美國醫院公司 (HCA) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the HCA Third Quarter 2012 Earnings Release Conference Call.

As a reminder, today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over to the Senior Vice President, Mr. Vic Campbell.

Please go ahead, sir.

Alright.

Thank you very much and good morning, everyone.

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

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

And we have several other members of the senior management team here with us 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're based on management's current expectations.

Numerous risks and 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 their 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 when they are 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, I'll turn the call over to Richard Bracken.

Thank you, Rick, and good morning to all.

With Hurricane Sandy and the storms creating so much destruction and chaos in the northeast, we do very much appreciate those of you who are able to join us on our call this morning.

Our thoughts are with all of you as you are dealing with the aftermath of this horrible storm.

Before Milton and Sam provide details on our third quarter performance, let me take a moment to provide a couple of thoughts.

On balance, we were pleased with the results of third quarter.

Our volume trends continue to show stable growth, market share trends remain favorable, patient acuity or case mix continue to increase consistently with the recent quarterly trends, expense management was in line with expectations, and we were recognized for some success in our quality performance agenda.

However, revenues per unit continued to be under pressure and, to some extent, offset certain of these more favorable metrics.

All in all, the quarter closed within our general expectations and, of course, we will talk about all of this in just a minute.

Through the first nine months of 2012, the company has achieved adjusted EBITDA of $4.925 billion or growth of 11.4% compared to the prior year.

On a same-facility basis, year-to-date admissions and equivalent admissions increased 2.6% and 3.8% respectively, slightly ahead of our expectations.

We have now experienced 20 consecutive quarters of positive equivalent admissions growth.

Year-to-date same-facility growth rate of emergency visits was robust at 7.2%.

Importantly, we believe adjusted EBITDA performance is on track for a full year and are re-confirming our previously stated guidance for 2012.

On October 23, the company's Board of Directors approved a special cash dividend of $2.50 per share.

The record date for this dividend is November 2, with a payment date of November 16.

And we are pleased to be able to provide this special dividend to our shareholders.

We are confident this dividend will not impede our ability to invest in our markets or negatively affect our ability to make acquisitions.

The impact of this dividend on the company's leverage is modest, taking us from a 4.1 times debt to adjusted EBITDA at September 30, to a pro-forma ratio of 4.3 times.

And you may recall this leverage ratio was 4.5 times at December 31 last year.

During October, we were able to complete two important financing transactions.

First we issued $2.5 billion of public notes with a ten and a half year maturities at historically low interest rates which was comprised of $1.25 billion of secured notes with a 4.75% coupon and a $1.25 billion of unsecured notes with a 5.875% coupon.

In addition, we replaced our cash flow revolving credit facility extending the maturity to November 2016 and lowering, by 100 basis points, the borrowing spread schedule take effects later this month.

We are appreciative of the strong support we continue to receive in the debt capital market.

We are also pleased that certain of our quality improvement efforts were recognized in the quarter.

In September, the Joint Commission published its list of top performers, a national ranking based on the accreditation agency's analysis of objectives public accountability measures of clinical performance.

Ninety-six of HCA's 135 licensed affiliated hospitals, slightly over 70%, were included in the listing of top performing hospitals.

Also, we recently announced results of a nationwide study concerning optimal methods to reduce hospital-acquired infections.

This collaborative effort, conducted with investigators from several academic institutions and research programs at two US Department of Health and Human Service agencies -- the Agency for Healthcare Research and Quality and the Centers for Disease Control and Prevention -- focused on the reduction of bloodstream infections.

The study was conducted exclusively at 43 HCA-affiliated hospitals and defines current best practices to prevent MRSA and central line infections, improve clinical outcomes, and reduce avoidable resource utilization.

We are proud of our role in this important study and believe the results will be helpful to the industry.

We are now in the process of rolling out all of these recommended procedures at all remaining HCA facilities.

And finally, in closing these opening remarks, last week we announced the retirement of two senior officers of the company, Paul Rutledge and Russ Harms.

Each has been with the company for decades and has contributed greatly to our success.

We wish to publicly thank them for all their contributions and leadership.

And with that, let me turn the call to Milton and start on the quarter.

Thank you, Richard, and good morning to all.

I hope most of you have had a chance to review our third quarter earnings release which was released this morning and is consistent with our previous earnings from October 16.

As a reminder, we began consolidating our Denver HealthONE venture in November of 2011, therefore, their results are included in our consolidated numbers but not in our same-facility results.

To summarize our third quarter, we saw solid volume growth although somewhat less than recent trends.

Our same-facility case mix increased for all financial classes compared to the prior year and expense management continued to be in line with recent trends albeit against tough comps from last year's third quarter.

Same-facility total case mix increased 0.4% in the third quarter, consistent with our second quarter results.

Revenues in the third quarter increased 11.1% to $8.062 billion, primarily reflecting the consolidation of our HealthONE venture in increased patient volumes.

Same-facility revenues increased 3.3% in the quarter, adjusted EBITDA totaled $1.533 billion, an increase of 8.6% from the prior year's $1.412 billion.

Same-facility adjusted EBITDA increased 3% in the third quarter compared to the prior year with our same-facility adjusted EBITDA margin declining 10 basis points to 19.9% as compared to the third quarter of 2011.

Net income, attributable to HCA Holdings, totaled $360 million or $0.78 per diluted share compared to $61 million or $0.11 per diluted share in last year's third quarter.

The third quarter results for 2011 included pre-tax losses on retirement of debt of $406 million or $0.49 per diluted share.

For the third quarter, volume trends were strong with same-facility admissions increasing 2.1% and same-facility equivalent admissions increasing 2.6% against difficult volume comps from last year's third quarter when we experienced growth of 3.2% and 3.8% respectively.

Our volume trends, especially admissions and surgical cases, were adversely affected by one less business day in the quarter compared to last year.

Patient volume growth was primarily a function of growth in our same-facility medical admissions of 4.1% while same-facility surgical admissions declined 1.3% compared to the prior year.

Total admissions increased 7% while equivalent admissions increased 8.3% compared to the prior year.

Same-facility Medicare admissions and equivalent admissions increased 3.6% and 4%, respectively, in the third quarter.

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

Managed Medicare admissions increased 14.4% on a same-facility basis and represent 26.5% of our total Medicare admissions.

Same-facility Medicaid admissions increased 2.7%; the same-facility equivalent admissions increasing 3.8% in the quarter.

Same-facility managed care and other admissions declined 1.2% in the third quarter and same-facility managed care and other equivalent admissions were basically flat year-over-year.

Uninsured admissions increased 7.3% on a same-facility basis in the third quarter compared to the prior year.

The growth in uninsured admits accounts for approximately 55 basis points or the 2.1% same-facility admissions growth during the third quarter.

Same-facility uninsured admissions represent 8.1% of total admissions in the quarter compared to 7.8% in last year's third quarter.

Same-facility emergency room visits remain strong increasing 7.4% in the quarter.

On a consolidated basis, ER visits increased 12% for the third quarter compared to the prior year.

Total same-facility surgeries declined 1.3% in the quarter reflecting a decline of 2.1% in our inpatient surgeries and 0.8% decline in our outpatient surgeries on a same-facility basis.

Year-to-date through September, same-facility surgical volumes remain relatively flat with inpatient surgeries down 0.4% and outpatient surgeries up 0.6%.

Same-facility revenue for equivalent admission increased 0.7% in the third quarter.

Although a low growth rate, it is the highest rate of revenue for equivalent admission growth in the past year.

Several factors are influencing our rate including Medicaid rate deductions in Florida and Texas, and changes in service and payer mix.

During the third quarter, the same-facility Medicare revenue per equivalent admission declined 0.3%.

Medicaid revenue per equivalent admission declined 6.9% and, as expected, we did see less Medicaid rate pressure in Florida but we continued to incur rate reductions in Texas through the third quarter.

Same-facility managed care and other revenue per equivalent admission increased 4.5%, consistent with recent trends.

Same-facility charity care and uninsured discounts increased $434 million in the third quarter compared to the prior year and, during the third quarter, same-facility charity care discounts totaled $766 million, an increase of $90 million from the prior year.

While same-facility uninsured discounts totaled $1.784 billion, an increase of $144 million from the prior year.

We were pleased with our overall expense management in the quarter.

As we anticipated, the year-over-year comparisons became more difficult in the third quarter.

Same-facility operating expense for equivalent admission increased 2% in the quarter compared to the prior year, however, sequentially, our operating expense for equivalent admission in the third quarter was basically flat with the second quarter of 2012.

Salaries for equivalent admission increased 4.1% on the same-facility basis.

Same-facility productivity performances measured by man hours per equivalent admission increased slightly over the prior year and same-facility wage rate rose 1.6% in the third quarter.

Personnel costs associated with physician employment increased by $11 million or 4.3% from the previous year's third quarter.

Same-facility supply costs for equivalent admission declined 1.6% from the prior year, reflecting less surgical volume, low supply cost inflation, and the company's ongoing supply cost reduction initiatives.

Same-facility other operating costs for equivalent admission increase 0.4% from the prior year.

We recognized $131 million in electronic health record incentive income in the third quarter, consistent with our expectations.

The company also incurred approximately $24 million in EHR-related expense in the quarter, compared to $14 million in the third quarter of 2011.

Substantially, all of our hospitals have achieved a second year of stage 1 meaningful use and expect to certify such during the fourth quarter.

Cash flow from operating activities totaled $655 million in the quarter compared to $880 million last year.

The decline was primarily due to a reduction of $145 million from changes in working capital items including approximately $100 million increase in AR related to the Texas UPL program and $107 million from higher income tax payments based on accounts receivable at September 30, 2012 for 52 days compared to 50 days at the same period last year.

For the nine months ended September 30, 2012, cash flow from operating activities totaled $2.9 billion and our free cash flow after CAPEX and distributions to non-controlling interests totaled $1.34 billion.

Finally, now having completed nine months of the year, we believe the company will complete the year 2012 at approximately the midpoint of our previously-issued adjusted EBITDA guidance of $6.37 billion to $6.62 billion.

As for next year, we are currently in the process of building our budgets for 2013 and will provide 2013 guidance on our 2012 Fourth Quarter Earnings Call.

However, as a reminder, 2012 results include two significant items that should be considered as you model for 2013.

One, the Medicare Rural Floor Settlement, net of the SSI ratio charge added $170 million to our first quarter 2012 adjusted EBITDA which will not re-occur in 2013.

Secondly, we expect 2012 high tech incentive income of approximately $334 million to decline by approximately $115 million in 2013 that's consistent with the federal incentive payment schedule.

Now I'll turn the call over to Sam.

Good morning.

I'll begin my comments this morning with more detail on the company's volume trends for the quarter and then provide an update on inpatient market share for the first quarter of 2012.

Volume growth across the company's 14 domestic divisions was very balanced again this quarter.

On a year-over-year basis, 12 out of 14 domestic divisions had growth in same-facility inpatient admissions, 13 out of 14 had growth in same-facility adjusted admissions, all divisions had growth in same-facility emergency room visits again this quarter, reflecting continued success with our many initiatives to gain share in this service line.

Eleven out of our 14 divisions had growth in managed care emergency room visits which were up 4.2%.

And finally, EMS visits to our hospitals grew by 5.2%.

All but one division had growth in this area.

Surgical volumes were weak this quarter but we believe most of this was due to the number of business days in the quarter.

This year we had one less business day in the quarter as compared to last year.

Approximately 96% of all surgeries in our hospitals and ambulatory surgery centers are done on business days.

When we look at same-facility total surgeries per business day, our volumes for the quarter were slightly up as compared to prior year.

Our surgical growth initiative, which I highlighted on the first quarter call, is progressing well for the company.

Same facility admissions into our adult intensive care and neonatal intensive care units this quarter were up 3.8% and 3.4%, respectively.

The improvement in our neonatal volume is driven mostly by growth in obstetrics admissions which grew by 1.7%.

This rate of growth is an improvement over the rate in the first half of the year.

Now let me transition to some market share highlights for the 12 months ending first quarter 2012.

Again, this is the most current data available and it represents almost 90% of the company's markets.

First, the company's overall market share during this period increased by 44 basis points to 23.2%.

Second, we gained market share on a sequential basis when comparing the first quarter of 2012 to the fourth quarter of 2011.

This followed sequential market share gains in both the third quarter and fourth quarter of 2011 as compared to the respective preceding quarter.

We gained market share in 13 out of 17 service lines that we monitor.

HCA had market share gains in 28 of 37 markets with strong growth in all major Texas markets, Denver, Miami, Nashville, Richmond, and Las Vegas.

We had market share growth in both the commercial and in migration segments of our business.

And finally, overall market demand for this period grew by 0.7% which is a slight acceleration from the same period 12 months ago.

If we use this growth rate as a proxy for inpatient demand in the second and third quarters, we believe HCA has increased its market share during these periods also.

We are continually enhancing our growth plans while leveraging what we are learning across the company.

This effort is allowing us to improve the key elements of our plan which are service line development, rural outreach efforts, increasing access to our systems, and physician engagement.

Additionally, we continue investing in capital to increase capacity in growth markets, and to improve the technology offerings in our facilities, making them more attractive to our physicians and patients.

For example, HCA has announced the development of three new hospitals which will expand our footprint in three markets-- Salt Lake City, Houston and Orlando.

We are currently evaluating three others and expect to announce one of these soon.

These hospitals will be smaller community-based hospitals that are intended to serve growing communities and support HCA's larger networks in their respective markets.

Two of these will open in 2013 and the others will open by the end of 2014.

We believe these efforts to learn are capital investments, and solid execution are combining to drive these gains in market share.

With that, I'll turn the call back to Vic for questions.

Alright, thank you, Sam.

Thank you, everyone, for participating.

We'll now move to Q&A and, as always, I encourage you to limit your calls to one so we can give everyone an opportunity.

Operator, do you want to pick back up?

Certainly sir.

Today's question and answer session will be conducted electronically.

(Operator Instructions).

And we'll first go to Frank Morgan with RBC Capital Markets.

Good morning.

Quick question.

You referenced Florida and Texas with regard to Medicaid but I was hoping you could go back in and talk a little bit more in detail about Texas, you mentioned the build-up in the Texas UPL AR.

So any color around that and how you see these programs playing out over the next 6 to12 months?

Thanks.

Thank you, Frank.

Milt, you want that?

Sure.

The Texas UPL program referenced the impact it had on our cash flow of about $100 million.

We saw, basically in the third quarter, we did not receive our payment that we typically would receive and it's just going to be a timing difference.

So our receivable from the program increased by approximately $100 million during the quarter and I see that coming back to us in the fourth quarter.

With respect to Medicaid, we anniversaried the significant cuts in Florida at the end of June, so at the end of the second quarter.

If you look at our year-to-date, we've been -- Medicaid is down almost 11% on a rate basis for the company year-to-date through the nine months, of course, down just under 7% for this third quarter.

And that's what we expected.

So what we're going through now, primarily, we do have still some small cuts in Florida that we're going through, a second round of cuts, but much less significant than what we went through last year or through June 30 of this year.

And then we're going through the Texas cuts which, on an annualized basis, would probably be in the neighborhood of $80 million or so.

And that should anniversary the end of -- here at the end of the third quarter.

Milt, either you or John have, sort of, any update, anything to say about Texas waiver and the status of that?

This is Sam.

John's not available on the call.

But we are still in the regulatory infernal, sort of, documentation phase, if you will, for the UPL program or the waiver program and all of those details still are not known at this particular point in time.

It's our belief, through the process, that changes that will be made should be more modest than what we've experienced this year as it relates to reduction.

So there could be some reductions here and there but it won't be anything near as material as what it has been.

Frank, thank you.

And next we'll go to Tom Gallucci with Lazard Capital Markets.

Hi, good morning, this is Colleen.

I'm on for Tom.

Just on the pricing, I think that comp eases significantly in Q4, particularly on the managed care front.

Are you more optimistic that pricing will improve in the fourth quarter or is mix still a headwind?

Milton?

Sure, well, on the Medicare front, we would expect it to improve as we receive, I think, it's a 2.3% increase and so, for the year.

So that will be a positive for pricing starting in the fourth quarter.

With respect to managed care, I would remain a little more cautious there with respect to seeing increases.

Year-to-date we're up about 4.5% is what we've been yielding on the managed care book and it's primarily due, as you referenced, to service mix issues.

And so I would not expect that to change drastically in the fourth quarter but I do see the governmental piece from Medicare being an improvement for us.

Thanks, Colleen.

Thanks.

Next we'll go to Joshua Raskin with Barclays.

Hi thanks.

Good morning.

Thanks for taking the question guys.

Just a question -- a little bit more about as you're preparing for 2014 and I'm just curious what sort of efforts HCA is going to undertake around branding and, maybe, awareness around some of your quality outcomes, especially relative to the broader industry.

And I don't know if there's any way to quantify any impact on what you're seeing in terms of contracting for 2014 or if it's just still too early to even have those conversations with the payers.

But just be curious on the efforts there.

Josh, thank you.

Richard, do you want to take a shot at that one?

I'll start and I was hoping someone would ask a question on quality.

We included in our remarks to this audience because we think our efforts at systematically reducing negative and unnecessary clinical variation across our provider system is of the highest priority.

And it's not only the highest priority because it's the best thing to do for the patients and the care that they get, but it also aligns with more efficient care and, given the changes that we focus on in this industry, that is certainly paramount among them.

In terms of branding, I wouldn't look for us to really brand these activities as such.

We are so proud of the many successes that we've achieved.

We roll them out across our enterprise on all sorts of measures whether it's how we've been able to improve patient wait times in our EDs, or our perinatal initiatives, or our 39-week standard, reduction of MRSA like we commented on today.

This is, to us, the fundamentals of providing good healthcare and they wouldn't rise to, sort of, an external branding effort.

We will, and do, talk to our payer communities and our provider communities about these efforts.

We think they're substantial.

We think they add tremendous value and, when we can pull this out over a wide number of assets and physicians, we make a significant difference.

So I guess the short answer is that this is an important part of our operating agenda.

We think it's going to create a lot of value going forward.

Where we have put economic return in it, tends to be more around the supply chain side of the equation whereby reduced months of stay or minimizing complications, we're able to save on supplies and we've quantified that and are increasingly putting that in our projections.

But really, what this is, this will build into our overall cost of care and, as they become more hardwired in our overall performance, it will show up in our projection numbers going forward.

That's, kind of, how we think about it.

Where we real clear, we don't want to get too far out there.

We think there's a lot of future there but we really don't put it into our projections until we really can see very tangible evidence.

2014.

Milt wants to add something.

Well, yes, you mentioned where we're contracting.

If you're referring just to commercial contracting under our traditional contracts, we're 60% to 65% of our revenues under contract for 2014 but, if you're referring to exchanges for 2014, there's really nothing material going on there.

You know, the states, I think, are waiting, largely, on the elections to make any major moves there with respect to exchanges.

We are experimenting on a small scale with some ACOs, both Medicare Advantage and commercial ACOs They're very, very small but at least we're starting there and starting to take a look at some of those and looking at clinical integrated networks.

Richmond is probably the most advanced for us there on that front.

And looking at a few other markets.

So we are starting to prepare for healthcare reform but, as of today, I would say these steps are relatively small and pilots at this point.

Josh, thank you.

And next we'll go to A.J. Rice with UBS.

Yes, hello everybody.

I guess, I would just ask the ACA in the last few months has been mentioned with a number of potential transactions out there and, obviously, we're seeing the entire backdrop on consolidation activity heat up as we head to 2014.

Can you just, maybe, comment on what you're seeing in terms of activity level and the company's capacity -- I know you commented on the debt to EBITDA -- but the company's financial and managerial capacity to pursue transactions and your appetite for that?

Let me just -- A.J., it's Richard.

Let me just make a start at this.

We -- as I said in my comments today, we feel we have plenty capacity in our balance sheet to pursue any strategic acquisition that we choose to.

I would also add that we are seeing more activity.

I mean, the whole industry is seeing it as various institutions and systems across America think about the future and how to choose scale in an increasingly difficult environment.

We certainly see a lot of that.

I would also add, as I always add, that we are disciplined in terms of what we want to do and what we want to pay.

We have seen a lot, we're at the table for a lot and we are pretty firm about what we think we should be spending and the value that we can bring to these assets.

So it's certainly an active part of our management team right now.

I will also just remind all of you that we were thinking that this would be the trend in the business and, several years ago, really revamped our development program, added a lot of talent there.

Not only on the transactional side but on the overall, sort of, development side so we're feeling that we're appropriately positioned to respond to a changing M&A environment.

I don't know if Milton -- does he want to know about the balance sheet in here?

Well, I mean, we've talked about our leverage ratios.

I think that we have an opportunity to pursue acquisitions with our balance sheet and feel very comfortable with that.

A.J. thank you.

And next we'll go to Sheryl Skolnick with CRT Capital Group.

Good morning, gentlemen.

Thank you so much for making the non-800 available and for your kind thoughts and wishes about those others out here still dealing with things.

It almost makes me sorry I'm going to ask you a question that you might not want to answer.

Could you give us an update on a couple of things that, we'll call it compliance and/or reimbursement oversight related such as New York Times/Miami US Attorney's Office inquiry and where that's standing?

If there's been any local fallout that you can see or any steps that you've taken.

You want to talk about the incidents of the rack pilot beginning the Mac prepayments and other audits.

And also, as I understand it, managed care is becoming increasingly vigilant in oversight on observation cases in a caring -- is the new Interpol standard.

I would be curious if you've seen any evidence of that either through managed care oversight activities or Medicare or investigative oversight activities.

And thank you.

Sheryl, thank you and we're thinking about you guys up there.

Milt, do you want to take that?

Alan Yuspeh's not here with us today but I know he and Milt have been talking about all of these issues.

Yes, I'm not going to address the New York Times.

I'll save that to the lawyers that have got anything to add.

But with respect to the rack audits and the observation and short-stay, sort of, issues, let me say that we have been experiencing an increase in the amount of rack activity and they have been emphasizing the sum that patients -- either inpatient or outpatient, has been an area of focus.

We have developed elaborate systems and, with our shared service centers, Parallon, to respond to these requests.

We've to add a significant number of people to handle some of the volume but we have found that almost all of the rack patient status denials merit an appeal and our shared service teams and our attorneys are appealing these denials.

We've had substantial success with the cases reviewed by the administrative law judges and we've put in place extensive measures to try to ensure the correct patient status assignment and we feel that the rack denials in this space are generally incorrect.

We've had no experience -- our rack experience at this point has not had any material effect on our financial performance, especially here in the third quarter.

But again, we're seeing an increased amount of activity.

With respect to the observation in short-stay, our observation rate -- so it's the observation as a percentage of observation plus short-stays -- we continue to be around 11%.

That's been our percentage now for -- consistently, for a couple of years.

So we're not seeing any increase in our observation.

Also, when you look at one-day stays, Medicare one-day stays, we're seeing our Medicare one-day stays grow at approximately the same rate as the overall Medicare volume.

So nothing really to distinguish anything there.

Alright and, Sheryl, I'll be the lawyer here.

I've already gotten the nod.

There really is no update on anything as it relates to the New York Times and related investigation issue and, I might add, in talking to Sam and our Board of folks, we have seen no business impact at all, operationally, as a result of that story.

That's perfect, thanks so much.

Thanks, Sheryl.

(Operator Instructions).

We'll next go to John Ransom with Raymond James.

Hi.

Just a couple of things.

You guys, over the past two years, have obviously given investors a nice dividend.

Do you think that's, kind of, one of these recurring, non-recurring things or do you think it's subject to tax law changes and your current ownership structure which is majority private equity?

Milt, do you want that?

Sure.

When the decision for a special dividend versus other alternatives for use of capital, really we take into account all of the market factors and you mentioned a few of them.

It could be tax rate impact for dividends.

If that changes drastically, maybe that would indicate that a share repurchase might be more attractive.

The cost of debt capital is a major factor.

The timing of certain -- of cash needed for acquisitions would be a factor.

The cash that we would need to -- if we want to step up investment in our existing markets, for example, would be a consideration.

So there's a number of factors that we look at as we think about a special dividend.

Here, over recent months, of course, we've been in an environment where we've been generating substantial cash flow.

We haven't had a substantial need of cash for a new acquisition outside of HealthONE and credit markets continue to be very favorable with the cost of debt capital.

And, at the same time, we believe that our shareholders appreciate the opportunity to have a cash yield on their investment.

So all those factors have led us to use our capital for special dividends but, going forward, we're not going to try to predict how we're going to continue that.

It will be continuing to consider all those factors from time to time in making those decisions.

Okay, and then secondly, as we think about 2013, I know you're not giving guidance, but could you give us your best guess as to first half of the year, second half of the year net Medicaid pricing.

What you -- obviously there's a substantial headwind this year but what does that look like next year?

Also factoring in what you think might be happening with Texas UPL.

Thanks.

Yes, I think, at this point, John, we're not going to address that.

The Medicaid will be part of the pricing discussion that we'll have when we give our guidance going forward.

We obviously -- we can't address a lot of these things.

We're sitting here with a sequester on the books that some people say are going away so we've just, sort of, drawn a line here and say, let's just -- as Milt reminded you of a couple of things that you and many others are aware of that are big non-recurring items in terms of the Rural Floor Settlement and the difference in the high-tech income are things that are known and we can tell you now.

But the other issues, we're going to wait until we do our fourth quarter call.

Okay, next we'll go to Kevin Fischbeck with Bank of America Merrill Lynch.

Great.

Thanks.

I appreciate the color on the volume number which seems like it's probably going to best volume number we see from the group again this quarter.

But I was wondering, in the past, I didn't hear some of the same color commentary about some of the things that were, maybe, weak this quarter as far as volumes as a thing of the past.

All (inaudible) talked about inpatient and site volume growth.

Can you just flush out, again, kind of, a little bit more about what might be ahead with the volume and the other two items?

Alright Kevin.

Sam, do you want to?

Let me just call out some service line volumes here.

Our Behavioral Health initiative continues to produce strong volume for the company.

We were up 6% in the quarter on a year-over-year basis.

Our Rehab initiative, which is following our Behavioral initiative, it's not as far down the road.

It was very strong at 13.5%.

As we said, the weakness in our volume was primarily Surgery which we attribute mostly to the business day mix that we had in the quarter.

On the Cardiology side, we were flattish.

On Cardiology volume, on the procedural side, we were up on the medical side as we had been.

When you look at the surgical component, the one service line that continues to really outpace all service lines is Orthopedics.

Orthopedics surgical volumes are growing nicely and then we had some softness in the others.

But again, when you normalize it for the business day mix, nothing sticks out as dramatically down.

I will tell you that, on a market share metric, the two service lines at a very granular level where we had some deterioration that we're trying to study and understand a little bit more, is on Cardiovascular surgery itself -- open heart and valve procedures.

We're actually up, we think, on valve but we're down on open heart.

That was one area that was softer than we had anticipated and so we have to study that a little bit further to understand the reasons for that.

But pretty good volume metrics, like I mentioned before, across the board on the other things.

Sam, I think we saw deliveries up and NICU activity up in the quarter.

Right, I mentioned that in the call.

That's right.

And so that was a little bit of a trend change.

And actually, on the neonatal side, we had length of stay improvement this quarter as compared to the first half of the year where we had length of stay compression on neonatal activity.

Alright.

Thank you, Kevin.

And next we'll go to Barry Taylor with Citi.

Sounds like I'm Barry today.

I like that.

I have one clarification, one question, so I hope I can slip both past Vic's firewall he's got up there.

I'll listen to them first.

Okay, the clarification is, so you expect 2012 EBITDA, the midpoint of your previous range which I believe would be about -- the midpoint would be about $6.495 billion.

I just want to make sure we should be using the year-to-date EBITDA $4.925 billion in terms of calculating what the stub guidance would, essentially, be for the fourth quarter.

But there's no other adjustments there.

Yes, Gary, this is Milton.

And of course, you're doing the math and you should be using our year-to-date EBITDA all-in GAAP number there.

And I hate to put a fourth -- I know you're backing into a fourth quarter number and I hate to take it to an absolute point estimate, but the -- if you think about it, probably, from a $1.550 billion to $1.6 billion for the fourth quarter, in that landing zone, and the midpoint of that range would put you pretty much on $6.5 billion.

And HIT should drop sequentially, right?

We have around $80 million.

Is that ballpark?

Let's see.

Total for the year, we gave it--

No, I think it's more than that.

I think what we are looking at for the full year would be $334 million and we've got $195 million through three quarters.

Gary, this is Mark.

We had talked about Healthcare HIT.

Forty percent of our expected revenue recognition would be in the third quarter and I believe we're expecting about 25% of the annualized number in the fourth quarter.

Hang on, let me see what we've got year-to-date.

So we're at $250 million -- it's right at $80 million.

You're right.

I was looking at the impact on EBITDA net of expenses.

So just looking at the income number, it's about $80 million.

Okay, that would work.

What's your other question?

Sam or maybe for Richard.

On the topic of exchanges, I get this question from investors a lot and I have my own view but I thought I'd see if you guys want to talk about your view.

Obviously, a substantial unknown isn't just how many people actually end up in these exchanges or the timing of that, but what payment rates, you know, your hospitals are going to see from subsidized plans in those exchanges.

And I guess, in the absence of any rate caps or any public plans with mandated government rates, the view is, I would think, that these are plans run by commercial companies are going to have to sit down and negotiate with you just like they do for your existing plans and their ability to just dictate a Medicaid or Medicare-type rate doesn't really exist in the negotiation.

Is that how you're thinking about it and expecting that it falls out somewhere closer to commercial rates?

Yes, I think a lot of the dynamics will unfold -- depending on the election and who's in, and how it's shaped but I think, generally, they will be competitively negotiated rates and that's the way that we're thinking about it.

Obviously, we would like them to be a lot closer to the commercial book but, you know, who knows exactly where all that's going to shake out.

But that would be a, sort of, I guess, how I was thinking about it.

The process you described accurately.

Don't know where it's going to land when we've got to the process but the process would be in negotiation with commercial payers.

Great.

Thank you.

Thanks Gary.

And next we'll go to Darren Lehrich with Deutsche Bank.

Thanks.

Good morning, everybody.

I wanted to just ask about expense growth and I wanted to just get a little bit more thought from you about how -- you're looking at expense growth in light of what could be a tougher year with (inaudible) for 2013.

How are you planning for that?

And I would like to just get some additional comments about physician employment costs and how you're thinking about the growth of that.

Alright.

Well I don't want to get in, again, too much into 2013.

I think that we want to cover that in our thinking and assumptions next quarter when we do the fourth quarter call.

But in the big picture, we expect that we're going to continue to be a low inflationary environment and we're going to continue to see that impact on wage rates -- on supply costs and other operating expenses.

With respect to things like our physician costs and physician employment, I think that that will be an area where, again, depending on the market, we've seen some growth but I think the growth, much like you're seeing now, would be at a more moderate growth rate than what we experienced, say, a year ago or 18 months ago from just a big picture outlook.

And on the physician piece itself just, you know, I know you gave us the actual growth rate and expenditure which I think you said was 4.3%, can you just maybe update us briefly on your employed physician base and, you know, any comments on physician practice losses running through the P&L?

This is Sam, Darren.

We have approximately 3.200 physicians that we employ across HCA's markets.

That's up from the previous year.

I don't have the exact growth rate in front of me but it's up 150 to 200 physicians thereabouts.

What we have done is we have learned a lot from the decisions that we have made over the previous years and have been able to refine our thinking around how to deploy this component of our strategy in a way that accomplishes our strategic objectives, accomplishes our clinical objectives, and puts us in a position where we can accomplish our economic objectives to be perfectly candid.

And we've done that by being, I think, more selective in the processing of these decisions, number one.

We've also been able to assimilate these practices more effectively as we've established systems and capabilities within our physicians' practice management arm.

Do we see more of it going forward?

Yes.

Is it going to be at a rapid pace?

I don't think so.

Not across all of HCA's markets.

Some markets faster than others, clearly, but across the portfolio, I don't see any more rapid movement.

For HCA, about 10% to 12% of our activity is from employed physicians.

We still depend on our affiliated physicians in a very significant way.

We have added, probably, 1,000 to 1,200 new active staff physicians to our hospitals this year on a base of about 35,000.

That's come through recruitment.

It's come through employment.

It's come through relocating physicians in a market to our campus.

So there's a host of things that go on in our medical staff development initiative.

Employment just being one piece but that's where we stand with the, sort of, that component of our business.

That's great.

Thanks.

Thanks, Darren.

And next we'll go to Kevin Campbell with Avondale Partners.

Good morning and thanks for taking my question.

Was curious if you guys could just maybe give some color about what you're doing to address the hospital re-admission penalties and, specifically, what you're doing to lower re-admissions.

Who wants to take a shot at that?

Jon?

Jon Perlin, our Chief Medical Director.

Thanks.

First, appreciate the question.

We do perform better than the industry at large, not that there's obviously room for improvement.

We're working with our case management function to better coordinate the care between our inpatient and outpatient settings.

The fact that we have the number of employed physicians that Sam mentioned, as well as very tight relationships with affiliated physicians, eases the hands off and our implementation of electronic health records assures the continuity of information to make sure that the patients' needs are met as effectively as possible.

And this is Sam.

Let me just add to what Jon said.

We have probably 20 hospitals that we have targeted very selectively with some more aggressive initiatives to see what impact we can have around some of these tactics that Jon just mentioned.

And we're studying those and really engaged in those very intently.

And I think, from there, we will learn, and as we learn we start to transport those learnings across the company.

And so those 20 are getting a significant amount of scrutiny and support from the corporate office to understand what works and what doesn't work with impacting this particular issue.

Can you give any color on what those initiatives might be at those 20 hospitals?

It varies.

It depends on what some of the service lines and so forth -- we could probably do that better offline because there's host of things we're working on.

We've got nurse navigation, we have discharge planning, we have follow-up with certain pharmacy -- I mean, there's a litany of things we're trying to do to have an impact.

I'll follow up offline.

Thank you.

Thank you.

Thanks, Kevin.

And next we'll go to Jake Hindelong with Imperial Capital.

Jake, are you there?

Yes, good morning, Vic.

Morning everyone.

Guys, another fourth quarter reporting question.

Will the HealthONE numbers be in or not included in the same-facility numbers?

Not.

It would be next year, starting January.

As we quoted that in November, as I recall, so it wasn't a full quarter, Jake.

Correct.

Right.

Got it.

Great.

And then bigger picture.

Just as you think about more activity and consolidation as you move towards the big changes in 2014, is the appropriate leverage target probably in the low fours or are you comfortable at the 4.5 times level that you ended last year?

Jake, we view our range, say from 3.5 to 4.5 and that will be based upon the development activities and the like.

But I'd say 3.5 to 4.5 is the zone and, as you know, we were at 4.1 here before the dividends so almost at the midpoint of that.

Great, thanks.

Jake, thank you.

And next we'll go to Gary Lieberman with Wells Fargo.

Thanks.

Good morning.

Was wondering if you could tell us what percent of the inpatient and the adjusted admission growth came from the growth in Behavioral and Rehab?

I'll have to do some math here but just let me give you some topline color on that.

This is Sam.

Behavioral and Rehab only account for about 7% of HCA's total admissions.

And if you look at the percentage of our growth associated with that, it's less than 20%.

Okay.

And so, I guess, the fall would be at some point you run into more difficult comps there or is that so small that it's going to be quite a while?

Well, again, I think we're starting to see the Behavioral slow down so that comp is getting more difficult but, in the overall composite rated growth for the company, it's still such a small weighted impact that it doesn't really move the needle that much.

And then as Rehab continues to accelerate which we think it will, that will compensate a little bit for the Behavioral slowdown.

And again, the Behavioral slowdown, as we call it, was 6%.

We were up 12% year-to-date through the third quarter, 6% in the second quarter, and so it has slowed and we knew it was going to slow but it's not going to have a material impact on our composite rate.

Sam, I think our emergency room service line is a key for the growth feed going forward.

Great.

Thanks a lot.

Thanks Gary.

(Operator instructions).

We'll next go to Ralph Giacobbe with Credit Suisse.

Thanks.

Good morning.

Good morning.

Can you give us the percentage of revenue that's Medicare Advantage and maybe, separately, managed Medicaid?

And then, along those lines, just remind us are those rates negotiated or do you just pay the Medicare and Medicaid price?

I was going to say, the rates are negotiated but, obviously, we have an anchor there that's very public here in terms of what Medicare and Medicaid fee-for-service pricing would be in a particular market.

But we do negotiate with the payers around that.

I don't have -- well Medicaid, in total, absent the UPL program, is about 9% or so of our total net revenue.

Let's see if I've got it broken out here.

So, okay, managed Medicare is 9% of our net revenue and --

Managed Medicare, I'm sorry?

Managed Medicare and Managed Medicaid is about 5%.

No, that's helpful.

And just in terms of your first comment around the negotiations.

So there's an anchor, understandably, obviously.

Are you able to get rates above that or not?

And I guess I ask the question in some ways, related to the coming exchanges and your ability to negotiate pricing then or do you think that's totally apples and oranges?

Markets vary and so we're going to have different experiences relevant to fee-for-service pricing in different markets.

So it's not a uniformed across the company, sort of, response there.

As you would imagine, different strengths in different markets.

Okay, thanks.

Thanks, Ralph.

We've got time for one last question if anybody's out there.

(Operator Instructions).

Alright.

I think we're good.

I think we got everybody covered.

I want to thank everybody for being on the call.

Mark and I are here all day so give us a call if you need any follow-ups and have a good day and, again, condolences to some of you who, I know, have had direct hits on Sandy and I hope things get better for you and your families.