美國醫院公司 (HCA) 2008 Q2 法說會逐字稿

Good day everyone, and welcome to the HCA second quarter 2008 earnings release conference call.

Today's conference is being recorded.

A this time for opening remarks and introductions, I would like to turn the conference over to Mr.

Vic Campbell.

Please go ahead, sir.

Jennifer, thank you, and good morning to everyone on the call.

And also to those of you who might be listening on our webcast.

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

And we have several other management team here in the room to assist during Q&A.

Let me remind you that today's call will contain some forward-looking statements.

They are based on managements's current expectations.

As you know, there are numerous risks, uncertainties, and other factors that 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 they are also in our SEC filings, which we encourage you to review.

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 significant uncertainties inherent in our forward-looking statements, you should not place undue reliance on these statements.

And we do not-- we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, or future events.

The call is being recorded.

Reply will be available later today for anyone interested.

Today we're going to jump straight to Milton Johnson, our CFO, and David Anderson.

To let them make the presentation, again-- Jack Bovender, Richard Bracken are here and will assist and help during the Q&A.

So, Milton do you want to lead us off?

Sure.

Thank you, Dick.

And good morning.

Each of you should have received a copy of our earnings release issued this morning.

Let me take a few minutes to provide several general observations, before highlighting some details of the quarter.

Overall volume trends in the quarter were good.

Improving over the first quarter of this year.

Our same facility admission growth rate of 1.3%, over the second quarter of last year, was the highest growth rate we have reported since the first quarter of 2004.

This quarter also is the first quarter since the first quarter of 2004, that we have seen two consecutive quarterly admission growth rate increases.

Similar to the first quarter of this year, we saw higher medical admissions, but lower surgical volumes in the second quarter.

Likewise, we saw solid growth in same facility equivalent admissions of 2%, compared to the second quarter of last year.

Medicare admissions contribute significantly to our overall volume rate.

Same facility Medicare admissions grew 3.2% over last year second quarter.

Our medicare admissions include both traditional Medicare, and managed Medicare.

Managed Medicare admissions represent approximately 20% of our total Medicare admissions, while traditional Medicare admissions were slightly down from last year, managed Medicare admissions grew 19.7% on a same facility basis.

Medicare equivalent admissions increased by 4.1% in the second quarter, compared to last year.

In the second quarter, same facility Medicaid admissions grew 2%, and same facility managed care admissions declined 1.6%.

Although managed care admissions declined, the decline is approximately 100 basis points less than recent quarterly trends.

Also improving significantly over the recent trend, same facility self-pay and charity admissions grew only 1% in the second quarter.

Most of our improvement is in the Western market.

Same facility inpatient surgical volumes declined 0.5% from the second quarter of last year.

Overall outpatient surgery, both hospital based and ASC cases declined to 0.7% in the second quarter.

Year to date, ASC plastic surgery cases, which are highly elective in nature, are down 9%, or about 1,000 cases compared to last year.

Same facility emergency department visits increased 4.4% in the second quarter.

Turning to revenue, our same facility cash revenue for equivalent admissions grew 2.5% in the second quarter over the prior year.

As a reminder, cash revenue is net revenue, less bad debt expense.

This growth rate is softer than our recent trend.

After considering normalizing adjustments for UPL, and bad debt hindsight, the growth rate would be 4.7%, more in line with our recent trend.

UPL related revenue was less in the second quarter this year, which has a 120 basis point negative impact on cash revenue per equivalent admissions.

Additionally we have recorded a $60 million increase to the provision for that account in the second quarter, based upon the results of our quarterly accounts receivable hindsight review.

No material hindsight adjustments were necessary in the second quarter of last year.

This adjustment unfavorably affected cash revenue per equivalent admissions by 100 basis points.

Same facility managed care revenue per equivalent admissions increased 5.5% in the second quarter.

This growth rate is somewhat softer than we generally expect, due primarily to service mix.

That is less surgical, and more medical patient,s which generally provides less revenue per admission, and lower NICU length of stay.

As I mention each quarter, volume trends vary among our market.

We have several markets that experience good volume growth in the quarter, such as Tampa, (inaudible), Fort Lauderdale, and New Orleans.

Our softest volume comparisons were in [Brownsville], [McAllen], Oklahoma, and Wichita.

In summary, we were pleased with overall volume growth this quarter.

However, our financial results were adversely affected by the hindsight adjustment, and lower than expected growth in managed care rate per equivalent admission.

Adjusted EBITDA in the second quarter totaled a $1.104 billion, compared to $1.18 billion last year.

Normalizing for sold facilities and hindsight, consolidated adjusted EBITDA would have been generally flat with the prior-year second quarter.

The facilities sold since last year generated 12 million of adjusted EBITDA in 2007, and a $1 million loss in this quarter, as mentioned earlier, our quarterly hindsight adjustment was $60 million this quarter, versus about $1 million in last year's second quarter.

Ex of cost, salary and benefits were 40.7% of revenue for the quarter.

Although increase over prior year as a percent of net revenue, our performance was consistent with our expectations as we continue to invest in additional labor, to support our growth, quality, and electronic health record initiative.

Productivity performance at our hospitals remain consistent with prior year, and wage-rate growth was consistent with recent trends.

Supplies increased from the prior year by 20 basis, points to 16.5% of revenue.

On a equivalent admission bases supply expense increased 3.9% in the quarter, other operating expenses improved by 20 basis points.

Last year's second quarter other operating expenses included $104 million of UPL related costs compared to $39 million this year, bad debt increased as a percent of revenue to 11.7%, from 11.2% in the prior year.

Net income for the quarter, totaled $141 million, compared to (inaudible) million last year.

Interest expense declined in the second quarter by $63 million to $494 million.

And as mentioned in the press release this morning, we have reached a settlement with the IRS Appeals Division on certain 2001 and 2002 tax issues, resulting in a $38 million reduction to our provision for income taxes in the second quarter.

Same facility case mix index increased 0 .8% over last year, and average length of stay was flat.

Same facility charity care discounts increased by $66 million to $435 million, and same facility uninsured discounts increased by $96 million to $434 million in the second quarter.

Days in accounts receivables are 51 days, an improvement of two days in the first quarter.

Capital expenditures in the quarter were $409 million and year to date we've spent $717 million.

As previously mentioned in our first quarter call, we expect capital expenditures to be approximately $1.65 billion for 2008.

Now i'll turn the call over to David Anderson to discuss the balance sheet, and cash flow for the quarter.

Thank you, Milton and good morning.

As you can see on the balance sheet, cash was $368 million, down $25 million from year end of $393 million.

There really aren't any material changes in here.

Our overnights were $26 million, versus 92 million at the end of the year.

HCI reclass was up $18 million and international cash was also up $18 million.

Long-term debt was up $307 million from year end, at $27.6 billion.

Our quarter-- the second quarter is always a heavy payment month for the company.

For example, tax payments in the quarter were $405 million.

If you look at the six-month expenditures on taxes, they were 532.

Interest expense payments were 596 million, versus $1 billion for the six months, while capital expenditure payments were $409 million, and $717 million for the six months.

Debt to EBITDA, our major credit metric was 6.25, an increase from year end at 5.95, driven by the increase in the debt, plus the reduction in the run rate on EBITDA.

Our cash flow availability under our revolving credit is $1.65 billion.

This is down from year end, as you probably recall, we closed a tender offer for $500 million for early maturities on certain of our debt, which took up basically that much capacity in our revolving credit.

We have $250 million outstanding on the cash flow revolver, and also $103 million worth of letters of credit, which is basically flat.

All right.

Milton and Dave, thank you very much.

Jennifer, if you would like to come on, and we'll go straight to Q&A.

Certainly.

(OPERATOR INSTRUCTIONS).

We'll hear first from Lawrence Weiss, of Citi.

Hello guys, one of your competitors were talking about an issue out in Indiana, but I know you have only one hospital out in Indiana.

Can you just talk about the relative health of the state's budgets in terms of Medicaid, and what it is that you are seeing out from the states?

And then just to continue out and just general pricing overall, and I just have one follow-up after that.

Thanks.

All right.

We have two our of group Presidents, Paul Rutledge, again we have very small in Indiana, but I know you're asking broader than, Sam Hazen is also here to cover the west.

Paul, do you want to make any comments about any of the states in Medicaid?

In Indiana, there was a very specific issue with Indiana State program.

It was a budget neutral.

It was-- some hospitals gained, some hospitals lost.

We-- it is really a dish issue, and we do not qualify for dish in our one hospital there, so it did not affect us.

Any other states Paul that you see any Medicaid issues right now?

Nothing.

Sam, anything there in the west?

In the West you have three states that are benefiting from the economy as it relates to energy.

Texas, Oklahoma, and Colorado in particular.

So we have no issues at this particular point in time in those three states.

California, however, and Nevada both of which are struggling from an overall economy standpoint, are seeing some slowdowns in payments as well as potential cutbacks in those two states, but Texas is by far the largest Medicaid revenue state that we have in the Western group.

So at this particular point in time we have pretty good visibility into that situation.

All right.

Sam.

Thank you.

Milton you have want to address Florida?

chuck Hall is not with us this morning.

Yes, Florida is probably as far as Medicaid, the biggest impact on the company, Florida budgeting issues.

They did cut Medicaid effective July 1.

We're still working through the impact.

I would estimate probably-- maybe $2 million a month of revenue impact from those Florida cuts.

So that's revenue impacts?

Yes, revenue impacts.

All right, thank you very much.

We'll move next to Miles Highsmith, of Credit Suisse.

Hello, good morning, guys.

Just wondering the volumes were pretty strong in any quarter following a decent Q1 as well, and just wondering if you can make any comments about this from a broader basis?

Is there something that is taking us to better place in terms of volumes, or it is a little bit of aberration and we kind of revert back to flatish that we were seeing in the '07 time frame?

Thanks.

Richard Bracken, do you want to lead us off there?

Yes actually, I mean, I think it's really worthwhile to talk about volumes, market specific.

And certainly when our volumes are off, we talk about our problems from a common market specific perspective, and when they are up it's only fair to so as well.

I would say, and the group guys can comment on some of the successes they are seeing.

I would say, though, that we have spent a lot of time over the last year thinking about the growth initiatives of the company, and how to position our markets-- our facilities more effectively in our markets.

We have a very robust set of strategies that are really built around quality, and physician engagement initiatives, service-line initiatives.

We have added some support in our divisions to effect these strategies, and while I think it's too early to say that the growth is because of all of our strategies, it is-- it does feel good to see the growth going up, after we put a lot of effort in to them.

I think the test of this will be overtime.

We think our strategies are right on the mark.

Our facilities are very in tuned to the growth opportunities in their markets, and are executing accordingly.

All right.

Sam and Paul, anybody else want to--

We're seeing a really good volumes in Florida.

And again, that's a lot of effort there, and a lot of our process improvement, especially in the ED.

And I think that's obviously generating some additional growth for us, and from a payer standpoint, as I mentioned most of our growth has been the Medicare book right now, but again, a less declining in the managed care as well, so overall good geographic growth, but especially in Florida.

Good.

Thanks, Milton.

We'll move next to Henry Reukauf, at Deutsche Bank.

Hello, guys just two questions.

One is I think the second quarter you had a look-back adjustment.

I think each quarter it was $50 million or $60 million.

Is there some specific area that you are charging-- that you are go having to go back and charge-off, and do you just need to take up the general accrual.

And the second was-- second one, you mentioned your investment in SG&A really kind of drove up, as a percentage of revenue this quarter.

Do you -- when do we see the benefit from that investment, and where do you think that goes as a percentage of revenue, once your investment has made?

Milton you want to take a look back, and then Richard may want to talk about the labor piece of it.

Sure the hindsight as you stated-- we do this hindsight review every quarter, based on a rolling 12 months, rolling four quarters, looking back 12 months, and this is just the general accrual step-up.

Right now, no indication-- matter of fact, we're not seeing any indication that we're seeing deterioration in collectibility of co-pay and deductibles.

Our up-front deductibles consistently have been running around $25 million a month, or $75 million a quarter.

That hasn't changed.

It's I think primarily related to the true uninsured, is where we're seeing increased write-off.

So we did have to step it this up quarter.

We're hopeful that maybe we'll see some improvement in that going forward, but that's been the main cause of the hindsight adjustment this quarter.

Milton, thanks.

Richard do you want to talk about the labor investments?

No doubt, the labor number when you look at the as reported salary, wages, and benefits as a percent of net revenue, was up over prior-year quarter.

When you look at that it's about 130 basis points, but as Milton mentioned in his remarks, there were a couple of things that effected the denominator of that ratio on the net revenue line, that aren't directly related to labor, per se.

And if you normalize for that, really, the swing is about 30 basis points, and not 130 basis points, or around $20 million.

And I think, when we think about labor, of course, we first go to our hospitals and their productivity and wage rate issues, our productivity in our hospitals was actually slightly improved over prior year, and our wage rate assumptions were right on with our trends at about 4.9%.

So-- from sort of the management of the business perspective, the labor agenda has been executed well.

We have, as I just mentioned in my prior response, added some labor relative to our growth agendas, Milt mentioned the electronic health record we brought on [ICNS] personnel, certainly around our quality agendas, and our physician development agendas.

We have invested in some additional labor on the growth side of the equation.

We're-- we think these are the right strategic moves.

There are some additional costs related to these agendas, but we think it's a dollars well spent.

What is the extra 100 basis points?

What was that made up if you could?

Yeah, the two issues would be the UPL and then the slowdown in the self-insured business.

Maybe just give the details of that.

The UPL revenue, Richard is referring to.

In 2007, last year second quarter, we recorded $123 million of revenue from these Texas UPL program, and the reason that was so high in the second quarter, we had a change in accounting-- the [round-up] programs, and in the month of April of last year, we had a significant amount of revenue.

It did not really-- we also had a significant amount of expense, and it really didn't go to the bottom line, but it was an accounting change-- basic (inaudible) on a gross basis.

Whereas in the second quarter of this year, the UPL revenue we booked was only $56 million, so if you normalize both years for the UPL effect, that would drop the 130 basis points growth on a percent of net by 50 basis points.

And then our uninsured revenue, because though volume was so low than our historical run rate of-- historically we are running 9% or 10% of growth.

We would normally see our uninsured revenue grow $115 million to $125 million on quarterly basis year-over-year, and in this quarter, our uninsured net revenue was about $90 million less than we normally expect.

So we were up year or year, but much, much less than the normal run rate.

So when you factor that uninsured revenue in to our top line, that would also be about another 150 basis point on the impact on the [SW&BF] percent of net, leaving the 30 basis points that Richard referred to.

Thanks.

I know you don't all have insight into this, but our labor came in within $5 million of our budget, out of $2.8 billion, that was obviously consistent with our expectations.

Good.

Henry, thank you.

And our next question will come from Mark Afrasiabi, with PIMCO.

Yeah, hello there.

Good morning.

Thanks.

Yes, just in terms of the labor-- I just had a couple of quick questions, one is labor.

Do you have an outlook for unit labor growth, like headcount growth over the next two years, three years, or four years, or even just this year?

Any thoughts or comments on-- I'm not sure we have got anything to project there, Richard, any general comments?

No.

You know, if you think about, as I mentioned how we sort of allocate labor in the company, we would probably think about hospital-only productivity in the same zone that which have been running.

We don't think there's a lot of opportunity to change the staffing in the hospital.

Of course more volume, increases productivity as we're able to spread out fixed labor.

So sort of going forward, we would think our productivity levels in the hospital would be the same.

On the support side in some of these new initiatives, building electronic health records, we're deploying across the company.

Ramping up our quality initiatives, these are-- there are infrastructure costs associated with this, but I don't think they go up-- I mean, they don't go up forever, and we don't really have them penciled out here for the next three or four years.

Good.

Thank you, Rich.

Okay.

And just on the managed care side volume decline you mentioned there.

Just wondering if you could talk about the underlying reasons there, if there are particular cities, or facilities where this is being driven?

And if there's something like the LBO going private, basically that has resulted in some sort of physician disruption on those-- higher margin volumes there?

I'm looking around the room.

Sam, you want to take a shot on the west?

I think in the Western markets we have probably seen more decline in managed care admissions than the other two groups for a couple of reasons.

One, we have seen quite a bit more supply of new competitors in the markets, whether it's physician-owned competitors, or other general acute care hospital development.

And that obviously has an impact on the short run, and so we have some dislocation of business in certain markets, that is directly attributable, I think in most cases, to the new competition.

As it relates to managed our care pricing and physician strategies and so forth, I'm not seeing any negative impact from any of those.

It's mostly, again, related to the new supply of competitors in our market.

Good, Sam, thanks.

And I think if you do look at our groups, the three groups, West, Central, and East, in fact Central and East were up flat to nominally.

The decline was in the West, and again, that's where we have seen new hospitals, no [CON] out there, so that's been part-- that's probably the main impact.

And then I think on the outpatient side it's been more the discretionary utilization that has been reduced somewhat.

Thank you.

Okay.

Thanks a lot.

Our next question comes from Duncan Brown of Wachovia.

Good morning.

I was wondering if you could take a step back, and you guys comment on what you are seeing in the M&A market, maybe in terms of multiples, activity, and then your appetite for either acquisitions or divestitures?

All right.

Jack Bovender will take that one.

As I have stated many times in the past, we are in the acquisition market on a opportunistic basis if it makes sense, and it is within a reasonable time frame, accretive to the sponsor model that we developed when we did the LBO.

I often use the example of Kansas City, if we could find another one of those, that within five years went from $50 million EBITDA to this year about $200 million EBITDA, obviously we would be very interested.

We are starting to see some facilities on the not-for-profit side being discussed, or talked about, or at lease floated to some degree.

We have not made any efforts, or offers on any of these at this time.

You know, what is important in this situation-- it's always an issue about whether it makes sense to make an acquisition, and make the effort, and face the challenges of making it accretive, or whether it is a better use of your cash flow to pay down debt.

And we're constantly analyzing those situations, and we're constantly analyzing each opportunity.

We also do that on the divestiture side, as you know.

We have made some very accretive divestitures over the last year, and the last one announced being the West Florida hospital in Pensacola, and if that transaction is consummated, we'll have divested over $1 billion worth of assets since the inception of the LBO.

Again, at a very accretive rate for us.

So the answer on kind of the short-basis answer to this, is yes, yes, we're very interested both on the acquisition and the divestiture side, but it's a got to make sense relative to the model that we developed for this LBO.

Jack, thank you.

We'll move next to Mike Scaragella, with Merrill Lynch.

Good morning.

You mentioned revenue per equivalent admission growth, lower than it has been historically.

I was wondering if you could just maybe give us a little insight on how the managed care negotiations are going, how you are doing on rate, carve-outs, et cetera?

And if you would expect this growth rate to pick up in the next couple of quarters?

And you also mentioned lower surgical volume contributed to that.

I was just wondering if you could identify any drivers of lower surgical volume?

I'll ask Beverly Wallace to talk and the managed care contracting, and then I'll leave it to Richard or Milton to talk about the surgical volume.

Yes, we did see a little softness in our managed care rate.

Our inpatient rate is very strong.

It's more on the outpatient side, and it's driven by that decline in surgical volume that was mentioned earlier.

We're also seeing a little bit of a accelerated pace of the rental networks, being acquired by the larger payers, or actually losing volume to the larger payers, and that's where we have a big piece of our rates, so even though it's a small portion of our business, it does impact it a little bit.

We do have some negotiations coming up in the third and fourth quarter of this year.

Namely with several of our Blue Cross Blue Shield plans.

Our expectations stay the same.

We're targeting between 6.5% and 7% increase year-over-year.

Bev, thanks.

Richard do you want to-- ?

Yes, I may as well start on surgeries.

Here is what I think about surgery, and we get away from percentages, and think about the absolute numbers here.

Total surgeries for the company for the quarter, were off just little bit about 2,000 surgeries, and about a third of that, say 30% of that really, is on the inpatient side of the business, and about 70% or so was on the outpatient side of the business.

On the inpatient side of the business, it's really not an Eastern or Central group issue, it's really focused on the Western Group as we actually commented on earlier, and really built around losses in OB and in women's services.

On the outpatient side of the business, of course we have two buckets of outpatient surgery business.

That that occurs in our hospital, and then that which occurs in our free-standing surgery centers, and although we're down on hospital-based outpatient surgery, we're down, really at a lower rate than we have been running, a reasonable performance there.

And we did see a step up in decreases in our free-standing surgery business, and actually it came up a little bit earlier in the call, a really around some of the cosmetic procedures, and in certain of the markets where we have had a lot of new supply brought on.

So when we track it back, those are the reasons in and out.

Richard, thanks.

Thank you.

Milt do you want to add to that-- ?

Let me say one thing about Beverly'scomment about surgical volume impact and so forth, just to give you an idea of the quarter-- as you say 5.5% growth in managed care (inaudible).

just to give you the volatility of that within the quarter, April was just under 5%, May was 4%, but June was 8.1%.

And June was a very strong service-mix month for us, and also a month in which we didn't see a drop in length of stay in our NICU, and you can see the impact on rates just from service mix.

So just to give you an idea of the actual changes on monthly basis, based on the type of service mix we see.

So tell you that I think this rate, as you look out to the rest of the year, we're not going to predict it, but obviously if our service mix can improve slightly it can have a significant impact on the managed care service rate.

Great.

Thanks.

Next question?

(OPERATOR INSTRUCTIONS).

We'll hear Adam Feinstein, of Lehman Brothers.

Thank you, good morning, everyone.

Good morning.

Just-- I guess a couple of questions.

One, if you guys talk about [acuity] and just what the impact of that was in the quarter.

I know you were talking about surgical cases, so I would expect that would have some impact.

But just curious to get your thoughts in terms of whether there has been a mix shift there?

And then secondly, just want to know, around bad debt expense just in terms of-- any changes there, in terms of what you are actually getting from the patients, so on a (inaudible) is it still $0.08 to $0.10 on the dollar, have things changed there much there in recent months?

So just any color would be great.

Thank you.

You know what, some things never change.

We tell you to ask one question, and here you go.

you are such a good guy.

We're going to let you have it.

Thank you.

Appreciate that.

All right.

Milt you want to lead off.

The [acuity] question, we saw our case mix increase slightly up about 0.8%, so some slight increase in [acuity] but not any-- I think significant impact or change there.

The-- with respect to bad debts, and where we see it going forward, the wild card here is always our hindsight adjustment, and that's been totally unpredictable.

We are hopeful-- at least you look back at the last three or four years of trends.

We haven't seen a continuation of these massive, and I call these, what we have been going through $60 million a quarter, as massive, adjustments to our balance sheet.

You know, they don't normally continue.

But I can't predict that it won't in this case.

We are trying to understand the effect of this down economy, but at this point, as I said in my earlier comment, we're not seeing any change in our cash collections up front from, in this quarter versus really over the past four quarters.

It has been around $75 million a quarter up front.

That's continuing.

But, you know, the outlook for bad debts will continue to be how much volume we have, obviously we're encouraged by seeing the slowdown in the rate of growth of uninsured.

If we can continue to see that, that should be favorable to our trends on bad debt going forward.

Okay.

Thanks.

I won't ask a third question.

Thanks Adam.

We'll hear next from Matthew Armas, of Goldman Sachs.

Good morning, just two quick questions.

I apologize if you mentioned it.

But can you say what the year to year change was in self-pay uninsured volume?

And secondly, the sequential growth in salary wages for equivalent [HFA] and salary wages per admin was around 2.5%.

Is that a fair way to think about how those two metrics will move on a sequential basis going forward?

Milton?

It was up 1% self-pay, and we're up 3% for the first six months compared to last year.

Historically that has been a low double-digit growth rate, so it's moderated significantly in the past six months.

Yes, with respect to how you kind of look at salary, and benefits and-- to try to-- how you look going forward, so much of our labor is dependent upon the acuity of our parent mix, our service levels, and as Richard mentioned, that's a day by day flexing you do to adjust to your patient load.

Whether you are going to see an increase in ICU, an increase in nursing, versus a preliminary-- a more medical sort of case load.

It's hard to say what the benchmark would be looking at it it that way.

Because it is going to flex according to the-- I think to the acuity of the patient.

All right.

Thanks, Sam you have something you want add?

I just want to add to what Milton just said.

This is Sam from the Western group.

We typically see sequential growth in cost per unit from the first quarter to the second quarter, for a couple of reasons.

One is we clearly have more volume in the first quarter, as Richard mentioned, we do get to leverage our fixed labor, and so that snapback that you get in the second quarter is somewhat reflective of the fact that we do have less volume to spread that fixed labor.

The second issue is a lot of our annual merit increases occur in the second quarter, and when that happens, that steps up the wage rate, so you don't see the same kind of growth in the third quarter, or in the fourth quarter with respect to wage growth, so you got those two phenomenon happening in the second quarter versus the first quarter.

So I don't think the 2.5% is representative of sort of an annual kind of growth rate.

Thank you very much.

Thanks.

(OPERATOR INSTRUCTIONS).

We'll take a follow-up question from Lawrence Wise.

Yes, just what is your expectations on cash, taxes, and also what is your credit agreement leverage at the end of the quarter?

Cash taxes credit agreement leverage, Milton or David?

Cash taxes, right now we're up slightly over the first six months of last year, and that's because we have-- some of the asset sales and that's generating a little more tax payment, but I wouldn't expect our cash taxes, except for possible asset sales, to vary from the run rate that you are seeing right now on a quarterly base.

David?

And debt to EBITDA is 596.

Let me just point out-- second quarter, we have two estimated tax payments in the second quarter, which makes the second quarter, obviously more larger with DSO, when you look at the annualized run rate, I don't expect, any significant change there.

And -- the leverage is 5.96, so you're-- the leverage-- the grid on your term A is going to stay at the LIPO plus 200?

That's correct.

Thank you.

Thank you.

We'll take one more question, Jennifer.

Thank you.

Our final question will come from Ray Garson, of RBS.

Thank you.

Is there a significant difference in the profitability, or acuity, in managed Medicare patient versus a traditional Medicare patient?

Want to take that one Beverly?

This is Beverly.

We did get paid slightly higher on our managed-care book of business, than we do on traditional, and the acuity, we have been looking at it, length of stay is a little less than managed Medicare, but other than that, we're seeing sort of the same case-mix index.

All right.

I want to thank everybody for being on the call.

Mark will be around to take your calls today, as will I.

Thank you very much.

A great day.

That does conclude today's conference.

Thank you all for your participation, and have a great day.