美國醫院公司 (HCA) 2011 Q1 法說會逐字稿

Welcome to the HCA first quarter 2011 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 Senior Vice President Mr.

Vic Campbell.

Please go ahead, sir.

All right.

Good morning.

Thank you.

Mark Kimbrough, our Chief Investor Relations Officer and I would like to welcome everyone on today's call, and also those of you that are listening to the webcast.

With me here this morning are Chairman and CEO Richard Bracken, our President, Chief Financial Officer Milton Johnson, and then we have a number of other senior management members of the Company here to participate in the Q&A as needed.

Before I turn the call over to Richard just let me remind everybody that should today's call contain any forward-looking statements they are based on management's current expectations.

Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today.

Many of these factors are listed in today's press release and they're included in our various SEC filings.

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

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

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

And as you heard the call is being recorded and a replay will be available later today.

With that, Richard Bracken.

Thank you, Vic, and good morning to all.

We are pleased to host this call this morning.

Our first quarterly call since our public offering on March 10, and from all of us in Nashville we are excited to be back in the public equity markets.

I also want to welcome and thank our new shareholders who might be on the call.

We enjoyed visiting with many of you during our road show presentations leading up to the offering, and also my thanks to many of the sell side analysts who have now initiated coverage of HCA.

We have been looking forward to this mornings call.

With the IPO now behind us we'll be able to be more interactive with all of you.

So let me begin by sharing a few observations about the quarter.

We are very pleased to be able to report solid performance.

For the quarter the Company reported revenues totaling $8.1 billion, cash revenues or net revenue less bad debts were up 6.1%.

Volumes including our newly acquired facilities in Texas were robust for the quarter with reported admissions up 2%, and reported equivalent admissions up 3.7%, which we believe are reflective of our comprehensive operating agenda and strategic asset locations.

Adjusted EBITDA totaled $1.59 billion, up 1% from the first quarter of the prior year.

growth in adjusted EBITDA exceeded our internal expectations for the quarter and as we shared with you're doing our presentations for the full year 2011 we continue to expect mid single digit growth in adjusted EBITDA which includes anticipated high-tech reimbursements from CMS to be realized primarily in the fourth quarter.

And you this you know is contingent upon a successful rollout of our electronic health records initiative consisted with stage one meaningful use requirements.

For which we remain on track.

And I also want to note that the Company's net cash provided from operations increased 6.9% in the quarter to $918 million.

In short our view of the first quarter is a positive one.

Marked by a strong patient volumes, stable expense management and favorable cash results all while we are continuing to invest in necessary technologies and key operating strategies and more on all of this in just a moment.

Now since we have not had an investor call since we announced our internal management reorganization in mid February I thought might be appropriate to take a few moments and comment on this.

First our reorganization included the appointment of Milton Johnson as President I think as you know Melton also retains his role as Chief Financial Officer and will be providing his analysis of the quarter's financial and operating results in just a few moments.

Our organizational changes were quite straightforward.

The changes we made were designed to more effectively align our corporate leadership with our key lines of business.

This included a consolidation of our inpatient, outpatient and related hospital support areas under the leadership of Sam Hazen, a consolidation of our clinical services group, and physician practice operations under the leadership of Dr.

Jon Perlin, the creation of a wholly owned subsidiary to sell certain support services to third parties under the leadership of Bev Wallace and the consolidation of most all other remaining corporate services under the leadership of Milton.

And we believe these changes will assist us in creating additional efficiencies in our operations.

Improved effectiveness of the services we now provide, improve our speed to market for competencies we believe can provide value to the industry at large and also create an additional revenue stream for HCA and better support our growing physician and clinical enterprise.

Regarding our new wholly-owned subsidiary there has been a significant amount of activity in this effort, and much new interest has already been expressed from the marketplace for the service offering.

Our plan is to have Bev provide more transparency relative to business growth over the coming quarters.

We are two weeks away from an official rollout of the name and Bev's team has been very busy.

So expect much more from this important initiative in quarters to come.

As a mentioned to many of you during our roadshow presentations we remain active on the development front.

We announced on Monday the completion of our acquisition of the 473 bed Mercy Hospital in Miami with the addition of Mercy HCAs east Florida division now includes 13 hospitals 12 outpatient surgery centers and integrated laboratory and numerous imaging facilities, physician practices and medical education and training programs.

And this acquisition aligns very well with our strategy of operating large, comprehensive and clinically sophisticated delivery networks in large population centers and we are delighted to have Mercy organization join ACA.

As we go forward it is our intention to provide more commentary on our market operations, accordingly I've asked Sam to routinely participate in our quarterly calls providing more insights into the key issues and trends we are experiencing at the market level and you will hear from Sam in just a few moments .

And finally, before Milton comments on the financial and statistical performance for the quarter, let me provide some comments on the issue of observation days that has recently received much attention.

First all HCA hospitals use the industry standard intercoil screening tool, and I think as many of you know that screening tool assists hospitals in determining whether patients should be billed as an inpatient, an observation patient, or outpatient.

Second, we have invested significantly in technology and people over the last years to further enhance our processes and finally we can confirm that the 13.5% observation rate that Tenant attributed to us in its lawsuit is substantially accurate and that our rate in 20101 increased to 14.3%.

And with that let me turn the call over to

Good morning to all.

I trust each of you has had an opportunity to review the Company's first-quarter earnings release issued earlier this morning.

We have included in today's release a supplemental schedule which provides a comparative view of our GAAP revenues and non-GAAP cash revenues in relation to the Company's expense items.

Although the comparative impact is mitigated as our uninsured discount policy change was in effect for all periods being compared we believe this is useful due to the effect of increase in uninsured volume and discounts on our reported revenues and the provision for doubtful account.

Now let me provide some general comments and highlights for the quarter.

The Company's first-quarter results including adjusted EBITDA, patient volumes and expense management all trended generally in line are better than our expectations.

We grew adjusted EBITDA by 1% on the strength of our patient volume and good expense management.

Net income attributable to HCA Holdings Inc.

totaled $240 million or $0.52 per diluted share for the quarter ended March 1, 2011.

Compared to $388 million or $0.89 per diluted share for the quarter ended March 31, 2010.

First quarter 2011 results include a charge of $181 million or $0.32 per diluted share related to the termination of the management agreement between HCA and the investors upon the completion of the initial public offering per.

If you add back the effect of the management agreement charge our diluted earnings per share would have been $0.84 per diluted share.

Shares used for diluted earnings per share were 462 million shares for the quarter ended March 31, 2011, and 435.7 million shares reported ended March 31, 2010.

We completed the initial public offering of 87.7 million shares of our common stock on March 15, 2011 and the shares are reflected in very used for earnings per share, relations for the portion of the quarter subsequent to the confirmation of the offering.

During the first quarter same facility admissions increased 1.6% while same facility equivalent missions increased 3.3% compared to the prior year.

This is our 14th consecutive quarter reporting growth in the same facility equivalent admissions over the prior year period.

During the first quarter year-over-year admissions excluding deliveries and flu-related same facility admissions grew 1.5% which is comparable to the 1.7% growth we saw in the fourth quarter of 2010.

Consistent with recent experience we saw growth in volumes in patients covered under governmental programs.

Same facility Medicare admissions and equivalent admissions increased to 3.2% and 4.6% respectively compared to the prior years first quarter.

Our same facility Medicare initiative include both traditional and managed Medicare -- managed Medicare admissions increased 6.9% on a same quarter basis and represents 23.6% of our total Medicare admissions.

Same facility managed care and other missions declined 3.2% in the first quarter compared to the prior year while same facility managed care and other insured equivalent admissions declined only 0.6%, the least decline since the fourth quarter of 2009 and an improvement sequentially from the fourth quarter decline of 1.7%.

Same facility uninsured admissions increased 1,198 admissions or 4.7% in the quarter compared to the prior year.

Same facility uninsured admissions represented 6.5% of our total additions in the first quarter compared to 6.3% in the first quarter of 2010.

Same facility surgical volume in the quarter declined 0.3% primarily driven by reduced electrosurgical procedures.

Same facility inpatient surgeries declined 2.3% in the quarter while our outpatient surgeries increased 1% compared to the prior year.

Outpatient elective surgeries declined 2.6% in the quarter.

Excluding elective outpatient surgeries both hospital and ASC-based outpatient surgeries would have increased 3.8%.

Same facility ER visits increased 11.3% in the first quarter.

ER visits related to flu or flu symptoms increased 27% year-over-year; however, without the impact of flu volume ER visits still increased 9.3%.

Now turning to revenues.

Same facility cash revenue grew by 5.3% during the first quarter.

The volume component of this with the previously mentioned 3.3% increase in equivalent admission growth, our same facility cash revenue per equivalent admission increased 2% in the first quarter over the prior year.

As a reminder, cash revenue is a non-GAAP financial measure and represents reported revenue less the provision for doubtful accounts.

An unfavorable shift in payer and service mix during the first quarter was offset somewhat by higher acuity, measured by case mix which increased 1.7% on the same facility basis on the first quarter over the same period of 2010.

We experienced a higher medical additions and surgical ratio in the first quarter which has a negative impact on cash revenue per equivalent admission.

Consistent with our expectations same facility Medicaid revenue per equivalent admission excluding EPO revenue declined 1.1%.

Same facility managed care and other insurers revenue per equivalent admission increased 5.5% compared to the prior year's first-quarter.

The Company modified its uninsured discount policy in the third quarter of 2009 increasing its discount percentage.

Now that we have a full-year of reporting uninsured discounts and bad debt trends should be more comparable than in the past few quarters.

Same facility maturity care and uninsured discounts increased by $333 million in the first quarter compared to the prior year.

In the first quarter same facility maturity care discounts totaled $633 million an increase of $91 million from the prior year.

While same facility uninsured discounts totaled $1.27 billion an increase of $242 million from the prior year.

Management typically reviews our operating expenses in relation to cash revenues which is reported revenues less bad debt expense.

Therefore we have included in our release this morning a supplemental non-GAAP disclosure schedule and title operating measures on a cash revenue basis.

We were extremely pleased with the expense management in the first quarter as same facility cash operating expense per equivalent admission increased 3% compared to the prior-year.

Consistent with recent trends we continue to benefit from low inflationary pressure while effectively managing our cash expenses.

Cash operating expense is a non-GAAP measure and it's comprised of salaries and benefits, supplies and other operating expenses.

As I describe each of our expenses please refer to the aforementioned operating measures on cash revenue basis scheduled for an analysis of expenses as a percentage of cash revenue.

Salary and benefit expense per equivalent admission increased 3.2% in the quarter on the same facility basis.

Productivity performance as measured by man hours per equivalent admission improved 0.5% on the same facility basis compared to the prior-year and our wage rate increased 2.9% on the same facility basis compared to prior year.

Supply cost per equivalent admission increased 1.4% on a same facility basis compared to the prior-year.

Supply costs continue to benefit from contract pricing established by our GPO, Health Trust Purchasing Group and numerous supply saving initiatives resulting from our supply chain and hospital management team.

Same facility other operating expenses per equivalent admission increased 4.1% related to small increases in professional fees, contract services and repairs and maintenance.

Adjusted EBITDA during the first quarter increased 1% to $1.59 billion reflecting adjusted EBITDA margin of 19.7% on a cash revenue basis the adjusted EBITDA margin was 21.5% 100 basis point reduction from the prior period.

The margin reduction is attributable to the relatively small impacts from several areas including increased physician employment, increased expense associated with our HER, lower EPO revenue growth, increased employee benefit cost, increased usage of contract labor and others.

As a reminder, adjusted EBITDA is a non-GAAP measure and is reconciled to net income attributable to HC Holdings Inc, and the Company's earnings release.

Bad debt plus charity and uninsured discounts as a percentage of revenue plus charity and uninsured discounts was 25.7% compared to 23.5% in the previous year's fourth quarter.

We currently have 93% of our total self paid book reserve upfront collections were approximately $89 million up 3.8% from the prior year.

Now, let me mention two items that relate to subsequent quarter of this year.

First, we have updated our projection for high-tech revenue and related incremental expenses for 2011.

We now project contact revenues to be in the range of $290 million to $340 million and the related incremental expenses to be in the range $115 million to $140 million.

The increased at revenue range relates primarily to Medicaid high tech revenue is the reason for the change there.

Second, yesterday in Florida the House and Senate budget conference reach an agreement on proposed Medicaid reductions for their fiscal year beginning July 1, 2011.

This budget is ultimately signed into law.

We estimate that our Florida Medicaid payments would be reduced by approximately $25 million to $26 million in the second half of 2011 and another $25 million to $26 million in the first half of 2012.

These high-tech changes and the proposed Florida Medicaid reductions are built into our guidance for 2011 which was stated by Richard earlier.

I might add that the Texas legislator is still in discussions regarding the Medicaid budget for their fiscal year which began September 1, 2011.

We are anticipating reductions in Texas as well.

Cash flows from operating activities increased 6.9% to $918 million in the first quarter compared to $859 million in the previous year.

The increase of $59 million was primarily due to income taxes.

Excluding the cash flow impact related to the termination of the Company's management agreement with its investors, cash flows from operating activities would've increased by 24.2% to $1.067 billion.

Days in accounts receivable at the end of the first quarter were 45 days compared to 46 days in the first quarter 2010.

Capital expenditures totaled $329 million in the first quarter compared to $214 million last year primarily reflecting increases in routine and construction capital.

In March 2011, HCA completed IPO which provided net proceeds of $2.5 billion after season expenses.

Pending more permanent applications the proceeds were used to reduce the Company's outstanding balance under its revolvers.

The Company's long-term debt at March 31, was $25.366 billion $2.859 billion reduction from December 31, 2010.

The Company's debt to adjusted EBITDA ratio was 4.31 at March 31, 2011, compared to 4.81 times at December 31, 2010.

The amount available under our senior secured credit facilities at the end of the first quarter was $3.9 billion.

We're in the process of completing an amendment to our cash flow and ABL credit agreement as well as an extension of certain of our certain term loans.

The amendment provides for future financing flexibility for the Company.

In addition, we will extend the maturity of $594 million of our term loan A from November 2012 to May 2016, and 537 million of our term loan A and $1.836 billion of our term loan B from November 2012 and 2013, respectively to May 2018.

The remaining balance of the original term loan A and term loan B are $487 million and $1.689 billion respectively.

On May 3, 2011, the Company called for redemption of all $1 billion aggregate principle amount to its 9.125% senior secured notes due 2014.

The second lien notes will be redeemed on June 2, 2011, at a redemption price of 104.563% of the principal amount.

Also on May 3, 2011, HCA also called for redemption of $108.5 million aggregate principal amount of its outstanding 9.875% senior secured notes due 2017.

These second lien notes will be redeemed also on June 2, 2011 at a redemption price of 109.875% of the principal amount.

The pretax impact on interest expense of the extensions and redemptions is projected to be a reduction of approximately $18 million in 2011.

The projected charge related to the early extinguishment of debt is approximately $75 million.

So this concludes my remarks in the first quarter and Sam I'll turn the call over to you for your comments.

Good morning.

As part of the reorganization that Richard mentioned we balanced the responsibilities of the three operating groups by reallocating two divisions, the Far West division and the Mountain division.

From the old Western group to the new national grew.

The national group also includes the four old Eastern group divisions three of which are in Florida.

This group is led by Chuck Hall and has 64 hospitals.

The remaining old Western group divisions, the four Texas divisions and the Continental division are now part of the Southwest group which is headed by John Foster.

John previously led the Central and West Texas division which is based in Austin.

This Southwest group has 46 hospitals.

The Center group which is led by Paul Rutledge remains intact with 47 hospitals in the US and six hospitals in London England.

Reorganizations can be a disruptive event for a companies operations but I'm pleased to report that we have been able to avoid this.

The operating performance across the Company was very balanced and consistent in the first quarter.

14 out of 16 divisions experienced growth and adjusted admissions on a year-over-year basis.

11 out of 16 divisions experienced growth in inpatient admissions on a year-over-year basis.

And all divisions had growth in emergency room visits for the quarter as compared to last year.

As you know the Company has a multifaceted growth strategy, the emergency room is a key component.

It accounts for the majority of our inpatient admission and is a large part of our outpatient revenue mix.

The Company over the past few years has invested heavily to deepen its operating capabilities in our emergency rooms.

We've reduced the cycle time to treat a patient which has improved patient satisfaction and elevated patient safety, we've added more sophisticated programs to our network offerings such as trauma and stroke, we have made significant capital expenditures to increase emergency room capacity in our markets, and we have stepped up our marketing and outreach efforts to heighten community awareness of these capabilities.

As a result, our emergency room visits have grown at 4.5% per annum over the past three years and as you previously heard this quarter was even stronger at 11% growth.

Finally, financial results across the three operating groups were generally consistent in performance and in line with our first quarter plan.

That concludes my comments so with that I'll turn it back to Vic.

All right.

Sam, thank you, and welcome to the call.

All right with that we are ready to go to Q&A.

(Operator Instructions) We will take our first question from Adam Feinstein with Barclays Capital.

All right, thank you good morning everyone and welcome back to the public markets.

I guess my question the volume number was very strong, just trying to better understand mix within mix and just trying to understand the impact from the flu comps and just thinking about acuity also as other companies have talked about higher acuity.

And Milton, I know you gave numbers on the commercial volumes I had a hard time hearing all that.

Just maybe if you can just work that number into the intro as well.

Thank you.

Sure Adam, let me just again highlight -- breakdown our admissions volume and then I can do adjusted admissions as well.

Looking at the quarter, again Medicare admissions up 3.2% in the quarter, Medicaid up 5.7%, managed care and other down 3.2% and self pay up 4.7%.

On an adjusted admissions basis of course our equivalent admission basis taking into account the outpatient activity including the emergency room activity we saw Medicare equivalent growth in the quarter of 4.6%, Medicaid at 8.8%, managed care and other down only 0.6%, and self pay up 7.1%.

That's all same facility growth numbers.

You want to addressed or any of that Sam you want to talk a little bit about it

Yes, we did see in the overall book of business an acuity increase of about 1.7% across all those payers.

Medicare, if you recall in the fourth quarter we saw an actually decrease in acuity which affected our Medicare rate increase last quarter.

We did not see that again.

We saw an acuity increase in the Medicare book of 0.9%, almost 1%, which we saw reflected in a better Medicare rate as well.

I guess the only other thing, Sam, you want to talk a little -- I know you mentioned different groups, any particular areas where volumes were stronger than--.

Well, just to add some color to the acuity mix if you look across the Company not in any particular division and look at some of the more acute areas of services that we offer our critical care admissions were up for the quarter about 3% and our neonatal admissions were up almost 4% and then open heart surgeries were up almost 2% on same storage basis so within our service line categories we did see some elevation in admissions in areas where we have strong revenue production and so that sort of colors some of the acuity that Milton mentioned with the 1.75% increase in case mix.

Good thank you

Thank you very much

Will take our next question from Justin Lake with UBS.

Thanks, good morning.

Just wanted to get some color on -- some further color on Florida just in terms of where you think the spends, the likelihood that it passes in it current form, it sounds like it's highly probable.

We just wanted to get your color and thoughts there.

Thoughts on other states especially Texas and then maybe you can just wrap up with an update on UPL, the impact for the year, and what your source in the quarter would be helpful, thanks.

Milton, you want to take that.

Let me take the Florida and Texas Medicaid.

If you break it down how we see the cuts again as proposed now and we think, at least we believe will be effective.

With respect to our traditional fee for service, traditional Medicaid program we expect to cut their units 12% cut and that would be about roughly $33 million to $34 million annualized, again a full-year impact would be about $33 million to $34 million.

Can I just interrupt for one second.

Does that include the impact of likely flow through to managed care or is that just on fee for service.

That's just on fee for service.

With respect to the managed Medicaid book we've -- out of the approximate $80 million we have in managed Medicaid in Florida about $71 million of that would be impacted by these cuts.

So a 12% cut there would yield about an $8.5 million annualized impact, $8 million to $9 million.

And then lastly, we expect to have a reduction in our low income pool financing or lift money that would be about a $10 million annualized cut.

That would be the breakdown of the approximately $50 million to $52 million annualized that I've described about 0.5 will impact 2011 in the last part of 2011 and the other half of that would impact the first half of 2012.

With respect to Texas as I mentioned we don't have the clarity there.

As what's going to happen.

We are expecting cuts in Texas.

We are expecting cuts that would be 10% or possibly higher.

That's factored into our thinking, of course those cuts will not be effective until September 1 of 2011, so wouldn't quite have the impact that Florida would have since Florida starts midyear.

Milton, I might add that in Texas it's still a moving target.

It's centered I think has moved into budget discussions.

I think just yesterday so there are still a time to play out.

Their target is to complete their session by the end of May.

They may or may not make the end of May and if they don't then it will roll on into the summer, obviously they've got to be finished by September 1, and so still a lot of work to be done down there and we're participating very actively.

With respect to UPL maybe I'll make a couple comments.

Sam, you can come in as well.

With respect to the cuts that we were aware of coming into this year which was the reduction in the FMAP funding that would impact the Company negatively of about $70 million in 2011 primarily in the back half of 2011 of course we knew that coming in and had that built into our thinking.

Sam, I don't know if there's any further UPL cuts that you're aware of but I'm not aware of any other cuts that are pending as of now.

There are none.

Thank you, Justin.

Our next question comes from Ralph Jacoby the Credit Suisse

Thanks, good morning.

I guess just to -- just to kind of flesh out comments around the uses of cash and just thoughts on the acquisition environment obviously you have made a couple of deals.

Is that the type of opportunity we should be looking at you guys pursuing?

Do you see larger opportunities, obviously there has been a lot out in the industry in general.

So what is your sort of commentary and thoughts around that?

Richard you want that

We've been -- we've been pretty clear about how we think about acquisitions and the acquisition environment.

We think over the longer pull here that more acquisitions will continue to be -- to present themselves in the marketplace and as you mention Ralph we have closed three in the last what six months or so.

And I'll comment on Mercy in just a moment.

We continue to think about acquisitions as we have in the past.

We obviously are opportunistic.

We are also a disciplined buyer when it comes to potential acquisitions.

The Mercy transaction fits our preferred strategy very well.

It's where we can bring in a hospital into an existing network and immediately provide value that comes with our existing operations in the marketplace.

A big sophisticated hospital like Mercy fits perfectly with our strategy and we think it's going to be a win-win for both organizations is so it plays exactly into our preferred acquisition strategies.

But in general about the acquisition market we do think there will be more.

We remain -- our eyes and ears are open for all opportunities and we'll take a look and consider all things that come our way.

Ralph, thank you.

We'll take our next question from [Jake Hentalong] with Soleil Securities

Good morning.

I'd like to focus in on the product launch you mentioned that will be two weeks out for your new businesses services subsidiary.

Just any color you could add with respect to revenue run rate, growth margins potential for new customers and if the accounting will be different on the next quarter report would be great

Jake thank you.

Bev, you want to talk a little bit.

I know you are somewhat restricted because we are approaching a public rollout but you can talk about it some and Milton you may from an accounting respective take that.

Bev?

Sure.

Right now we are in what I call building the infrastructure phase of our new organization.

We are recruiting some critical positions for ourselves.

We've also met with several systems and individual hospitals to display our services and we are getting really good feedback from that.

So we're excited about the opportunity.

We think that over the next several months and quarters we will have more to share with you.

I would caution that this is a long sales cycle and so as we ramp up and grow we will share that information with you but there will be a period of time before we've really got something to share.

With respect to closing a transaction.

As far as reporting I'll leave that to Milton.

Sure, and on the accounting reporting front clearly it's not materially to HCAs earnings today.

With where we are.

As it gains traction and we see more third party revenue and EBITDA from the subsidiary we will talk about it on calls such as this.

It's not material enough for segment reporting as far as formal SEC reporting at this point and if it evolves to that stage of course we will break it out but we plan to be -- the Company plans to be transparent about the activities of newco as we develop it in terms of customers that we sign and the pipeline as Bev described so we intend to be transparent but it will not rise to the level of being a segment report, NRSCC reporting in the foreseeable future.

Jake, thank you

We will take her next question from [Tom Gallucci] with Lazard Capital Markets.

Thank you, good morning everybody.

I think Sam mentioned some of the things that you've done on the ER side of things but the results were particularly strong this quarter even next to the flu, so curious if there's any more granularity that you can offer maybe in particular trends this quarter.

And then same thing on the elective side, just wondering if you're seeing any changing trends on the pressure there or if it's still just pretty consistent with where you've been.

Thank you.

Sam, you want that one

I'm not sure I understand the question about more granularity with respect to ER services so I'll try to answer it this way.

We have seen over the years a growing demand for emergency services across many of our markets.

And our strategy has been to respond to that with improved service as I mentioned, additional capital as I mentioned, but more importantly about increased program offerings where we have advanced our capabilities from a service standpoint while offering more sophisticated services in our emergency room and that does a number of things for us.

One, it creates a wider net for us to capture EMS traffic, ambulance traffic and so forth.

It brings a different kind of physician to our hospital which helps us with program development on the inpatient side typically in more acute care service offerings.

And then thirdly, it advances our ability to reach into our rural market and service EMS providers in the rural market and the rural market in large part of our Company is a very important outreach component and so when you pull all that together that has helped to drive some of our activity.

We continue to look to new ways to advance our service with technology and other clinical initiatives inside the emergency room so that we remain competitive in a lot of instances we think ahead of our competition.

And as the emergency room goes we tend to be successful in growing our business.

So not sure if that's the granularity you are looking for but that would be some more detail on that particular component of our business.

And then Tom you were asking about elective surgeries and if we're seeing any changes there, is that your other second question?

Changes in trend I know they're still sort of under pressure just curious if there is any less pressure or more pressure that you've seen lately?

I don't think I can say that there's any less pressure, in total between inpatient and outpatient surgeries we were down modestly in the quarter, 0.3%.

We had growth in our outpatient arena and declines in our inpatient arena, some of that is natural movement because of technology and so forth but we're not necessarily seeing any kind of trend change at this particular point in time.

We're encouraged somewhat by some of the unemployment trends that are taking place which may over time influence our elective activity but it's quite early to call anything on that particular issue at this point.

Thank you

And next question comes from [Kevin Fischbeck] with Bank of America Merrill Lynch.

Okay thanks.

I wondered if you could provide some commentary on your outlook for managed care pricing, some of the managed care companies are talking about restricting networks and being able to leverage the that in negotiations.

Wanted to see if you're seeing anything as far as change in trend either from the types of contracts that are being signed in our network or just the overall rate increase and then maybe some comments on the ACO reg and how you plan to deal with that?

This is Milton let me take one of the rate questions and Juan if you want to maybe take on the ACO reg piece.

We're not seeing right now our rates being impacted.

We are -- from what the ranges that we've been historically talking about.

We are basically complete over 90% complete with 2011 managed care revenues at the silent half of 6% range and we are probably about 55% or so complete with 2012 managed care revenues and the 6% to 7% range.

So again we are not seeing an impact on our rates from those sort of changes at this point in time.

Juan, do you want to--?

Let me do one thing before we ask Juan.

He has spoken on some of these calls before, sort of quietly but welcome him.

Juan, in as of the reorganization was promoted to Senior VP managed care, which he has been working many years.

I can't remember how many, but anyhow we're happy to have Juan here, and you want to talk -- he's also our ACO expert if there is such.

Juan?

With regard to the ACO rate, while we admire of the (inaudible) of the regs, we find a lot of concerns regarding the administrative cost and clarity in foreign abuse waivers, the retroactive assignment.

So they really do not excite us.

I think if we look at the foreseeable future most of our business is going to be fee for service.

So there's a lot of noise on ACO.

We need to focus on the fee for service side, which we do.

Great thanks

Thanks, Kevin

We will take her next question from Christine Arnold with Cowen & Co.

Hi there, can you help me the Texas Medicaid.

I'm thinking it's $836 million in revenue minus $585 million in UPL gives you about $251 million of exposure.

Is that math right and what does that look like including managed care.

Christine if you look at Texas we've got about $320 million some of traditional, a little over $500 million of managed care.

So there's roughly a $858 million, $860 million there, we get some dish payments and then UPO is a separate program altogether that we report independently.

And the UPL program wouldn't be subject to the proposed cuts.

So if a 10% cut again because of the managed care aspect of part of that revenue we project again at a 10% level is probably going to be $50 million to $60 million revenue impact on the Company.

Effectively less obviously than 10% on the total Texas Medicaid revenue.

But I would expect it to be $50 million to $60 million range if the 10% cut is past.

Okay.

And then UPO we've got a watch the rider, is that your perception as well?

That is correct.

As they address expanding managed Medicaid it does have some tales that go there.

And then when you do your refinancings and other things that you're considering with ABL, term A, term B, does that eliminate limitations on your ability to call and pay off other tranches of high cost debt?

The amendments that we made give us more financial flexibility to be able to issue the first lien debt or unsecured debt and to have more flexibility with how we apply those proceeds.

The perfect thanks

We will take our next question from [Cheryl Skolnik] with CRT Capital Group

Well, good morning everybody.

And thank you so much for the all the comments and details you've given on so many interesting issues including your observation rates.

My question though this morning gets to one of the other regulations that came out which I find potentially problematic which was the value-based purchasing regulation.

And I was wondering if you could comment on that final rule in terms of how you think it will impact a Company such as yours who has made such significant strides in investments in improving quality of care before those regs go into effect

Cheryl thank you.

Looking at John Perlin.

Do you want to talk a little bit about those regs, John?

Thanks, Vic, and good morning, Cheryl.

We've been tracking the metrics that are part of the value-based purchasing program for awhile in this areas that we're working on so they are part of our core activities and part of the logic of linking clinical and physician services to really drive it best performance -- those metrics.

I guess one of the concerns I had was it was a little worrisome that you would measure performance in a base period, might give you the incentive to actually lower quality in the base period, and might increase reimbursements when the rule finally goes into effect to those who had lower quality in the base period because of measuring the delta.

Well, appreciate the opportunity to clarify it first a commitment to the higher quality care and second even before the roles came out our strategy was really to gear toward as high performance as possible.

So our goal is to be successful on this value-based purchasing metrics on the basis of high-performance.

So you don't think that it will be a disadvantage for you is the English translation?

No we don't.

In fact, it's an area that we are really heavily focused on in terms of our clinical performance.

Okay, great thank you.

And Cheryl just add to that, obviously if -- I mean, your math would work but practically that's not how we are proceeding.

We see -- I mean as our mission to provide the best care we can when there is more clarity from the CMS regarding issues that are going to be reported and whatnot.

We are fully focused on trying each and every day to make our performance better and honestly, the numbers fall where they may after that.

We really want to draw the best healthcare as we can in our hospitals as quick as we can figure out how to do it

That was actually my point is that because I don't expect you to drop your quality in the measurement period that it might put HCA at a slight disadvantage to the rest, but over the longer run I would imagine in your managed care contracting as well as just simply from the ethical perspective of delivering the highest quality of care you can, you're not going to abandoned that strategy even if it might mean slightly lower Medicare reimbursement relative to others?

That's right.

And you're right in calling out that the formula might work that way but that's really not a direction we're going in and over the long pull we believe in an efficient high-quality strategy is the clear winner.

Excellent.

Thank you

Are right.

Thank you, Cheryl

And is question comes from Shelley Gnall with Goldman Sachs

Thank you.

I know you've already provided a lot of DPL on your operating trends by various markets and I appreciate the detail but if I could just request one more slice of it.

HCA's hospital -- some of your larger and more profitable hospitals are in probably more counties seeing faster improvement in unemployment rates than any of your peers, actually by wide margin.

I'm looking at in particular seven counties in Florida from St.

Lucie, (inaudible), Charlotte, Sarasota, Palm Beach and you've also got exposure to Orleans County in Louisiana.

Wondering if you could just comment on trends whether -- these counties, these markets that are seeing the most rapid improvement in unemployment are you seeing any change in specifically in payer mix yet or any volume trends and then secondarily if not -- if you're not seeing anything yet I did hear the comment I think from Sam that it's too early to see much from unemployment changes yet but are you taking any steps in these markets to position ahead of maybe better volume trends?

Sam do you want to get that?

As I stated previously there are some indications across the portfolio of some improving employment trends and payer mix trends.

Again I'm hesitant to call that a permanent change in our business.

I'm optimistic that it's going to play out that way with reemployment and so forth as the economy recovers.

But again I think it's a little too early to call that.

Naturally we believe our portfolio of markets are well positioned to rebound and rebound favorably I mean HCA has been in strong strong population centers that have reflected the trend demographically across the country for years.

And we think as the recession and the economy recovers those positions and those markets are going to be favorable for us.

That's our strategy.

From an asset placement standpoint.

With respect to businesses initiatives yes, we are taking and looking at a granular level at the commercial book of business to understand what adjustments we can make within our initiatives whether it's physician strategies or outreach strategies or program development and even capital to try and drive up more share gain on a commercial book .

And so as we continue to execute on that front if we do in fact see an improvement then we're hopeful that that will yield better share gains on the commercial side as well.

So that's sort of how I see it at this point.

I think it's hard to say specifically about some of those individual counties by comparison to the other companies but that's our view at this

Thank you.

Shelley thank you

Will take our next question from Gary Lieberman with Wells Fargo

Thanks good morning.

I'm not sure if you did it, maybe if you just update us on where you are for your managed care contracting for the remainder of this year and 2012 and even 2013?

We are basically complete with 2011 managed care revenue contracting we're over 90% at about 5.5% to 6% base rating increase and we're about 55% or so with 2012 in the 6% to 7% range.

Thank you.

Just a quick update on the where you are on the meaningful use criteria and are you guys still feel like you're locked and loaded to be in compliance by the end of the year?

Milt, do you want to take that?

Probably John would be better prepared to answer to it but we feel good about where we are.

We are on track, on schedule.

Jon?

Really nothing to add to that.

All of us, of course know that July 1, is the date where one has to first meet the meaningful use criteria and we are attracting each criteria very closely and reported that we are on track to that date.

Thanks a lot.

Thanks, Gary.

Will go next to John Rex with JPMorgan

Thanks, appreciate all the color you provided on Medicaid and just two more points I want some clarification on.

I guess first, your view as to whether or not -- so say these are all passed as anticipated whether or not there is any equal access provision pushback that we've seen sometimes providers use, maybe docs more often in these cases.

And then just point two, as you talk about the difference between the sensitivity in the traditional books and managed care books.

What kind of lad period do you usually see in terms of the managed care rates kind of resetting or mimicking the traditional rates.

Any volunteers for the equal access question

I'm not sure how that is going to play out in these States from that.

I think that's another -- of course the effect of that would be to -- trying to prevent States from making those deeper cuts.

We're not building that into our planning and our thoughts right now.

In your experience I mean I'm thinking back California from a few years ago and such when these things were attempted?

I don't have any -- there was not any material impact at least on an HCA facility in California when that happened and so it's really hard to sort of comment on that with respect to other States.

So on the managed care contracting side one each contract has its own termination provision and its own stipulation and so they vary by contract and there is a logical assumption that over time they may migrate more toward the State rates but in some contracts because of certain nuances we have differential rates on Medicaid contract

Some would be effective when the law changed, some would not be effective until the contract comes up for renewal.

So it's as Sam said, it varies quite a bit.

Would it be fair to think about it as maybe a one for those that don't change that you'd typically be a one-year lag though or would they be sometimes 2 to 3 year lock-in rates.

The dollar guidance that we gave with respect to Florida and to Texas reflects our best thinking as to when our managed Medicaid revenues would be impacted by the rate cuts.

Okay thanks.

Thanks, John.

We will take our next question with AJ Rice with Susquehanna Financial Group.

Hello, everybody.

Maybe just ask you on the cost side I know lots of times there are a couple particular areas say any supply expense or maybe even other operating expense where you guys are focused on the opportunity looking out the next year or so, maybe could we just ask you to highlight where there are some particular areas in those two metrics that you are looking at?

Milton, you want to--?

Let me maybe kickoff and take one of them which is our supply cost.

We continue to have a number of initiatives in that area that I think will bring us savings this year and into next year.

One example I will give you A.J.

is our global sourcing with -- through Health Trust Purchasing Group.

Where now we have opened an office in Shanghai.

We have employees in China.

We have sourcing products directly from manufacturers.

And as a result we are seeing reductions in those cost of around 20%.

So we see that continuing to grow, right now we're focused on low-tech or commodity items like linens and sponges and the like.

But we see the opportunity over time to continue to expand the offerings there, and we think that that's going to produce some nice savings for us over the next few years as we continue to focus on that strategy.

Let me just add sort of as a general strategy A.J.

how we think about it and how we prioritize our cost agenda.

I would say that where we see the greatest opportunity going forward is in a couple of areas.

One would be in the management of offerings that we provide on our shared service platform.

More simply overhead management.

How can we be more efficient in the overhead cost required to run the business.

And of course this is what our shared service agenda is.

We continue to migrate more operating overhead cost into these regional platforms so that we can drop the unit cost and Milton's comments about supply chain or revenue cycle or contract or staffing agencies.

We are moving into medical records/coding management and we keep expanding the offerings on the insureds shared service platform to protect level services that we provide at the bedside.

That would be the fundamental sort of operating cost move.

The other thing we do and we've had a tremendous amount of success with is we call our performance improvement initiatives where we have created for lack of a better word an internal group of subject matter experts that move on a priority basis within the entire organization to spread best practices, deal with outlier management that might exist in any given hospital.

And so we continue to refresh that agenda.

We continue to get to more and more hospitals.

We have a robust internal engine that's out there continually trying to raise the performance of each of our operating units.

And so from a global side that's kind of how we look at reengineering our processes.

And on top of that of course is where we go longer-term which is taking unnecessary clinical variation out of the agenda and of course that's a cultural change that's done in concert with our physician partners and we have a lot of strategy that we're putting in place to go after that over time but in the shorter term his question around sort of detail cost management that would be where we are harvesting our early successes.

Thank you A.J.

I'll tell you what, we're bumping on the hour so maybe another question or two at most.

Will take our next question from Frank Morgan do with RBC Capital Markets.

Good morning, just a couple of nits at this point.

First, were there actually any accruals for high-tech in the first quarter?

I know you mentioned you will be adjusting your assumptions for the year but did you actually accrue any in the first quarter and then the second question would just be any color I think you mentioned on the increasing contract labor?

Thank you.

Frank, this is Milton, we did not accrue any high tech revenue in the first quarter.

It is possible that we will in fact, have some high-tech revenues in the second and third quarter.

Again it would be state Medicaid high tech dollars.

We are looking at that and that may happen here in the next couple of quarters but nothing in the first quarter.

And contract labor?

Well, we saw an uptick this quarter compared to last year.

Part of that is we moved in a division environmental services from an employee model to a contracted model and that put some pressure there.

But also with the volume that we saw we did see some increase in contract labor to meet the demands of the volume that we had in certain markets.

And that's a normal result of an uptick in volume.

We don't want to obviously staff in our hospitals to the highest expected volume.

We staff to a, what we call a core level and then we rely on contract labor if we have a surge in volume.

When you have surge in volume, this is our way of officially staffing for it so they usually go together.

It was a modest increase.

One more

We will take her next question from [Doug Simpson] with Morgan Stanley

Good morning everyone and appreciate taking my question.

A lot of stuff has obviously been asked.

Just in thinking about the outlook for elective procedures relative to the economy, maybe just to think about this in a little different light.

If wage growth is relatively low and people are shouldering more of their cost, more the aggregate healthcare cost how do you think that may impact the change in elective procedures looking out as the economy improves.

Is there any data you have looking back longer-term as to how that dynamic may impact any improvement in the elective procedures?

Sam or Juan, anybody want to venture a answer?

I'm not sure I can point to anything in the past that would give us an indication of how spending patterns will develop in the future with respect to this economy and this recovery it is a little bit difficult to point at anything.

Last year, for example, we had a significant drop-off in -- (inaudible) services and deliveries across the country and in our hospitals in particular.

The first quarter still had declined but not as significant as 2010 and so from that standpoint that could be an early indicator, again, I'm not willing to call that at this point.

So I can't really speak to the elective demand that may exist coming out of this recession.

I don't know that there has been any material changes in the structure of health insurance benefit on sort of a sequential basis that would suggest a change in demand either.

So I can't point to anything or even forecast it.

One last thought on this whole elective discussion I mean certainly there are certain procedures that can be eliminated based on the economy.

But I think a good bit of these procedures are deferrals.

And so over time I think that we're going to see some of this come back.

I think you can defer it for a while but eventually these services will be needed I think.

I don't think it's all economy based as far as being able to postpone it forever, I think it's going to come back to us sooner or later.

Thank you

Doug think you very much and I think we've probably run a little longer than anybody anticipated.

I want to thank everybody for being on the call and Mark and I will be here for any follow-ups, thank you so much.

That concludes today conference at you for your participation.