanent or a fixed number on that, but I would assume by the end of July, possibly.

Yes, I think possibly as early as end of the second quarter or early third quarter, we should see it close.

Thank you.

(OPERATOR INSTRUCTIONS) Erin Blume, Goldman Sachs.

I didn't think I would make it back around. My question is about maintaining doctor satisfaction, and with this cost cutting environment that it seems that you're in, what are you doing now to proactively make sure doctors remain satisfied and continue to refer patients?

Richard, do you want to -- ?

I will take a first shot at that, and maybe I can have some of the operators talk a little bit more specifically about it. But first of all, you mentioned a cost cutting environment, and I wouldn't necessarily characterize our environment that way. We have been operating really the same way over the last couple of quarters as we have in the prior years. We obviously are very concerned about the efficiency of our operations, but we are also very concerned about our relationships with our physicians and our patients, and the level of services that we provide. So just to sort of set that, we are cognizant of our expenses, and have some good expense results. But I wouldn't characterize it as something dramatically different than where we've been in the past. Relative to physician satisfaction, we really are focusing on things that make their practice better. Process improvement, turnaround times, available and accessible medical office building space, dedicated sales teams where we troubleshoot how -- what their issues are as they enter our hospitals in terms of accessing their patients and data. We have a pretty big effort underway right now to re-tool some of our information systems that would be very important on the front end for doctors for results reporting, part of our long-term electronic health record strategy. So we have a lot of things that we are doing, really built around how to make their time more efficient, how to make the hospitals work more efficiently for them, and keep the service and quality levels up. Paul, would you have any -- ?

Can I just get a little more specific in what I was trying to ask? So you cited, I guess it was travel and entertainment as two of the items that contributed to the cost saving. And so, who's travel and entertainment was that?

Well, that would be our employees.

That wouldn't be the physicians.

The 180,000 employees we have, that's where we tightened the belt with travel and entertainment.

Well said. But that would not be on the physician side. Your question -- .

So it's not marketing to physicians to bring them in to be on staff?

Marketing, of course, is a wide range of topics. I mean, marketing can be advertising, or marketing can be direct sales to physicians. And where we have tightened the belt on marketing has been on overall outside advertising, image advertising, not in our outreach to physicians.

Okay. I understand, thanks.

Paul, anything you wanted to add?

No.

Okay. Thank you.

[Doug Dieter], Bank of New York.

Most of my questions have been answered, but I did want to ask, now that the hospital-proposed IPPS rules have been released three or four weeks ago, if it is enacted as-is from October to next September, what do you think the impact is to -- financially to HCA?

All right, I will take that since I spend a good bit of time with the Federation and deal with government relations. And just to set it in position, we did have the proposed inpatient rule came out in April. Comments are due in June, and then over the course of the summer they will be finalized. We should see final regs in the first or second week of August. This is the standard timetable that we look at every year, and we deal with every year. We generally don't project numbers in this interim period. Because, number one, they won't end up being the final numbers. And, number two, we've got to continue to work on them, and basically use them as we lobby. So that will be the normal process. And I might remind you, we had some proposed rules last year that ended up not surviving when the final regs came out in August. Now having said that, obviously the one change, there's the move to MS-DRGs, the severity adjusted DRGs, moving from 538 DRGs today to 745, which is a pretty significant change. There will be winners and losers. We will have winners and losers within our Company. But again, not in a position to really provide numbers to go with that at this point.

They did, as you probably saw, publicly say we are giving full market basket updates. Well, that's nice. However, in the next line they said, we are -- however, as we roll-out the new DRGs, we are going to have a 2.4% reduction, called a behavioral adjustment, which I can tell you, and I'm sure you've read from various industry associations and various companies, we think that is totally inappropriate. And the comments will address that very specifically. That clearly should not survive, and time will tell as to how that plays out. But we think that is an inappropriate adjustment at this point in time. So, again, rather than ramble on and look at each one of these, we will continue to work on this over the next couple of months. And once we have the final, we will be happy to share with you what that impact will be and what we think it will mean to our numbers.

Thank you. I just have one more, I promise an easier question. Which would be, your average length of stay has obviously slowly gone down over time. I just wanted to know kind of what the threshold here is, how much lower could it go? Or do you just expect it to be kind of more in line with what it's been this quarter and frankly, year-over-year it hasn't changed?

Jack?

This is Jack. It's impossible to predict this, because it's impossible to really predict where medical technology is going over the next five or ten years. Mitigating on the other side of that obviously, is as the population ages, the baby boomers get older, hospitalizations tend be longer for older people than it is for younger people. But it's just impossible to predict that number.

Okay. Thank you.

Thank you. Shannon, we probably just have time for one more question. We need to get Jack and some others headed for Kansas City.

Sheryl Skolnick, CRT Capital Group.

Thanks very much, and I will try to keep it brief. You've done an excellent job of controlling your costs. But I am curious with the reduction in the total number of facilities, how much of that is related to the change in the portfolio versus an ongoing or new focus since the LBO on cost control?

Maybe I will take that. The numbers -- we have ten fewer hospitals this year than we had last year. For the most part, those hospitals are relatively small hospitals, as you know, from West Virginia and some other smaller markets that we divested over mid '06. When you look at, on a same-facility basis, we are down in marketing just about $21 million and about $8 million in travel on a same-facility basis. So, most of the cost cuts we are seeing as a result of again, trying to manage the business as efficiently as we can, especially in this areas of discretionary expenses, rather than, I think a reduction of number of hospitals. Certainly, that contributed to some of the improvement on a reported basis.

And clearly, if you look at the line items, the labor line item is the big number. And I think our people continue to a great job, Sheryl, on managing their labor in their local markets. And also we had significant improvements on the supply front. So those two line items really helped us. But those really didn't relate to the divestiture -- .

And with the ICU increase that you had, which seems to have driven the case mix, should I interpret that as being more medical as opposed to surgical when I put all of those numbers together, and could that also, the mix have contributed to the supply? Or is it that you have new people in your GPO, and you have, therefore more volume discounts coupled with your controls?

We really didn't see a mix in our surgical medical business overall. That pretty much (inaudible).

Okay. So it's these other outside focus and control items?

I think so, Sheryl.

Obviously, you have the (inaudible) benefited from the reduction in (inaudible) stamps as a result of medical research in that area.

Okay.

That was a big contributor to the supply improvement.

Yes, you said that. Thank you very much.

Thank you. I want to thank everybody. And Mark and I will be here to respond to any calls.

That does conclude today's teleconference. Thank you for your participation, and have a great day.