美國醫院公司 (HCA) 2007 Q2 法說會逐字稿

Good day, everyone.

Welcome to the HCA second-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 call over to Mr.

Vic Campbell.

Please go ahead, sir.

Thank you very much.

Good morning to everyone on the call and also to everyone listening on our webcast.

With me this morning for the call are our CEO Jack Bovender; President and Chief Operating Officer, Richard Bracken; CFO, Milton Johnson; Senior Vice President of Finance, David Anderson; and our Investor Relations Officer, Mark Kimbrough.

We also have a number of other of the senior officers of the Company that will be here to participate during the Q&A.

I do want to remind you that today's call will contain some forward-looking statements based on management's current expectations.

Numerous risks, uncertainties and other factors may cause actual results to differ materially from those expressed in these forward-looking statements.

Many of these factors are listed in our press release and in our SEC filings which we encourage you to review.

Many of these factors that will determine the Company's future results are beyond the ability of the Company to control or predict.

In light of significant uncertainties inherent in forward-looking statements, you should not place undue reliance on those statements.

And the Company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events.

As you heard, the call is being recorded.

A replay of the conference call will be made available later today.

Let me turn the call over to Jack Bovender.

Thanks, Vic, and good morning, everyone.

My comments will be brief this morning as Milton Johnson, our CFO, and David Anderson, our Treasurer, will provide details on the quarter.

Also, Richard Bracken and I, along with over other members of our management team here today, will be happy to respond to your questions.

We are quite pleased with the overall results of our second quarter.

Our adjusted EBITDA was up nearly 10%.

This is ahead of our expectations as was the first quarter.

Our topline revenue growth was solid, coming in just under 6%.

Our volumes continue to reflect the general softness in the industry, but when you get behind the consolidated statistics as Milton will discuss, you will see good growth in some key markets, as well as strong growth in some high acuity services.

This higher acuity and change in our mix of business led to a 10% increase in our same facility net revenue per adjusted admission.

This was a key driver in the quarter.

Milton will provide more details on our net revenue per adjusted admission growth in a moment.

Once again, this quarter we were particularly pleased with the management of our operating costs, which led to a 60 basis point improvement in our adjusted EBITDA margins up to 17.5%.

Let me congratulate Richard Bracken and his entire operations team for their great job not only in this quarter but for the entire first half of 2007.

While David Anderson will provide some cash flow and balance sheet details, let me mention that subsequent to the end of the second quarter we completed the sale of our Geneva Switzerland operations for approximately $400 million, a price that is very accretive for us.

We used these proceeds to pay down a portion of our Euro term loan.

As was previously announced, we are also working with the University of Miami to sell them our 560 bed Cedars Medical Center in Miami.

The price is not public at this time.

But this will provide the University with their own teaching hospital much more quickly and less expensively than building their own hospital.

We expect to complete this sale early in the fourth quarter.

Let me conclude by saying management and our Board who met yesterday are very pleased with the Company's results for the first half of the year, as well as the results of our divestitures which are accretive to the Company.

We recognize in order to continue at these levels of success, we must maintain our focus on the execution of our operating and financial strategies during these somewhat turbulent times in the health care industry.

With that I will turn it over to Milton.

Thank you, Jack, and good morning.

Generally, just as in the first quarter this year, earnings performance was driven by a combination of favorable net revenue per adjusted admissions and strong expense management.

While volumes overall continue to be soft, we're seeing reasonable growth from certain high acuity services.

Also, just as in the first quarter, our volume performance looked better, excluding the impact of the Las Vegas market as we repositioned our managed care portfolio in Las Vegas.

However, the Las Vegas market financial results exceeded prior year performance in the second quarter just as we saw in the first quarter of this year.

As you saw in our earnings release this morning, net income for the quarter was $116 million compared to $295 million last year.

Interest expense increased by $361 million over last year's second quarter.

Gains on investments in the second quarter 2007 were $7 million compared to $25 million in the second quarter of last year.

We also reported gains on sales of assets of $11 million this year versus $5 million last year.

Also in the second quarter of 2007 included a $24 million charge for an impairment of a recently closed facility.

We saw a solid revenue growth in the second quarter of 5.8% on a reported basis and 8.4% on a same facility basis.

Adjusted EBITDA grew 9.7% to $1.18 billion compared to $1.07 billion in the second quarter of 2006.

As a reminder adjusted EBITDA is reconciled in the Company's earnings release.

During the second quarter, the Company recorded approximately $123 million of revenue and supplemental payments for Medicaid pursuant to programs often referred to as UPL programs.

These programs, which operate in Texas, were a premise on our hospitals assisting in the provision of indigent care with other area providers, and the total cost of that care in the second quarter was $103 million.

Claims from Texas to provide the federal match for the state Medicaid portion in these UPL programs are now pending CMS approval.

Later in my comments I will provide cash revenue per adjusted admission and cash expenses per adjusted admission, growth rates with and without the effects of these UPL programs.

Adjusted EBITDA margin improved to 17.5%, an improvement of 60 basis points from the same period last year.

The improvement was primarily driven by 160 basis point improvement in salaries and benefits and a 90 basis point improvement in supplies.

Other operating expenses increased by 100 basis points primarily due to two factors.

First, professional liability malpractice expense was $44 million in the second quarter of this year compared to $8 million last year.

In the second quarter of 2006, the Company recorded an $85 million reduction to professional liability reserves to reflect the improving claims trends at our facilities.

Second, as previously mentioned, the Company recorded $103 million of expenses in the second quarter of this year related to the provision of indigent care in Texas.

Bad debts increased by 60 basis points in the second quarter of 2006 to 11.2% of revenue.

Same facility revenue per equivalent admission increased 10%.

Revenue per equivalent admission growth was a result of solid yields from our managed care and Medicare book of business.

In the second quarter, same facility managed care revenue per adjusted admission increased 7% over last year and same facility Medicare revenue per adjusted admission increased 4% over last year.

This includes both traditional Medicare and Managed Medicare products.

Same facility cash revenue measured by net revenue less bad debt expense increased 9.4% over the second quarter of last year.

Excluding UPL-related revenue, we had an increase of 7.1%.

During the quarter we continued to see an increase in acuity measured by case mix index, which increased 0.8% over last year.

Our average length of stay also increased 1.2% to 4.96 days compared to 4.9 days last year.

Consistent with the first quarter of this year, the second-quarter results reflect growth in admissions and high acuity services such as neurological surgery admissions which increased 7.5%, ICU CCU admissions increased 4.4%, and orthopedic surgery admissions increased 7.9% from the previous year.

Medical cardiology admissions declined 6.5%, and cardiovascular surgical admissions declined 4.8% during the quarter.

Same facility admissions declined 1.8% compared to last year's second quarter, and on an adjusted admission basis, the decline was 1.5%.

Excluding the impact of the Las Vegas market from our same facility admissions calculations, adjusted admissions declined 1.1% during the second quarter.

It is important to remember that we have several markets with solid admission growth in the quarter over last year such as San Antonio, up 4.5%; El Paso, up 11.2%; and Tampa, up 2.7% to name the top three by number of increased admissions.

The gains were offset by declines in Las Vegas, which was down 13.6%; Palm Beach, down 8.8%; and Houston, down 2.6%.

The same facility outpatient surgical volumes declined 1.2% in the second quarter compared with last year.

Excluding the Las Vegas market, the decline would have been 0.8%.

Same facility surgery center or ASC volumes increased 0.5%, while same facility hospital-based outpatient surgeries decreased 2.3%.

The hospital-based outpatient comparison reflects some cannibalization of our new ASCs, which are not included in our same facility ASC statistic.

Including all ASC surgeries, total outpatient surgeries increased 0.2% in the second quarter.

We were extremely pleased with cost management during the second quarter.

Same facility cash expenses per adjusted admissions, including SW&B supply cost and other operating expenses increased 7.6% over last year.

Excluding the Texas indigent care expenses, same facility cash expenses per adjusted admission increased 5.2%.

Labor cost expressed as a percent of revenues totaled 39.4% compared to 41% in last year's second quarter.

Wage rate growth continued in line with previous trends at 5.7%, while productivity measured by man-hours per equivalent admissions was relatively flat.

However, measured by adjusted patient day, which takes into account the length of stay, productivity improved by 0.7%.

Supply expense, which was 16.3% of revenue compared to 17.2% in the second quarter of 2006, supply cost per equivalent admission increased 4.8% in the second quarter on a same facility basis.

During the quarter we saw a decrease in our same facility drug-eluting stent cost of 38.9%, driven by a decline of 2168 coronary stent cases over the prior year.

Coronary stent costs per case declined 16.9% in the second quarter.

In the second quarter, pharmacy expense per equivalent admission increased just 3.8% due to our formulary standardization strategy.

Other operating expenses increased to 16.4% of revenues in the second quarter of 2007 compared to 15.4% last year.

As I stated earlier, this is primarily a result of prior year reductions in professional liability reserves and new indigent care expenses this quarter.

Normalizing for both items, other operating expenses would have been 15.6% of second-quarter 2007 revenues compared to 16.8% last year.

Same facility uninsured admissions saw continued growth in the second quarter of 2007 compared to last year with an increase of 9.9%, down from the first quarter's 12.4% increase.

Same facility charity care discounts increased by $34 million to $371 million, and same facility uninsured discounts increased by $87 million to $338 million.

We experienced solid cash collections during the quarter, reducing our days in Accounts Receivable by one day in the first quarter to 51 days.

Now I will turn the call over to David Anderson to discuss balance sheet and cash flow for the second quarter.

Thanks, Milton, and good morning.

In reviewing the cash flow statement, obviously we are comparing a public company in the first six months of '06 with a private company for the first six months of '07.

As you can see, the increase in interest expense which reduced net income by about $378 million is the major driver in the reduction of cash flow from operations of $326 million compared to cash flow in '06.

Income tax expense is also down as are tax payments benefiting from a $149 million refund in the first quarter of this year.

Two comments about investing activities.

Property, plant and equipment increased.

Our capital expenditures were $675 million, which would give you a run-rate on CapEx of approximately $1,350,000,000 for this year compared to our stated budget of $1.8 billion.

It is management's belief that we will spend approximately $1.7 billion as a total for this year, which is an increase in the last -- obviously for the last six months.

The $192 million source of cash from HCI in investments is a repayment to HCA from our malpractice captive, HCI, for certain expenses and tax payments made on their behalf in the first six months.

Financing activities include a $210 million reduction in revolving credit balances, $40 million in our cash flow revolver and $170 million on our ABL facility or asset-based loan, which is our receivables facility.

We also repaid $148 million, which the major principal reduction was mandatory payments on our A loan and B loan.

Also you will see in the cash flow that we had $100 million source of cash from the sale of equity when the transaction or the LBO was done in November.

We set aside $100 million for a potential sale of stock to our employees who purchased $40 million in equity, and the remainder was filled by our equity sponsors.

As a result, cash on the balance sheet was reduced by $280 million from year-end to $354 million.

Our goal for operating cash as I believe I stated before is we try to run about 50 to $75 million.

At June 30 we had overnight investments of $65 million.

The remainder of the cash is in international accounts and various other cash accounts for us.

Our availability under our revolving credits, which is a key obviously for us, is $2.1 billion.

Turning to debt, obviously the debt is down a net $312 million from 12/31/06, and debt to EBITDA is 6.05 at June 30.

One last comment, Jack has already talked about Geneva.

The Euro term loan was paid down.

We obviously sold Geneva in Swiss francs, converted them to Euros, made a $290 million Euro payment on that $1 billion facility, so -- EUR1 billion facility -- and the balance is obviously now EUR710 million.

David, thank you very, Jack and Milton.

Katie, you want to come back on and poll for calls or questions.

(OPERATOR INSTRUCTIONS).

Lawrence Weiss, Citi.

Just two quick questions.

One, you did guide once upon a time to CapEx of about $1.8 billion.

Are you still okay with that with the first half year?

You are not -- you're only about 675.

And the second question is, talk about your cash flow because this quarter was pretty weak from a cash flow from operations standpoint.

It looks like a lot of that is coming out of the working capital side.

It seems like each quarter the first quarter and the second quarter is about 300 or $250 million more of a use of cash than the previous year.

So just kind of give us a little granularity about what is going on with that.

Thank you.

This is Milton.

On the first question, the CapEx spend for the year, yes, I think we will be backing off the 1.8 for 2007 probably to about 1.7.

It is just a timing difference related to the spend.

We will commit projects that would spend the 1.8 this year.

I just think the actual spend will probably roll over to next year, which would take our target capital spend next year from 1.5 to 1.6.

So it is just simply a timing difference, not really a reduction in our planning for expansion.

Secondly, with respect to cash flow from operating activities in the second quarter, it is down from $385 million last year in the second quarter to $54 million this year.

But really the only substantial difference really relates to interest paid.

Our interest payment increased in the second quarter of '07, the cash out for interest was $459 million.

And then we did have a reduction in tax payments as well from $535 million last year to 376.

So those are the two big differences in our cash flow from ops.

It primarily relates to just the higher interest expense and the LBO debt.

Wei Romualdo, Stone Harbor.

Yes, just focus on the cash flow.

If you look at your balance sheet, the other accrued expense was down significantly.

Can you -- what is that -- what is the cause of that?

Sequentially?

Hang on.

Just a second.

Milton will look at that.

The -- just scanning through -- really I think it was just some timing fluctuation.

Looking at the change here year to date and basically you know we ended the year with other accrued expenses at $1.193 billion, and we are at $1.172 billion now six months into the new year.

So I think you may have been looking at it into the first quarter and probably just some normal timing differences with respect to accrued interest and accrued tax payable, things like that is what I would imagine it would be.

There is really no significant change from the year-end balance.

Okay.

So then I guess back in the first quarter I was given the cash flow I felt was weak too, and I was given more or less the reason looking at Accounts Payable comparing to year-end was down about a little shy of $200 million.

And this quarter Accounts Payable is pretty much flat, so is Accounts Payable likely to go back to the $1.4 billion range, or is there some type of permanent paydown there?

Is that timing, or is that something permanent?

No, I mean our AP accruals will fluctuate from quarter to quarter depending on which day of the week the quarter ends on with respect to certain payment cycles.

So you will see that fluctuate from quarter to quarter.

The Accounts Payable system is designed to take invoices that are submitted, calculate when those payments are due and make sure that the payments are mailed properly so that we take advantage of discounts.

So the fluctuation in AP is just a normal fluctuation, and more of the accruals are in the hospital system.

Okay.

And I don't know if you give that number, but in terms of the total uncompensated care, charity and all that, bad debts or charge-off add-up, what percentage of revenue is uncompensated care this quarter?

Yes, hang on.

I have got that too.

I think it was about -- all-in I think it was 15.9% of adjusted revenue.

And how does that compare to the prior year or prior quarter?

Give us a second.

Yes, bad debt and charity as a percent of net and charity was 15.9% for the quarter.

It is up 100 basis points from where it was in the first quarter.

It has been trending for the year in really a range of around 15 to 16%.

It is at the high end of the recent range.

Miles Highsmith, Credit Suisse.

I'm probably just calculating things a little differently.

I guess I look at the bad debt, charity and discount as a percent of revenue growth stop for discounts and charity kind of in the 19.7% range versus 18.5 in Q1 and kind of just under 19 in Q4.

I know your self-pay admits are going up.

I guess my question is outside of normal trends and knowing that Florida and Texas are always tough markets for you, was there anything in the way of a geographic incremental difference this quarter, or does that increase reflect just the same old vanilla challenges we are seeing on compensated care?

Yes, this is Milton.

Yes, your calculation I think is correct.

The numbers I was using I did not have uninsured discounts included.

It was just bad debt and charity.

So when you put discounts in, I think it does go up to that approximately 19%.

I don't know of any particular changes and see any changes in our bad debt trends.

I think it is pretty much as we expected.

We have been seeing, as you know, in recent trends quarter-over-quarter growth of approximately 10%.

As a matter-of-fact, if you look back the last couple of years, we have been just under 10% on insured admission growth.

So I don't really see this quarter's trends being any different than the recent trends, and actually these trends are consistent with how we have modeled, so really no surprises to the management team with the uninsured activities during the quarter.

Henry Reukauf, Deutsche Bank.

Just a question back on the cash flow.

I guess there were no unusual items in the cash flow for the first half of the year, and you're at 408, and your CapEx is going to be $1.7 billion.

Should there be a ramp here in your operating cash flow, or are we probably looking at a fairly significant negative cash flow after CapEx?

Well, it is like giving forward-looking statements.

I think in terms of debt paydown, I don't anticipate a significant additional paydown of debt over the remainder of the year.

But we will obviously have to see what operating results are.

Other than the Geneva sale (multiple speakers).

With the exception of any proceeds from the sales of assets, I'm sorry.

But it just looks light as you have been -- it has been hit on a couple of times.

Then just one more on the admissions.

The 10% increase.

I think you said 7% was in Managed Care.

You got a 7% year-over-year for Managed Care and a 4% for Medicare.

What I guess makes up the difference between the 10% overall rise and the 7% Managed Care and 4% Medicare?

You're looking at the unadjusted rate per unit growth of 10%?

Again, we did have the UPL revenue of $123 million as I mentioned.

When you back that out, the cash revenue -- back out the bad debts -- the cash revenue growth rate for the quarter was 7.1%, cash revenue per adjusted admission, and again that is driven primarily by the Managed Care at 7% and the Medicare at 4%.

So ex-UPL it is really at 7.1%?

That is correct.

Okay.

Is UPL continuing?

That is the last question.

How should we look at that?

Yes, right now we have these claims pending at CMS for approval.

We certainly expect that those claims would be approved, and we would expect it to continue throughout the year.

Now that being said, it is subject to CMS approval, and there is no assurance of that.

But these programs, these supplemental payments obviously are subject to change by the federal government and the state on a fairly routine basis.

But right now we do expect to receive what we have booked in the first half of the year.

Walter Branson, Regiment Capital.

A couple of things.

You paid $376 million in taxes during the quarter.

What is the outlook for the year on tax payments?

I don't think we will pay that level throughout the year.

I don't have the actual projection off the top of my head, but typically we see our tax payments actually heavier in the first half of the year because our earnings typically the first quarter and second quarter typically are better.

The fourth-quarter earnings you can defer into actually '08.

So I would expect you would see a reduction in cash used to pay taxes in the second half of the year.

I don't have the actual number in front of me.

Okay.

And I wonder if you just maybe only for my benefit if you could explain a little bit more about this UPL program?

Do I understand that the entire cost of care for those patients is in other operating expenses?

Is that right?

Yes, $103 million of new indigent care expenses and other operating expenses.

That is correct.

The UPL program is a state program in Texas that several of our hospitals and several markets along with other providers are participating in.

Again, it is federal matching dollars with respect to really it comes through the state to our hospitals and again other area hospitals.

Are these patients that you were not previously caring for?

No, this relates to -- it is not patient specific money, but it relates to our Medicare, our treatment of Medicaid patients in the state of Texas.

Mike Scarangella, Merrill Lynch.

Just looking at your volume and pricing, you have your volume on one side of the spectrum, which is weaker than your peers have reported so far, and your pricing is quite a bit ahead.

So I'm trying to understand how much of that is cause and effect related?

In other words, in some markets have you exited unprofitable business, or have you pushed through price increases that might have resulted in lost volume?

How much of that is kind of self-inflicted?

Thank you.

Richard, do you want to address that?

Well, it is hard to come up with a precise number from a composite perspective for the Company, but let me give you an example of the market.

We have mentioned this in the past in Las Vegas where we made a rather significant decision to change our Managed Care portfolio there.

And the result of that in that market will state on year-to-date statistics was almost a 14% reduction in admission volume.

However, if you look at the earnings associated in that market, they are up 4%.

So in a situation like that, we obviously would trade lower volume for increased earnings.

And it does not always play out like that across every market, but that was certainly a big effect for us in the first part of this year.

I think you had said, excluding Las Vegas -- did I get it right -- you would have been down 1.1%?

Just admissions, that is correct.

Okay.

So is it safe to say you are okay with these admissions results given your strategy on pricing and Managed Care?

Is part of this result a desired result?

Well, I would not say that we are okay with our volume numbers.

Obviously we would like to see a more robust volume agenda.

But to your point, some of our reduction is self-inflicted as you say.

I mean we make decisions.

We see rollbacks in volume, and it makes good economic sense.

We do those volumes from competitive situations.

There has been a lot of supply added in some of our markets, which has taken some business away from us.

But, on the other side of the coin, the volume that has come to us, as Milton said in his comments, has been the high-end volume.

We are seeing increases in intensive care stays, NICU stays, orthopedic business.

So the high dollar per unit admission volume has been on balance very good for us.

So when we look at composite numbers, you really have to kind of step back and ask what is going on in each market to get a sense of the dynamics at play.

[Marisa Allen], CRT Capital.

My questions were answered.

Thank you very much.

[Pat Pace], AIG Investments.

Actually you just touched on this a minute ago.

I wanted to follow-up on some of the high dollar procedures.

Can you just talk a little bit about what is behind the I guess the growth in orthopedics and neurosurgery?

Is it additional recruitment, or is this an increase in volumes of major orthopedic and spine procedures?

Well, we would like to think that the increase is consistent with what we have been doing over the last couple of years to grow our service lines.

I have mentioned in prior calls our operating teams have really spent a lot of time thinking about these lines of business because they are more profitable for us, and we're getting some traction.

And, as you said in orthopedics and NICU, we have some very, very fine programs.

We have made some significant capital investments in certain of our facilities where these are big services.

So in a sense this is the business that we are seeking, and to a certain extent, the numbers are reflecting it.

And then just one follow-up on the cardiology side.

Have you guys seen any stabilization in your cardiovascular stent procedures over the last couple of months?

It went down.

You know, cardiology would be the one high acuity service that we are not up in.

Obviously this is an issue industry-wide.

You are familiar with some of the medical literature that is changing treatment patterns.

That is certainly being reflected in our facilities, and we're clearly down in our cardiology volumes.

Matthew Armas, Goldman Sachs.

I just have a couple of quick ones.

First, could you please repeat what the med mal charge for the quarter was, the difference on a year-over-year basis?

Sure.

In this quarter we recorded $44 million of med mal expense versus $8 million in the second quarter last year.

Last year's second quarter included an $85 million favorable adjustment as a result of seeing our actuaries seeing the continued favorable trends at our facilities.

Great.

Thank you.

And can you say just I am going back to UPL for a second, you said if I'm correct there was $123 million of revenue booked in the quarter.

Is that correct?

That is correct.

And is that the state portion and the federal match, or is that just the federal match?

That is both.

That is both.

And if CMS rejects the claim for some reason, will you still get the state portion?

We would expect we would retain the state portion.

And if CMS rejects the claim, is there -- do you have the view or are you of the view that the program then would go away on a go forward basis, or would Texas seek to restructure the program or submit a new waiver?

I don't know.

It would depend on the reason that they rejected these claims and how we would have to work with amending the program possibly to continue it.

So I really cannot answer that because I don't know the reasonings or why CMS would reject the claim.

And the $103 million of expense, and it was only $103 million, so there was a net profit contribution -- a fairly modest one, if you will -- from this particular line of business?

That is correct.

Our adjusted EBITDA for the quarter included approximately $20 million from the program.

And these are basically patients you would wind up treating and just wind up classifying this as bad debt; is that kind of fair to say?

No, these would have been Medicaid patients.

They are Medicaid patients.

And again, this is a supplemental payment from the state Medicaid program that is partially funded with a federal match.

So it relates to our Medicaid patients, not to uninsured patients.

Ray Garson, RBS.

It was again another great performance in terms of salaries and benefits as a percent of revenue.

I was wondering if you could give us just a little bit more granularity as to the drivers of that year-over-year improvement and just understand if that from your perspective is a sustainable level going forward?

This is Richard again.

Well, clearly when you think about our labor, you have to understand what is going on at our hospitals.

And we have always felt we have been pretty good on managing the labor lines.

We have not done really anything Herculean at the facilities.

We continue to work on managing variation and outliers as they might exist across our market.

Our operators are obviously with the roll-backs and volumes very attuned to efficient staffing and effective staffing.

And we're just -- it is the result of a lot of focus and a lot of attention by the operating and clinical team.

On the corporate side, we have added some help there, and we have obviously taken some overhead out at the corporate level.

Not a large amount, but we continue to push efficiencies at the corporate level as well.

One other thing that is also coming into play for us, you know over time we have spent a lot of time and resources and energy developing our shared services in the passes and our supply chain operations, and this allows us to become more efficient as we are able to centralize operations and take that burden off each individual hospital unit.

So I think really from my vantage point, all these things are clicking right for us right now.

It takes a lot of work to keep it there, but our expectation is these are sustainable gains, and we look forward to operating at these levels of productivity going forward.

The issues that are working against us, when volumes are soft, productivity is under even more attack because we have less volume in which to spread the labor across, and we're still picking up some value there.

So our teams are doing a good job.

They are very focused on it, and we are pleased with the performance.

And then I was wondering if you could just give us maybe first impressions of the final inpatient prospective rule.

Either anything that is particularly out of whack with where you were thinking either from a worrisome or a positive perspective?

I will do that.

I guess on balance we were somewhat pleased.

Clearly the final rule was better than the proposed rule we saw back in April.

We still don't like it in total, but I guess as you probably saw, the behavioral adjustment, which we adamantly oppose and think it is inappropriate, was reduced from 2.4% next year to 1.2%.

There is more in the out years, but I guess the good news is, it will be phased in and give us an opportunity to phase this in over a couple of years.

The behavioral adjustment being less, and it will give everyone time to sort of see how that plays out and what should happen in those subsequent years.

So we like it better than what we saw back in April.

Just a final one.

I appreciate the time.

It is just I guess with respect to your remaining international operations, is that something that is currently being evaluated in terms of your overall portfolio kind of configuration, or maybe you could just give us a little bit of perspective about the London operations in particular?

We feel that our London operations add a lot of value.

We consider it one of our core markets.

We have got six absolutely first-rate hospitals in Metropolitan London.

The growth rate is very significant there, and we have no plans at all to sell those facilities.

Adam Feinstein, Lehman Brothers.

Some interest from the equity markets here also.

I just wanted to get your point of view here in terms of the uninsured, and I have heard companies talk about some disruption in the quarter.

So I just wanted to hear if you guys see any change in just your assumptions in terms of reserving for bad debt and just in terms of what you're getting.

We have always heard this $0.08 to $0.10 on the dollar.

I'm just curious if you have seen any significant change there and so just any updated perspectives there?

This is Milton.

I will take a shot at answering that.

As you know, we do a quarterly hindsight -- we evaluate well over 90% of our revenue in that hindsight every quarter.

We have been doing that now for a few years.

And we're not seeing -- recent trends indicate that we're not seeing any change in the valuation of the self-pay accounts.

We are right now reserving right around 91% of total self-pay.

That would include copay and deductibles, as well as uninsured receivables as well.

And this quarter again we did not have any adjustment to our valuation.

Previous quarters recently have been small immaterial adjustments, and so we recently -- about a 91% reserve rate where we settled in, and we did not have any -- again, no change to really our valuation in this quarter.

Okay.

Great.

Just one follow-up question if I may.

Just you gave some data earlier in the call on some of the regions, [we] highlight some of the strength in a few markets and some of the underperforming markets as well.

I was just curious if you just had some higher level data.

I don't know if you still break that out, but just in terms of the Eastern, Western and Central regions just in terms of some of the overall big picture trends?

Well, this is a good chance for the group guys maybe to give them an overview of their markets.

How about a quick comment?

We have got the groups here.

Paul, you have got the central group.

Do you want to go first?

Any general comments that you want to share with Adam.

Okay.

Just overall we have five markets or five divisions in the Central group.

We're performing fairly well in all, but we're still challenged.

Probably the market I would highlight would be the two markets.

One would be Richmond and one would be New Orleans.

Richmond we struggled last year from a year-over-year basis from the standpoint of a new competitor opening up, and we have rebased and we are doing well there.

The New Orleans market is a continuing struggle.

In fact, yesterday our Division President, Mel Lagarde, testified before the subcommittee of the Energy and Commerce Committee, and really it's a collaborative effort amongst all of the providers in the New Orleans market.

It is a struggle in that the cost of care continues to go up.

The volume that is spread amongst all the providers because of the charity hospital and the VA hospital being closed is a tremendous concern.

The projection there for New Orleans for Tulane specifically is still a loss in the range of $18 million for this year.

Last year we did have a benefit of the BI.

So that market is really from a year-over-year or quarter-over-quarter comparable basis a very difficult rebasing down there, and we cannot exactly tell you how it is all going to turn out.

But it is going to take much longer than we thought.

Just back on the Richmond market, even though we did rebase, we're still very profitable, and we are definitely the strong player in that market.

Sam, the West?

Sorry about that.

I had the mike off here.

Overall for the Western Group, we actually had adjusted admission growth when you exclude the Las Vegas market.

Just to give you some perspective on the Las Vegas market, we lost an incredible number of patients a day and have backfilled about two-thirds of those.

And that is what has driven the profitability that Richard referenced previously.

But in total the group had pretty good volume activity given the incredible amount of new competition that we have seen in our market.

Our adjusted admissions, like I said, without Las Vegas were up.

Our women's services programs were up nicely year-over-year at about 3%.

That is comparable to what our neonatal business did.

Actually our inpatient and outpatient surgery activities were up.

Our emergency room activity was up.

In total, without the Las Vegas influence on our volume statistics, I'm generally pleased with the activity across the group.

As mentioned previously, El Paso, San Antonio, Houston, Austin, continue to perform well.

Our California market performed well.

A lot of competition in [DSW] and in Denver that's had a slight influence on their business.

So net net fairly consistent results across most major markets in the group.

Thank you.

Don Stinnett, CFO of the Eastern Group.

Yes, Milton mentioned a couple of markets that I will add a little color to.

First of all, the Palm Beach market we're down about 8% there, and a lot of that really related to some physician issues that were specific to one of our large hospitals in the Palm Beach market.

Some anesthesia coverage issues and hospitalist issues that we really don't see that as anything that will affect us going forward.

Most of that is behind us I believe.

And then really the South Florida economy probably is a bit of a pressure on us there.

As an example, this past week Broward County mentioned their convention business this fall is down 46%.

Somewhat of a constant stream of unfortunate economic news related to South Florida economy that I think ultimately leads over into the health care sector.

On the positive side, over in Tampa Bay, we have added some new capacity at our Brandon Hospital, and seen very good performance there, as well as we're very pleased with our service line strategies and physician sales strategies that Richard was mentioning earlier, that have yielded a lot of benefit in that particular market.

Alright.

Don, thank you.

Adam, thank you.

(multiple speakers).

We have time probably just for one more question.

[Mark Afrozobey], PEMCO.

I just wanted to ask you one thing.

I don't have the documents in front of me, but while I'm on the call, I figured I would ask.

Your bank debt has been trading down like with everybody else recently at $0.95 on the dollar.

A lot of technical factors and so on.

I'm wondering, as you pay down your bank debt over time if your bank debt is trading at $0.95 or $0.96, what -- do you know if you're permitted to buy it back in the open market rather than pay it down, and if so, why wouldn't you do that?

Could you just touch on that?

I don't have the documents with me.

This is David.

We are very well aware of, frankly, the pricing on almost all of our debt.

We have certain limitations on what, in fact, we can do in terms of the repurchase of debt, but it is something that the Company is aware of and actually is currently reviewing.

Okay.

You don't know yet right now whether you could buy it back in the open market just offhand?

If I did, I'm afraid I probably could not disclose it.

No problem.

I will check out the -- I got to go back and check the documents.

Thanks so much.

Katie, thank you very much.

Thank everyone for being on the call, and we're here if you have further questions.

Appreciate it.

We thank you for your participation.

That does conclude today's conference call.

You may disconnect at this time.