美國醫院公司 (HCA) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HCA third-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 the Senior Vice President, Mr.

Vic Campbell.

Please go ahead, sir.

Carla, thank you, and good morning, everyone.

Mark Kimbrough, our Chief Investor Relations Officer, is here with me this morning, and we would like to welcome everyone on today's call, also to those of you that are listening to the webcast.

Here in the room with me this morning, our Chairman and CEO Richard Bracken; our President and CFO Milton Johnson; Sam Hazen, President of Operations; and then we have a cast of other characters here, senior officers of the Company that can help us during the Q&A.

Before I turn the call over to Richard, let me remind everyone that should today's call contain any forward-looking statements, they're 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 the factors that are listed in today's press release and are 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 statements, whether as a result of new information or future events.

This morning's call is being recorded.

A replay will be available starting later today.

With that, I'll turn the call over to Richard Bracken.

All right, thank you, Vic, and good morning to all.

We do appreciate your participation on our call this morning.

This has been a very busy quarter for all of us at HCA, so we have a lot to comment on this morning.

Before we get started, let me thank many of you for the meetings over the last month, as we provided commentary on the Company and market dynamics.

So let's get started.

First -- earnings.

For the quarter, we reported adjusted EBITDA growth of 4%, or $1.412 billion.

While this does include revenues from meeting Stage I Meaningful Use requirements, excluding both HITECH revenues and expenses, our adjusted EBITDA grew 1.3% over last year's third quarter.

From an operations perspective, our earnings were achieved primarily due to strong patient volumes and expense control, despite a continued softness in revenues per unit.

During the quarter, we continued on track for a successful roll out of our electronic health records initiative, consistent with meeting Stage I Meaningful Use requirements.

As delineated in our release this morning, we recorded both Medicare and Medicaid incentive revenues, as certain of our hospitals completed their attestation process.

During the fourth quarter, we will continue the process of attestation, and we expect that most all of our remaining hospitals will also meet performance standards.

We are quite satisfied with our performance in this regard.

I believe this to be a major accomplishment for our organization, albeit only a first step in a long process.

It represents solid execution by our operating, quality performance in [IT&S] teams, and is an important foundational step in our ability to create a digitalized medical record to assist in providing cost efficient and effective healthcare services.

Our review indicates that, at this point, only a fraction of all US hospitals are expected to attest in 2011; we are proud to be part of this group.

Also during the quarter, our finance team has been exceedingly active in the quarter.

We refinanced approximately $7 billion of existing indebtedness, that, net, will lower our annual interest expense, and strengthen our balance sheet.

These transactions, coupled with the financing activities in the second quarter, are expected to generate annual interest savings of approximately $350 million next year.

And we expect the EPS impact to be accretive by approximately $0.47 in 2012.

Additionally, on September 21, recall that we were successful in repurchasing more than 80 million shares of our common stock from Bank of America.

This repurchase represented a buyout of their equity interest, and resulted in the termination of any governance rights they had.

We estimate this repurchase of nearly 16% of our outstanding shares will be accretive to EPS by approximately $0.46 in 2012.

And finally, shortly after the quarter ended, we completed the purchase of the remaining 40% of our HealthONE joint venture in the Denver market for $1.45 billion.

We are very pleased with the opportunity to purchase this remaining equity percentage.

We have appreciated our association with the Colorado Health Foundation over the past years.

Look forward to continuing the very solid performance that our partnership had achieved, and to serving the Denver community for many years to come.

We do estimate that this acquisition will be accretive to EPS by approximately $0.12 in 2012.

Now, a few thoughts on some of the operating highlights for the third quarter.

Our patient volumes for the quarter, including our newly acquired facilities, continued in line with recent favorable trends.

Reported admissions for the quarter were up 4.8%, and reported equivalent admissions increased 5.4%.

Similarly, on a same-facility basis, we reported that admissions and equivalent admissions grew 3.2% and 3.8%, respectively.

We have now experienced 16 quarters in a row of positive equivalent admission growth.

Also, consistent with strong admission growth, we continued our favorable trends in same-facility emergency visit growth, with a 4.9% growth rate for the third quarter.

I think that you generally are aware that we believe this growth reflects not only favorable facility locations in areas with favorable growth dynamics, but also an operating agenda that seeks to improve the efficiency in which we process patients through our system.

With these strong volumes, our Company reported revenues for the quarter totaling $7.31 billion, up 5.5% from $6.93 billion last year.

Same-facility revenue grew 3.7% in the quarter, or about 60 basis points favorable to our second-quarter growth.

Our primary challenge in the quarter is reflected in our revenue per equivalent admission growth of only 0.2%.

Milton and Sam will provide more on this in a moment, but as we indicated in our release this morning, we continue to experience growth in medical admissions and declines in surgical admissions.

This, obviously, led to lower revenue per unit equivalent admission.

As we mentioned on our last 2 conference calls, when we identified this revenue issue back in the second quarter, our operators set in motion a number of adjustments.

The efforts of our operating teams during the quarter were effective, as reflected in our operating expense per equivalent admission increasing only 0.5% for the quarter.

And you'll also hear more about our cost management agenda in just a few moments.

And finally, let me mention that in September, the Joint Commission for Accreditation of Hospital Organizations recognized 76 HCA hospitals among 405 US hospitals as Top Performers on Key Quality Measures.

The Joint Commission recognized these hospitals for evidence-based care processes, closely linked to positive patient outcomes, as demonstrated by attaining and sustaining excellence in accountability-measured performance.

Only 14% of the Joint Commission Accredited hospitals earned this distinction, and we were proud that HCA hospitals were among them.

On that note, let me close, and turn the call over to Milton.

Thank you, Richard, and good morning to all.

Hopefully, everyone has had an opportunity to review the Company's third quarter earnings release issued earlier today.

As noted in our release this morning, we have chosen early adoption of the provisions of Accounting Standards Update, number 2011-07, for the Presentation of Patient Service Revenue, and Provision for Bad Debts for the periods ended September 30, 2011.

The new accounting standard changes the presentations of provision for bad debts, from an operating expense to a deduction from patient service revenues.

This new presentation is consistent with our previous presentation of cash revenue and cash expenses that we supplementally provided to investors over the past few years.

As Richard mentioned, the third-quarter results provided strong volume growth, and excellent expense management.

However, we did continue to experience an unfavorable shift in service mix, much like the second quarter, resulting in lower acuity and revenue per adjusted admission growth.

Revenues in the third quarter increased 5.5% to $7.31 billion, primarily driven by increased patient volumes.

Same-facility revenues increased 3.7%.

As noted in this morning's release, the Company recognized $51 million of HITECH revenues comprised of $34 million of Medicaid incentives, and $17 million of Medicare incentives in the third quarter.

Additionally, we incurred $14 million of expense related to HITECH implementation in the third quarter.

Net income in the third quarter totaled $61 million or $0.11 per diluted share, which includes pre-tax losses on retirement of debt of $406 million, or $0.49 per diluted share related to the Company's debt refinancing during the third quarter.

Tax rate in the third quarter was favorably impacted by the finalization of certain settlements for the tax years 1997 through 2001.

These settlements resulted in a reduction to the Company's tax-related interest expense of $66 million pretax, or $0.08 per diluted share.

Shares used in computing our diluted earnings per share for the third quarter of 2011 increased 20.2% from the third quarter of 2010, due primarily to the issuance of shares to the Company's IPO in March of this year.

The repurchase of the 80.8 million Bank of America shares had an immaterial impact on the share count in the quarter, due to the September 21 closing of the transaction.

During the third quarter, same-facility admissions increased 3.2%, while same-facility equivalent admissions increased 3.8%, the Company's strongest growth in same-facility equivalent admissions since the third quarter of 2009.

Consolidated admissions and equivalent admissions, which include recent acquisitions, increased 4.8% and 5.4%, respectively.

As noted in our release, patient volumes in the quarter were driven by higher medical admits of 5.7%, while surgical admits decreased 1.4%.

This compares to our second quarter, when medical admits increased 3.7%, and surgical admits decreased 1.6%.

We continue to see growth in volume from patients covered by governmental programs.

Same-facility Medicare admissions and equivalent admissions increased 4.4% and 5.3%, respectively, compared to the prior year's third quarter.

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

Managed Medicare admissions increased 6.8% on a same-facility basis, and represents 24.1% of our total Medicare admissions.

Same-facility Medicaid admissions increased 5.8%, and same-facility equivalent admissions increased 5.2% in the quarter, compared to the prior year.

Same-facility managed care and other admissions decreased 0.8% in the quarter.

However, same-facility equivalent admissions actually increased 0.5% in the third quarter, as compared to the prior year.

This is the first quarter in several years where we have experienced growth in our same-facility managed care and other equivalent admissions.

Same-facility total surgical volume in the third quarter declined 1.1% from the prior year, and Sam will provide additional insights into our surgical volumes following my comments.

Same-facility uninsured admissions increased by 8.8% or 2,489 admissions in the third quarter compared to the prior year.

Same-facility uninsured admissions represent 7.8% of total admits in the quarter, compared to 7.4% in the third quarter of 2010.

Same-facility ER visits increased 4.9% in the third quarter, as compared to the prior year.

Now a few comments on revenue.

Our revenue growth was driven by strong same-facility equivalent admission growth in the quarter.

The unfavorable shift in our service mix during the quarter is reflected in our same-facility revenue per adjusted admission decline of 0.1% for the third quarter.

Without HITECH related revenues, same-facility revenue per equivalent admission declined 0.8% for the third quarter.

Same-facility Medicare revenue per equivalent admission declined 0.6% in the quarter.

Same-facility Medicare CMI declined 1.8% from last year's third quarter, and declined 0.4% on a sequential comparison to the second quarter of this year.

Same-facility Medicaid revenue per equivalent admission, excluding UPL, declined by 2.5% in the third quarter compared to the prior year.

The decline in Medicaid rate per equivalent admission is primarily attributable to Florida funding reductions.

During our previous earnings call, we provided the estimated impact of Medicaid reimbursement cuts in both Florida and Texas.

We have revised our estimates as follows.

In Florida, we previously estimated Medicaid reimbursement cuts to be approximately $50 million annualized impact effective July 1, 2011.

Based on the final published rates from the state of Florida, we have revised this estimate upward, to be an annualized impact of $70 million, $35 million in the second half of 2011 and $35 million in the first half of 2012.

This represents the impact of the state Medicaid rate cuts, the flow-through of the rate cut to managed Medicaid contracts, and the reduction of low income pool reimbursements.

The original estimates were based on information available to management at that time.

The revised estimate reflects the state's final calculations, resulted in the actual rate cut being worse than our original estimates.

The yearly revised estimate is included in our 2011 full-year earnings guidance.

In Texas, we previously estimated Medicaid reimbursement cuts to be approximately $25 million to $30 million annualized impact effective September 1, 2011.

Based on our understanding of the final published rules from the state of Texas, we have revised this estimate upward, to be an annualized impact of $80 million, $20 million in 2011 and $60 million in 2012.

This represents the impact of the state Medicaid rate cut, and the flow-through of that rate cut to managed Medicaid contracts.

The original estimates were based on information available to management at that time, and this newly revised estimate is also included in our 2011 full-year earnings guidance.

Now, moving to managed care.

Same-facility managed care revenue and other insured per equivalent admission increased 3.8% in the quarter.

This growth rate compares to 5.5% growth in the first quarter, and 4.9% growth in the second quarter of this year.

The declining rate of growth is attributable to changes in managed care service mix, compared to last year's third quarter.

Same-facility managed care and other case mix increased 0.9% over last year's third quarter.

The monthly trend on our managed care and other revenue per equivalent admission growth rate was as follows.

In July, we were up 2.7%; in August, we increased 4.3%; and in September, we increased 4.7%.

After an unusually low rate of growth in July, we saw an improving growth rate in August and September.

Same-facility charity care and uninsured discounts increased by $349 million in the third quarter, compared to the prior year.

And during the third quarter, same-facility charity care discounts totaled $676 million, an increase of $92 million from the prior year, while same-facility uninsured discounts totaled $1.432 billion, an increase of $257 million from the prior year.

We were very pleased with expense management in the third quarter, as same-facility operating expense per equivalent admission increased only 0.1% compared to the prior year.

On a reported basis, operating expense per equivalent admission increased 0.5%.

Salaries per equivalent admission on a same-facility basis increased 0.6% in the quarter compared to the prior year.

Hospital-only productivity performance, as measured by man hours per equivalent admission, improved 3.4%, while the Company improved 2.2% on a same-facility basis compared to the prior year.

Wage rate growth for the third quarter was 2% on a same-facility basis, compared to the prior year.

Same-facility supply cost per equivalent admission declined to 3.5% in the third quarter, reflecting benefits from our contracting pricing established by our GPO, Healthtrust Purchasing Group, a decline in high-intensity surgical volumes, and several supply-cost-saving initiatives.

Same-facility other operating expense per equivalent admission increased 2% in the quarter, consistent with prior quarters, and reflective of several small variances from the prior year.

Adjusted EBITDA increased 4% to $1.412 billion in the third quarter, from $1.357 billion in the prior year.

Adjusted EBITDA margin declined 30 basis points to 19.3%, from 19.6% in the prior-year third quarter, reflecting a slower revenue growth, and increased physician employment expenses.

Same-facility personnel costs associated with our physician employment company increased to $247 million in the third quarter of this year, compared to $192 million in the third quarter of 2010.

Bad debt plus charity and uninsured discounts as a percentage of revenue, plus bad debt, charity and uninsured discounts was 28.3% compared to 26.4% for the third quarter of 2010.

We currently have 92% of our self pay book reserved.

Upfront collections totaled $78 million, up 2.8% from the prior year.

Our cash flows from operating activities decreased to $880 million, from $1.256 billion in the prior year's third quarter, primarily due to changes in working capital items.

The reduction of cash flow in the third quarter was more of a reflection of the strength in cash flows from the working capital items in the third quarter of 2010, which increased by approximately $490 million, while the cash flows related to changes in working capital items for the current quarter were relatively flat.

As an example, accounts receivable went down approximately $20 million in the third quarter of this year, but was down approximately $130 million in the third quarter of 2010.

So, although positive to cash flow in the third quarter of this year, a significant decline from the prior year's third quarter.

Accounts payable, salaries payable and accrued expenses increased by approximately $270 million in the third quarter of 2010, but declined by approximately $40 million in the current quarter, resulting in approximately $310 million negative impact on cash flows for the third quarter of 2011 compared to the third quarter of 2010.

I believe this is primarily due to timing issues from period to period.

Days in accounts receivable at the end of the third quarter were 49 days, which compares to 48 days at September 30, 2010.

These calculations have been made based upon revenues after provision for doubtful accounts for both periods.

Capital expenditures totaled $394 million during the quarter.

At September 30, 2011, the Company's debt to adjusted EBITDA ratio was 4.53 times, compared to 4.36 times at June 30, 2011.

At the end of the third quarter, we had $1.928 billion of liquidity available under our senior secured credit facilities.

The Company completed significant refinancing activities during the third quarter, which will provide significant interest expense reductions in future periods.

Considering the impact of the repurchase of 80.8 million shares from Bank of America, I would expect the Company's diluted share count to be approximately 457 million shares in the fourth quarter of 2011, and 497 million shares for the full-year 2011.

As previously mentioned, the HealthONE acquisition closed on October 14.

We will use November 1, 2011 as the effective date for accounting purposes.

Therefore, HealthONE will be accounted for on a consolidated basis effective November 1.

Annual revenues associated with HealthONE are approximately $2 billion.

In closing, I would like to address fourth quarter expectations for HITECH revenues.

We would expect, based upon completion of our attestations, that the Company would recognize additional HITECH revenues of $310 million to $340 million in the fourth quarter.

For the full-year 2011, we expect HITECH revenues of $400 million to $430 million.

We expect HITECH related expenses of $15 million to $25 million in the fourth quarter.

And for the full-year 2011, we expect HITECH expenses of $75 million to $85 million.

Our fourth quarter estimated HITECH revenues and our full-year estimate now includes an estimated $60 million of incentives attributable to year-2 of Stage I Meaningful Use.

We expect to begin accruing the pro rata estimate of our second payment year of HITECH incentive revenues during October of 2011.

Our previous HITECH guidance for 2011 did not include any year-2 incentives.

This morning, we are confirming our 2011 adjusted EBITDA guidance of 3% to 5% growth.

Our guidance includes HITECH related revenues and expenses, but excludes the recently closed HealthONE transaction.

With or without the estimated $60 million of accrued year-2 HITECH incentives for the fourth quarter of this year, we expect to be within our 3% to 5% adjusted EBITDA guidance range for 2011.

Although, with the additional $60 million, we now expect to be near the top of that range.

I'll turn the call over to Sam Hazen.

Good morning.

I'm going to begin my comments this morning reviewing various components of our volumes for the second quarter.

First, I want to speak to the balance across our portfolio, which again this quarter is a favorable factor for the Company.

14 out of 16 divisions had growth in same-facility inpatient admissions for the quarter.

Of the 2 divisions that were down, 1 was down only 0.2%, and the other was down 0.6%.

15 out of 16 divisions had growth in same-facility adjusted admissions.

And for the third consecutive quarter, all divisions had growth in same-facility emergency room visits.

The only volume indicator that had inconsistent performance across the Company was surgeries.

Only 6 divisions had growth in same-facility total surgeries, which combines inpatient and outpatient volumes.

We continued to experience softness in our surgical volumes.

Inpatient surgical admits represented 31.3% of total admits for the third quarter.

This is down from 32.8% in the third quarter of the prior year.

Year to date through June, surgical admits represented 30.9% of total admits.

Seasonally, surgical admits in the third quarter represent a greater percentage of total admits, as compared to the first half of the year.

This year's third quarter seasonality factor was slightly down, only 20 basis points as compared to the third quarter of the prior year.

Once again, cardiovascular surgical procedures represented the majority of our declines.

Cardiovascular surgical procedures were down 6% in the third quarter, as compared to the third quarter of prior year.

Year to date through June, cardiovascular surgical procedures were down about 4%.

So, we did see a slight acceleration in the rate of decline for the third quarter.

This acceleration explains most of the seasonality factor decline mentioned previously.

Orthopedic and neurological surgical procedures were up almost 2% for the third quarter.

This growth represents an improvement in our rate of growth, as compared to the growth for these service lines in the first half of the year.

Now, let me transition to market share data.

As a reminder, we typically have a 90- to 180-day delay in getting market share data to analyze.

So, the most current data we have is for the second quarter in certain markets.

We have received market share data for 11 major markets, which includes data from the following states -- Texas, Virginia, Nevada, Utah, and Colorado.

In total, for all payers in these markets, cardiovascular demand, both medical and surgical, declined in the second quarter of 2011 by 2.4%.

Medical cardiovascular demand, which makes up almost 60% of the total, declined by 1.8% during this time period, and surgical related cardiovascular demand declined by 3.4%.

HCA in these 11 markets picked up 140 basis points of cardiovascular share.

On the medical side, HCA picked up 210 basis points.

And on the surgical side, HCA picked up 30 basis points.

Of the 11 markets studied, 7 were up in total cardiovascular share, 6 were up in medical, and 7 were up in surgical.

Although we are still dealing with pressures on our cardiovascular surgical volumes, I am encouraged by our hospitals' efforts to grow high-acuity business in other areas.

For example, in the third quarter we saw 2.7% growth in admissions to our intensive care units.

Our efforts to expand the market areas that we serve, by affiliating with other facilities and providers in rural markets, are maturing.

And as a result, we are seeing market share gains on in-migration business.

The most recent market share data shows that HCA has grown its in-migration share in these rural markets by 73 basis points.

Our physician strategies are focused on these areas also.

And finally, the Company has rolled out a number of operational initiatives to improve our surgical departments, and make them more attractive to our surgeons.

And to wrap up, let me make a few comments about our operating costs.

Milton mentioned the positive trends in the quarter.

We have numerous efforts at the hospital level to improve the day-to-day, shift-to-shift components of our labor cost management.

These efforts include an enhanced scheduling management system, which allows our hospitals to adjust their staffing levels more timely to fluctuations in both census levels and patient acuity.

Also, we have improved our human resource systems, which helps our hospitals manage premium-pay practices more effectively, thus reducing the most expensive components of labor.

Additionally, we have many corporate initiatives that are designed to support our hospitals, and reduce the overhead costs in our Company.

An example of this is our consolidation of coding into a shared service environment.

Another example of this is our comprehensive supply chain agenda, which continues to produce good cost strength for the Company.

And finally, we continue to implement numerous clinical excellence initiatives that we believe will deliver better patient care, greater physician engagement, and reduce costs by eliminating inefficient processes and unnecessary variations.

That concludes my comments.

I will return the call back to Vic.

All right.

Thanks, everyone.

Carla, if you can please come back on, and we will poll for questions.

I do want to ask today that people really try to hold your questions to 1 at a time, so we can get people in.

We do want to be respectful, knowing that many of you need to be on a call -- another earnings call in about 30 minutes.

So with that, Carla?

Thank you.

(Operator Instructions)

Our first question comes from Ralph Giacobbe with Credit Suisse.

Thanks, good morning.

Hi, Ralph.

I just want to go back to the pricing metric.

Maybe it would be helpful, if you could just go through just pure pricing increases on each of the books of business, just in terms what your expectations are?

For managed care, it was helpful to get the Medicaid color, but just in terms of an aggregate, what we should think about in terms of cuts on the Medicaid side?

And then the Medicare increase?

And then, I may have missed it, did you give just the overall drag from mix?

Milton, you want to take that?

Yes.

Well, basically our overall revenue per adjusted admission was basically flat in the third quarter, over a year ago.

And basically, looking at it by payer, for the third quarter on a same facility basis, our traditional Medicare was down 0.7%.

Again, reflecting the lower case mix index that we reported as well, down 1.8%.

Managed Medicare was basically flat, it was actually down 0.1%.

Medicare -- I'm sorry, Medicaid excluding UPL, was down 2.5% per adjusted admission.

And our managed care and other book was up 3.8%, third quarter over a year ago.

And as I mentioned, that managed care and other rate growth was adversely impacted by a very unusually low rate in July of under 3%.

And we saw it rebound up to 4.7% by September, but the average came in at 3.8%.

Okay.

And then as we sort of think about things going forward, any commentary on how we should think about -- even sort of the contribution between sort of that adjusted admission, and the revenue per adjusted admission?

No.

I think right now our revenue growth is being driven by volume.

And that's where we're seeing the top line growth, as primarily driven by the strong volumes that we're seeing in the third quarter.

We are optimistic about our volumes in the fourth quarter.

With respect to rate, although we did receive about a 1% Medicare rate in October, we continued to see the impact though, of the cuts from Medicaid, relative to the net revenue per adjusted admission rate increases.

So I think as you look at the fourth quarter -- again, the hard part is this acuity trend, and how it will play out in the fourth quarter.

But assuming it continues, and stabilizes and continues where it is, I think you'll continue to see us be flattish rate, maybe up or down a few points, but primarily top line driven by volume in the fourth quarter.

And Milton, you may add we haven't really seen any material changes in our managed care pricing as we go forward.

In the contracted rate -- that's correct.

We're continuing to see the contract -- we're about roughly 65% to 70% through the 2012 revenue book on our managed care contract.

And we're at a rate of approximately 6% increase from managed care.

And moving on --

Thank you, Ralph.

And moving on, we'll hear from Justin Lake with UBS.

Thanks, good morning.

My question was just around trying to put together the pieces for next year.

I know you haven't given guidance, but I'd like to just kind of walk through the -- the headwinds and tailwinds that we know about.

For instance, you gave some Medicaid numbers, just wanted to get an update on UPL, the healthcare IT year-over-year.

And then maybe the HealthONE contribution, that should be a tailwind in next year, and kind of the one-time items?

Okay.

I think HealthONE, we can talk -- we've sort of talked a little bit about, but Justin we're not going to get into the pieces for guidance for next year.

And I know everyone would love to do that, but we will do that on our next quarter's call.

So we have laid out the Medicaid that we know about, because those changes took place both in Texas and in Florida.

I think we've talked about HealthONE, Milton --

-- probably about $250 million additional EBITDA next year, over the EBITDA that will tick up for the last two months of this year.

Yes.

And then obviously, the Medicare payment rates are out there, in terms, we saw that rate October 1 at roughly 1%.

But the other parts, obviously moving.

We know it's piecemeal, but we're going to come back to you with a very comprehensive look at next year, with the appropriate guidance.

Same way with the HITECH.

We do have -- you may want to readdress that accrual just a little bit, so to make sure they understand that item as it relates to the fourth quarter.

And we'll have better guidance too, on next year on HITECH.

Yes.

So with respect to -- as I said, with respect to the fourth quarter, we're expecting to book HITECH revenues of $310 million to $340 million during the fourth quarter.

The expenses in the fourth quarter related to that, would be anywhere from $15 million to $25 million in the fourth quarter.

And again, that revenue range that I gave you, did include an expected $60 million accrual.

We are converting, from basically the recognition of the revenue, when we attest to -- meeting the HITECH Meaningful 1 Standards, to an accrual basis starting now worth -- effective October 1.

And now we're in Year 2 of Stage I Meaningful Use.

And we are going to accrue the revenue associated with Year 2, starting October 1.

We estimate that accrual to be about $60 million of additional revenue.

And we have included that in our guidance for the full year 2011.

Yes.

And I guess my last comment, Richard, reminds me, I mean we're just in the midst of our budget process, which really runs up into December.

And so we have -- we have an very extensive budget process, that we need to go through before we get to the guidance level.

No problem.

Thanks.

All right.

Thank you.

Got it.

Next question?

We're running tight here.

And now we'll hear from Sheryl Skolnick with CRT Capital.

Hi, Sheryl.

Good morning.

Good morning, everyone.

Thank you for all of that detail.

Can we go back to the cash flows, and particular emphasis, trying to understand the difference in the accounting and the accruals, versus the prior revenue recognition for the HITECH?

So first of all, if there are timing differences in the cash flow in this quarter, when will we see those timing differences made up?

That's question number one.

And question number two, talk to me about the pattern of the receipt of cash for all the HITECH revenues that are -- we need to get used to, and we need to understand.

Because I suspect strongly, that your cash flow in the fourth quarter will not be as robust as your EBITDA.

Sheryl, this is Milton.

Let me try to take on that.

First of all, I referred to the timing issues, they had to do with the accounts payable and salaries payable, and accrued expenses -- that the way the cut-off dropped -- in the -- happened in the year ago, we realized more benefit -- on the cash flow in the third quarter.

And then this year, the way that the cut-off occurred, the timing of it, is such, that we didn't see it.

So I think that, that those are just timing issues, as opposed to a real change in an annual run rate of our cash flows related to those working capital items.

So do they slide into the fourth quarter?

Or were they in the second quarter?

I'm not sure, Sheryl.

Right now, I haven't looked at that whether -- I think our second-quarter cash flows were pretty strong but I --

Yes, they were.

I can't say that it's -- that's attributable to that, to that reason.

But for whole -- but for the point I'm getting at, is for the full-year, as we think about cash flow for HCA, I don't think this is going to be a drag on the full-year.

Relative to the HITECH to -- we do expect -- I'm not exactly sure of the timing.

Obviously, we haven't ever receive these funds before.

We are receiving cash from certain states, with respect to the Medicaid attestations that we have made in certain states, with respect to the larger Medicare and the Federal money.

The way were planning for it, we do expect to receive some of that money in the fourth quarter of this year.

And there is some that we have -- about $100 million or so I think we have planned to receive in early part of the first quarter.

But that's our best estimate, again going through this, as we try to understand the timing.

With respect to the $60 million accrual that I mentioned though, for the fourth quarter of 2011, we would not expect to receive that cash until the fourth quarter of 2012.

So as we accrue this revenue throughout the year, we will be building up a receivable, that we will not received before the end of the year.

So we should think of that -- instead of having a lump-sum fourth quarter payment as we did this year and a lot of risk around that, your accruing as you achieve?

Yes.

The reason is, we have systems in place, dash boards in place, tracking mechanisms in place that, that we know where we stand, relative to meeting the requirements --

Got it.

-- of Meaningful Use.

And so we can, as we see the -- we'll have to adjust, of course our accrual, if we see a hospital or two fall off -- and we can't -- we then believe they cannot meet the requirement, we'll have to adjust our accrual for that hospital.

So it will be a fluid accrual throughout the year, but based on our performance for the first 90 day period of Meaningful Use, Stage 1 Year 1, we believe that going to the accrual method is a better accounting recognition method than the lump-sum.

Great.

Okay.

Thanks very much.

Thank you.

Moving on, we'll hear from Adam Feinstein with Barclays Capital.

All right.

Thank you, good morning everyone.

It seems like it is certainly did a great job of mitigating some of the impact from the acuity issue.

So I guess my question is this, can you just break out what the impact on the revenue per adjusted admit was from the acuity in other quarter?

I think last for you broke out a $74 million number.

I just wanted to see what the comparable number this quarter would be.

And then, just as we get to the mitigation, Sam was helpful, you spoke about some of the initiatives in place.

Was just curious, in terms of, as you view these costs as ongoing savings, just curious, if you have a number in terms of the run rate savings from the various e-initiatives you've outlined?

Maybe take the acuity question.

The $74 million that you referenced, Adam, I believe was the total Medicare revenue, attributable to all the factors we discovered, including prior year cost reports, 72 hour rule, and the like.

I think at the end of the day, we attributed about $25 million of that $74 million to the acuity issue.

We were down, I think 1.4% -- 1.2%, 1.4% in acuity.

In the second quarter, we're down 1.8%, so I haven't updated that number, but I would assume it's going to be something around the same probably financial impact as $25 million to $30 million for this year, as far as the acuity impact would be, my best estimate.

Based on the work we did for the second quarter.

Sam, you want to talk about costs little bit?

I mean, Richard?

Let me just general cost, we get a lot of questions, our cost performance has been very good, how sustainable is it?

And let me just give you a couple of broad thoughts on how we think about it.

First of all, our cost agenda is not static.

It's not like there's a certain thing we can do, and that's it.

It continues to grow.

There's new ideas all the time, and we've developed these ideas from different sources.

The most fundamental source, of course, is our 160 hospitals out there, all trying to solve many of the same problems.

And we get ideas and we move them across the system, as you know, and it's been very, very productive for us as a Company over time.

We look at benchmarking externally of course.

And as Sam mentioned during his remarks, we're adding technology.

He mentioned the example of technology to help us do our forecasting at the labor lines and the like.

The fundamental issue for us is that, we know that the cost agenda is flexible.

It -- there are new ideas all the time.

We are continually harvesting it, for what ideas can we deploy across the Company at large?

We invest in both short-term and long-term solutions.

The EHR, and all this effort to get it up and running -- at the end of the day, it is not only going to be about better care, it's going to be about more efficient care.

These are longer-term solutions that we're putting in place.

And the general answer, I would offer is that it's our approach to managing costs both in the short-term and the long-term, have provided -- we've had a good track record around it, and we expect that that's going to continue to be the situation going forward.

We are going to take a look at all opportunities as they present themselves.

And we're going to continue to manage to, the different aspects of the business cycle.

I think that's good, with that.

All right.

Thank you.

Thanks, Adam.

Moving on, we'll hear from Christine Arnold with Cowen & Company.

Hi, there.

Just a quick revenue questions, if you're comfortable answering them.

HITECH next year, will that be down about $85 million, which is what I think you have been sensing earlier?

And then UPL in the quarter, please?

All right.

In terms of HITECH, of course, we had the accrual of about $60 million.

And Milton, you want to --

Well, I mean the HITECH is going to -- revenue -- what we don't know yet about 2012 is the fourth quarter of 2012.

And of course, with -- at the end of September of 2012, we'll be at the end of Year 2, Stage 1 incentives.

And then, how will the Stage 2 incentives work?

Will they be postponed?

Will they be effective?

And we don't -- I don't know those numbers yet.

So it's very hard at this point in time, to give guidance for the full-year 2012, because I think there's still some uncertainty about the fourth quarter of next year.

Should each of the quarters, the first three quarters, be similar to this year?

Or is there a year-over-year drag, each of the first three quarters?

Yes.

So you think about the revenue, we're accruing $60 million here in the fourth quarter.

I would expect that number may move around a little bit, but I would use that as a proxy for the first, second and third quarters of 2012, as the amount of revenue that we will accrue.

Each quarter?

Yes, each quarter.

And fourth quarter is the one, that we're going to have to have some more visibility before we can clarify.

With respect to UPL, Texas UPL in the third quarter of this year, we had about $48 million of EBITDA net from the program, down about $15 million, from a year ago.

And the revenue, please?

The revenue in the third quarter, about $129 million versus $150 million a year ago, down about $20 million, $21 million.

Thanks so much.

Thanks, Christine.

And now we hear from Tom Gallucci with Lazard Capital Markets.

Hi, Tom

Good morning.

Just following up on Christine's question there, Texas UPL.

I'm not really so worried or concerned about fiscal 2012 I guess, but can you give us your perspective on maybe some of the changes that are going on down there, as we look into fiscal 2013 and beyond?

The way that program seems to be getting adjusted, potentially?

Either Sam or John, do you want to talk -- the question really about the waiver and any updates on the status of the waiver?

Well, this is Sam.

Let me start out by saying this.

We know obviously there are some adjustments in the first half of next year, related to the fact that FMAP supplemental funding will not exist.

And so that is a bona fide change that we know will occur, regardless of what happens with the waiver that the state of Texas is trying to achieve with CMS.

As it relates to the waiver, to date, the state has still not received a waiver from CMS.

So I'll say this, that we're in a little bit of a state of flux with respect to that program, and understanding exactly what the modifications will be, and what the implications of those modifications will be.

We are actively involved in the process with our representatives at the THA, as well as our senior management in Texas.

And so as we get more information, we'll share it.

But at this particular point in time, we are really at a loss with being able to provide any details.

Yes.

And again, I think it goes back to the intent is to try to keep the transition year, keep hospitals whole.

We've just got see the final rules and regs, whether or not that plays out or not.

So we'll be suspect, until everything is in writing.

And once it's in writing, we'll deliver the best prognosis that we can give you on, where we think those numbers will go.

Okay.

Thanks, guys.

I'll let you move onto the next one.

Thanks.

And I will open the floor up to Gary Lieberman, with Wells Fargo Securities.

Thanks.

You talked about the favorable monthly progression on the service mix during the quarter.

Can you talk a little bit more about that?

Was that just a matter of how the comps played out?

Or do you think you're seeing impact from some of the -- the implementation of some of the programs that you've got?

Gary, this is Milton.

I think you're referring to the favorable progression that we saw on our managed care, and the underlying trends there on pricing, where we start off below 3 and progressed -- I'm sorry, progressed up to an increase of 4.7.

Gary, it's very hard.

Some of the -- July was no doubt, adversely impacted by the business day count.

We had one less business day in July this year than a year ago.

That's going to affect surgical volumes, basically managed care surgical volumes, and it's going to put some pressure.

So we did see that.

That's probably a piece of the July downturn.

But as Sam mentioned, in the service mix overall, we're just continuing to see our growth come from the medical admissions, medical volumes and less surgical volume.

And that's what I think is putting pressure on our managed care, to push it below the contracted rate.

We expect about 5.5% this year, and we're running year-to-date slightly under that, around 5%.

So I think it's just more reflective of the service mix that Sam mentioned at this point in time.

But do you think the trend is starting to turn in your favor, based on monthly progression?

Or it's too early to say?

Well, I think, Gary, this is Sam.

Our surgical volumes were fairly consistent with previous quarters, with respect to decline.

And we were down somewhere around 1%, and that's about what we've been.

What we're seeing is that the admission activity that is being generated in the hospital is more medicine.

So the ratio of surgery to total is declining a little bit faster than previous, simply because we're seeing more of the total volume growth from the medical side.

And so it's a skewing the composite ratio.

It's having an impact on our composite revenue per unit, but we are able to leverage some of that.

We just don't get to leverage it as much from a profitability standpoint, because there's not as much revenue associated with medicine patient.

There's no substantial trend change -- I was looking month-to-month over the last few months -- in our volume with respect to surgical activity or cardiac activity or critical care activity.

So from that standpoint, not seeing any trend change.

It's just that what we are seeing is more medicine business, and it's a significant portion of our growth.

And that yields lesser revenue and a little less margin than our -- obviously, our surgical business.

So that's really sort of the implications and sort of the trend.

Gary, thank you.

Time for probably a couple more questions before 9.00.

Now we'll go to A.

J.

Rice with Susquehanna Financial Group.

Hello, everyone.

Maybe just a broad question about capital deployment strategies.

You guys put a lot of capital to work here in the last three months.

But what -- going forward, debt paydown versus I guess you have been mentioned with a couple -- at least one big acquisition opportunity in Colorado, how does that factor into your thinking going forward?

A.

J., this is Milton.

I think you'll be -- we'll use our free cash flow to take leverage down here over the next several months.

Even -- we're looking for transactions, looking for acquisitions that fit our strategy, fit our market.

The one as mentioned, of course, out in Colorado, that's going to -- even if that occurs, that's months down the road.

So our strategies right now, after taking on the BofA repurchase and the HealthONE repurchase, would be to reduce our leverage at this time.

Okay.

All right.

Thanks.

Thanks, A.

J.

Moving on, we'll go to Frank Morgan with RBC Capital Markets.

Good morning.

Quick question here.

With regard to the volume in acuity and surgical trends, could you talk a little bit about, did you see the regional variations from one part of the country to the other?

And then the second question is, can you -- you mentioned what your managed care book look like for 2012 for the most part on the rate side.

But are you seeing any changes kind of in the structure of those contracts?

Thanks.

Sam, do you want to --

This is Sam Hazen again.

If you look at the 3 groups, I'll use that as the geography.

I don't have a map of every division in front of me, and it would take a while to sort through that.

But if you look at the 3 groups, the one group that had better surgical performance was the Southwest group, which includes Texas, Colorado, Oklahoma, and Kansas.

That group actually saw -- that group actually saw growth in their surgical admissions in the quarter.

The other 2 groups were consistently down at about 2%, with again, significant declines in cardiology.

I will say this, that in the Southwest group, their cardiology trends were consistent with the other 2 groups.

So quite a bit of cardiology pressure in Florida, based upon some first quarter market share data that we could see.

And that's obviously a big book of their business, given our position in Florida.

So that puts pressure on the national group and again, the central group was down also, at about 2% on a year-over-year basis.

So fairly consistent in those 2 groups, a little better performance in Texas.

And so we saw slight growth of there on our total -- total surgical activities.

And Richard, do you want to address any other questions?

I would just say that we really haven't seen any material changes in the structure of any managed care contracts that we've executed.

Okay.

Thanks.

Thank you.

Maybe one last question?

Our final question comes from Kevin Fischbeck with Bank of America Merrill Lynch.

Hi, Kevin.

Great.

Thank you.

To the -- the cost control in the quarter was pretty impressive, and you guys went through a lot of the things that you're doing.

I guess I want to get your sense about, what you think -- how sustainable this 50 basis point increase is, at least for this couple quarters before you start comping against it?

Or is there some extra pressure you would expect, with next couple quarters on that line?

All right.

This is that Sam Hazen again.

I think as we move through the fourth quarter, we're fairly confident that we will continue to see similar trends.

It can move a little bit depending on acuity, and so forth.

Certain markets have wage adjustments that, that they put in at the last half of the year, so those kind of things could have a slight impact.

But largely, we're confident that we've instituted some permanent adjustments that will carry us through the fourth quarter.

And in some instances, on into next year with some of those adjustments.

Again, as Richard mentioned, it's a dynamic process, cost management in a hospital business.

And as we identify new opportunities, we move to implement those, so there could be additional initiatives that surface as we move through the rest of this year into the budgeting process, and on into the next year.

But cost management in our business is day-to-day.

It's reflective of what's going on from an acuity standpoint, a mix standpoint, and so forth.

And I'm confident that our systems are getting better.

And so, we're encouraged by where we are, and we'll just continue to be diligent in the efforts.

So I'm really not in a position to give any kind of numbers for next year.

But I will say, that as we move through the fourth quarter, we're pretty confident with where we are.

I think also, underlying those key trends around those metrics would be volume.

That we continue with our fixed cost structure to leverage the current volume that we're seeing, and to drive towards 0.5 or lower sort of a target.

Volume is going to have to be part of the equation as well.

All right, Kevin, thank you.

With that, apologize to anyone who didn't get a question in.

But I do know there is a call now, and there's another call in another hour.

So thank you very much.

And Mark and I are here, happy to answer any other questions.

Have a great day.

Ladies and gentlemen, that does conclude our conference call for today.

Again, thank you for your participation.