美國醫院公司 (HCA) 2009 Q1 法說會逐字稿

Good day and welcome to the HCA first-quarter 2009 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 the Senior Vice President, Mr.

Vic Campbell.

Please go ahead, sir.

James, thank you and good morning to everyone on today's call and also to those of you listening to our webcast.

Participating with me on the call this morning, our CEO Richard Bracken; CFO, Milton Johnson; Senior Vice President of Finance, David Anderson; and our Investor Relations Officer, Mark Kimbrough.

And several other members of the senior management team are here today to assist during the Q&A.

Let me remind you, 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 any forward-looking statement.

Many of the factors that will affect our results are listed in our press release and in our SEC filings.

I encourage you to look at them.

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

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

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

Also as a reminder, you heard the call is being recorded and a replay of the call will be available later today.

With that, I will turn the call over to you, Richard Bracken.

Thanks Vic.

Good morning to all and thank you for joining the call.

Before we go over the numbers for the quarter, let me share a couple of thoughts with you.

First, we were generally pleased with our first-quarter results.

Most operating indicators showed solid performance and from our perspective, these results reflect a significant amount of work that has been underway for some period of time.

Similar to most businesses in America, we entered 2009 with a fair number of questions and concerns relative to the macro environment and how this might affect our performance.

And to a large extent, these questions still remain.

With so much uncertainty in the economy, our strategy was to approach the management of our operations in a very conservative and disciplined way which included a very keen focus on expense management and our capital spend program, while at the same time the continued support of key growth and critical initiatives.

As difficult as the current economy may be, we continue to feel it essential to prepare for a changing healthcare environment.

The necessary and essential components of healthcare reform will require much of the delivery system and certain continued investments that we are making remain essential.

We believe that the benefits of our strategy and the activities we have been pursuing over the course of the last couple of years are evident in the results we are reporting today.

The practical view of course is that this is just one quarter's results in a very difficult and fluid environment and much might continue to happen that could unfavorably affect our performance.

Accordingly, we remain committed to stay the course on this conservative operating agenda.

With that said, let me commend our local management teams and all of our employees for a solid start to the year.

Our patient volumes, while not robust, were reasonable given today's pressures.

Our significant efforts to right-size our cost structure, including the corporate division and shared service units, have served us well and our continued activities to improve the quality of care provided in our hospitals remained robust and fully funded.

We believe that sustainable cost improvements in most cases requires reengineering of systems and processes and our operating teams have been tackling these agendas over the past several years.

Improvements in our cost structure, productivity, supply-chain spend, marketing and discretionary spending categories are all showing improvement.

On the revenue side of the equation, performance has been accessible given the circumstances.

As I mentioned, while admission volumes were soft, generally we believe this to be a result of a poor economy rather than market share shifts.

We have seen some slowdown in elective procedures as you might expect in this stressed economy with growing levels of unemployment and this has disproportionately affected our outpatient services volumes.

Our pricing has remained stable given that virtually all of our managed care contracts for 2009 have been negotiated.

Incidentally, almost 63% of our managed care net revenue for 2010 is also under contract.

As we identified in our release, we did receive a favorable revenue effect due to the change in our ED coding methodology.

In just a minute, Milton will walk you through our thinking behind this change.

So before I close, let me also emphasize that we continue to drive more improvements in our quality outcomes across the organization.

Our preliminary first-quarter 2009 CMS data indicate that 65% of our clinical core measure set scores for AMI or heart attack, heart failure, pneumonia and surgical care improvements are at or above the CMS 90th percentile and 83% are at or above the CMS 75th percentile.

And please note that there's some limitation with this comparison in that we are comparing our most recent quarter to the publicly available nationwide data which represents the trailing four quarters as of the second quarter 2008.

Regardless, we have realized a very strong result in our outcome performance.

Additionally, we're pleased that we were able to complete two long-term refinancing transactions since January of this year.

We issued $300 million of bonds with eight year maturities in early February and another $1.5 billion of bonds with 10 year maturities just last week.

I want to thank all of you on the call who participate in these findings.

We appreciate your interest and confidence in HCA.

And finally, as you all know, the healthcare reform agenda continues to heat up and we are doing our part to participate in the process.

We remain hopeful that the administration will be able to efficiently tackle the issue of universal coverage, ensure that all Americans have access to quality care at the right time and in the right setting.

It's not only the right thing to do, but it's good medicine and we believe good economics.

HCA hopes to be able to participate in the planning for meaningful healthcare reform.

With that, over to you, Milt.

Thank you Richard and good morning.

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

I'll take a few minutes to provide general observations and highlight some details of the quarter before we take a few questions.

As we view the quarter's improvement over last year's run rate, we believe approximately two-thirds of the improvement was attributable to expense management and one-third from revenue growth.

Considering the negative impact from the loss of one business day compared to last year due to leap year, overall volume trends in the quarter were reasonably good.

We estimate that the impact of one less business day to be approximately 120 basis points on our admission and surgical growth rates compared to last year's first quarter.

This is the sixth consecutive quarter we've experienced same-facility equivalent admissions growth over the prior year's quarter.

Same-facility admissions declined 0.9% while our same-facility equivalent admissions increased 1.9% over last year's first quarter.

During the quarter, pulmonary volumes declined 11% or 5153 admissions as compared to the previous year.

Surgical volumes declined slightly compared to the previous year.

Same-facility Medicare admissions declined 0.5% compared to last year's first quarter.

Our same-facility Medicare admissions include both traditional and managed Medicare.

Managed Medicare admissions on a same facility basis increased 11.4% and represented approximately 21.5% of our Medicare admissions.

Same-facility Medicare equivalent admissions increased 1.7% in the first quarter compared to last year.

In the first quarter, same-facility Medicaid admissions grew 5.2% over the prior year and same-facility managed care admissions declined 4.1%.

After considering the leap year effect on managed care admissions, we saw a somewhat greater decline in managed care admissions than recent trends.

Uninsured volume trends continued to moderate during the first quarter.

Our same-facility self pay and charity admissions in the quarter declined 0.1% from the first quarter of 2008.

For the year 2008, same-facility uninsured admissions increased 1.7% compared to 9.4% in the year 2007.

Same-facility uninsured emergency department visits increased 0.7% over the first quarter of 2008.

Same-facility total surgeries declined 0.6% compared to last year's first quarter.

Same-facility inpatient surgeries declined 0.5% compared to last year's first quarter.

Same-facility outpatient surgery, both hospital-based and ASC cases, declined 0.7% in the first quarter compared to the prior year.

Same-facility emergency department visits declined 0.3% in the first quarter compared to the prior year.

Now turning to revenues.

Our same-facility cash revenue per equivalent admission increased 4.4% in the first quarter of 2009 over the prior year's quarter.

As a reminder, cash revenue was net revenue less the provision for (inaudible) accounts.

Excluding our Texas upper payment limit, or UPL revenues, same-facility cash revenue per equivalent admission increased 4% in the first quarter.

We recognized $63 million in revenues related to Medicaid supplemental payments pursuant to Texas UPL programs during the first quarter of 2009.

Same-facility Medicare revenue per equivalent admission increased 3.5% compared to the first quarter of 2008.

Excluding UPL revenues, same-facility Medicaid revenue per equivalent admission declined 1.4% compared to the first quarter of 2008.

This decline was primarily driven by the rate reductions in Florida.

Same-facility managed care revenue per equivalent admission increased 9.6% in the first quarter primarily as a result of our contracted rate growth, acuity increase of 1.7% and the change in ED coding.

We have implemented an approach for assigning emergency department evaluation and management codes based on the American College of Emergency Physicians or ACEP model.

That system is used by many hospitals nationwide.

The system uses interventions like IVs and cardiac monitoring as a proxy for resource consumption in the ED.

We implemented this system because it provides greater consistency and simplicity than the point system HCA had previously used.

We believe that the previously used point system, at least as it was implemented, had the effect of understating the acuity of ED patients seen in HCA hospitals.

While CMS has declined to create a uniform national coding system or assigning E&M codes in the emergency department, CMS in 2007 endorsed the [appropriateness] of a proxy system like that created by ACEP.

Based on our analysis, our coding in the ED based on the ACEP model is consistent with CMS regulations.

We estimate adjusted EBITDA increase by approximately $75 million to $100 million in the first quarter of 2009 as a result of the ED evaluation and management change.

While we believe there will be continued future benefit from this change, the impacts in future quarters may vary.

Adjusted EBITDA in the first quarter totaled $1.457 billion compared to $1.180 billion in 2008, an increase of 23.5%.

Adjusted EBITDA margin expanded 300 basis points as compared to last year.

As a reminder, adjusted EBITDA is a non-GAAP measure and is reconciled to net income attributable to HCA Inc.

in the Company's earnings release.

As to cost, cash expense per equivalent admission was flat on a same-facility basis as compared to the prior year, clearly a strong performance.

Salary and benefits were 39.3% of revenues for the first quarter compared to 39.8% in last year's first quarter.

Productivity performance as measured by man hours per equivalent admission improved by 3.5% on a same-facility basis compared to the prior year's first quarter and same-facility wage growth was down from recent trends to 4.1% due to current economic issues which have resulted in lower wage growth in many of our markets.

Supply costs decreased 20 basis points to 16.3% of revenues in the first quarter compared to 16.5% last year.

On a same-facility equivalent admission basis, supply expense increased 0.1% in the first quarter.

Other operating expenses as a percent of revenue decreased to 14.8% compared to 15.5% last year primarily due to lower insurance costs.

Bad debts decreased to 10.9% of revenues compared to 12.5% in last year's first quarter.

Bad debt hindsight adjustments were made this quarter, totaling $25 million compared to $57 million in last year's first quarter.

Same-facility charity care discounts increased by $101 million to $485 million in the first quarter of 2009.

Same-facility uninsured discounts increase by $201 million to $597 million in the first quarter of 2009.

Uninsured net revenues declined in the quarter compared to 2008 and accordingly the provision for (inaudible) accounts declined.

We believe the decline is due to flat uninsured admission volumes driven to some extent by more conversions to Medicaid, a shorter average length of stay as well as an increase in the uninsured discount percentage.

We currently have 93.4% of our total self-pay books reserved.

Bad debts plus charity and uninsured discounts as a percentage of revenues plus charity and uninsured discounts was 22.4% compared to 21.3% in last year's first quarter.

Upfront cash collections increased from $79 million during the first quarter of last year to $83 million during the first quarter of this year.

Net income attributable to HCA Inc.

totaled $360 million for the first quarter compared to $170 million in the prior year's first quarter.

We had a loss of $5 million related to the sale of assets and an impairment of assets of $9 million this quarter compared to a gain on sale of assets of $51 million last year.

The tax provision for the first quarter reflects a $30 million favorable adjustment primarily due to the completion of certain state tax audits and the reporting of certain pre-1995 federal tax adjustments to state taxing authorities and a reduction in accrued interest related to certain pre-1995 federal tax [years].

The Company experienced strong cash flow from operations during the first quarter, totaling $567 million compared to $227 million last year.

Days in Accounts Receivable for the quarter were 47 days, an improvement of one day from the fourth quarter of 2008.

Capital expenditures totaled $337 million in first quarter of 2009.

Now I'll turn it over to David Anderson to discuss our cash flow and the balance sheet for the quarter.

Thanks Milton and good morning to everybody.

I will start off on our cash balance at March 31 was $356 million.

This is a decrease of $109 million from $465 million at December 31, 2008.

This was due primarily to the declaration and payment of a dividend from Health Care Indemnity, our malpractice (inaudible) insurance company to the parent company which was then used to pay down debt.

The balance of long-term debt at March 31 was $26.6 billion, down $422 million from year-end December.

The major drivers of this reduction were free cash flow of $230 million, that is the $567 million of cash flow from operations, less $337 million in capital expenditures for the quarter, the HCI dividend which I mentioned and we also had a favorable currency translation of $45 million based on the debt at our UK subsidiary, obviously translated to dollars in the US.

Leverage as measured by debt to EBITDA per our financial statements was 5.48 times at March 31.

This is a favorable decrease of 0.42 from 5.9 at December 31, 2008.

This obviously was driven by the debt decrease of $422 million and the increase in the last 12 months EBITDA run rate of $277 million, $4.85 billion versus $4.57 billion.

Our floating rate debt at March 31 was 16.4% versus 18.7% at December 31, 2008.

Our liquidity position, our ABL facility, we have drawn $1.7 billion with $285 million available.

Obviously our cash flow revolving credit is therefore undrawn but we do have $86 million of letters of credit and our total availability was $2.2 billion.

If you look at the cash flow statement, just a few observations.

That $567 million was driven by obviously an increase in EBITDA of $277 million.

Interest payments were lower by $67 million and then you had increase of -- a decrease of one day in Accounts Receivable collections which is worth probably somewhere around $75 million; just for the highlights.

Cash flow used in investing activities, $61 million increase in the use of cash.

A couple of highlights -- $29 million increase in CapEx over 2008.

We had a $116 million use due to a reduction in net divestitures.

We had $33 million in net acquisitions in the first quarter of 2009 versus $83 million in net divestitures in the first quarter of 2008.

And then there was an $84 million provision of cash because of the HCI dividend net of some other items.

Cash used in financing activities, you can go to cash flow statement.

You can see we issued $300 million of long-term debt net of a reduction in our revolving credit facilities of 335 and also the mandatory prepayment of other long-term debt of 339 for a total of 338 on the cash flow statement.

Again, the $45 million currency translation adjustment makes up the bulk of the difference in the debt paydown.

And with that, I'll turn it back to you.

Thank you.

Thanks everyone.

James, if you'll come back and poll for questions and remind everyone if you would please limit your questions to one at a time so everyone gets a chance.

Thank you.

(Operator Instructions) Adam Feinstein, Barclays Capital.

We all owe you guys a thank you for getting this rally started in the hospital stock a couple of weeks back.

So thank you.

Just wanted to get some clarity on the managed-care volumes.

Just what are your thoughts?

You highlighted that it was a little bit weaker than the recent trend.

Obviously there's less people with managed-care assurance.

But just curious to get your thoughts in terms of what you thought drove that and whether that was something you saw in most markets or if it was more concentrated in certain areas.

This is Milton.

Let me make a few comments and Beverly Wallace who is not in the room with us but on the call.

You know, Adam, what I did when I normalized the managed-care volumes -- and other was off about 4.1% for the quarter as I mentioned -- I think about 120 basis points of that would be attributable to leap year.

So that would get us to about 2.9% off.

And our kind of normal -- last year for 2008 for the whole year we were down 2% and the years before that we have been down about 2.5%.

We saw a slight improvement in the decline in 2008.

So that's kind of -- my comment was based on looking at the recent years and 2.9 would be at the high end of kind of our range.

I think one piece of that would definitely be less flu related, pulmonary related impact that we saw in our business in the first quarter this year versus last year.

I haven't completely normalized for that because I didn't want to try to use too many normalizing items here.

But certainly that has an impact and that alone may have put it back in the range with where we have been which is probably 2 to 2.5%.

So that is kind of -- as far as the numbers, that is kind of my insight.

And, Beverly, if you've got any further comments about that --.

The only thing that I would add is that we continue to see the decline in gynecology procedures performed at the facilities.

But pulmonary was the biggest driver.

Darren Lehrich, Deutsche Bank.

Thanks, good morning everyone.

I just wanted to key into the result of the bad debt line.

Just obviously given the state of the economy, I wanted to get your thoughts on the bad debt results.

Was that a favorable variance versus your expectation and maybe could you give us some broad comments on your self-pay admissions trending during the quarter and any broad comments about the state of the economies in your local markets where you have EBITDA concentration?

Thanks.

Milt, you want to --?

Here, let me again take some of that.

Well clearly I think seeing flat uninsured charity admissions in the quarter versus last year was a pleasant surprise for management in this economy with rising unemployment in many of our markets, most of our markets.

To see that, as we were in the fourth quarter of '08 as well, continues to be a favorable I think surprise for us.

You know, when I look at bad debt though, the expense line there being down as much as it is, keep in mind that is just one of three components of revenue really related to the activities of the uninsured and HCA.

We see an increase as I mentioned in charity discounts.

We saw an increase in our uninsured discount program as well.

We did increase our earnings through discount twice and since the first quarter of last year.

So that did push that up and obviously helped reduce the amount going to the bad debt line.

But we look at total uncompensated care on a reported basis, we were up 13.2%.

So total uncompensated care of about $1.9 billion versus just under $1.7 billion last year's first quarter.

What kind of drove a 13% increase is [charge master] is somewhere around 10% of that increase.

We did see when you look at the uninsured ED volume, that is up 0.7%.

So we did see an increase in the outpatient activity there that would probably put us about say 10 to 11 -- about 11% I would say.

You can mathematically get there.

So probably about 2 to 2.5% more to explain.

I think that could be explained by the case mix index for the uninsured book in the first quarter was up 3.6%.

That's probably directly related to less flu related admissions in the uninsured book driving up case mix index.

So when you factor that in, I think you can pretty easily get to understanding the 13.2% increase in uncompensated care.

And again, a lot of that showed up as increase in charity discount and uninsured discounts rather than bad debt in this quarter the way it fell out.

When you look at the actual underlying volumes though from a geographic standpoint, we are seeing most of our decreases in uninsured and charity admissions, most of the decrease is in the western group in the western part of the country.

The second largest decrease would be the central group.

Our Richmond, Nashville, Kansas City, New Orleans markets make up primarily the central group.

And then in the eastern group, actually we continue to see increases primarily driven of course by the state of Florida.

The eastern group actually saw an increase of 9.7% in uninsured and charity admissions during the quarter.

So net net, we were flat but we continued to see growth near double digits in Florida while the rest of the country in our major markets we have seen pretty good declines.

Henry Reukauf, Deutsche Bank.

I know you said that the ACEP, the adjustment in the uninsured -- or the ED visit was going to be greater or worse in various periods.

But do you have a feel for whether this particular quarter with the 75 to $100 million increase was unusual just since it is such a large item?

Can you give us any kind of commentary on really if that's what we should expect going forward, something of that scale or was there something in there that made it particularly large this quarter?

Milt, you are on a roll here.

Sure, well I don't think there was -- you say particularly large this quarter.

It's going to vary quarter to quarter.

I would expect it probably to decline from this level somewhat primarily because typically we have most of our volume in the first quarter.

So the volume is going to drive of course a piece of that.

The other variables are going to be payor mix.

Most of the increase is coming from managed care.

So the payor mix from quarter to quarter will have an impact as well.

And of course the acuity level of the patients is the key driver and that's difficult to predict as well.

But I would think just primarily because of the volume change, you should see somewhat of a decline in that level of EBITDA growth from the coding change in future quarters.

Shelley (inaudible) Goldman Sachs.

Just a high-level question here on your admission trend.

You guys are making it look easy, puting up pretty good volume numbers this quarter and it's definitely been our understanding that over -- industrywide there's been a good deal of weakness in inpatient trends.

Can you talk a little bit -- is this the result of intense sort of proactive focus on taking share?

Or is there -- are you seeing sort of a broader natural migration to hospitals that are better capitalized in this environment?

Richard, you want that one?

I'm not sure I would describe it as looking easy.

There's a lot of hard work that's been going on for a lot of years by the operating teams.

And I guess the way we view volume growth is on a couple of different fronts.

First, we are in good markets in terms of overall population growth.

We operate in big cities.

We have big networks and for the most part, there's continued growth in these areas.

Also we see the opportunity from time to time to move share and so we can pick some share up.

But we think at the end of the day, we have had a very stable capital investment program over the last five years.

It serves us well right now.

We are focused on service both at the hospital level and at the outpatient level.

We are very careful about how we develop our strategies market by market.

So every market has got a strategy that is tailored to its own special dynamics.

And there's really no one major thing that allows us to keep inching away here.

It's a lot of hard work by a lot of management teams staying close to their marketplace dynamics and their physician strategies.

And this has been our strategy for a long period of time.

Sometimes the dynamics will cover it up and you don't really see a lot of growth.

Other times it moves in uneven ways and we're able to recruit a big group as we have in Austin or in other markets and it jumps a pretty good.

So we believe in the strategy.

We think it's a combination of service and proper capital investment and built around large networks.

It's a stable strategy.

David Common, JPMorgan.

Thank you for the opportunity here.

I wanted to follow up on your comments favoring universal coverage and since things are going to be heating up over the next four or five months, find out what your view is as to how that would actually be financed.

That's a good question.

Richard, do you want to take the first (multiple speakers) Okay, thank you so much.

Such a softball.

You know, we like the end result.

We don't wrestle with the financing too much as long as it doesn't come from our sector.

That is clearly the big question and the question is whether it gets there.

But we truly believe, as you've heard from this management team for several years, that this country, it's a disgrace that we have as many uninsured as we have.

That number is growing obviously with the economy we're in and it would be easy for everyone to sort of say the economy is bad.

Let's forget about it, let's move on.

But as I had to head to Washington again today, as I go about every week, I see a growing consensus, desire to try to do something about it.

And the desire is to try to get to universal coverage.

It's not going to happen in a year.

It's going to take a long time if in fact it can happen at all.

We believe it should happen.

There are a lot of ways to go about financing it.

That's really not where we see our job.

Our job is to try to support and work with members of Congress, staffers, administration and others.

Obviously there are pieces in terms of the health delivery system reform.

A lot of that will take place.

A lot of changes will take place in the cost of healthcare if we can get those that are insured paying something so we can stop the cost shifting that we see in this country.

So I will stop at that.

We can talk for a half hour.

I know -- either Richard or Jack, have anything you want to throw in?

Sheryl Skolnick, CRT Capital Group.

Thank you for the comments on the bad debt and the uninsured.

That was extremely helpful.

Vic, I'm going to come back to you again because I think the future here is what is really kind of -- not that the day-to-day isn't challenging, but what Washington could do to various industries is probably more going to determine future value of the investment than anything else.

There were -- in the Obama budget there were two elements and then there was a third element that has been talked about in the marketplace that I would like to get a sense of where the Company is today and where you think things might come out.

The first one is the whole notion of readmissions.

Granted, the Obama budget does not say anything about readmissions for the same diagnosis, but let's presume that they are talking about that.

Can you give us a sense of what the Company's experience is with that and what your position will be as you go to Washington and A, whether you think it will be part of any budget or health reform bill; and B, if it is, what the impact on the Company might be by telling us what your readmission rates are now.

And then the second one obviously is bundling, which I think is probably less difficult for you to answer.

And then the third one is the whole coding [creep] issue and where we stand with that, what the rate reduction has been so far and how many more years we have and whether or not you think or you sense that if CMS comes out with yet another coding [creep] reduction whether there might be some ammunition to help get that reversed in Congress.

All right Sheryl.

Thank you for that softball.

Thanks.

Why don't we start readmissions.

John Perlin, you want to take that one, our Chief Medical Director?

Good morning.

Thanks for that question.

It's obviously something that we have been thinking about given current events.

We have been reviewing our preliminary data and actually it turns out that we think we're better positioned than some of the data that has been coming forward.

We actually view this as an opportunity.

I think the concept that patients require better follow-up really opens doors for us for closer working relationships with the physicians that are really part of the voluntary staff in our referral network.

And toward that end, whether it's really the either the readmissions or the bundling, we look forward to some of the reforms -- would actually help to better align the incentives for hospitals and physician practices, resulting in more effective patient care and tighter working relationships.

I think that really applies to both the readmissions and the bundling opportunity.

Richard, anything you want to add?

On the readmissions, I would say that I think in general as a part of reform, it's an important idea and an important direction to go.

I think the detail is going to be in how it's defined, what are appropriate readmissions, what are inappropriate readmissions and a level of data collection that allows us to navigate through those.

But generally the notion of managing readmissions to be more efficient in the delivery system is I think a fair one.

On the bundling front, we are -- I guess based on what we know now and some of the talk that's been out there, we're okay with it.

I think there's probably going to be some amount of time that's going to pass before this really gets to be a reality in our business.

But on balance to the extent that -- certainly with post-acute care, I think we could be reasonably comfortable in managing that.

I guess to the third piece -- and I assume you're asking about the changes in the DRG's that took (multiple speakers)

That were still waiting for.

A couple of years ago in the behavioral adjustment, which was estimated, we like you are still waiting.

The proposed rule is not out there.

We're not getting a lot of signals as to where that is headed.

So probably too early to really say what we think of what is coming.

So we will get back to you as soon as we see something there and let you know whether we think it's reasonable or unreasonable.

Okay, was there any numbers that anyone would care to attach to your rate of readmissions or if it were to happen without having control over the whole post-acute continuum what the impact might be on the Company?

John?

Well, I think Richard made a tremendously important point, is that readmissions need to be divided into different groups.

If I need two knees replaced since I have modest health, then it makes sense for me to have one knee now and one knee after I've recovered a bit.

So we're going through this data.

But suffice it to say that the published rates in the (inaudible) article of 19% of all Medicare readmissions are substantially higher than the numbers that we're seeing.

We're scrubbing our data and we agree with the general philosophy but seem to be pretty well positioned in that regard.

Duncan Brown, Wachovia Securities.

I just had a question on the expense management side.

Saw some pretty nice improvement year-over-year and sequentially on the other line.

Can you talk a little bit about the drivers there?

I think you said insurance in the opening remarks, just any color there in sustainability of current margins?

Thanks.

Milton (multiple speakers)

Well you know I think we saw improvement in all cash expenses compared to the run rate that we have had last year's first quarter for example when you look at our expenses as a percent of net revenue.

Clearly the labor agenda, we did have some reductions in force of management ranks in the fourth quarter of 2008.

We talked about that on our fourth quarter call.

We are seeing the benefit of that in our productivity numbers.

Our labor management, our clinical management at the bedside I think was very effective this particular quarter as well.

Our strategy around labor rate, again I think was mentioned in the fourth quarter.

Virtually no management merit increases this year.

We did provide merit increases for most of our clinical labor at the bedside and some of our lowest paid employees.

So again, we're seeing that benefit.

With supply costs, we continued to see the benefits of our merger with Consorta a couple of years ago.

Again, contracts that we have negotiated with Boston Scientific and Medtronics providing some additional help toward managing our supply costs in the first quarter of this year versus last year, just to name a couple of pretty big contracts.

And then other operating expenses as I mentioned, insurance being the primary driver there in terms of actual dollars.

But all of those expenses I think look pretty good.

Travel is down, marketing is down.

And so discretionary spending was well managed during the quarter.

Steve Valiquette, UBS.

I apologize if I missed this, but I think in relation to the Texas Medicaid UPL revenue, in some periods historically you have had some profit tied to that revenue.

Other periods, the expense has offset the revenue such that it is a wash on the EBITDA line.

So were there any profits from that in the first quarter?

About $24 million of EBITDA from that program in the first quarter.

Wei Romualdo, Stone Harbor Investment Partners.

My question has been answered.

Miles Highsmith, Credit Suisse.

So sorry to go back to the ED thing but I'm just curious -- with the old methodology of coding that yielded some lower payments or some lower dollars, can you just talk a little bit about what was driving that?

Was it more of kind of a lack of knowledge of the different levels as to how to to code more appropriately and then maybe there wasn't consistency amongst the facilities?

Or was there maybe a piece of conservativism in there?

Just curious too as this has just started, have you noticed or sensed any commercial pushback in recent negotiations?

Thanks.

Let me take the first part of that and maybe Beverly can address the payor community and the reaction there.

With respect to the old system, the point system, it was complex quite frankly.

It was a matter of going through and checking 50 to 60 different interventions or procedures that could have been done and doing a total point count that's based on the points assigned to each of the interventions and coming up with the total and where did you land in levels one to five.

And it was quite complex.

We have again tried to retrain and train our nurses there.

But it's the complexity of the system I think and the volume of activities probably in the ER and ED that contributed to our lack of being able to have consistency with that particular point system.

We have been looking at this for really a number of years and we thought maybe CMS would issue a national system to use.

They declined to do so.

Back at the end of 2007, CMS indicated that -- as I said in my comments, that a proxy system such as the ACEP system would be appropriate.

At that point in 2008, we started looking at it.

We ran a pilot.

We saw a much improved accuracy and consistency in our coding.

It's a much simpler system where you basically check one box at a certain level and you understand where you would fall in the scale of one to five.

So as a result of that pilot, we started rolling it out at the end of '08 in November and by the end of December we had it fully implemented across our hospitals and we saw the benefit of that in the first quarter.

So I would say the problem with the old system was primarily the complexity and our inability to be consistent across our Company with that system.

This new system, the ACEP-based model is one that's much simpler to use and as a result our consistency and accuracy has increased.

Bev, do you want to add anything on the managed-care side?

I will just say that we have had a couple of questions from a couple of our payors and I think we successfully resolved those questions as we explained the new system.

It will probably be an item of discussion in our go forward negotiations.

But typically their renegotiation, either we have something or the payor has something that provides a little bit more attention.

So we will just work through it in our 2010 negotiations.

Mark Afrasiabi, PIMCO.

Just on the same issue of the coding, ACEP coding change, it sounds like it so much simpler from what you are seeing, simplification.

I guess just related to that then, if it is kind of (inaudible) tool if you will, how confident can you be that it won't cost you at some point in the future in a certain quarter?

Can you really be certain that it can only help you going forward?

This is Richard.

Coding is about accuracy.

Whether it helps or it hurts, you have to code according to a system and a process that you have high degrees of confidence in.

And as Milton had just mentioned, our view is that this will result in a higher degree of accuracy and confidence in the resulting codes.

At the end of the day, over broad numbers and time, your overall distribution by level should be somewhat normal and that's really all the benchmarks that we really have.

So the specific answer to your question, it could be negative in the future just as it's positive now.

Related to that real quick, follow-up there, what's the average percent price increase that you had on these bills that were impacted by this change?

Just trying to get to the degree of underbilling, if you will.

Can you give us kind of a rough idea of the average kind of percent increase in those bills impacted positively?

I don't have an average number.

Again we have -- you see the 75 to $100 million EBITDA pickup there.

But I don't have it broken down by bill.

It's going to vary.

Again, it's hard to say what by bill what the increase is because of the various different payors, different managed care contracts that's involved in all this.

It's going to vary significantly by payor and acuity level.

It's not something that we've tried to estimate because quite frankly, it would be a very complex sort of calculation to make.

It's a Company average number across all the different payors that we deal with.

We've got time for about one more question.

Justin Lake, UBS.

Thanks.

Most of my questions have been answered.

Just one quickie on commercial volumes for the quarter.

Did you give that number out?

Managed-care and other which is 85% plus (inaudible) commercial managed care, some of the other pieces would be [campus] and tri-care and so forth and workers comp and some state programs.

But that book, managed-care and other, down in admissions of 4.1% in the quarter versus last year.

All right, thank you.

I want to thank everybody for being on the call.

Mark and I are around if you need to follow up.

Have a great day.

Thank you.

That does conclude today's conference call.

We thank you for your participation and have a nice day.