美國醫院公司 (HCA) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HCA fourth-quarter and year-end 2011 earnings release call.

As a reminder 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.

Leah, thank you, and good morning to everyone on today's call and to those of you who are listening on the webcast.

Mark Kimbrough our Chief Investor Relations Officer and I are pleased to host you here this morning.

With us, our Chairman and CEO, Richard Bracken; our President and CFO, Milton Johnson; and Sam Hazen, President of Operations.

We also have several other members of the HCA senior management team here this morning to assist 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 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 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 significant uncertainties inherent in any forward-looking statement 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 let me turn the call over to Richard Bracken.

Okay, thank you, Vic, and good morning to all.

We do appreciate your participation on our call this morning.

We have a lot to cover today, so let me get to it.

I will start by providing some overall observations for the year and then Milton and Sam will follow with a detailed review of the fourth quarter's financial and operating results.

Milton will then close this morning with our 2012 guidance and some of the key assumptions in that guidance.

Let me begin by saying that we are generally pleased with how our operating teams navigated through some pretty significant challenges the hospital industry faced in 2011.

We entered the year not expecting to see significant improvement in unemployment rates and other key economic indicators and also knowing that hospitals would not receive a Medicare payment rate increase for at least three quarters of the year.

In addition, we expected some Medicaid payment pressures in certain states, but as you now know we ended up with a greater than anticipated Medicaid rate cuts in both Florida and Texas in the second half of the year.

And as we have discussed at length in our calls beginning with the second quarter of 2011, we have experienced a service mix shift from surgical to medical admissions.

Despite these significant challenges we produced revenue growth of nearly 6% and adjusted EBITDA growth of 3.3%.

During 2011, we made significant investments in technology in our clinical, quality and patient services agendas and our market-based service line strategies.

And we are confident these investments will continue to serve us very well in the future.

We are particularly pleased with the successful efforts of operating teams to adjust their operating costs in the second half of the year to offset the greater than anticipated revenue per admission pressures.

In our third quarter, our same-facility operating expense per equivalent admission was flat.

And in the fourth quarter, we actually saw a 0.4% decline in our same-facility operating expense per equivalent admission.

For the full year, our operating expense per equivalent admission rose only 1.4%, reflecting strong management of both overhead and variable expenses while still supporting important growth initiatives.

As we have discussed before, part of our ability to manage operating costs effectively is a result of our continued strong volume growth.

This proved true throughout each quarter of 2011.

For the full year, our admissions grew 4.2%, equivalent admissions are up 5.2%, and emergency room visits were up 7.7%.

On the same-facility basis admissions grew 2.3%, equivalent admissions 3%, and ER visits up 6.2%.

We now have experienced 17 straight quarters of same-facility equivalent admission growth.

And Milton and Sam will provide some more color on our volume growth in a few minutes, but let me just say that we believe this growth not only confirms our favorable facility locations in areas with good population growth dynamics, but also reflects an operating agenda that seeks greater efficiency and effectiveness in how we process patients through our hospitals.

Equally important in this strategy is our commitment to improve clinical outcomes and enhance the overall patient experience.

As you might have noticed in our release this morning our cash flows from operating activities totaled $3.9 billion in 2011.

These funds along with the proceeds from our March IPO of approximately $2.5 billion gave us significant financial flexibility in 2011.

During 2011, we made capital investments of approximately $1.7 billion in our existing facilities and markets.

We invested $1.45 billion to acquire full ownership of our HealthONE partnership in Denver.

And on our prior calls we have talked at length about the benefits we foresee in this market in the coming years.

You will also recall that in September of this past year we successfully repurchased more than 80 million shares of our common stock, which was owned by Bank of America, representing approximately 16% of our outstanding shares.

We paid approximately $1.5 billion to purchase these shares at $18.61 a share; obviously an accretive transaction for our shareholders.

In addition we were able to refinance and extend a significant amount of our LBO debt during 2001 (sic) at favorable rates.

And as a result our near-term debt maturities have been substantially reduced and we will realize meaningful interest savings.

We have consistently said since returning to the public market that we plan to be flexible in determining the best uses of our cash flow.

Even with these substantial investments I just mentioned, we lowered our debt to adjusted EBITDA ratio from a little over 4.8 times at the end of 2010 to just under 4.5 times at the end of 2011.

As stated in our release this morning, our board has approved a special cash dividend of $2 per share of common stock, providing liquidity to our shareholders.

This payout should not affect our ability to invest in our markets or impair our acquisition strategy.

It is important to note that the impact on our leverage from this dividend will be modest.

A discussion of HCA highlights for 2011 would be incomplete without recognizing the 76 HCA hospitals named among the 405 US hospitals identified by The Joint Commission for accreditation of hospital organizations as top performers on key quality measures.

You may recall in September that The Joint Commission recognized these hospitals for evidence-based care processes closely linked to positive patient outcomes.

We are proud that 20% of those hospitals recognize our HCA facilities.

And finally, I wanted to commend our operating quality performance and IT [and S] teams who were responsible for the very successful rollout of our EHR in 2011, allowing virtually all HCA hospitals to meet stage I meaningful use requirements during the first year.

We are pleased to be among the leaders in what we believe is an important foundational step in our ability to create a clinical data set to assist in the provision of more cost-efficient and effective healthcare services.

And finally, on February 1, we closed on an acquisition of an 82-bed hospital in Wichita, Kansas that complements our 760-bed Wesley Medical Center, and we are pleased to welcome them to our organization.

So with that let me turn the call over to Milton.

Thank you, Richard, and good morning to all.

I hope each of you have had the opportunity to review the company's fourth-quarter earnings release issued this morning.

We have a lot of moving parts in this quarter, so I'll attempt to clarify major issues as well as provide more insight into our 2012 earnings guidance provided in today's earnings release.

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

We did, however, continue to experience an unfavorable shift in service mix compared to the prior year, along with Medicaid reductions in a couple of states, which resulted in lower revenue per equivalent admission growth.

Before I begin to get into the details let me point out that this is the first quarter that our HealthONE joint venture is now fully consolidated in our financial and operating stats.

It is not included in same-facility financial or operating metrics.

We accounted for investment in HealthONE using the equity method through October of 2011, with our share of the operations all recorded in the line item equity and earnings of affiliates in our consolidated income statement.

Our share of HealthONE's earnings represented approximately 90% of the total equity in earnings of affiliates in our consolidated income statements for each of the last three years.

We began consolidating HealthONE's operations in our consolidated income statement beginning November 2011.

And the equity and earnings of affiliates line item has been and is expected to continue to be significantly reduced compared to periods prior to November 2011.

Revenues in the fourth quarter increased 8.5% to $7.769 billion, primarily driven by increased patient volume and the consolidation of the HealthONE joint venture.

Same facility revenues increased 2.2%.

Net income attributable to HCA Holdings Inc.

in the fourth quarter totaled $1.935 billion or $4.25 per diluted share.

This includes a pretax gain on acquisition of controlling interest in our equity investment in HealthONE of $1.522 billion or $3.13 per diluted share, reflecting the re-measurement of estimated fair value of our investment in HealthONE following our acquisition of the remaining 40% ownership in the Colorado Health Foundation.

Also in the fourth-quarter results include a pretax on sale of facilities of $145 million or $0.18 per diluted share, primarily reflecting the sale of our Palmyra Medical Center in the quarter.

Tax rate in the quarter was favorably impacted due to the majority of the HealthONE gain being a nontaxable item.

During the fourth quarter, same facility admissions increased 2.5%, while same facility equivalent admissions increased 3.2%, each compared to the prior year's fourth quarter.

As noted in this morning's release, excluding international facilities, patient volume growth in the quarter was primarily driven by medical admissions which increased 4.8% while surgical admissions declined 1.8% on a same-facility basis.

This is fairly consistent with the prior [two] quarters.

We continue to see our patient volume growth resulting primarily from governmental payors, however, we have seen some improving trends in our commercial payor volumes.

Same-facility Medicare admissions and equivalent admissions increased 4.2% and 4.8%, respectively, in the quarter.

Same-facility Medicare admissions include both traditional and managed Medicare.

Managed Medicare admissions increased 8.1% on a same-facility basis and represents 24.2% of our total Medicare admissions.

Same-facility Medicaid admissions increased 3.1% and same-facility equivalent admissions increased 4.3% in the quarter compared to the prior year.

During the fourth quarter same-facility managed care and other admissions declined 0.7%.

However, same facility equivalent admissions increased 0.8% compared to the prior year.

This is the second consecutive quarter that we have experienced growth in managed-care equivalent admissions.

Same facility total surgeries declined 1.8% compared to the prior year, reflecting a decline in inpatient surgeries of 2.1% and outpatient surgeries of 1.6%.

Same facility uninsured admissions increased 5.2% or 1,399 admits in the fourth quarter compared to the prior year.

Same facility uninsured admissions represent 7.2% of total admits in the quarter compared to 7% in the prior year's fourth quarter.

We continued to experience strong growth in the Company's ER visits, a major driver of hospital inpatient volume.

During the fourth quarter, the same-facility ER visits increased 4.4% compared to the prior year.

Same-facility revenue growth in the fourth quarter was primarily driven by solid equivalent admissions growth.

The continued shift in our medical mix during the quarter is reflected in the same-facility revenue per equivalent admission decline of 1% during the fourth quarter.

Our same-facility Medicare revenue per equivalent admission increased 0.7% in the quarter.

Same-facility Medicare case mix index decreased 1% from last year's fourth quarter.

However, it increased sequentially 0.5% from the third quarter of 2011.

Same facility Medicaid revenue per equivalent admission excluding UPL declined 10.4%, primarily reflecting reimbursement reductions in Texas and Florida.

Same-facility Medicaid revenue per equivalent admission, including UPL reductions, declined 14.2% in the quarter compared to the prior year.

Same-facility managed-care and other revenue per equivalent admission growth was below recent trends, increasing 1.3% in the fourth quarter, reflecting an unfavorable shift in service mix.

Managed care and other case mix index for the quarter declined 0.7%.

We experienced year-over-year declines in neonatal patient volume as well as cardiovascular surgery and spine surgery.

Same-facility charity care and uninsured discounts increased by $269 million in the fourth quarter compared to the prior year.

During the fourth quarter, same-facility charity care discounts totaled $680 million, an increase of $76 million from the prior year, while same-facility uninsured discounts totaled $1.348 billion, an increase of $193 million from the prior year.

We were very pleased with expense management in the fourth quarter as same facility operating expense per equivalent admission declined 0.4% compared to the prior year.

On a reported basis operating expense per equivalent admission increased 0.6%.

Salaries per equivalent admission on a same-facility basis increased 0.7% in the quarter when compared to the prior year.

Hospital-only productivity performance as measured by man hours per equivalent admission improved 3%, while the company improved 2.2% on a same facility basis compared to the prior year.

Wage rate growth was 1.8% for the fourth quarter on a same-facility basis.

Same-facility personnel costs associated with our physician employment company increased $39 million to $249 million compared to the fourth -- to prior year's fourth quarter.

Same-facility supply cost per equivalent admission declined 4.5% in the fourth quarter, reflecting a decline in surgical volumes and continued effective execution of our supply-chain initiative.

Same-facility other operating expense increased 0.9% in the fourth quarter, consistent with prior quarters.

The company recognized $120 million of EHR incentive income related to the meaningful use of certified EHR technology and approximately $19 million of EHR-related expenses in the fourth quarter.

In response to new accounting guidance the company revised its accounting recognition of income from EHR incentive payments.

EHR incentive income is not included in revenues, but is presented as a separate line item in our consolidated income statement.

For the year, EHR incentive income totaled $210 million, and we incurred $77 million of EHR-related expenses.

During 2011, the company received $306 million in EHR incentive cash payments.

For the fourth quarter cash flows from operating activities increased to $1.387 billion from $534 million in the prior year, primarily reflecting improvements in working capital items of $388 million and $467 million related to income taxes.

CapEx for the fourth quarter increased to $509 million from $465 million in the fourth quarter of 2010.

[$14 million] of the increase reflects the consolidation of the HealthONE joint venture.

Days in accounts receivable at December 31, 2011 were [52] days compared to 50 days at the end of the third quarter and 49 days at December 31, 2010.

At December 31, 2011, the Company's debt to adjusted EBITDA ratio was 4.46 times compared to 4.81 times at December 31, 2010.

At the end of the quarter we had $2.137 billion of borrowing capacity under our senior secured credit facilities.

We will use available cash and the Company's credit facilities to fund this morning's announcement of a special dividend of $2 per share or approximately $952 million.

Our leverage ratio pro forma for the dividend as of 12/31/11, 4.63 times.

Now before going to Sam, let me go ahead and cover our 2012 guidance.

We estimate that for 2012 consolidated revenues for HCA should range from $32 billion to $33 billion.

Included in our estimates is $2.1 billion to $2.2 billion in revenue from HealthONE.

Our estimate does not include any additional revenues from acquisitions that may be completed in 2012.

Adjusted EBITDA, we estimate a range from $6.20 billion to $6.45 billion for the year, while earnings per diluted share, we estimate a range from $3.35 to $3.55 for 2012.

On a same-facility basis we expect overall volume growth at a slightly lower rate than 2011.

HealthONE will be included in our consolidated volume stats, but will not be included in same-facility stats.

On a consolidated basis we expect equivalent admissions growth to range from 7% to 8% for the year.

On a same-facilities basis we expect equivalent admission growth to range from 2% to 3% for the year.

With respect to net revenue per equivalent admission growth, we expect to continue to see unfavorable rate impact from changes in service mix during the first quarter of 2012, but we expect less rate impact from service mix changes for the remaining three quarters of 2012.

On a consolidated basis excluding UPL, we expect net revenue per equivalent admission growth in a range of 3% to 3.5% for 2012.

On a same-facilities basis excluding UPL we expect net revenue per equivalent admission growth in a range of 1.5% to 2%.

Our guidance assumes an expense growth outlook that will continue to benefit from a low inflationary environment.

We will continue to invest in our clinical and EHR development strategies.

Our total expense growth is modeled based upon our expected revenue growth for 2012.

Our guidance includes estimated EHR incentive income in a range of $325 million to $350 million and EHR-related expenses in a range of $140 million to $160 million.

Also capital expenditures for 2012 should range from $1.8 billion to $1.9 billion, with the increase primarily reflecting the change in recognition of HealthONE-related capital expenditures.

So with that I will pause and turn the call over to Sam.

Good morning.

I am going to focus my comments on more details related to the volume statistics this quarter.

I will begin with a look inside our portfolio to give you some perspective on the performance across the markets.

Once again the company had very good balance across our 16 divisions with respect to volume growth for the quarter as compared to the previous year.

All 15 domestic divisions had year-over-year same facilities admission growth.

The range of growth was a low of 0.3% to a high of 8.2%.

Thirteen out of 16 divisions had year-over-year growth in same facilities adjusted admissions.

And of the 3 that did not have growth, one was flat and the other 2 were down 1% or less.

14 out of 15 domestic divisions had growth in same facilities emergency room visits as compared to the prior year.

Of this 11 divisions had growth in excess of 3% with a high of 9.5%.

The only division that did not have growth was down 0.3% year over year.

Surgical volumes were down again this quarter as compared to the prior year.

The trend was not materially different than previous quarters this year.

Within surgery cardiovascular volume trends slightly improved in total.

Inpatient cardiovascular surgeries were down 3.6% for the quarter as compared to the prior year.

This is a slight improvement over the September year-to-date trend, which was a decline of around 5%.

We did see a deteriorating trend in the most revenue-intensive components of cardiovascular surgeries with open heart related cardiovascular cases being down for the quarter 7.8%.

Year-to-date September we were down only 1.5%.

This trend change was a significant component of the managed-care revenue softness for the quarter with commercial volumes in this category down 19% as compared to 5% through September.

The Company has rolled out a comprehensive surgery growth initiative which is designed to improve our surgical volumes.

We are implementing this initiative in a manner similar to our emergency room initiative, which has yielded positive results for the Company over the past few years.

Included as part of this initiative are enhancements to the process of scheduling surgical cases.

These enhancements, which include improvements in both process and technology, will make it easier and more efficient for our physicians to schedule cases, while at the same time increasing our operating room capacity.

Also, we are dedicating additional capital spending in our budget to enhance further the technology and equipment necessary to attract more surgeons.

We have increased the resources in our physician outreach and communication function to ensure that any operational, scheduling, or equipment issues are addressed in a timely manner.

Also as part of this initiative, we have established at each of our hospitals a surgical services advisory council to ensure that both certain operating standards are met and our physicians have the necessary input into our surgical operations.

We believe these additional efforts, coupled with our comprehensive service line strategies, will help differentiate us in the markets over time and allow us to continue to grow market share and improved clinical outcomes.

And one final point on volumes, which we also believe to be a part of the explanation for our managed-care revenue softness, is on our women's and children's services -- deliveries were down this quarter 2.4% on a same facilities basis.

Through September we were down 0.8%.

Most of the difference this quarter is explained by Medicaid volumes and not managed-care volumes.

Managed care deliveries were actually up this quarter by 1.9%.

Year-to-date they were down 1.3%.

Normally this translates into more neonatal volumes, but in the fourth quarter our managed-care neonatal patient days were down 6.5% with the length of stay accounting for 3.6% of this decline.

Length of stay is generally a proxy for acuity in our neonatal units.

Through September the length of stay for our managed-care neonatal business was down only 1.2%.

This decline, in conjunction with the decline in open heart surgical volumes, explains a large portion of the change in managed-care revenue for the fourth quarter.

We are confident in our women's and children's service line strategies and believe them to be well-crafted to compete effectively in the marketplace.

To wrap up, I want to provide you with our perspective as we head into 2012 on the broader trends across HCA's markets.

We have studied the macro trends in our markets, and in addition to the forecast that Milton provided in his comments, our revenue guidance for 2012 is built in part on the following four observations.

First, market demand for inpatient services is strengthening some and we are forecasting it to grow overall in the range of 0.5% to 1%.

Second, market demand for emergency services should remain strong and continue to grow in the 2% to 3% range.

Third, commercial enrollment in volumes should remain stable.

And fourth, the competitive landscape is anticipated to remain largely unchanged in comparison to 2011.

We have seen our market share grow some over the past year as a result of our service line strategies, capital investment strategies, physician alignment strategies, and quality improvement strategies.

As we move into 2012 we are anticipating a continuation of this performance.

And with that I will turn the call back to Vic.

Sam, thank you, and Richard and Milton.

Leah, would you like to come back on and we will poll for questions.

(Operator Instructions) Adam Feinstein, Barclays Capital.

Thank you.

Good morning, everyone, and great news on the dividend payment.

I guess I just want to ask on the volume side, clearly, your volumes have been stronger than what the market growth rate has been.

And Sam, I appreciated the details you gave earlier.

Just wanted to just get some additional thoughts in terms of as you guys think about the markets you're in and just maybe what going on there with demographics and everything else, just curious if -- how you are thinking about your overall market share.

And then just on the mix question with the volumes, I guess just what is your sense in terms of the mix impact on other hospitals in the same markets?

All right, Adam.

Thank you.

Sam, do you want to start out basically asking about market share and the mix shift.

Well just to remind everybody once again our market share data is somewhat lagging.

And to date we are starting to get in market share data in certain markets.

And we have better market share data through the second quarter.

And for HCA on a 12-month running basis, our market share has grown modestly, and in a marketplace that has been slightly flat to up maybe 0.5 point over the 12-month period.

And what we have seen inside that market share is generally statistics that are reflective of what we have been reporting.

For example women's services during this time period have been down 3.5%.

And HCA's market share is modestly down like 5 basis points.

Cardiology for example has been down about 4% in the market and HCA has picked up market share around 9 basis points.

So within the different categories our market share trends, generally favorable, but reflective of the overall volume trends that we have reported over the year.

I will say that I think as the year has progressed we have picked up slightly more market share than what we've reported through the second quarter with the volumes that we reported in the third quarter as well as the volumes that we reported in the fourth quarter.

I haven't seen the specific service line data yet to understand whether or not we were gaining or losing market share within the different service lines, but as soon as we get that information, we study it, and we work with our division president to ensure that the information is being used to adjust our strategies and so forth.

Milton, did you want to add something?

Just one other comment.

As you know, our market share data is inpatient only.

It doesn't capture the outpatient activity.

And the company has been seeing very strong emergency room volume growth over the past year, over 6%, as Richard mentioned, for the year just ended 2011.

And I think that strategy and the growth we are seeing in our emergency room is contributing to the overall adjusted admission growth that we are reporting, especially over the last two quarters.

All right.

Thank you very much.

Gary Lieberman with Wells Fargo.

Good morning.

It seems like your operating expense -- you had better success controlling it in the second half of the year than maybe you did in the first half of the year.

And it sounds like from your comments you expect that to generally continue into next year.

Any concern as you get into the second half of 2012 if there is anything specific that anniversaries that might make some of the operating expense benefits a little bit more difficult to get?

All right.

Milton, do you want to take that?

Well, sure.

I think overall, no doubt that the second half of 2012 our comps will become more difficult with our operating expense performance that we've generated in 2011.

I am not aware of any particular item out there.

I do think as I said in the comments a low inflationary period.

We are projecting that is going to carry through the year.

You know we have very effective supply initiatives underway that we think will also help us.

If we see a stabilization in the service mix which we are calling for really in the second, third, and fourth quarter of next year, that may put some year-over-year comp pressure on supply costs, but I don't consider that to be a major headwind for us.

So I do think our cost overall trends should be similar, but I think it is going to be more difficult in the second half of the year; certainly more difficult than you will see in the first quarter of 2012.

Just on the balance sheet if you look at the other accrued expenses that accrue in the fourth quarter, is there anything in particular there, or is that primarily just the addition of HealthONE to the balance sheet?

I just got a -- Don saying that this is deferred high-tech revenue.

Okay, great.

Deferred income.

Okay.

Justin Lake with UBS.

Good morning.

Just question around the EBITDA numbers for this year and just how you are thinking about the bigger picture from a growth perspective.

So I think you typically talk to EBITDA growth for the business being mid single digits.

I am backing into about 1% ex items this year for healthcare IT and HealthONE.

It makes sense.

I know there are a number of moving parts, so I am hoping you can just do two things.

One, can you walk us through the moving parts that are a headwind for this year?

I'm thinking UPL, Medicaid, just kind of level set us.

And then give us a quick comment in terms do you still think the longer-term growth for EBITDA in this business is that 5%, 6%?

Thanks.

Sure, Gary.

And of course the range of growth -- EBITDA growth based on the $6.2 billion to $6.45 billion of course would be 2.3% to 6.4% EBITDA growth all in compared to 2011.

If you look at some of the major pieces of it and walk through it and, again, there's different ways of cutting this no doubt and looking at it, but about -- we are looking at next year in our guidance probably around 80 basis points to 1% sort of tailwind from high-tech.

We are also looking in the neighborhood of probably around 4% or so of tailwind from HealthONE included in that guidance.

Now the headwinds we have got are primarily of course -- is going to be the UPL, which I think we have given guidance of probably $80 million to $90 million sort of hit there with respect to UPL.

And then on Texas Medicaid, there should be about a $60 million headwind there versus $20 million that we had this year.

So a net $40 million impact on the growth rate.

So if you take all that into account, the pluses and minuses, we are showing the underlying business growing about in that probably 1.5% to 3% range, somewhere in that zone.

Great.

Thanks for all the detail.

A.J.

Rice with Susquehanna Financial.

Hello, everybody.

I just thought I might ask you to update us on anything new or different worth talking about on the Parallon initiative.

And then specifically the supply cost area, you've alluded to that a couple times.

And I know last quarter you talked about a Far East initiative on basic supplies; any update on that as well.

Yes, let me mention on Parallon.

First of all here with us this morning is Michael O'Boyle, who just joined us in January as our new CEO of Parallon, of course to replace Beverly Wallace, who retired at the end of the year.

And we are very, very happy to have Michael on board and his guidance of Parallon over the coming years.

Really in our -- when we look at the supply agenda with respect to HPG, you know, we continue to see good growth opportunities in HPG.

We continue to see opportunities again to -- with our contracting strategies, especially as we roll out some strategies around medical devices, and it's a very market by market approach.

It's a very sensitive approach to our physicians, but it is one that we believe will continue to be able to yield results.

As one example, as we bring our supply-chain strategies into the OR opportunities, there as well.

So we have a lot of opportunity there.

With respect to -- I think you were mentioning or referencing our outsourcing initiative in China, that continues to develop at this point.

That initiative is not having a material impact on the company, but one we are continuing to develop in 2012.

Darren Lehrich with Deutsche Bank.

Good morning, everybody.

I wanted to just ask a little bit about managed care contracting, how it is a evolving in 2012, with your general pricing outlook is.

Sam, you have obviously given us commentary on mix, so thanks for that.

But maybe more from the standpoint of how contracting is going.

And are you seeing bundled structures at this point now, or networks, just how you see that evolving in '12?

You want to -- Juan, do you want to do that?

Juan Vallarino heads up our managed care.

It's really more of the same.

I haven't seen very different approaches yet.

There's talking in our networks with discussion back and forth, but I would say for the foreseeable next year it's going to be much more of the same range, as the guys have been given contract structures the same, a couple of pilots here and there.

And I am going to remind you that we have got about 85%, 90% of our 2012 managed-care revenue currently under contract in that 5% to 6% sort of contracted rate increased zone, with structures under those contracts very similar to what we have been operating under in recent years.

We have got about half of our 2013 managed-care revenue under contract in that same sort of rate growth range at this point, and again, with the underlying structures consistent.

So all those -- there would be discussions I think, especially as we get closer to 2014 and assuming health-care reform continues to be on track and the like.

But as of now I would say our managed-care pricing and our structures are similar to what -- and largely consistent with what we have been working with in recent years.

Okay.

And if you could just help me square then -- you know the managed-care pricing growth I think you told us was 1.3% in the quarter on an equivalent admission basis but the mix was down just only about 1%.

So maybe just help us think a little bit more about that number in light of the pricing growth that you are talking about here.

Yes.

So Sam -- I am going to turn it to him.

Sam I think in his comments addressed the primary reason that our yield is below our contracted rate.

And it has to do with basically our surgical volumes in a few areas.

Yes, let me just add to that for one minute.

I think when we look at managed-care activity -- and I want to give you some stats through the end of the year as well as the fourth quarter because I think it will help understand what changed in the fourth quarter and caused our trend to move from 4% or so down to 1.5% to 2%.

And it really involves the fact that the book of business that grew and sort of moved us to where we are basically flat with managed-care admissions for the quarter is in the medical admission category.

We were up almost 3% in the fourth quarter on medical admissions.

Year-to-date through September we were flat.

Within medical admissions, the case mix and revenue per admission is almost 0.5 of surgical admissions.

And so when you look within surgical admission, we were down less in the fourth quarter not a whole lot, but less -- we were down about 5% in the fourth quarter.

And through September year-to-date, down 5.5%.

And in the mix, in the combination of the weighting of the differences between the revenue per medical admission patient versus the revenue per surgical patient starts to bring down the composite rate.

And obviously we do okay on medical admissions.

We do better on surgical admissions, but the weighting brings the overall composite revenue per adjusted admission to a number that is below our contracted number.

So said another way we just had movement in our book of business.

Within surgery, we did see a little bit of a decline in the cardiovascular -- or a large decline, actually, like I said in my comments, in the neonatal; that contributed to some of it.

But I think the mix of business here is also a significant contributing factor.

And I think, Sam, too, the comp we had last year was a pretty high bar, so that contributed to a piece of it as well.

That's great.

Okay.

Thank you.

Christine Arnold with Cowen and Company.

You mentioned in your prepared remarks that you were seeing -- beginning to see an increase in commercial volume.

Could you elaborate on what you're seeing?

And do you think that we'll see an improvement in the pricing metrics on the commercial side next year, kind of next quarter, first quarter or full year 2012?

And then could you give us the UPL numbers for this year, just for this quarter, please.

Okay.

Let me kind of give you the trend here in our managed-care adjusted admission growth for the year.

And this of course -- and this trend is encouraging relative -- as we -- to 2012 outlook.

So our managed-care adjusted admission, we had a decline of 0.6% in the first quarter of 2011 versus 2010.

In the second quarter we were flat.

In the third quarter we actually had growth; we grew 0.5% in managed-care and other adjusted admission growth.

That's the first quarter we have reflected growth in years in that stat.

And now in the fourth quarter, we were up 0.8% over -- in fourth quarter versus the fourth quarter of 2010.

So each quarter this year, a continuing improvement in the growth rate.

And so we are encouraged by that as we go into 2012.

Now with respect to the rate we are going through this service mix shift that Sam just described very well relative to the yield that we are getting on that rate.

I think we are going to see probably continued pressure on yield in the first quarter, but as we get further into 2012, I think we are going to see a stable -- we are seeing a stabilization now.

We have got a difficult comp in the first quarter of 2012.

And after that we should start to see a stable -- that stabilization resulting in more yield pull through closer to our contracted rate rather than what we're seeing now.

With respect to UPL for the quarter, we reported EBITDA from the UPL program in the fourth quarter of $48 million.

That compares to $86 million of EBITDA in the fourth quarter of 2010.

For the year, $231 million of EBITDA UPL program versus $304 million in 2010.

So a $73 million decline for the year, $38 million decline for the quarter.

Okay.

And on the managed-care adjusted admissions, are you expecting that to be in positive turf in 2012?

Well we are not giving guidance on details by payor on volume, again, but we are encouraged looking at the trend going into 2012, especially with some of the recent news around unemployment; at least that picture looking a little bit better as well.

Okay.

Thank you.

Frank Morgan with RBC Capital Markets.

Good morning.

Looking at your really strong free cash flow and the fact you paid this special dividend, I am just curious how will you be thinking about that in the future, be it additional dividends, be it share repurchases?

And what was the criteria that really set you up to do that dividend this quarter?

So just some color there about how you think about the world going forward, particularly going into 2013.

Thanks.

Thank you, Frank.

Richard, do you want to take that?

Obviously, the way we think about the special dividend, it is really a method of returning some liquidity to all of our shareholders -- and without requiring them to reduce their ownership position.

And so this is really -- this makes a lot of sense given the interest rates and the generally lower industry valuation environment.

You know our -- we have said repeatedly that our strong cash position allows us to be very flexible in creating value and that is going to be our go-forward strategy.

A strong cash flow allows us lots of choices.

You saw over 2011, we not only fully sourced our capital budgets, but we repurchased the shares from Bank of America -- 80 million shares.

We have completed key acquisitions.

And all these issues are -- we will evaluate as we go forward.

Strong cash flow gives us that positive set of choices and we will continue to apply that kind of discipline to where we can create value for the shareholders and still maintain our market position.

And we will be flexible and supple about that as we go forward.

Sheryl Skolnick with CRT Capital.

Good morning, gentlemen, and very nice job to everyone pulling out of a difficult second quarter into a much stronger second half, but you have done it before.

So I guess you pulled the rule book out and adopted it and you did a good job.

But I want to look forward a little bit and while I don't want to dump any kind of cold water on what should be a very nice party today, I do need to ask about readmissions and that little lawsuit down in Florida.

So not related, but I think two important things.

First of all if I understand all of your strategies directly from a quality of care point of view, from an accuracy and process and clinical protocol point of view I would understand you to already be working towards reducing unnecessary or avoidable readmissions.

So there's two questions about that.

One, by how much more would your volumes be growing if you weren't avoiding those readmissions?

Two, how much more do you have to go?

And three, what are you including in your guidance for fourth quarter 2012 when the rules change for payment?

And then if you could tell us what the situation is with the lawsuit down in Florida, I would greatly appreciate it.

Sheryl, I am going to bump, as you would expect, to Jon Perlin, the readmission discussions.

Jon is our Chief Medical Officer as you well know, make sure everybody else knows.

But on the litigation we have a pretty standard policy over the years that we do not comment on pending litigation.

So I would like to leave it at that on that particular case at this point.

Thanks, Vic.

In the area of readmissions as you probably know the initial CMS data have come out; they are tracking readmissions for heart attack, heart failure and pneumonia.

And our data looked pretty comparable to the industry, in some instances, better.

Obviously it's an area where we want to make sure the patient care is integrated.

It is an area that tests us in terms of continuity care models.

And with the large number of employed providers, especially in the area of cardiovascular services, we have the opportunity to create longitudinal relationships, as well as with our voluntary medical staff.

So it is an area where we see a good connection between the hospital-based services and the non-hospital-based services.

And if there's any opportunity or capacity created that would be one potential benefit, but we see it as really an opportunity for good patient care across the continuum.

Okay, I'm sorry.

That's all -- I understand that and I think I understand the nuances there of connecting with the non-hospital-based continuum which seems to be the key because you can't control what happens after they are discharged.

But what I am also trying to get at is there seems to be -- for those hospital companies that perhaps have not been proactive in trying to improve the process in quality of care and reduce not only unnecessary readmissions but also length of stay, you know there would be a difference between your already industry-leading volume growth.

In other words if you weren't avoiding those readmissions can you give me a sense, or will you be able to give us a sense at some point as to how much you are leaving on the table?

I think just to add to what Jon is saying it's through our analysis and our programs and other efforts, at this particular point in time we are viewing readmissions as an immaterial risk to sort of our volume metrics at this particular point in time.

Okay, all right.

That's great.

I think I get that.

And could you just explain the big tax item in the cash flow this year?

And how much you are looking for, for cash flow from operations for next year?

Sure, Milton.

Yes, with respect to the tax item, we settled a couple of tax cases, a couple -- closed out a couple of years and we picked up about what $172 million in refunds related to those years.

So now I believe we have all of our tax years closed through 2004.

And so we are very pleased to get those settled and agreed to, we think, in terms that are reasonable.

So we did pick up our refund, of course; that should not reoccur.

Also this year and in the fourth quarter we benefited from accelerated depreciation with some of the tax law changes as a result of the recession.

So able to expense for tax faster than we are writing off or depreciating for books.

That certainly helped our effective tax rate as well during the year.

Of course that will work against us in the future periods.

As far as our cash flow from ops going forward, of course another thing benefit this year was the high-tech incentive payments, also, was a benefit for our cash this year.

So going forward, I would say that our cash flow from operations for next year would range probably around $3.4 billion to $3.6 billion, framed around the same range of our EBITDA target that we had given.

That's great.

Well I think I am just going to quit my job and go buy HBA stocks and bonds because you guys keep returning lots of value to shareholders.

So thank you.

Thank you, Sheryl.

Gary Taylor with Citigroup.

Good morning.

Good quarter.

The question I just wanted to focus on was, as you think about the fourth quarter, of 2012 a couple moving parts.

One I think I am understanding that unless the Texas Medicaid waiver is extended that there's some risk to the continuing UPL benefit.

And I wasn't clear exactly maybe what you were assuming for the year.

And then the second part of the question for the fourth quarter is obviously there is a pretty wide range of potential outcomes on the Medicare update given the MS-DRG coding add back and the potential for some other coding callback, et cetera.

Those two items almost kind of net each other off in my mind in a dollar fashion for the 4Q.

But I'm just wondering kind of what your range of expectations were for those two items.

All right, I think on the Medicare side, Gary, all we are doing, we are projecting current law.

Obviously there will be inpatient update and what have you that we'll deal with, but at this point our expectations and estimates are based on current law.

In terms of UPL, I know, Milton, you talked a little bit about the downdraft that we expect, and it relates -- I don't know so much to fourth quarter; it relates to the full year.

It relates to the full year, about call it $80 million to $90 million of additional drop in EBITDA from the UPL program for 2012 versus 2011.

Of course, like I said we did have a $73 million decline in 2011 versus 2010 and we have just used our best information.

There's still some uncertainty and details.

We don't know about the new waiver and how it is going to play out in some of our markets.

But we have used our best information, our best estimates, to come up with the guidance that we are giving on UPL for 2012, but there's certainly still some moving parts.

And am I right -- and then I will just -- last follow-up -- am I right that that waiver would have to get extended again to preserve even that diminished level of funding?

Is the waiver for one year?

Am I right?

Okay, I'm looking -- five years.

Oh, okay.

Sam -- Gary, it's a five-year waiver.

I mean there can be adjustments in how the waiver is implemented, clearly, during that five-year period, but it is a five-year waiver.

Oh, okay.

Great.

Thank you.

All right, Gary.

Thank you.

We have got time for one last question.

Tom Gallucci with Lazard.

Just really two follow-ups -- one you pointed to the neonatal trends there, Sam, earlier.

Was curious, what sort of volatility do you normally see in that business?

And can you point to anything that may be unique now or is it explainable?

And then I think Gary was just sort of touching on the Washington environment and some of the variables.

I know you are particularly active there, Vic.

Any color that you all can offer in terms of what you are hearing and what might come out on specific initiatives that are on the table right now?

Well one thing that has happened within our neonatal business is the clinical initiative that we put forth many years ago and I think HCA got some credit externally around 39-week policies and so forth, and that has had some impact on our neonatal unit.

The other thing that we have seen across the market is infertility volumes -- through infertility clinics has been down during the recession, which makes sense to me at a certain level.

And that does have some implication on multiple births and how it plays out in a neonatal setting.

Outside of that, we are really not seeing anything material that we can point to with neonatal activity across the Company, but those are just some high-level observations that we think have had some impact.

And again, the fourth quarter was dramatically different than the first 9 months of the year, so I'm not necessarily focusing in on that as any kind of significant trend change.

It is just a component of the explanation for this quarter.

Tom, this is Vic.

On Washington you know probably as much as I know right now.

Clearly, we have got a doc fix bill that goes through the end of February.

I think the general thinking is it gets extended for 10 more months through the end of the year, and the pay-fors that are being discussed are the same pay-fors that were out there at the end of last year.

Obviously, though, at the end of last year they were talking about a two-year fix versus a 10 month.

There are some, however, that would like to fix this and resolve it in its entirety.

And there's a good bit of discussion about the OCF funds possibly being used there, but there are a lot of folks that would like to use those funds as well.

So your guess is as good as mine.

Again, looking at the doc fix bill, it is not a terribly material amount of money to have to come up with if they have got to deal with it on a 10-month basis.

Outside of that particular piece I don't see much happening in healthcare legislation this year.

It is more of an election year.

Okay.

Thank you.

All right.

With that I want to thank everybody for being on the call.

Mark and I are here all day.

So look forward to seeing and talking to many of you.

Thanks, again.

Thank you, ladies and gentlemen.

That will conclude today's presentation.

We appreciate your attendance.

You may now disconnect.