環球健康 (UHS) 2002 Q2 法說會逐字稿

Good morning, my name is and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Health Services second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to answer a question during this time, simply press star, and then the number one, on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Gorman, you may begin your conference.

Thank you. Good morning, I'm Kirk Gorman. Welcome to this review of Universal Health Services' results for the second quarter ended June 30th, 2002. Alan Miller, our president and CEO, should be joining us shortly. He's returning from a business trip. But rather than delay all of you, we'll go ahead and get started and hope Alan can be with us for the Q&A session in a few minutes.

For the quarter, the company earned $0.69 per share, diluted. These earnings represent a 35 percent increase from the earnings per share in last year's second quarter. During this conference call, I'll be using words such as believes, expects, anticipates, and similar words that constitute forecasts, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the second on page 22 of our 2001 annual report to shareholders.

I'd like to highlight just a couple of developments and business trends before opening the call up to questions. Admissions in the quarter, in both our acute care and our behavioral health divisions were really quite strong. We recorded same-store growth in adjusted admissions in both divisions in excess of 6 percent, bringing year to date admissions growth in both divisions to approximately 6 percent. This growth rate is a little higher than our medium term expectations of 3 percent to 5 percent annual growth.

Price increases remain quite acceptable, too. Net revenue per adjusted admission in our key care hospitals increased 1.3 percent in the quarter. However, this statistic is a little depressed. It's depressed by about 250 basis points due to the change in accounting for charity care that we instituted in the fourth quarter of last year. We estimate revenue per adjusted admission increased nearly 4 percent, after adjusting for the change in accounting for charity care.

Our revenue per admission and patient statistics will continue to be a little out of line and look a little depressed until we anniversary this accounting change for charity care in the fourth quarter of 2002. We do not see any reduction in current pricing trends in the private sector from the approximately 6 percent increases we have been achieving. We do expect Medicare pricing to increase at a slightly lower rate in 2002 than in 2001, however. While we are certainly aware of all the newspaper articles and other news reports that many states are considering changes in their Medicaid programs to deal with state budgetary problems, we are not seen any meaningful reduction in Medicaid reimbursements to our acute care hospitals.

Price increases in the behavioral health division follow their historic pattern of being more modest than in the acute care division as the large majority of our business is priced on a per diem basis. We think revenue per adjusted patient day is a - is a superior statistic to revenue per admission for tracking pricing trends.

Revenue for adjusted patient day declined about one percent in the second quarter. Just as in the acute care hospital division, we changed the accounting for charity care in the fourth quarter of last year and has - this change also has the same depressing effect on this revenue per day statistic. We are down about 200 basis points on the statistic due to the change in accounting policy, and we therefore estimate that revenue per adjusted patient day grew about 1.7 percent after adjusting for this charity care accounting change.

Our bad debt expense is a percent of net revenues continues to decline and our day sales outstanding remain relatively steady at approximately 53 days in the quarter. While an accounting change in charity care certainly did contribute to the decline in bad debt expense, the solid DSO number shows that we are continuing to make progress in improving our billing and collecting and we are quite comfortable, that there has been a lot of solid work at many of our hospitals to improve our cash collection capability.

We spent about $56 million on capital expenditures in the second quarter, compared to $39 million in the second quarter of last year. For the first six months of 2002 we've spent $97 million on capital projects, compared to $69 million last year. We currently expect capital expenditures to be about $200 to $225 million for the full year 2002.

The five largest projects are the remaining expenditures on the new George Washington University Hospital in Washington, D.C., a major renovation and modernization of our Auburn Regional Medical Center just south of Seattle, Washington, The first phase of a new 75 million 176 bed hospital in Las Vegas, a major new cardiology wing and bed expansion of Northwest Texas Medical Center in Amarillo, Texas, and a recently announced new 120 bed hospital in Manatee County Florida.

The George Washington construction is completed and we will commence operations on August 23. The Auburn project will be completed in - and in operation in December. The new hospital in Las Vegas named will be completed in the third quarter of 2003, as will the Northwest Texas project. The new hospital in Manatee County Florida named will open late in the fourth quarter of 2003.

Together these five projects alone will increase UHS's acute care bed capacity by 12 percent within the next 18 months.

The focus of growth of the company in the past few years has been to make attractive acquisitions and increase the operating leverage of UHS. We are currently actively continuing to review acquisition opportunities in all divisions; our acute care, our behavioral health, our ambulatory surgery center division as well as in our French company.

In addition to continuing to look for quality acquisitions, we are also spending more money as we just discussed on our strong franchises in fast growing markets to take advantage of opportunities in the communities we already serve.

We also, particularly in our acute care hospital division, will be focused on improving operating margins and expect to see some improvement in labor and supply expenses as the year progresses.

An energetic focus on our provision for accounts is already yielded results in excess of our expectations at the beginning of the year.

We believe we have tremendous opportunities to grow from internal activities and we may see a somewhat smaller portion of our growth generated from external acquisitions this year and next.

We're quite pleased with the performance recorded in the second quarter in the first half of 2002. Based on the strong performance to date we are increasing our earnings expectations by three cents a share to $2.56 per share for the full year 2002.

The expenses related to the opening of the new George Washington University Hospital may dampen third quarter earnings below a normal trend line but we should record solid results again in the fourth quarter.

has joined us as predicted. And he and I will be happy to respond to any questions anyone might have at this point.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from with JP Morgan.

Hi . I have actually two questions. First is can you expand on the comments that you made with regard to GW and tell us with the hospital opening next month you know what are your expectations for margins over the next, say, couple of quarters? And as you look out into '03 what are your expectations for margins there compared to old GW which I think had low to mid single digit margins?

, I think you're right. We've been running year-to-date in the single digits, middle single digit range EBITDA margins that you don't - certainly the third quarter is going to be burdened with some moving expense and transferring patient expense, start up expense. So the third quarter may not be all that great for GW.

But certainly based on the excitement in the medical community and the hard work being done by the management team in Washington, D.C., we would anticipate the fourth quarter to be a pretty good quarter for GW. Probably the first quarter of next year could be the best margin quarter we've had at GW since we became involved with the university.

OK. And in terms of below the line changes to DNA and interest expense for carrying the new facility?

Upon opening we will begin to expense both interest and depreciation at the rate of about $2 million a quarter ...

Combined?

It would be about another $8 million a year in expense, D&A and interest expense coming from the new hospital we certainly expect operating expenses, things as puny as utility expense and certainly staffing is going to be a little bit more productive given the layout of the floors and things like that.

But not all of that eight million but a noticeable portion of that eight million should be offset by just pure operating efficiencies. And the rest we think we can cover if not in the fourth quarter although very possibly in the fourth quarter - if not in the fourth quarter, beginning in the first quarter we should cover all the rest of that with increased patient volumes.

OK. And then the second question real quick. What's your unused capacity on your credit lines at this point? And what are your actual cap ex commitments for your major development projects in the rest of the year?

We've got about 350 million available under our revolving credit. Really we don't have much out in the future sorts of capital expenditures in a way of commitments. We would anticipate that our capital expenditures this year would be 200 to 225 and as we finish up some of these projects, the Las Vegas hospital, the Amarillo project, the new hospital in Florida.

There are a couple of other projects we're analyzing right now, it wouldn't be surprising if capital expenditures next year came in about the same level. Obviously acquisitions would be in addition to that. We are looking at a couple of acquisitions or a couple of conversations that are progressing favorably at this point. We don't really budget for acquisitions. We try to do every good one we can find, so the moneys I'm talking about, the 200 to 225, both for this year and next, are really just pure cap ex, and would show on that line as opposed to acquisitions. Acquisitions would be in addition.

OK, great, thank you very much.

Your next question comes from with Lehman Brothers.

Great, thank you, good morning everyone. Just a couple of questions, Kirk. One just on the labor cost in the quarter, I'd just like to get an update there. I know you guys have been doing a lot to manage the registry cost, so just curious about how that flowed out -- flowed through in the quarter. And then secondly, just wanted to get an update on some of the issues with the malpractice costs, you know, where are you guys in the process with . And then also, you know, are the costs running at the same level as you had outlined in the beginning of the year?

We've had really pretty good success in bringing registry expense, temporary nursing expense, down. In June, we're under $30 per patient day. That compares to July of 2001, when we peaked at $55 per patient day. You know, a pretty dramatic 40 percent reduction or better in the amount of money per patient day that we're spending on temporary nursing. That has not, as you can see on our income statement, that has not yet been reflected in improvement in our labor and benefit costs line as a percent of net revenue. Part of that is that in order to improve the quality of care by getting rid of the temporary nurses, we have invested pretty heavily in sign on bonuses, retention bonuses, internal training programs and things like that.

We do anticipate that as the year progresses, the expense related to these activities will moderate, and that we should begin to see some moderation in the inflation rate of our labor and benefit line. We do think that there's still an opportunity for us to increase our margin in the second half of the year. As the labor benefit line moderates, we ought to continue to see revenue growth. So the percentage of net revenue being consumed by the labor and benefits should drop a little bit as we get through the second half of the year.

Malpractice is pretty much where we expected it to be, maybe a little bit better. The -- I guess I look at malpractice in two days. The $40 million we reserved at the end of last year was established to cover any claims that we might have to pay that should have been paid by if they had not gone bankrupt. That $40 million was based on several estimates, some of which were legal estimates, not necessarily financial, actuarial, but how certain legal issues might get resolved, and whether or not we would win or lose some of these things.

To date, we have won most of those legal issues. These issues relate to whether or not we really do qualify for coverage under state guarantee funds, and whether or not the tail exposures during certain time periods will be covered. Most of these issues have been resolved favorably as far as we're concerned. So we're confident that the $40 million is more than enough to cover -- at this stage -- is more than enough to cover any potential liabilities that will come our way as these cases get settled out over the next five or six years.

We have not seen anything in the current -- the other half of the malpractice issue is we haven't really seen anything in the current time frame to lead us believe that the expense that we are putting through the income statement to build up our self insurance reserve for this year is - is inadequate at all. The claims experience we have seen so far this year is in line with our expectations.

As you know, we are expensing about $4 million a month to build that self insurance malpractice reserve, and that certainly seems though the first half of this year - certainly continues to - to appear adequate for what we can judge. It's a little big early to have a high degree of confidence. Malpractice claims as you know, are a little slow to arrive and we don't - we won't see until early next year, middle of next year enough information begin to be able to actuarially extrapolate more accurately. But certainly everything we are seeing now, that gives us a good deal of confidence that our accounting has been a little conservative both on the 40 million reserve as well as on the current build up in reserve to cover the current malpractice issues in 2002.

OK. And maybe just one follow up question. It is that time of year when you guys start having the - the conversations with the Texas and South Carolina Medicaid programs and I just wanted to see, do you have any early read on - on how - how that is going to next fiscal year?

You are right , at this - at this time we should have already have heard from South Carolina on the disproportion share program in South Carolina. They are already in their 2003 fiscal year. We have not received any information from South Carolina as to what that program will - will look like. So we are still waiting to hear from that.

We have not yet ended the fiscal year in Texas. Texas as you may recall, is a much more important program for us than is the South Carolina program. We in our own thinking and budgeting are prepared for a couple of million dollar you know, 5, 10, 12 percent sort of reduction in overall payments. These payments go up and down by about that amount every year. We had a pretty favorable result last year and things sometimes get adjusted. So we wouldn't be too surprised if we saw a little bit of a reduction this year. We are kind of thinking that's the way the numbers turn out. But we really haven't seen anything from either state to support our at this point.

Great. OK, thank you guys.

Your next question comes from with the .

Thanks, good morning. Can you just quantify a little bit about your bad debt improvement and just comment on you know, what's causing that here. It would appear that you've done, you know, made some significant progress in your business offices. And I don't think we've seen the mid-six percent levels of revenues since the you know, the mid-90s, so is this an indication that your bad debt expense can hover you know, in this range or in the low seven range from year out?

, I wouldn't - I mean we'll certainly take everything we can get in -- the performance in this quarter is really good and is a testimony to the guys in the hospitals really working the accounts. I'll mention this is a little bit better than we'd anticipated. I would not expect us to remain under seven percent. We'll be - we'll be higher than seven percent I would expect, here on out.

There are a couple of things going on here in this quarter. Obviously, since the fourth quarter of last year we've had this charity care accounting issue, which has affected both our revenues as well as our bad debt expense...

...sure...

...in the quarter is probably, oh 100 basis point improvement in bad debt expense from prior year, something like that. It's a little for us to be precise but it's somewhere in that range. We certainly have improved collection experience.

The hospitals, part of the improvement that occurs this quarter is that we were successful in collecting some accounts that had been previously reserved. So we get kind of a one time surprise improvement by collecting some old accounts. The receivables are already off the balance sheet so when the account does get collected it flows through the income statement line. We debit the cash and we credit the expense line.

We certainly do have a lot of old accounts that have not yet been collected but those are tough to collect. I don't think we would necessarily forecast that we would each quarter have success in collecting a lot of those accounts. Or we are frankly anticipating our bad debt expense percentage or provision for doubtful accounts to rise from the current level.

And roughly how much from the prior year collections were recognized in the quarter?

, I don't have that little a detail in front of me. I'm sorry.

OK. And if I can just follow up on the malpractice question that posed. Maybe, , if you could just give us some commentary on the Manatee Memorial situation and just discuss how many of the hospitals in your system are attempting to change the bylaws to allow physicians you know for self insurance? And just give us some color on that situation. Thanks.

going to talk about - well, let's get the Manatee question out of the way first. will answer that one.

The - I'm not sure everybody understands what's going on at our Manatee Memorial hospital . The medical staff there in response to rising insurance costs and the same sort of pressures that docs and hospitals are feeling all over the country have decided to try to change the bylaws of the hospital to allow the doctors to go bare is the nomenclature. It's not physically. It's - insurance wise go bare.

The idea being that the docs they will move all of their assets into a trust or into their wife's name and simply not have any insurance whatsoever. Obviously, if that were the case no plaintiff attorney would bother suing the doctor and that is one response the doctors are trying to make to the insurance crisis. We certainly have some role in determining whether or not those bylaws get amended and we are talking to our doctors about this.

There is also a state law that requires doctors to either have $250,000 of insurance or to post assets, bonds or letters of credit, any amount of $250,000. I have not been personally involved with the conversations with the doctors and the medical staff. I know a lot of the other guys around here and certainly folks in the hospital have been - at the first level what you're seeing is another response by doctors rebelling against the unfair tort system and malpractice system that exists in many states in the country.

We're not so sure that the so-called solution or approach that the docs at Manatee are trying really addresses the issue. And we're working with them, talking to them about other means of trying to make them comfortable and stay in the profession at the same time complying with state law. And I'm not exactly sure how all this plays out. This is a conversation that you know we're kind of half way through with the docs.

The - usually these laws are related to states, and it's state law. Currently, representative from County here in Pennsylvania has introduced a law into the House having to do with tort reform along the line of the California law, which would have caps of 250,000, et cetera, which would be very helpful. A number of states have such laws. Pennsylvania's been struggling with what to do, and Pennsylvania has passed a law, and then they passed another law, in response to what's been happening in this state.

And it's been helpful. I don't want to go through the whole thing, but one large benefit has been the area where you've gone into joint and several, and what they've done is, instead of having a joint and several open, where if a hospital, for example, were 1 or 2 or 5 or 10 percent responsible, they would have to pay the whole claim, they've now gone to a situation where, in part -- each party pays up to their portion and there's a 60 percent cap, et cetera. So it's very helpful. I'm sure you may be aware of what happened in Las Vegas, where the major trauma center was closed down because of the just going on strike. They've come back and there's supposed to be, there will be, a special session of the legislature in Nevada to enact some legislation to control the insurance cost there as well.

I view this as being very positive, in the long run, because it's finally gotten the attention of the legislators, and in most cases they duck it until there's a fire, and when they can no longer stand the heat, they'll do something. I've spoken to a few senators about this, about the bill in the House, and they always say it's impossible to get things done because the Democrat senators will block this, in part being in the pocket of the trial lawyers.

But I think that this may be a sea change, and we'd like to see some legislation passed. The states are certainly working on it, so in the long run, I think this is going to be actually positive. Because the more drastic the measures that they're taking, like the strike in Las Vegas, and like doctors going in Florida, things of that sort. This is on the front pages in the newspapers and the legislators read.

Thanks a lot. Nice quarter.

Your next question comes from with Salomon Smith Barney.

Good morning. What's left to ask? I guess, I was just wondering, Kirk, if you think you'll have some idea, you know, the 6 percent or so seems to admissions in the acute care area over the first half of the year. Can you give us a sense of whether that's broad based throughout all of your facilities or if it's, you know, some certain markets, and just give us a little bit more color? Do you know, you know, what types of admissions are increasing at a relatively faster rate than others? Just give us a little bit more color on that?

, the admission growth, both in the acute as well as the behavior health divisions is really quite broad-based. It is not just a hospital or two, or a region or two, that is skewing the numbers. Maybe what we ought to do, although I'm not prepared to do it live here on the phone, is thinking about disclosing a standard deviation of growth rate or something like that. Our standard deviation of growth rate would be pretty small this quarter. We had very strong performance in all three months of the quarter, and with few exceptions all hospitals showed pretty solid results. We had good growth in our big markets. We had good growth in , so some of the big hospitals certainly contributed, but even some of our little guys did pretty well. And the same is pretty much true in the behavioral health hospitals. It was - it was pretty strong in many, many, many hospitals.

OK, great. Yes, that standard deviation information is actually pretty interesting. Do you - do you have any other color on just you know, sort of if it was any certain type of admissions versus others, or anything like that?

I don't have that level of detail yet.

OK. Thank you.

Your next question comes from with Wachovia Securities.

Good morning and congratulations guys. I was wondering if you could do us a favor and possibly expand upon other revenue. You - you've seen some very strong growth in that particular part of your business and hopefully you can help us there. And secondly Kirk, I was wondering if you could elaborate on the malpractice side. I know that the example one of your competitors is actually in the situation where they are going to be underwriting taking the risk liability of to insure. Would your organization do anything along those lines? And secondly, when you are seeing, you know you - as you pointed, you read in the paper about all of this problem with the doctors and doctors supposedly retiring and leaving states, et cetera, it doesn't appear that it's impacting your volume to date, but is this something that you know, you are seeing anything unusual going on in that regard?

Part of the other revenue answer , is that in response to inquiries and suggestions from guys like you and your peers as well as some of our investors, we - we keep moving our French operation around. Sometimes it's in the acute care numbers, and sometimes it is out. Starting this quarter from now until somebody tells us we ought to switch it again I guess, but starting this quarter our French hospital company is in the other column and is not part of our acute care statistic. So that would be the largest single piece of the other revenue issue. Also in other revenue is our ambulatory surgery center, radiation centers. We lease - we have some medical office space that we lease to doctors. You know there are - there are things like that that - that would also be in that line item. But the French hospital company is about $100 million in revenues, and that would be the largest piece of that - that line item.

Our historic relationship with doctors has always been to be kind of peers, colleagues, we've never really thought that we should be owning physician practices. We never thought the doctors should own pieces of our hospitals. And we will continue to shy away from becoming financially linked directly to our docs by providing them malpractice insurance. We may do so in some indirect industry wides sorts of ways. In one of our communities the hospitals have helped create an insurance company that will under write risks of doctors in that community and the hospitals have put in some seed capital to help create this insurance company, but we and the rest of the hospitals in the community will have no direct role in the operations of that insurance company and it will be an independent insurance company dealing with the doctors. So we - we do not have any interest in becoming directly involved in - in under writing the risks or subsidizing the - the risks of the doctors. We have provided a lot of consulting, a lot of information. We've made introductions. We had a couple of education seminars. So we are working with our docs to try to help them through this crisis. But we are not interested in providing direct cash subsidies or actually taking on any of that risk ourselves.

And you're absolutely right. The insurance crisis which is causing some doctors to go on sabbatical, take leaves of absence, move out of certain states is not having a substantial impact on our admission trends as you can see. But we had very strong growth in admissions in Las Vegas for instance and that is one of the areas where we have seen doctors leave practice, primarily obstetricians.

It has not really affected our overall flow of business very much in any community yet. Although you know it's hard to know how quickly the legislatures in some of these states can repair the issue and attack the problem and get it fixed. I don't know how long docs can hang on. So it's up to the legislatures to really address this problem promptly so the doctors can remain doctors and patients can continue to receive care.

It - let me add one thing also because reading the headlines I think people could be I wouldn't say overly concerned. We're concerned but this doesn't affect largely the medical patients because the internists and the family practice people have had very little to - very moderate increases in malpractice.

It is really I'll tell you limited to certain specialties. Neurosurgery is one of them. It's generally in the surgery area, it's OB, it's neurosurgery and there is something now in the . But the medical patients are largely unaffected through their doctors. And it's these specialties that are under the gun and getting the attention to try and correct the situation.

OK. Thank you very much.

Your next question comes from with CIBC World Market.

Hi. Good morning. I just have one topic that hasn't been touched on that I've been thinking about. When you look at your behavioral hospital operations you know a lot has been discussed in the marketplace with us and with investors about capacity utilization and constraints in the acute care business.

And the behavioral hospital business I would imagine given that it has a modestly longer length of stay, is a bit more residential in nature may not be seeing that. But I'm just curious as you're moving up into the 70, the mid 70s in occupancy are there any constraints on those facilities that you need to address?

, you're absolutely right. We do have a few facilities that are bumping up against capacity constraints. We do have some construction programs under way to address those issues in those hospitals. Those programs tend not to cost as much money. They don't consumer as much capital.

And, therefore, they don't make our list of top five or three or 10 sorts of capital expenditures programs that we talk about all the time. We talk about the acute care projects because they consume most of the capital. But we do have about three pretty sizeable construction programs under way to add capacity in our behavioral health division.

And we continue to look at those needs. We don't want to be in a position where we can't service the needs of our community. In many cases - in most cases we're the leading provider of these sorts of services to our community. And we've got a responsibility to continue to be able to provide that service. You're absolutely right, our occupancy rate does continue to increase. For instance, last year in the second quarter, we were running at about a 75 percent occupancy rate on an available bed basis, not licensed, although the difference in behavior health between available and licensed isn't as great as acute. But nevertheless, we were about 75 percent last year's second quarter, and this year we're up to about 78 percent.

So it does -- our occupancy rate does continue to creep up, and we do have to keep a very sharp eye on whether or not we need to add a wing or add some capacity.

That's great, thanks a lot.

Your next question comes from with US -- excuse me, UBS Warburg.

Thanks, good morning. Kirk, now that you mention it, what is your occupancy for available beds on the acute care side?

Oh, I was afraid you might ask that. Last year, in the second quarter our occupancy rate on an available bed basis was 66 percent, and this year in the second quarter it was 70 percent.

OK, one thing we've been hearing just recently in the last 24 hours about the Senate bill that may introduce, you know, $40 to $50 billion as a package, has anyone heard anything along those lines?

Not all of that is coming to UHS.

Ah, OK.

I read an e-mail this morning, , but other than reading an e-mail that I wasn't completely sure about, I'm really not prepared to offer an opinion on a somewhat incomplete message I saw on my computer this morning. So, there has been talk that the Senate in particular would find ways of improving upon what has come out of -- improving upon from a hospital guy's standpoint ...

Yes.

What has come out of the House. But I'm not exactly sure what that means. I only had very sketchy sorts of comments, and I'm not sure what context they were really made.

OK, in terms of HMO pricing, can you give us a sense of what your forecast might be for 2003 as part one, part two. What you're hearing in terms of benefit buy downs, multi-tiered provider networks, any major changes on the ER visit co-pay side? Anything you want to talk about on the HMO pricing environment for next year?

Well, as an employer with about 30,000 employees, we are talking to HMOs about the prices they are going to be charging us. And they're being a little bit coy, but certainly indications are we're going to see another year of 15 to 20 percent sort of premium increases from the HMOs. I'm not sure when the pricing environment changes, but certainly our operating guys running the hospitals, in their conversations with the HMOs, are not seeing any difficulty in renewing contracts at the 6 percent or better sorts of annual price increases. I'm not sure why we don't get the 15 percent that the HMOs are getting, but -- we're only picking up 6 or 7 percent out of the 15 or 20 that the HMOs are getting.

I don't really -- there's nothing that I see yet or I hear yet that causes me to think the pricing environment's going to be any different in 2003 than it has been in 2002.

OK, in terms of the multi-tiered networks, are you hearing or seeing anything in your local markets?

Not yet. You know, most of that is still California. We do have a couple of hospitals in California, but they're a little bit remote from the more crowded portions of the California market, so we have not really seen any of the more creative attempts by the HMOs to create pricing strategies against hospitals.

You know, we - we hear the talk but we don't believe any of our contracts include any of that language. We don't think any of our employers that send patients to us have any of that. We just haven't seen it yet.

OK. And last question, with your cash flow a little soft, I assume that's . But you are working cap is coming up a little bit as a percent or revenues. Is that mostly because of the change on - on charity and hence the revenue growth is slowing relative to the asset base?

I'm not sure that's it, because the change in charity also in time has an effect on the size of the receivable. The there is no receivable. There is a little bit of wobble, just nature wobble and part of my answer is, I have no idea. Working capital is a percent of revenues or a percent of total assets is going to bounce around a little bit. A good portion of the a little bit decline, a small decline in our cash flow from operations is due to our tax payments.

OK...

...we had lower tax payments than we do this year, and that accounts for some of the change. I don't think we've given you the full cash flow statement yet...

...no...

...working on some of the details, but the - the tax line that you will see in our actually does account for a good deal of the difference in the - in the cash available from operations.

OK. Thank you.

Your next question comes from with Goldman Sachs.

Hi, good morning. Just a question occurred. In tracking the salary wages and benefits per patient day in the year over year growth in that metric, it - it appears that there has been some moderation in that line item on a sequential basis at least, I think by our calculation is roughly seven percent this quarter versus up 9.6 percent in the first quarter. You know it seems as though that there is some expectation on your behalf of some moderation principally due to the registry cost abatement. What - what other factors and what's your expectation for the remainder of the year. I assume that is part and parcel of what's embedded in your earning guidance. And is that probably the greatest swing factor on the operating cost structure? Thanks.

, our operating guys continue to work very closely on a couple of cost issues. Certainly labor is one of the big areas. It consumes about 40 percent of our net revenues, so obviously that takes a lot of attention. Our guys still think that we will see some improvement in labor cost as a percent of net revenue as the year goes on. A lot of the investment we've made in the first half of this year to reduce our reliance on registry is expected to pay off in somewhat moderated rates of inflation and labor expense in the second half of the year.

But our guys are really working on a lot of the things. You may have seen recently, we signed a new pharmacy contract. We expect that to be reflected in a modest improvement in our pharmacy expenses beginning September 1. It will take a little while to role in, fourth quarter will be the first quarter we really benefit in full from - from the new contract.

We're working on other supply expense items. We think there is still some room for improvement in our supply expense, maybe not so much from pure pricing of product, but from inventory management, supply management improvement. Working with our docs, working with our inventory management activities. But yes - yes you are actually right, labor expense is - is a big focus, but there are a couple of other key tactical issues that the operating guys are looking at to try to bring operating expenses more under control so that we can continue to see some margin improvements as the year goes on and on into next year.

Thanks. One follow up. On the labor line though is it the case that the principle means of rationing that down is the registry expense? I mean presumably your - there's not much flux in wage rate increases and this is sort of a necessary investment and your productivity is relatively high. So is that the principle vehicle or is there something else that you can do there?

I would say that that is by itself it's hard to isolate that. But absolutely that's at the core of the reduction in the growth rate in our labor expense. As we replace temporary nurses who might be getting paid $50 an hour with nurses who might be getting paid $25 an hour that is going to be a big change.

Embedded in the strategies to reduce our reliance on the temporary nurses is a whole series of other financial incentives bonuses and things that make the calculation a little bit more difficult. But you're absolutely right, reducing the registry expense is at the core of how we're addressing our labor issue.

OK. Thanks very much.

Your next question comes from with .

Great. Thanks. On GWU my recollection is the revenue run right there has been anywhere between 125 and $150 million. Is that still pretty much the case or has that changed?

Those revenues have come up, , thank goodness. We were a couple of years ago down in that range. But we're in the 170ish range at this point. We're - the run rate is probably closer to 170 million now. And in the new building we wouldn't be surprised if we crossed 200 million pretty quickly.

You know we'll see. We have a lot of optimism and high hopes for the new building. There's a lot of doctors very excited about bringing patients to this new standard of care. We're in a great location, a lot of energy, a lot of excitement.

We've just hired or are in the process of hiring 120 new nurses. And I'm not so sure that the new building being the best place to work in the district if you're a healthcare worker isn't a big part of our sales pitch to bring those nurses on board. So we've got high hopes that we can cross 200 million in revenues here sometime next year on a run rate.

Great. And then is there anything new worth noting with regard to the French operations, either potential acquisitions or just any changes in the operating environment?

France is pretty small so it doesn't matter to the consolidated numbers a lot. France is having a better year this year than last year. Expenses are a little bit better under control. We did receive some price increases from the French government. So margins are up a little bit. Our income is up a little bit.

We have seen you know the normal sort of choppiness that holidays cause. May was kind of a soft month due to a bunch of holidays in France. We see the same sort of trends in the states maybe not quite as pronounced. We don't have as many holidays.

Overall, I'd say France is pretty much on budget with our expectations for this year. We are looking at a couple of acquisition opportunities. I'll see them firsthand next week as a matter of fact. So we do hope that in addition to the one acquisition we made in last October that we will finally begin to see some good acquisition opportunities where we can grow this business.

Great. Thank you.

Your next question comes from with CSFB.

Thanks, good morning. I was just wondering if you could speak about any changes one way or the other in average patient acuity in your acute care business during this quarter. And with the roll out of several large capital products, particularly the GW hospital, if you'd expect, you know, any acceleration or increase on the average acuity at your acute care hospitals going forward?

, you know, we continue to see, as most hospitals see, we continue to see a little bit creep upward in our case mix index, acuity indices, things like that, but there's nothing dramatic in this quarter. I don't know that the new hospital in GW is going to change the intensity immediately, but certainly we are going to be geared to do some higher tech procedures there. The expansion in Amarillo, Texas is going to include some additional capacity in cardiology, so certainly that project by itself should raise at least that hospital's acuity index.

Overall, I don't think that the capital that we're investing is going to by itself change our case mix indices or any sorts of acuity measure by a lot, although we, along with everybody else, are continuing to see more cardiology, more cancer, more complex orthopedics.

OK, thank you very much.

Your next question comes from with Bank of America.

Good morning. Most of my questions have been answered, just have one. When we look at other operating expenses, which is up about 100 basis points year to year, you know, I calculate the malpractice increase as anywhere from maybe 60 to 80 basis points of that, but just wondered if you could comment on, one, if that analysis is approximately correct, and two, what other items in that expense category have been increasing?

I think the malpractice increase is up more than that, but not much. You're about right, it's about 100 basis point increase. Pharmacy is probably the other largest single contributor to the increase there, which is one of the reasons we've entered into the new arrangement with . After malpractice and pharmacy, it kind of drops off to a bunch of smaller items. Those would be the two largest.

OK, thank you.

Your next question comes from with Merrill Lynch.

Actually, it's , how are you guys doing? Just maybe to follow up on some of the comments about your cash flow and use of cash flow. I think, Kirk, your comment was you have about 350 million available under your bank line, and I guess debt settled cap is at 43 percent, so that's sort of toward the low end of the historic range. I know you guys have capital projects, you say there's a couple of acquisitions that are out there that you're at least looking at. In this market, you know, I know investors are interested in share repurchases and things like that, again, the craziness of the market.

Can you give us some flavor for how you prioritize some of those spending objectives and what we're likely to see as uses of the cash flow and borrowing capacity over the next year?

I think we continue to look at -- at ways of trying to equate investment opportunities. We certainly don't suffer for lack of investment opportunities through acquisitions, through capital expenditures, and, as you say, a lot of us are beginning to look at share repurchase programs as a - as a returning competitor for capital. In our line of what we are trying to do is build a company that is going to be a lot stronger, better company three years from now, five years from now. I don't think we have any strong desire to go private...

...right, right...

...but you know, we have bought shares in the past. We haven't bought a lot recently, but we've from time to time been pretty aggressive buying in some shares. And that is - that is certainly entering into the arithmetic again as - as something that we haven't thought about a whole lot recently. I think the - the company this year probably generates a little bit of free cash flow prior to acquisitions. If we make acquisitions we probably don't have any free cash flow left over. But if we don't make acquisitions, that free cash flow would in the first instance go to pay down our floating rate debt. We park our extra liquidity by having less debt outstanding. But you know in the - in the medium term or longer term sort of cycle we - we are really constantly weighing return on investments or against - for acquisitions against internal acquisitions, either capital acquisitions or share of UHS acquisitions. Fortunately we generate an awful lot of cash flow. It's been pretty easy for us to finance everything we want to do.

Right. Can you just comment a little bit more on the acquisition environment and you know, the prospects for doing something this year? Do you see things at the prices that you guys, I know you tend to be a little optimistic in looking for a very attractive price, are you seeing things out there that meet your criteria?

Yes, hey , it's Alan. There are some. We're selective. As Kirk mentioned, we've got a few that we're a little more interested in than - than normal flow. I think we are a prudent buyer. as you know. We're not going to stretch. There's no reason to stretch. So for our purposes, we - we're seeing some. And we're seeing some that we can deal with in a reasonable range. There's a lot out there that's I think being bid and overpriced we think. We've walked away from a number of situations. But I'm not unhappy with what we are seeing. And obviously we have a lot of internal needs. We have a number of projects that we think are terrific that we are funding ourselves...

...right...

...so those are wonderful acquisitions because we only pay the construction costs, so we are happy with those and I think that Kirk just about . We've used up our - our capital in the very short run perhaps, on our own projects and if you add an acquisition or two, that might do it for this year, but there is good things out there, and I think that since we're in a position of strength we'll be very selective.

OK, great. Thanks a lot.

Your next question comes from with .

Good morning. Could you talk a little bit about revenues per patient day adjusted and the low acuity rate in the second quarter versus the first and maybe talk about that and maybe give us some guidance about those - those metrics going forward?

I'm not sure we're seeing lower acuity in our acute care hospitals, . We have seen a little bit of a patient mix shift in our behavioral health hospitals, away from a little bit more acute higher revenue per day patient to a less acute residential treatment type patient. It hasn't affected our numbers all that much.

OK, I thought - I thought revenues per patient day on the acute side - am I wrong, I thought it was down one or two points, second quarter versus first. Is that wrong?

I think the way we track pricing trends in the acute care area, , is revenue per admission or revenue per adjusted admission.

Which was up about 3.9, adjusted for the charity. Right?

Yes. That's right. About four percent increase in the quarter.

Wasn't it up more than that in the first? Or am I wrong?

It was up more than that in the first and I'm not so sure that - I mean I don't have all the numbers yet. Just anecdotally the guys who are reporting are seeing any great difference in mix of patients. So I'm not so sure the acuity is the answer to that on a sequential basis. We did see some big price increases roll through on the second quarter of last year. So it might just be that we've got a different sort of a comparison environment in the second quarter than we had in the first.

I see. OK. You're not - I mean one would think the acuity if anything would be working upward. Wouldn't you?

I would agree with that. Yes.

OK. And the accounting change for charity, how much of an impact on revenues did that have in the quarter? Was it - because I think you said it was like five or 10 million first quarter. Is that about where it was second or was it higher?

That's about the quarterly affect. Yes.

OK. And that lasts for one more quarter. Is that right?

Well it'll last for all of the third quarter and I guess a month of the fourth quarter.

OK. When we look at the expense ratios is the right way to adjust for that to sort of say add back the five or 10 million in revenues and the expenses wouldn't have been affected by your accounting change. Is that the right way of doing it?

That's correct. Now, on a lag basis that five or 10 million - a portion, a pretty high portion of that five or 10 million would have gone through our provision for doubtful accounts.

Right.

But you're absolutely right. It would not have affected any other expense line item on the income statement.

Right. And did you say that was 100 basis points and a bad debt improvement in the quarter?

Yes. I haven't calculated it out. I don't know the raw data in detail but when I've done it in the past it's about 100 or maybe even a little bit more than 100 basis points.

Great. Thanks a lot.

At this time there are no further questions. Mr. Gorman, do you have any closing remarks?

No. I think we were pretty pleased with the quarter and what the company has been able to accomplish so far this year. We're looking forward to an exciting opening of the George Washington University Hospital in August and a pretty good remainder of the year. I appreciate your interest in the company and look forward to talking to you as the year continues. Thank you very much.

This concludes today's Universal Health Services second quarter conference call. You may now disconnect.