美國醫院公司 (HCA) 2012 Q4 法說會逐字稿

Welcome to HCA Holdings Inc conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you very much.

Good morning, everyone.

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

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

Several other members of the HCA senior management team are 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 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.

This morning's call is being recorded and a replay of the call will be available later today.

With that, let me turn the call over to Richard Bracken.

Thanks, Vic.

Good morning to all and thanks for joining us on our call this morning.

I'd like to start today by providing a few general thoughts on our fourth quarter performance as well as some observations for the entire year and then following this I have a few comments that I would like to make about our ongoing work to analyze the potential effects of the healthcare reform legislation.

So, for the fourth quarter.

Generally, we were pleased with our overall performance for the quarter.

For the most part, from an operations perspective, the trends we have been reporting in prior quarters in the year continue to play out in the fourth quarter.

Favorable growth in patient volumes driven by market growth as well as continued improvement in market share performance and favorable expense management helped to offset continued pressures in growth of per-unit revenues.

Our favorable volume performance has allowed us to operate more efficiently by spreading our fixed cost over a larger base and accordingly help to overcome some of the revenue pressures.

As is our standard practice, in just a moment Milton and Sam will provide detail on all of this, but my general take away for the quarter, and really for the year, is that our positions and our key markets remain strong.

Our markets are growing, our operating agendas are structured appropriately.

They're focused and they are effective.

And the public and the communities we serve increasingly choose our delivery networks for their healthcare needs.

We are working hard to earn their choice by providing convenient access to our facilities, a comprehensive scope of services and technologies, a high level of service, and quality clinical care.

Regardless of how the healthcare delivery in America evolves, we believe these are key ingredients for success.

Same facility equivalent admissions grew 5% in the fourth quarter making 21 straight quarters of over five years straight of volume gains.

This years year's early and difficult flu season did impact our fourth quarter inpatient and emergency room volumes.

However, growth in both these indicators were strong even when normalized for flu-associated volumes.

Same facility emergency room visits in the fourth quarter were robust, increasing 12.7% over the prior year and increased 8.6% for the entire year.

Throughout all of 2012, revenues increased to $33 billion and 11.2% growth over the prior year quarter and adjusted EBITDA rose to $6.531 billion, a 7.8% increase over prior year.

EBITDA, as previously reported, reflects the consolidation of our HealthONE venture for the full year, high tech income, and net Medicare settlements in the first quarter of 2012.

Cash flow from operations in 2012 remain strong, totaling $4.175 billion compared to $3.933 billion last year.

And as we have previously stated, our ranked priority for use of cash is, first, to invest in our existing markets in 2012.

We invested $1.862 billion in CapEx comprising approximately $1.62 billion on facilities and equipment which accommodated the development of 400 new beds and $238 million for information technology.

Secondly, focus on strategic acquisitions that can provide long-term growth for the Company, and following these first two priorities, we consider a wide range of strategic options that can improve value to our shareholders, including debt repayment, share repurchase, or the distribution of special dividends which, as you know, we did on three occasions during 2012.

As you will recall, in October 2011 we purchased our partners' remaining ownership position and our HealthONE venture.

Given the size of this transaction, we thought it might be helpful to share some perspective on the performance following this transaction.

Our Denver market continued to perform favorably, even exceeding our internal expectations.

Adjusted EBITDA increased 11.2%, revenues increased 7.5%, and equivalent admissions grew 5.7% over 2011 results.

Now, before concluding my prepared comments this morning, I want to provide some general observations we have formulated concerning our analysis of the impact of healthcare reform.

Our most fundamental observations is while certain areas within the healthcare reform agenda are settled, many, and I stress many, uncertainties remain.

These uncertainties make accurate modeling at this time very challenging.

Nevertheless, we, like many of you, are in the process of trying to more fully understand the impact of this legislation and size the longer term effects that it might have.

Over the past month, Milton has been leading an effort within our organization, along with multiple outside resources, to develop working assumptions that begin to quantify a range of potential impact of the Affordable Care Act on our company.

Let me emphasize that this is preliminary work and it's expected to change as details that shape these assumptions continue to mature.

Having said all of this, we continue to develop and access our data and intelligence that is helping us improve our analysis.

Our goal is to reach a point, perhaps in the mid to latter part of this year, when we feel comfortable sharing some of our assessments of key assumptions and begin to size the potential impacts of reform.

One belief that we do have is that reform is not all about 2014.

We see it as being incremental, varied by market, and evolving over a period of years.

Consider the following.

It's possible that the ramp-up of newly insured enrollees in the exchanges may take three to four years to reach a steady state level.

These states in our portfolios have not determined yet whether they will expand Medicaid coverage or when they might do so.

The degree of employer opt out into the exchanges, which we believe in part will be influenced by employer size, still is to be determined.

And reimbursement rates to providers for exchange product, the utilization patterns of the newly insured, and the effects of local market dynamics to name just a few open issues, still need time to prove out.

As time progresses, we should continue to get more clarity around many of these areas, allowing us to refine our model and expectations.

I should probably add that while we all know the amount of the annual market basket reductions that were included in the Affordable Care Act to fund coverage expansion, the computation of the Medicare Disproportionate Share, or DSH, reallocation which is scheduled to begin this October 1 is more difficult to quantify at this time.

Milton will discuss our current thinking on DSH allocation in just a minute.

So, as we reflect upon all of this, we believe we are well positioned to perform in the reform environment.

Let me close by sharing with you that HCA's performance on the CMS core measures of clinical quality is now at 99.1%, as compared with the national average of 97.4%, based on their most recent release.

We extend our appreciation to our management and clinical teams as these facilities for this performance.

And, with that, I'll turn the call to Milton.

Thank you, Richard, and good morning.

I hope most of you had a chance now to review our fourth quarter earnings release issued this morning.

Sam and I will provide some thoughts around the fourth quarter results and then I will close by addressing our 2013 guidance.

Revenues in the fourth quarter increased 8.5% to $8.434 billion, primarily reflecting consolidation of our HealthONE venture and increased patient volumes.

Adjusted EBITDA totaled $1.606 billion, a decline of 2% from the prior year's $1.639 billion.

High-tech incentive income declined in the fourth quarter of this year by $40 million to $80 million compared to the fourth quarter of 2011.

Volume trends in the quarter were strong with same facility admissions increasing 4.3% and same facility equivalent missions increasing 5% compared to strong volume comps from last year's fourth quarter of 2.5% and 3.2%, respectively.

Our same facility medical admissions increased 6.1% while same facility surgical admissions increased 0.7% compared to prior year.

Total admissions increased 6% while equivalent admissions increased 7.1% compared to the prior year.

Same facility Medicare admissions and equivalent admissions increased 5.1% and 5.7% respectively in the fourth quarter.

Same facility Medicare admissions include both traditional and managed Medicare.

Managed Medicare admissions increased 17.5% on a same facility basis and represent 27% of our total Medicare admissions.

Same facility Medicaid admissions increased 6.1% while same facility equivalent admissions increased 8.3% in the quarter.

Same facility managed care and other admissions increased 1% in the fourth quarter, our highest quarterly growth rate in 2012.

Same facility managed care and other equivalent missions increased 3% over the prior year's fourth quarter.

Uninsured admissions increased 11% on a same facility basis in the fourth quarter when compared to the prior year.

The growth in uninsured mix accounts for approximately 80 basis points of the 4.3% same facility admission growth during the fourth quarter.

Same facility uninsured admissions represents 7.6% of total admissions in the quarter compared with 7.2% in last year's fourth quarter.

Same facility emergency room visits were strong, increasing 12.7% in the quarter.

On a consolidated basis, ER visits increased 14.1% during the quarter compared to the prior year.

Total same facility surgeries increased 1.4% in the quarter, reflecting an increase of 0.9% in our same facility inpatient surgeries, and 1.8% in our same facility outpatient surgeries.

During the quarter, we view our revenue growth rate as stable to slightly improving compared to recent trends.

Same facility revenue per equivalent admission increased 0.5% in the first quarter consistent with what we recorded in the third quarter.

Excluding the impact of the Texas Medicaid waiver program, revenue per equivalent mission increased 1.8%.

During the fourth quarter, same facility Medicare revenue per equivalent admission increased 0.7%, Medicaid revenue per equivalent admission, excluding the Texas Medicaid waiver program, increased 0.9%.

Managed Medicare and others increased 4.8% over the prior-year period, the highest quarterly growth rate yield on our managed care revenue in 2012.

Same facility security care and uninsured discounts increased $184 million in the fourth quarter compared to the prior year.

During the fourth quarter, same facility charity care discounts totaled $716 million, an increase of $31 million in the prior-year period while same facility uninsured discounts totaled $1.691 billion, an increase of $153 million from the prior year period.

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

Same facility operating expense per equivalent mission increased 1.1% in the fourth quarter compared to the prior year.

Same facility operating expense, excluding high tech and Texas Medicaid waiver program expenses, increased 2.3% in the fourth quarter of 2012 which is fairly consistent with third quarter expense trends.

Salary per equivalent admission increased 2.2% on a same facility basis.

Same facility productivity performance as measured by man hours per equivalent admission improved 1.5% over the prior-year period and same facility wage rate growth was 2.3% in the fourth quarter.

Personnel costs associated with physician employment increased by $5 million or a 2.2% from the previous year's fourth quarter.

Same facility supply cost for equivalent admission increased 3.6% from the prior-year period, reflecting increased surgical volume and a reclassification that health trust purchasing group that was implemented effective October 1, 2012.

The reclassification related to non-equity members administrative fees previously accounted for as a reduction in supply expense being reclassified as health trust purchasing group revenues.

The amount reclassified was approximately $41 million and contributes 310 basis points to the growth of supply expense per equivalent admission in the fourth quarter.

The reclassification had no impact on adjusted EBITDA for the quarter.

Same facility other operating expense -- other operating cost per equivalent mission declined 3.7% from the prior-year period primarily due to a $69 million decline in Texas Medicaid waiver program-related expenses.

We recognized $80 million in electronic health record incentive income in the fourth quarter compared to $120 million in the fourth quarter of last year.

This is consistent with our expectations.

The Company also incurred approximately $19 million in EHR related expense of the fourth quarters of 2012 and 2011.

All of our hospitals have achieved the second year, stage one meaningful use and have certified the such during the fourth quarter.

Cash flow from operating activities totaled $1.263 billion in the quarter compared to $1.387 billion last year, the decline was primarily due to increased tax payments.

Cash tax payments totaled $190 million in the fourth quarter of 2012 compared to a net cash tax refund of $161 million in the fourth quarter of 2011.

Days on accounts receivable at the end of the fourth quarter were 51 days compared to 52 days for the same period last year.

And at December 31, 2012, the Company's debt to adjusted EBITDA ratio was 4.4 times compared to 4.5 times at December 31, 2011.

At the end of the quarter, we had $2.964 billion of borrowing capacity under our senior secured credit facility.

With that, now let me turn the call over to Sam.

Good morning.

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

Volume growth across the Company's 14 domestic divisions was very consistent again this quarter.

On a year-over-year basis, 13 out of 14 domestic divisions had growth in same facility inpatient admissions, nine divisions had growth in same facility managed care inpatient admissions.

Same facility inpatient admissions, excluding pulmonary or flu-related admissions, were up 3.3% which represents a strong rate of normalized growth for the quarter.

All 14 domestic divisions had growth in same facility adjusted admissions, 12 divisions had growth in same facility managed care adjusted admissions, the Company has implemented specific plans to grow the commercial segment of our business and we believe our plans are progressing will across most markets.

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.

Additionally, all divisions had growth in managed care emergency room visits which were up 9.6%.

And, finally, EMS visits to our emergency rooms grew by 5.9%.

All divisions had growth in this area, also.

Same facility ER visits, excluding pulmonary or flu-related visits, were up 8.9% for the quarter.

This adjusted rate is above our 2012 growth rate for the prior quarters and, like inpatient admissions, represents a strong rate of normalized growth.

Milton mentioned the improvement in our surgical volumes this quarter.

On an inpatient basis, orthopedics, neurosurgery, and oncology services showed the strongest growth.

On an outpatient basis, orthopedics, women's, and GI services were strong.

Managed care outpatient surgery volumes this quarter were essentially flat, which is an improvement over recent trends.

Same facility admissions entered our adult intensive care and neonatal intensive care unit this quarter were up 3.5% and 1.8% respectively.

The growth in our neonatal volume is driven mostly by growth in obstetrics admissions which grew 4% this quarter.

Growth in managed care obstetrics admissions was comparable.

And, finally, on a same facility basis, behavioral (inaudible) in the quarter and rehab admissions grew 15.9%.

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

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

First, the Company's overall market share during this period increased by 54 basis points to 23.3%.

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

This follows sequential market share gains in each of the past three quarters as compared to the respective preceding quarter.

Market share for the second quarter was the highest it has been over the past 14 quarters.

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

HCA had market share gains and 28 of 37 markets with strong growth in all major Texas markets, Denver, Miami, Jacksonville, 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 in HCA's markets for inpatient admissions in this period grew by 0.5%, 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 third and fourth quarters of 2012, we believe HCA will show when the data becomes available further gains in market share during these periods also.

As we move into 2013, we believe the components of our organic growth plan, coupled with the continual leveraging the best practices across the Company, position us well to draw comparable gains in market share.

With that, I will turn the call back to Milton.

Thanks, Sam.

Before discussing our guidance for 2013, I'd like to comment on our results for 2012 relative to the guidance we gave you last year.

Recall that we last revised our 2012 guidance on May 3, 2012.

We hit to the high end of our revenue estimate by $33 billion and finished sightly above the midpoint of our range for adjusted EBITDA guidance.

Although we were able to meet our guidance for adjusted EBITDA for the year, the underlying metrics were challenging.

Our same facility revenue rate growth fell short of the 1.5% to 2% target with 0.3% growth.

We were able to offset the revenue rate shortfall with volumes well above our expectations and better expense management than planned.

Now, turning to our 2013 guidance.

As noted in our earnings release this morning, we estimate for 2013 consolidated revenues should range from $33.5 billion to $34.5 billion, this does not include the impact from acquisitions that may be completed in 2013.

Adjusted EBITDA, we estimate a range of $6.25 billion to $6.5 billion for the year while earnings per diluted share are estimated to range from $3 to $3.30 for 2013.

We estimate the equivalent admission growth to range from 2% to 3% for the year.

With respect to net revenues per equivalent admission, excluding the impact of the Texas Medicaid waiver program, we expect growth of 1% to 2% in 2013.

We expect to continue to face reimbursement pressure from governmental payers during 2013.

Medicare revenues and our 2013 estimate reflects a composite declining rate of approximately 1.2% and our estimate assumes the following -- 2% payment reduction attributable to sequestration beginning in April; coding recruitment reductions which were included in the year end [doc recalculation] of approximately $25 million beginning in the fourth quarter of 2013.

Although the rules related to DSH redistribution will not be issued until April, our estimate assumes Medicare DSH reductions of approximately $50 million in the fourth quarter of 2013 resulting from the affordable care act planned for DSH redistribution.

We remain hopeful that the final redistribution rule will result in a redistribution that more reasonably reflects the number of uninsured patients we treat at our facilities.

Medicaid revenues reflect an estimated reduction of approximately $40 million related to the Texas Medicaid waiver program.

Additionally, we expect rate reductions and manage Medicaid in 2013.

Relative to operating expenses, we anticipate that we continue to benefit from a low inflationary environment in 2013 while continuing to invest in our clinical and EHR development initiatives.

Our expense for equivalent admission, excluding the Texas Medicaid waiver program expense, is estimated to increase by approximately 2.5% over the prior year period.

Following our IPO in 2011, we adopted a new management equity program with annual grants generally vesting an expense over a four-year period.

As a result, it will take a full four years for this non-cash share -based compensation expense to fully normalize in our adjusted EBITDA run rate.

In 2012, the Company recognized $56 million related to the program.

Our 2013 guidance includes the second year of the program with non-cash share-based compensation expense increasing to $128 million or a $72 million increase over 2012.

The 2013 guidance includes estimated high-tech incentive income of $200 million to $225 million and high-tech related expenses in the range of $110 million to $130 million.

As I mentioned on last quarter's call, our adjusted EBITDA growth for 2013 will be negatively impacted as compared to 2012 by the net favorable Medicare adjustment, both the rule floor and SSI ratio recorded in the first quarter of 2012 up $170 million and approximately $115 million less high-tech incentive income in 2013.

These two items have a 460 basis point negative impact on 2013 adjusted EBITDA growth.

When also considering the non-cash share-based compensation expense growth, the negative impact on 2013 adjusted EBITDA totals 580 basis points.

With that, I will turn the call back to Vic.

All right.

Milton, Richard, Sam thank you.

Candace, do you want to come back on and pole for questions.

(Operator Instructions)

A.J. Rice from UBS.

Maybe I will go back to Richard's comment on the health reform.

I think you highlighted four major variables, ramp-up in coverage, Medicaid expansion, rates on the exchanges, and employer dumping.

Can you -- I know you guys aren't going to be ready to give specifics for a while, but I wondered if you could tell us as you think about the variability around each of those, which one has the most -- which ones have the most swing factor to you?

And if there's any sense on your part when you might get visibility on those four items?

Okay.

A.J., thank you.

As I look at those variables, they all look important to me.

I would say that though if I had to pick something that I think is most important, it would clearly be reimbursement rates that we would negotiate exchange products at and really sort of the utilization rates of the uninsured work.

And both of these things are going to -- that's why we are struggling to be definitive at this point in time.

And what -- the way we look at the work we are doing now, is there's a lot of variables out there and some we are able to begin to size through work that's being done by focus groups and surveys relative to the employer intentions or potential actions that publics might take in certain markets and we begin to size pieces of it, but others that are going to be rate based or utilization based will take more time to actually come online.

We certainly know what our commercial books are at.

We've been pretty public about how we think about that.

We are looking at each of these markets being independent.

We don't have a strategy or a policy that's going to roll out over every market.

So, this is truly a model that's in development and that we are continuing to get pieces and facts around.

And we will let you know what we have, as we said, in the middle to latter part of the year.

And, it will be what it is at that point in time.

There was still be holes at that point in time, but as much as we have been able to figure out or put some detail around or to the degree which we are assuming things, we will put that out as well.

Okay.

Just maybe a follow-up on that comment around managed care.

Can you just sort of update us again on where you're at in contracting for 2013 and 2014 and does any of that have exchange related contracting in it at this point?

A.J., this is Milton.

Right now, the answer to the second part of your question is no.

Right now our contracts restructured basically consistent with where they've been over recent years.

We've got virtually all of 2013 managed care revenue under contract in that contracted rate of 5% to 6%.

We've got about 50% of the managed care revenues for 2014 under contract in similar rate increases and probably 35% or so of '15.

So again, as usual, a lot of visibility into our managed care contracting, but really at this point in time no material exchange products have been negotiated.

All right.

Thanks a lot.

[Chris Riggs] from Susquehanna Financial Group.

I guess I just wanted to follow up on the DSH money.

So, you are basically saying it's $200 million annually, is that correct?

That's our estimate as of today.

Hopefully, when the regs are issued in April, we can have a more favorable outcome.

But based on what we know today, what we expect today, it will be an annual negative impact about $200 million.

Chris, this is Vic.

We will see proposed regs come out in April and the industry will have a period of time to comment and the final rule usually comes out in August.

Okay.

And is the money -- what were the Medicare, Medicaid DSH payments in 2012?

Probably, I would say Medicaid and Medicare probably around $650 million or so.

Okay.

Okay.

And then I guess a follow-up on the sort of managed care pricing.

When you think about the way HCA is set up, cluster market strategies, local market strength and you hear the managed care guys talking about they think narrow networks is sort of what you're going to see in 2014, do you view your sort of cluster strategy as being advantageous, meaning you're going to be a of the narrow network or that allows you to sort of hold the line on pricing and stay kind of status quo is what it is?

First of all, in healthcare reform, and what Richard obviously commented about, it's going to be a very market by market driven strategy.

There's not going to be a overall HCA cookie-cutter approach.

It will be market by market.

And certainly, there our markets where we may find a narrow network attractive but, again, it's going to be based on market circumstances and taking into account (inaudible).

Chris, thank you.

Matt Borsch from Goldman Sachs.

If I could ask a follow-up question on the managed care contracting for the exchanges.

If you don't have those rates locked down, do you default to the commercial rates?

I just wanted to confirm that.

And how-- can you characterize the early pace of the negotiations in terms of what you think the expectations of the health plans are in those negotiations?

Matt, Thank you.

Going to have Juan Vallarino who heads up our managed care group, you want to address that, Juan?

Sure.

Matt, to answer the first question, our current contract does not included exchange pricing.

It's a separate bucket.

So, commercial rate does not apply nor Medicaid rates would apply.

The second, the discussion is really too early to go into any substantive rate discussion.

Everything we are hearing right now is posturing on both sides.

I think over the next 45 days you will see it come to fruition and a lot of it plays out in network size and volume assumptions and the like.

All right.

And just if I could as a follow-up on the different topics.

How do you interpret the stronger utilization trend that you are seeing?

We have been waiting for utilization demand to firm up somewhat.

Historically, there's -- at least we've looked at and I know some of the actuaries have too, a pattern of multi year lag for utilization demand to return after the beginning of an economic recovery.

How are you looking at it at this stage?

Alright.

I'm going to ask Sam Hazen to address that.

And, also, I want to encourage folks, hold your questions to one because we've got a bunch of people on the line.

Got it.

I'm going to have to cut people off as we get there.

Go ahead, Sam.

Well, as I said in my comments, we have seen a slight acceleration in overall demand across HCA's market.

Again, I think that speaks to our portfolio as we said before in that where we are located, which markets we serve we have, in general, a better economic circumstance than other markets.

So, I think that's driving some piece of the demand that we are seeing inside of HCA.

The second thing is the strategy of the Company is yielding results, obviously as our market share continues to show improvement, but what we are seeing on the commercial side is somewhat encouraging.

We've seen sequentially across the quarters a slowdown in overall commercial reductions to the point where the last few quarters have started to get closer to sort of a flat environment inside of HCA's market.

And so that's, I think, a function of the lag that you mentioned previously about the economic rebound and how it affects overall demand on the commercial book of business.

Obviously, on the Medicare side, in the Medicaid side, utilization is not controlled to the same degree and doesn't get the same kind of impact in our estimation as the commercial side does with respect to the economy, but we are seeing that.

So, as we build our 2013 assumptions, we did factor in those observations and built that into our top-line assumptions.

Fantastic.

Thank you.

Joshua Raskin from Barclays.

My one question just focus on Las Vegas market.

I think you guys gave the update.

That was one of the market that showed the improvement in market share.

So, I'm just curious, what are you think is driving that?

And do you guys have any updated thoughts on potential contract negotiation with the biggest payer there?

Sam?

Well, when we severed our relationship with Sierra, now United, many years ago, we had to reinvent ourselves in that market in order to be effective.

Part of that strategy I think has served us well with our ability to operate our emergency rooms, our ability to focus on our physician relationships, and creating opportunities for them to do business that HCA facilities.

Then, we have been very effective at our outreach efforts in that market to compensate for the fact that we are dealing with a very small market when you consider our out-of-network position with Sierra.

We have added service lines that have helped us there as well.

And so from that standpoint we have been very pleased with the overall trend lines as it relates to our admission activity and market share performance.

We are, obviously, open to discussions.

We have ongoing discussions with the folks in Las Vegas and United.

We haven't yet reached any kind of relationship, but we're open to that, as the opportunity presents itself but it has to be at a rate that obviously makes sense for us.

We continue to invest in this market.

We are adding capacity at a couple of our facilities to accommodate the growth as well as some program development.

And we are seeing a little bit of a turn in the economy which is having a slight impact on our payer mix, not material but better than it's been over the past few years.

So, we continued to plug along with the same basic elements of our strategy and we are reasonably optimistic.

It's important to understand Las Vegas only represents about 3% to 4% of the Company's volume.

It's a very small piece of our overall portfolio, but it is an important market to us and we continue to focus our efforts appropriately.

Josh, thanks.

Justin Lake from JPMorgan.

My question is a follow-up on reform.

I want to make sure I'm hearing you correctly.

So, you're expecting reform to be a multi-year impact, which makes sense.

You don't get the full benefit in 2014 of coverage expansion and obviously there's a lot of moving parts, but given the moving parts for 2014, do you still believe the net impact of reform is likely to be positive overall in the Company or could the variables laid out actually lead to a net headwind from reform in 2014?

We're not going to give guidance on 2014 healthcare reform today.

As Richard mentioned, we are still working through our views and the model.

And hopefully later this year we will be able to give you that information probably not only for one year but for a multi-year outlook for healthcare reform.

Tom Gallucci from Lazard Capital Markets.

I guess my question is sort of on the acquisitions environment.

You mentioned strategic acquisition is sort of a second priority for cash.

Can you tell us a little bit more about your thoughts there?

Is it sort of supplementing with end markets?

Would you buy big systems in brand new markets?

And behavioral and rehab have been really strong contributors on volume, so are you thinking about ancillary areas like that as well in your acquisition strategy?

Richard, do want that one?

I will start off on the general acquisition sort of strategy.

Of course, we do believe that the environment is certainly -- there are more opportunities presenting themselves now than there were a couple of years ago.

We are certainly processing more potential opportunities for acquisition.

Having said that, acquisitions come up when they come up.

It can be choppy.

It's a reaction from the marketplace.

And we think the marketplace, as it gets more difficult over the future years, there will continue to be more acquisitions and we will remain very interested in analyzing those.

Our filters that we put through acquisitions through are many.

I think you know historically we have been very disciplined buyers.

We think that's important going forward.

We obviously like acquisitions of not only hospitals but all associated parts of our network strategies that support our markets.

So, we are open to different kinds of things and our key markets, clearly our strategy is to focus on where we have a base of operations rather than de novo markets.

And relative to de novo markets we do consider them if we can establish what we feel would be a meaningful network strategy over a period of time in a meaningful market share player.

I would say that de novo markets are probably lower down on our priority list, but the existing markets and all parts of the network strategy would be in our cross hairs.

Sam, do you want to --

Yes, let me just add to Richard's comment.

Last year, 2012, the Company acquired six outpatient surgery centers inside of existing markets.

And obviously the intent there is to complement our network of access and to develop a new physician relationship.

In addition to that, we acquired a surgical hospital in another one of our markets which expanded our capacity and expanded our reach in that community and then finally on the, I will call it the subacute, we have a letter of intent to acquire rehab hospital in the market.

So, we are very focused on adding appropriately to our network through those add-on acquisitions.

That will continue to be our strategy in 2013 as those opportunities surface.

In those markets where we think we have substantial market share and the inability to acquire or there's just not anything available in our opinion, we have a move toward adding capacity and adding new facilities.

As I mentioned on the last call, we have four new hospitals that are under construction in major HCA markets.

Two of them will come on line this year in 2013 and two of them will come on line in early 2014.

We think these are long-term plays for the Company, but at the same time they are very complementary to existing networks.

Thank you, Tom.

Ralph Giacobbe from Credit Suisse.

Just in terms of the reform assumptions going back, just to clarify, later this year should we expect kind of guidance in terms of the EBITDA and EPS or just kind of framework I guess first.

And then just along those lines, can you maybe talk about what you are doing now or plan to do in 2013 to prepare for 2014 in terms of both operational as well as an outreach perspective?

Like, how much of a role can you all play in getting people signed up for exchanges and/or processes in place to get them signed up for Medicaid?

Thanks.

Milton, you want those?

Yes.

Ralph, what we are anticipating and, again, I'm going to keep some flexibility here as we continue to work through this project, but what we anticipate is giving the impact on the Company from healthcare reform both we see the upside and then how we see the cuts from -- on the Medicare program.

So, it would be kind of a with and without approach is what we are anticipating.

It would not -- our outlook would not include anything about the base business in those out years.

It would include the impact of healthcare reform on the base business with whatever market forces we are dealing with and those out years.

It would be presented most likely in a range of EBITDA impact.

That is how we are thinking about it.

Relative to what we are doing, I think how we operate the business every day and how we've been operating the business for years actually positioned us well in a healthcare reform environment.

Major changes in how we run the Company in a healthcare reform environment obviously, as I said earlier, market by market there will be new opportunities and we will certainly implement strategies to maximize opportunities in those markets.

Thank you, Ralph.

Frank Morgan from RBC Capital Markets.

I just wanted to confirm, the numbers you gave on rehab and behavioral, were those same store or were those total?

Those were same-store numbers.

Okay.

Two questions.

I was hoping to get a quick update on the observation stay versus one-day stay.

Has that stabilized?

Is it incrementally getting better or worse?

And then, finally, do we expect any EOR volume spillover into the first quarter to kind of strengthen in the fourth?

Thanks.

The observation one-day stay, that has stabilized.

That has not been an issue for us this year.

It remains stable and the outlook for that is to remain stable.

And the ER volume?

I didn't hear the question.

Are we thinking about ER volume in early part of '13.

Frank, I think we really don't comment on current quarter periods of time.

So, obviously everybody reads the press.

There's lots of flu out there.

But I think in terms of trying to discuss January or February, we don't want to do that on this call.

Okay.

That's fair.

Thanks.

Cheryl Skolnick from CRT Capital Group.

Since I think I've heard you say we're not going to talk about anything more on reform, I think I'm not going to ask you about reform.

Thank you.

You're welcome.

So, let me ask you a completely different question then.

One of the concerns that I have heard from investors in your stock today is the disconnect between the EBITDA and where consensus is generally in line with your guidance.

And so we get the joke that you have got 500 basis points plus the pressure, but you are still producing EBITDA that's almost in line with what you reported this year.

Kudos.

But, the EPS seems to be out of whack.

So, can you help us to understand where we are wrong as a consensus estimate on the street between the EBITDA and the net income of per share line?

Sheryl, this is Milton.

Let me try to walk you through that.

So, if you think about the range of EBITDA guidance as a $6.25 billion to $6.5 billion for 2013, if you walk down and our assumptions around depreciation, approximately $1.7 billion in depreciation expense we would expect interest expense to be in the range of about $1.85 billion to $1.9 billion for the year.

Tax rate, call it like 38.5%, 39% tax rate and about 467 million roughly shares.

So, I think if you walk down the EBITDA guidance range with those metrics, you will come up with the EPS range.

Okay.

Just a clarification here.

When you talk about the tax rate, you're talking about the actual tax rate you apply to pretax less non-controlling interest?

Yes.

That's correct.

Okay.

So, it ends up looking lower than 38% when you do it that way.

Yes.

You have to take net income before taxes, subtract out the --

Minority interest.

-- and then you will see the tax rate being more in line with what you would expect.

And did you comment at all on cash flows?

Did I miss that?

I have not here.

We will be -- cash flows from operations for next year will probably be in the range of call it 3.4 to 3.6 or 3.5 to 3.6 sort of zone for next year.

We will have in our estimates, higher cash taxes.

You will see based upon the interest, the number I just gave you, slightly higher interest paid in next year.

And the CapEx target is going to be approximately $2 billion, which is up from the $1.862 billion this year.

So, we will see our cash flow from operations expectation would be declined from this year's I think record number of 4.175.

Yes.

Congratulations on that record.

We love it.

Cheryl, thank you.

Darren Lehrich from Deutsche Bank.

I just want to clarify one thing on CapEx.

Is there any way for you to break out for us what your IT expenditures are going to be, if that's the swing factor in terms of it growing?

So, that's a clarification.

And then maybe just more of a philosophical question I have for you.

We have seen a lot of different organizations respond to some of the CMMI initiatives and some of the payment models that CMMI has been putting out.

I guess the question here, what's HCA's approach to some of this and do you plan on participating in any of these models?

I'm just curious how you guys are thinking about those opportunities?

Let me just mention one thing on the CapEx and then maybe, Juan, you can talk a little bit about the CMMI initiatives or Sam, whoever wants to take that one on.

Our CapEx for next year is, from a composition basis, is pretty much similar to what it was this year.

What we stepped it up a little bit in terms of what we term our routine spend.

That's just the spend that goes to fundamental facilities, clinical equipment and the like.

So, we really don't see a major breakout in technology spending or any major changes in sort of the components of our CapEx allocation.

Let me start on the CMMI projects that you are mentioning.

The Company clearly evaluates any opportunity and any new program that comes out and we do it with our folks in the field.

We evaluate our programs, our position, in the marketplace our position capability and so forth.

And we went through the process on the most recent program that was discussed around bundled payments and so forth and we chose at this particular point in time not to pursue participating in those initiatives.

We felt there were other initiatives that made more sense for our organizations at that particular point in time.

We do have a number of tests and pilot programs with various payers across the marketplace, both with our physicians as well as our facilities, to understand what impact they have and how we would think about them in other situations across the Company.

And so we are very connected to that process.

It's just that when we don't have enough details or we don't have the necessary situation in place where it makes sense at the time, we make that decision as we do our valuation and that's pretty much how we handled this bundled project program that the government was pushing through the industry.

And across HCA's markets there's very few systems that actually participated.

And I think it just reflects the other opportunities that exist within those markets.

Great.

Thanks.

Kevin Fischbeck from Bank of America Merrill Lynch.

I just wanted to understand if there was anything that we should think about as far as investments that you guys are making to prepare for 2014?

We hear a lot about it from the managed care side of things but haven't really heard about it from the hospital side.

Is there anything that you need to do as far as staffing up in front of that potential volume increase in 2014 or investments around contracting or narrow networks or thinking about risk or anything along those lines that we should be thinking about as the year goes on?

This is Sam, again.

I think Richard mentioned in his comments, and Milton alluded to it, as well, I just mentioned that we do have a few pilot concepts that we are exploring that aren't necessarily applicable to reform, per se, they're just the dynamics that exist within our markets and we are responding to that.

One thing we have done is we have studied our capacity I think very carefully to understand where do we have capacity constraints that we need to address, whether that's with access within a market, whether that's with beds or other capabilities within our facility but, again, that's sort of normal business for HCA.

I wouldn't say it's anything new because of reform.

If we do see a spike in demand within our markets, like some people assume as reform develops, then we'll have to continually adjust our capacity if our share continues to maintain itself, but that's still normal course of operations for the Company.

We have a very disciplined approach to understanding our utilization of our facilities, our occupancy rates, our clinical technology needs and so forth, our physician needs.

And as we work our way through the market dynamics, study the behaviors of the market, we will adjust as we've been adjusting to the dynamics up to this point.

So, I don't think you'll see anything dramatically different for the Company as we move through the next 18 to 24 months.

You clearly wouldn't see any additions in variables staffing or anything of that.

That would all be handled on an as-needed basis very close to the time of demand.

So, you wouldn't see any kind of labor associated with that.

The only sort of incidental labor that I would mention, and it's not really related to reform, it's to Sam's point, the overall sort of market conditions is our continued investment in our quality agenda, our quality performance teams, our ability to deploy the EHR in meaningful use and the like.

Those areas we continue to invest labor to prepare ourselves for the future.

Thank you, Kevin.

We have time for one last question.

We will take our final question from Whit Mayo from Robert Baird.

Thanks.

I appreciate it.

I wasn't sure if you would answer this directly but, Milton, I was just curious what the actual assumption is you're making for the uninsured declines in that $200 million cut from DSH.

And do you have an idea actually when the CBO is going to publish their assumption for uninsured declines?

Whit, so what we know, there was a call and a document that was issued by CMS as the basis for our estimate.

Basically, today, as you are probably aware, DSH is distributed or allocated based upon Medicaid and SSI of recipient days.

And the new formula would be going to uncompensated care.

And right now the way that uncompensated care is being defined, with our understanding, would be charity care and bad debt and then that's multiplied by the cost of charge ratio.

What that formula does, it penalizes efficient providers.

And also what it doesn't pick up would be uninsured discounts.

As you know from following the Company over a number of years, we give significant uninsured discounts to our uninsured patients.

And that's not picked up in the uncompensated care formula, at least not as we understand it today.

So, as a result, it's not based upon a volume metric, this 75% redistribution, but based upon uncompensated care and the way that's being defined and then the fact that efficient providers with a lower cost of charge ratio again would be hurt in this redistribution.

And that's the -- the $200 million is the affect upon HCA.

I guess I would direct you to that call that Milton mentioned was a public call on it was on January 8 and I think there are some slides and information on the CMS website.

Again, it's preliminary.

We are still waiting for the actual proposed rule to come, but we had to put something in our numbers as we developed guidance for the year.

Whit, your comment about the reduction in the uninsured, so as you just heard, this redistribution formula, the $200 million is not attributable to reduced uninsured patients in our facility.

It's attributable to a new formula.

And going forward, as healthcare reform is implemented, the number of uninsureds do decrease, that pool that would decrease further over time.

It was my assumption that the CBO was just going to make an estimate and that's what the entire industry had to base their calculation on.

So, I just wasn't sure if you had an idea when the CBO may actually disclose or publish that?

No.

We really don't.

I will tell you, with that, we want to thank everyone.

We got done within the hour.

So, thank you very much.

You all have a great day.

Mark and I are here all day.

This concludes today's conference.

We thank you for your participation.