美國醫院公司 (HCA) 2012 Q2 法說會逐字稿

Welcome to the HCA second-quarter 2012 earnings release conference call.

Today's conference 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.

Jennifer, thank you and good morning, everyone.

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

With me here this morning as usual, our Chairman and CEO, Richard Bracken; our President and CFO, Milton Johnson and Sam Hazen, President of Operations.

Several other members of the senior management team are with us here as well 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 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.

And as you heard, the call is being recorded with replay available later today.

With that let me turn the call over to Richard.

All right.

Thank you, Vic, and thanks to all for joining our call this morning.

Let me just say at the outset that we were pleased with our overall performance in the second quarter.

In general, we saw a continuation of trends that we have been reporting on in recent quarters.

That is, favorable growth in patient volumes, effective expense management and continued pressure on revenue rate growth.

In regarding our revenue rate growth performance, patient acuity as measured by case mix index increased slightly but we continue to see pressure from Medicaid revenue rate declines.

For the quarter, consolidated reported adjusted EBITDA increased 10.5% to $1.569 billion from $1.42 billion in the prior year and same facility adjusted EBITDA increased 5.2%.

Our volumes continued to trend favorably to the prior period.

On a same facility basis, admissions and equivalent admissions increased 2.5% and 3.9%, respectively, and on an as reported basis admissions increased 7.7%.

And please recall that these as-reported numbers reflect the consolidation of the HealthONE acquisition last year.

We believe that our comprehensive service line strategy continues to provide a very firm foundation for this composite growth.

As an example, behavioral health and inpatient rehab admissions each increased approximately 14% during the quarter.

We have now experienced 19 consecutive quarters of positive equivalent admissions growth.

Additionally, we continued to experience favorable growth trends in emergency visit volumes.

As reported emergency visit growth was 13.4% and 8.8% on a same facility basis.

This performance is important in driving our overall admission levels since approximately 65% of our admissions come through our emergency department.

Also Sam will update in his remarks market share information.

The Company reported favorable cash flows from operations in the second quarter, totaling $1.46 billion.

For the first six months of 2012, cash flow from operations totaled $2.257 billion.

Capital expenditures totaled $449 million in the quarter and our leverage ratio which was 4.46 times at the end of last year has improved to 4.2 times at the end of the second quarter.

I would also like to mention Parallon's recent agreement with LifePoint hospitals to provide full revenue cycle outsourcing and full-service purchasing and accounts payable sourcing services for their hospitals.

We also extended our IT service agreement with LifePoint by four years.

And we are pleased with Parallon's success over this past year and believe Parallon is well-positioned to deliver solutions to improve cost-efficiency and cash flow to other healthcare providers.

Now before turning the call over to Milton, let me just add that we do expect the story, possibly two, to run in The New York times as early as this week.

Based on the feedback we have received and the questions we have been asked, we believe the stories will include several topic areas.

First, our ownership structure.

Second, the quality of care including medical necessity for cardiac services at certain of our Florida hospitals and wound care; our use of the ACEP, the American College of Emergency Physicians, evaluation and management guidelines in our emergency departments and our approach to care for the uninsured.

Obviously we do not know the precise contents of the story but to give you some context as you consider the article, we are posting some related information on our website.

Thanks, again, to our management teams for a solid performance for the quarter and to our clinicians and caregivers as they navigate in this period of change in America's healthcare delivery system.

And with that, let me ask Milton to say a few comments about the numbers.

Thank you, Richard, and good morning to all.

Hopefully, most of you have had an opportunity to review our second-quarter earnings release issued this morning.

I believe most of the numbers are fairly straightforward.

But as a reminder the HealthONE consolidation is included in our reportage results for the quarter; however it is not included in our same facility stats.

As Richard mentioned the second-quarter results were once again driven by strong same facility volume growth and excellent expense management.

As we anticipated, our case mix stabilized in the second quarter with all payers showing increases in their case mix with the exception of Medicaid which declined 1.1% compared to the prior year.

Same facility total case mix for the Company increased 0.4% in the second quarter and our same facility adjusted EBITDA margin increased 30 basis points to 20.5% as compared to the second quarter of last year.

Revenues in the second quarter increased 11.9% to $8.112 billion, primarily driven by the consolidation of our HealthONE venture and increased patient volumes.

Same facility revenues increased 3.8% in the second quarter compared to the prior year.

Net income attributable to HCA Holdings Inc.

totaled $391 million or $0.85 per diluted share in the second quarter compared to $229 million or $0.43 per diluted share in the second quarter of 2011.

Last year's results include losses on retirement of debt of $75 million or $0.08 per diluted share.

For the second quarter, volume trends remained strong with same facility admissions increasing 2.5% and same facility equivalent admissions increasing 3.9%.

Patient volume growth was primarily driven by increased same facility medical admissions of 4.1%, while same facility surgical admissions declined 0.8% compared to the prior period.

Total admissions which include our HealthONE consolidation increased 7.7% and equivalent admissions increased 9.7% during the second quarter.

During the second quarter, same facility Medicare admissions and equivalent admissions increased 3.1% and 4.3%, respectively.

Same facility Medicare admissions include both traditional and managed Medicare.

Managed Medicare admissions increased 15.4% on a same facility basis and now represent 26.3% of our total Medicare admissions.

Same facility Medicaid admissions increased 4%, with same facility equivalent admissions increasing 6.6% in the second quarter compared to the prior year period.

Same facility managed care and other admissions declined slightly, 0.7% in the second quarter.

However same facility equivalent admissions increased 1.4% in the quarter, the fourth consecutive quarterly increase.

Same facility uninsured admissions increased 8.9% in the second quarter compared to the prior year's second quarter.

This growth in uninsured admissions accounted for 65 basis points of the 2.5% same facility admission growth during the quarter.

Same facility uninsured admissions represents 7.8% of total admissions in the quarter, compared to 7.4% in last year's second quarter.

Total surgeries were flat year over year on a same facility basis, reflecting modest growth in our outpatient surgeries while inpatient surgeries declined slightly.

We continued to experience strong same facility emergency room visits in the second quarter, increasing 8.8% compared to the prior year.

On a reported basis, emergency rooms visits increased 13.4%.

Same facility revenue per equivalent admissions declined 0.1% in the second quarter.

As I have stated on several occasions, several factors are influencing our revenue per equivalent admissions including Medicaid rate cuts in Florida and Texas, and changes in both service mix and payer mix.

In fact if you look just at our combined same facility Medicare and managed-care revenue per equivalent admission in the quarter, it increased by 2.5% compared to the prior year.

Same facility Medicare revenue per equivalent admission increased 0.7% compared to the prior year and same facility Medicare case mix increased 0.6% in the second quarter.

Same facility in Medicaid revenue per equivalent admission declined 15.5% and that is generally consistent with recent quarters.

We expect to see less Medicaid rate pressure in the second half of 2012 as we anniversary the Florida rate cut in July of 2011.

Managed care and other revenue per equivalent admission increased 4.4% on a same facility basis in the quarter, which is slightly better than the 4.1% we reported in the first quarter of this year.

Managed care and other same facility case mix increased 0.5% compared to the prior year's second quarter.

Same facility charity care in uninsured discounts increased by $243 million in the second quarter compared to the prior year and, during the second quarter, same facility charity care discounts totaled $706 million, an increase of $52 million from the prior year, while same facility uninsured discounts totaled $1.526 billion, an increase of $191 million from the prior year.

Once again we were extremely pleased with expense management in the quarter.

As same facility operating expense per equivalent admission -- and this again would exclude the equity in earnings of affiliates and electronic health record incentive income -- increased only 0.1% compared to the prior year.

This is the fourth consecutive quarter where operating expense per equivalent admission is essentially flat with the prior year period.

Salaries per equivalent admissions increased 0.08% compared to the prior year on a same facility basis.

The same facility productivity performance improved 1.6% compared to last year's second quarter.

Same facility wage growth was 1.3% in the second quarter.

Also, personnel costs associated with physician employment increased by $14 million or 5.5% from the prior year's second quarter, a significant reduction from recent run rates.

Same facility supply cost per equivalent admission declined 2.2% from the prior year, reflecting minimal supply cost inflation in the Company's supply cost reduction initiatives.

Same facility other operating costs per equivalent admission increased 0.7% from the prior year.

The Company recognized $70 million in electronic health record incentive income in the second quarter, consistent with our expectations.

The Company also incurred approximately $19 million in EHR-related expense in the second quarter compared to $24 million in the second quarter of 2011.

Our monitoring mechanisms continue to report that we are achieving stage 1, year 2 meaningful use and we expect to certify such at most of our hospitals during the fourth quarter of this year.

Interest expense declined $72 million from $520 million for the second quarter of 2011 to $448 million for the second quarter of 2012.

This reduction in interest expense reflects the benefits of debt refinancing transactions we completed during 2011 and has a positive impact on our cash flows.

Cash flows from operating activities in the second quarter increased to $1.46 billion compared to $748 million last year.

The increase was primarily due to an increase in net income of $165 million, and an increase in favorable changes to operating assets and liabilities in the quarter of $525 million, including our receipt of approximately $270 million in payments on the rural floor in Medicare receivables that was recorded in the first quarter of 2012.

For the six months ended June 30, 2012, our free cash flow, after CapEx and distributions to non-controlling interest, totaled $1.282 billion.

Capital spend in the second quarter totaled $449 million compared to $447 million last year.

This is consistent with our expectations and guidance for the full year.

Days and accounts receivable at June 30, 2012, were 50 days, a decline of three days from March 2012 and unchanged from June 30, 2011.

Days in A/R declined partially due to the receipt of the A4 mentioned rural floor Medicare settlement.

At June 30, 2012, the Company's debt to adjusted EBITDA was 4.2 times compared to 4.43 times at March 30, 2012, and 4.46 times at December 31, 2011.

At the end of July, we had approximately $3.475 billion of borrowing capacity under our senior secured credit facilities.

And finally as you saw in the released this morning, we reaffirmed our guidance for 2012.

And now, I will turn the call over to Sam.

Good morning.

I will begin my comments this morning with more detail on our volume trends for the quarter and then wrap up with a review of our marketshare data for year ending 2011.

The performance across the Company's 15 divisions was very balanced again this quarter indicating broad-based execution of the Company's growth strategy.

10 out of 15 divisions had growth in same facility inpatient admit on a year-over-year basis.

Our Denver market, which is not included in same facility admits, had year-over-year growth in inpatient admissions also.

All but two divisions had growth in same facility adjusted admits.

All divisions had growth in emergency room visits again this quarter.

Also, same facility managed-care emergency room visits increased 6.1% for the quarter, reflecting improved outreach in greater access in this segment of the market.

The emergency room continues to drive strong inpatient admits for the Company.

Admissions through our emergency room were up 6.1%.

EMS drop-offs to our emergency rooms were up 6.5%.

We believe this growth in EMS volume is a function of program development such as trauma and stroke plus more efficient turnaround capabilities for our ambulance partners.

Although surgical volumes were flat for the quarter, we continued to be encouraged by the results of our surgical growth plan.

Seven divisions had growth in same facility surgical volumes for the quarter.

Four of the divisions that had declines were only down by less than 1%.

Orthopedic and neurosciences were the two areas that continued to show solid growth.

Cardiovascular services and general surgery were essentially flat while women's and urological services were down.

Critical care admits in both our adult and neonatal units grew 4.7% in total.

Length of stay, however, was down by 3%.

Now let me transition to 2011 year-end marketshare.

As a reminder, marketshare data is not available for all HCA markets.

We are able to get approximately 85% of the Company's market share in a reasonable time period, usually 120 to 180 days after the fact.

So I will be sharing some highlights from the most recent time period, which is the fourth quarter of 2011.

First, the Company's overall market share for 2011 improved by 35 basis points to almost 23%.

We gained market share on a sequential basis in each of the four quarters, gaining an additional 11 basis points in the fourth quarter.

The Company increased market share in 24 out of 37 markets.

We had growth in market share in 12 out of 17 service lines that we study.

Market share in the commercial segment grew, and finally we saw growth in the end migration segment reflecting progress with our rural outreach efforts.

Overall, demand for inpatient services in HCA markets grew in 2011 by 0.7% which is a slight improvement over the rate of growth in 2010.

Using this rate of growth as a proxy for the market growth in the first half of 2012 suggests that HCA is still gaining share with our year-to-date admission growth of 2.9%.

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

All right, Sam.

Thank you, Milt and Richard.

Let me say this before I turn the call back to Jennifer.

In the interest of time I would like to ask that everyone keep their questions this morning focused on the quarter and our business overall rather than get into any speculation about the potential article that Richard discussed.

I think between Richard's comments and also the website posting which he mentioned that is all we really can and have to say about that matter this morning, and I appreciate your understanding.

And I might just note that website is HCAhealthcare.com and it is on the home page but we hope you listen to the Q&A here because I think we had an excellent quarter that you probably have some interest in.

So with that Jennifer, do you want to pull for questions?

Again try to hold to one because I know we have a lot of people on today's call.

(Operator Instructions).

Ralph Giacobbe, Credit Suisse.

Thanks, good morning.

So the 8.8% ER increase was particularly strong especially in a non-flu quarter.

Maybe just remind us your initiatives there and maybe have there been any closures of competing hospitals or EDs that can help explain some of that increase?

And then just along those lines, bad debt was up a fair amount so was that also a function of the increase in ED?

And related to that, the use of ACEP that you talked about, I think that has been in place for a while.

Maybe just some context there.

Thanks.

This is Sam.

I will start with the emergency room growth.

I think the emergency room growth that we are seeing is a function of a significant effort that the Company has made over many, many years to improve our emergency room operations.

And that effort, I think if I could categorically answer it would really come down to four or five major efforts.

One is clearly improving our operations in how we take care of our patients when they enter the emergency room.

And I think we have done an incredible job at dropping our time to see a patient from maybe 45 to 50 minutes to somewhere around 22 minutes on average across the Company.

And that is clearly enhancing the service levels and the satisfaction that we are seeing in the emergency room.

The second thing that I would add that I think is having a tremendous impact is the fact that we are adding a lot of program capability.

And by program capability, I mentioned that in my comments earlier, we have added a number of trauma programs where it adds a level of sophistication to our emergency room, creates a better destination point for EMS services and so forth.

And on top of that trauma development we have developed sophisticated stroke capabilities in a number of our emergency rooms, as well as cardiac capability.

And I think, again, the combination of those program developments are adding volume as well.

And then the third piece, and there is one more after this one, that I would point to that I think is having a positive impact is capacity.

We have clearly added capacity in our emergency rooms where we have had compression.

We monitor our utilization per bed on a routine basis, and where we start to see capacity constraint we had capital here either on our campus or in some cases off our campus in locations that need emergency capabilities.

And then, finally, marketing.

I think we have marketed our emergency rooms in a way that showcases the performance and the capabilities.

And the combination of those four things I think are really driving the activity in our markets.

We have not seen any particular closures that have yielded marketshare gains or anything of that nature in the emergency services.

So that is really not a factor in what we are seeing in our markets.

So Milt, do you want to do the bad debt?

Sure, would be happy to.

Yes, the primary reason for the increase in bad debt expense relates to increase in uninsured revenue.

So, we basically have reserved for that.

The remaining bad debt increase is really related to co-pay and deductibles.

And there, we are up -- bad debt is up about 10% or roughly about $25 million.

That is related to higher managed-care volumes that we have reported.

Sam mentioned the new trauma programs and the ED.

Those trauma programs do result in some higher co-pays so that is contributing to a piece of that.

And then just the normal plan increases that we are seeing in co-pay and deductibles to our patients driving the remaining part.

So it is not any one thing; it is the -- but it is primarily as the uninsured revenue growth is what is driving bad debt.

Ralph, thank you.

I'm sorry, Sam.

And I wanted to add one thing to the discussion.

I think again HCA's portfolio of markets when you look at the demographics and you look at the population trends, in some of those dynamics that we have talked about in the past, it is having an impact on the emergency services demand within our markets as well.

So, that is another component that I think is driving growth that maybe is different than what you are seeing across the industries.

All right, thank you.

Darren Lehrich, Deutsche Bank.

Good morning, everybody.

I wanted to ask here a question about just volumes and specifically as it relates to the growth you have seen in psychiatric and inpatient from the units in your hospitals.

Thanks for giving us the growth of 14% from those units.

Can you maybe just update us a little bit on the strategy there and, also, if you could help us to put into perspective the growth that you are seeing in those services on the overall admission trend number, how much have we seen that contribute over year-to-date in this quarter, specifically?

Thanks.

Sam, you are up again.

I could not hear the first part but I think you were asking me about behavioral health and rehab with the growth of 14%.

Let me just give you some sense of what we saw as an opportunity again a few years back.

In certain hospitals and within certain markets, we had idle capacity that we felt was not being used effectively, and in a number of those markets we did not have a full complement of services around rehabilitation capability as well as behavioral health capability.

And so we saw two opportunities at a macro level with this initiative.

One being again using idle capacity and then, secondly, adding network capability to really service our overall complement of hospitals in a particular market.

Over the past number of years, we have invested a little heavier in behavioral health and rehabilitation services is catching up as far as overall investment.

I think at this particular point in time, we have north of 50 units in both services across the Company where we have capabilities.

And we have seen growth in both of those fairly consistent this year around 15% year-to-date on psychiatric and behavioral health admissions, so the quarter is consistent with year-to-date growth.

And then on a rehabilitation side, again, we have seen growth at 13% year-to-date very comparable to the second quarter.

The behavioral health capability has enhanced our ability again in the emergency room in that it has freed up capacity for us to take care of emergent patients, and then network and transfer behavioral health patients that access our emergency rooms and need behavioral health services.

So it has really played a big part in an overall comprehensive market strategy.

And as we look forward, we still have opportunities with capacity and we are investing in those in both service lines.

And again rehabilitation is not as far along in its progression as the behavioral health is.

That is helpful, thanks.

A.J. Rice, UBS.

Hello, everybody.

Maybe I will just switch gears and ask you about the cash flow trends and use of cash going forward.

You look like you have been now at a point where you are probably running ahead of where you thought you would be year-to-date and maybe that means that you will beat the cash flow guidance for the year plan.

Maybe comment on that and then, also, give us some flavor for use of cash flow going forward particularly in the context of all the refinancings that have already been done and where the debt levels are now, does that give you flexibility to look at other uses for free cash flow?

Milton, that one is yours.

Sure.

Yes, we are certainly pleased with the cash flow performance for the first half of the year and it is ahead of our expectations.

Of course, one reason would be the rural floor settlement of about $270 million that we did not have in our guidance at the beginning of the year, and that certainly is a piece of it.

But overall our cash flow has been very strong.

Our cash flow guidance that we gave I think was $3.4 billion to about $3.6 billion as we started the year.

And I would say now that that is probably closer to $3.8 billion to $4 billion cash flow from operations as we look at the rest of the year.

We will see, I think, higher tax payments in the second half of the year.

That typically happens so that I think will slow down the rate of free cash flow from operations compared to what we reported here halfway through the year.

With respect to use of cash, we continue to look for acquisition opportunities.

Our pipeline as the other companies have mentioned as well remains very strong.

We see some good opportunities there.

It is too early to tell how all those will play out; but we think there will be good opportunities to invest our cash in some acquisitions.

Following that, we will continue to repay debt as we have so far this year.

As you noticed here at the second quarter our debt levels on an absolute basis were basically flat with where we started the year.

We have covered the leverage from the dividend that we paid in February of this year.

So again, also for the second half of this year I think our CapEx run-rate will be higher than the first half of the year.

We still expect CapEx to be somewhere around $1.8 billion to $1.9 billion.

And so we will have a little bit of an acceleration in the second half of the year to hit that target.

Absent acquisitions and debt repayment, again from time to time as we have in the past we would consider a special dividend opportunity depending on the market and, again, those decisions are made based on market conditions at the time that we are reviewing those decisions.

Okay, thanks a lot.

Kevin Campbell, Avondale Partners.

Good morning.

Thanks for taking my questions.

I did want to ask one follow-up about the American College of Emergency Physicians.

I was hoping maybe you could just give us some color on -- remind us why you switched to that methodology a couple of years back?

Okay, we could barely hear you but you are just asking (multiple speakers) thinking going back we changed to ACEP a number of years ago.

In 2009, we made that change and primarily we felt like it was a better system, a system that resulted in a higher level or higher quality coding results for our patient assignment under the emergency room evaluation and management guidelines.

So it was done to improve, again, our assignment of those patients in the ER.

And remember as we described the ACEP or how this happens in the emergency departments, there are different systems out there.

And what we had been using before was a point system.

And what that meant is that people would look at the services provided in the emergency services, applies certain points according to a scale, total those points up and establish the classification for the visits.

What the ACEP system does -- and to understand how that works is it looks for proxies to establish levels of care.

And so it is a much more accurate system, an efficient system for -- to put in place.

So that is why we went to it.

Do you have a sense --?

Thanks for your question and welcome to the call.

Thank you.

Frank Morgan, RBC Capital Markets.

Good morning, good quarter.

Just a question in light of the changes in the assumptions surrounding HCIT?

I'm just curious, are you maintaining some conservatism by not raising your estimates, and maybe if you could give us an update on how you see Florida and Texas playing out?

Milton?

No, we did not raise our guidance.

We are halfway through the year.

And if you look at -- although our performance has been very solid relative to our guidance -- if you look at the pieces of it, volume has been better, about 1% better than we had projected in our guidance for the first half of the year, but our revenue rate is below what we had projected for the first half of the year by about 1% as well.

And we have made it up with better expense management of about almost 1.5% better than we saw it on our expense management.

So net net, we are doing well, relative to our guidance.

But at halfway through the year, again, we are still -- our expectation is still within that range.

We gave a $250 million range for EBITDA for this year and we feel like that is still the range that we would like to keep at this point in time in the year.

Juan, do you want to address Texas and Florida Medicaid?

I think that was the second-half of your question, Frank.

Yes.

In Texas, let me start there.

The anniversary date of the cuts that we have experienced this year is 9/30, so 10/1 we will anniversary last year's budget cuts.

The two outstanding items that we are yet to get final rules on are the disproportionate share of funding requirements in Texas as well as the Texas waiver.

Both of those components are yet to be finalized.

We still are working with the state and others on that process; and so there is uncertainty still around that particular resolution on those items.

With respect to Florida, there are some remaining cuts that we will experience in the second half of the year, although they are less than what we experienced in the previous year.

We anniversaried last year's cuts on June 30; and then next year's cuts are forecasted to be around 5%.

And I think the annualized effect on those is about $25 million (multiple speakers) or something like that we have estimated at this particular point in time.

So that is the status of those two states.

Sheryl Skolnick, CRT Capital Markets.

Such a simple name.

(laughter).

Okay, first of all, thank you for the very good explanation of the pricing.

That is very, very helpful.

I'm going to not ask you about the investigations or the article by not asking you about it, but I'm going to ask you about something else that is somewhat related because your stock is under pressure and it is of concern.

So you all have had -- our environment is now one that is very focused on not only controlling revenues but also controlling waste and fraudulent spending in healthcare.

That is a blanket statement.

So what are you all doing in your compliance programs to beef up what presumably is already a robust program and especially now that it seems like this focuses more on the physician decision-making capabilities and outcomes as well as related to quotes quality of care issues as much as it is just billing?

How are you managing through that, especially given how many physicians you employ as well as contract with or are related to or affiliated with in your markets?

Just an update on compliance if you would.

Let me take the first shot at that.

This is Richard speaking.

Well, first of all and as you mentioned we do have a robust compliance program in place and it has been out there, as you know, since the late 1990s.

As you mentioned, we have extensive policies and procedures, training protocols, ethic lines, vehicles for people to raise questions in place.

We followed up with ambitious monitoring and reviewing and surveys.

Well, all that has been in place.

We think it's a very important and effective program.

You bring up new issues that the industry is experiencing.

How do we think about it?

I would say, fundamentally, the first thing we are thinking about is putting in physician leadership at various levels in our organization that have the job to sit on top of all our existing activities that are underway.

Throughout the course of the last 12 months we have put in addition to physician leadership that might exist in the hospitals, additional physician leaderships at every one of our divisions who can sit on top and look at broad trends that might be occurring in the marketplace.

We have added significant physician leadership in the management of our physician practices.

We have moved our physician practices into a wholly owned organization with significant physician leadership in councils to help sort out these questions.

So we -- and in addition to other issues, we bring in specialty councils to help us decide issues of care that we can move across the enterprise.

And I think fundamentally and foundationally, probably one of the most important things in addition to all of this is that we are investing big-time in the EHR.

And of course, the EHR is out there to be more accurate, but it also creates a database to mine issues, to understand how care is being provided not only efficiently but compliantly.

And we have been on a quest to develop a systemwide EHR for years before the stimulus, the high-tech program was put in.

We think it is foundational to the Company and we are continuing to execute that as fast and as efficiently as we possibly can.

So, I think it is a combination of all these areas.

Not only the monitoring, not only the policies and procedures but the leadership, the organization and the infrastructure to make it happen.

Kevin Fischbeck, Bank of America/Merrill Lynch.

Thanks.

Hello.

I appreciate not wanting to talk about The New York Times investigation but I would really like to see if there is any color you have gotten out of the Florida investigation because there we have some disclosures that you can potentially respond to.

I mean, the investigation into interventional cardiology services, is that just a continuation of what we saw at the end of last year as far as some of these [RACK] things?

I guess the fact that you are calling it interventional cardiology is something different than the ICD scrutiny, it implies things like stents and [flu and] angioplasty, so I was wondering if there was any detail that you could flesh out there?

Okay, I will do that.

If you have not, obviously, we had disclosed in our 10-Q this morning that we did receive an inquiry from the Civil Division in Miami US Attorney's office.

And it came in July so it is new and it has requested information on any reviews that were assessing the medical necessity of interventional cardiology services at any of our facilities.

I think principally as we are looking now, we are trying to review to determine exactly which hospitals have had such reviews.

At this point, we are early in our analysis but we have identified about 10 facilities, the majority of those in Florida.

But I think there are two or three in some other states.

So we are gathering that.

Again we have just gotten the request, preliminary stages, and so really responding beyond that or trying to identify it beyond what we have put in our disclosure would be premature at this point.

So we have sort of given you everything we have got and can tell you at this point in time.

Okay, thanks.

Gary Taylor, Citi.

Good morning, guys.

The first is just a clarification so I'm hoping it will not count as a question.

You had mentioned some new information on the website.

Were you saying that was already available?

Because I was just kind of perusing it and not seeing it.

So maybe if you could direct us where that would be?

Yes.

I'm being told there is a blue bar across the top of the home website.

It is on the home page.

And it was posted -- it was put on I think as we started our call.

So yes, it is new and should be there.

Maybe I just need to update that.

Okay, we will look for that.

The question I wanted to ask for Milt -- actually I refreshed and it is there now so you are right, the blue bar on the top of the homepage (multiple speakers).

You are techy.

Way to go, Gary.

A question for Milt, just going back to the pressure that the Medicaid rate has had on your consolidated, you know, same store revenue per adjusted admission.

I guess it looks like that has contributed about at least 150 basis points of year-over-year pressure on that metric.

Is there a range you have in mind as we move into the back half of the year?

Should we see at least approximately 100 basis points of that coming back in your favor in the back half?

Is that about the magnitude of what you expect?

Well, Gary, maybe let me help with it a little bit.

First of all the impact on our Medicaid rate has been more than we thought it would be, primarily in Florida.

We had estimated that in the first half of this year it would probably about a $35 million impact.

I would say it is probably close to double that impact on our rate in the first half of the event so the second-half of the year, Sam just mentioned that we will see an additional cut in Florida starting July 1 of this year.

But that cut will be, we think, substantially less.

So if you think about a negative run-rate of call it $60 million to $70 million in the first half of this year on Florida Medicaid, and the second half of the year I would say it would be more, like, maybe $15 million as what we are thinking as far as drag.

So we will get some relief on the Florida impact.

With respect to Texas, the cuts we are taking there are about $7 million to $8 million a month on reductions in Texas Medicaid and then anniversaries, I believe, at the end of September.

And as of now we do not see any additional Texas cuts and don't expect that.

So again in the fourth quarter a little bit of help from Texas as well in the Medicaid rate.

So that is about how I would see the second half of the year relative to those two states.

Okay, thanks.

Gary Lieberman, Wells Fargo Securities.

Good morning.

Thanks for taking the question.

It looks like your tax rate was down a little bit sequentially.

Milton, can you just give us some guidance in terms of where you would expect it to be in the second half of the year and maybe for the full year?

Yes, it was down a little bit in this quarter.

We settled some disputes with the IRS and as a result tax-exempt interest expense, which is part of the tax rate, we had a reduction of $11 million in the quarter and that reduced the rate.

The normalized rate I would expect would be somewhere around 37% to 38%.

I think it was about 35% or so in this quarter.

So 37% to 38% would be a normalized rate.

Thanks a lot.

Whit Mayo, Robert W. Baird.

Thanks, good morning.

Really just a question for maybe Richard or Sam.

We have recently seen a number of deals in the physician area, medical group management, whatever you really want to call this sector.

I'm just curious on your perspective for what this trend may mean to you.

You have obviously seen a lot of cycles with this in the past and have been pretty aggressive in a lot of your markets organizing docs in the last few years.

So I am just kind of curious on your broader thoughts.

Well, in terms of the transactions for large physician groups that you mentioned, and the ones that I'm aware of were focused in areas where they have a concentration of physicians, really who are not in our markets.

And so they really don't apply to our strategy.

We look at physician integration on a range of fronts and local market by local market.

So again we think about how to integrate with physicians, not only in an employment model that you are referencing through some of these acquisitions perhaps, but lots of other ways as well in terms of service and connectivity and ITS connectivity and the like.

And so we are careful about that.

The price on the one transaction, I think you are referring to in Southern California, was very, very high and that is not really our model.

We look at physicians integration market by market and we look at a range of options other than just full employment.

And Richard, if I could add, when we look at the active number of physicians on HCA's medical staff this year compared to where it was at the end of last year, we have grown the number of physicians who have active privileges at HCA facilities by approximately 1,000 on a base of about 34,000.

So pretty significant growth.

Some of that has come through employment where we have added employment numbers to our base from last year in, clearly, recruitment.

And at the same time in supporting some of our service lines strategies we have added physician capability, either through recruitment locally or other methods to enhance the number of physicians that practice at our facilities.

So from that standpoint, it would really have to fit into the overall growth strategy within our markets as Richard mentioned, and that is how we are thinking about it.

But I don't see it as necessarily slowing down.

We are getting better at making decisions on the front end and we are getting much better at managing the practices on the backend and the combination of that is allowing us to really execute this strategy more effectively than we were in previous years, we believe.

Thanks for the thoughts.

Tom Gallucci, Lazard Capital Markets.

Thanks, good morning.

Just to follow up on the Medicaid in Florida, and then a question of that managed care.

You mentioned that the Medicaid had in Florida was bigger than you thought it was going to be.

Could you just give us a little bit of color, how you got that wrong and why you can identify the incremental cuts that are coming a little bit more accurately?

And then on managed care, not only were you seeing absolute rates as you are negotiating, but are there any changes in terms of the terms, risk-taking, etc.?

Thanks.

Alright, we are pointing the finger at Mike Marks since he is the CFO of that group.

One, clients have to be length of stay.

In Florida with Medicaid you are paid a per diem.

Our length of stay is down a couple of points so that is one reason why it was worse than we expected.

The second thing and I think has been described previously on our calls is there is movement between self-pay and Medicaid through eligibility processes.

We have seen that movement hurt us in the first half of this year.

That moves around as you go through timing between -- as self-pays comes in you try to get them converted to Medicaid through the eligibility process.

So between those moments in a little bit -- a little drop in length of stay would be the primary differences between what we expected and our actual results.

Yes, it is just not as simple as taking a prior year number and taking a haircut on it.

It is a pretty complicated, as Mike just described, calculation to try to estimate that, and some things moved on us that we did not expect, is the short story.

With respect to managed care I think your question was around were we seeing any structural differences, and we were not.

We have got virtually all of our 2012 managed-care revenue under contract.

It is like 95%, 96%.

We have got 70% of next year's managed-care revenue under contract and about 40% of the following year.

So again as we typically have this time of the year, good visibility with respect to our managed-care revenue and we continue to see rates similar to what we historically have been reporting in the 5% to 6% zone.

And no, at this time no real structural changes to those contracts.

John Ransom, Raymond James.

Good morning.

With respect to the Florida and Texas Medicaid programs, I know that it is not just about rate but they are also trying to manage utilization.

Have you seen any utilization changes as a result of that?

This is Sam.

Not materially.

There may be some adjustments on the fringes in those states as certain programs migrate to managed-care, but our volumes in both of those states are way up.

Now some of that could be enrollees.

I don't have enrollee participation in each of those states, but we are not seeing anything material at this particular point.

Okay and thanks.

As a follow-up what are your latest thoughts on separate reporting and more disclosure on Parallon?

Thanks.

(multiple speakers)

Yes, this is Milton.

We continue to analyze that at the end of each year as we think about the coming year.

So our team will go through that process at the end of this year as we think about reporting for 2013.

At this point in time, I think still from a materiality standpoint we are not there.

But as we continue to see growth in Parallon, that can change, so that is a process we review end of each year.

Okay, thanks a lot.

Okay, thank you John.

And Jennifer, I think we have got time for one last question.

Vicky Bryan with Gimme Credit.

-- along the lines of the previous question.

Can you tell us what percentage of the total admissions and equivalent admissions this quarter that you saw with the behavioral health and rehab?

Can you break that out for us?

This quarter, behavioral health and rehab the percent of admissions --

The answer is one third of our overall growth is related to those two service lines.

And keep in mind that behavioral health and rehab represent approximately 7% or 8% of our total admissions approximately and that was a pretty consistent metric for year to date as well.

And that is for equivalent admissions as well?

Well, it is more on the inpatient side.

The outpatient activity in both of those service lines is not nearly as material as our acute service lines.

I don't know that I have it on an adjusted admission basis but I can have somebody get that back to you.

Thank you.

All right, Vicky, thank you.

And I want to thank everyone for your questions this morning and your patience and Mark and I are around all day.

You all have a great day.