環球健康 (UHS) 2003 Q2 法說會逐字稿

Good morning. My name is Shala (ph), and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Health Services second quarter earnings release 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 ask a question during this time, simply press star, 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Mr. Filton, you may begin your conference.

Good morning. I'm Steve Filton. Alan Miller, our CEO, is also with us. Welcome to this review of Universal Health Services results for the second quarter ended June 30th, 2003. For the quarter, the company reported 82 cents per share, diluted. These earnings represent a 19% increase from the earnings per share in last year's second quarter.

During this conference call, we will be using words such as believes, expects, anticipates and similar words that constitute forecasts, projections and forward-looking statements. While we certainly believe all such statements to be true, listeners should be familiar with the risks and uncertainties of these forward looking statements as discussed on page 24 of our 2002 annual report to shareholders. I would like to highlight a couple of developments and business trends before opening up the call up to questions. Revenues for the quarter were $903 million, an increase of 12% from the revenues in last year's quarter. EBITDA or Earnings Before Interest Tax Depreciation and Amortization was $126 million, 15% higher than in last year's second quarter. Net income of $51 million was 15% higher than last year. The diluted earnings per share of 82 cents was 19% higher than the prior year's quarter.

In the quarter ended June 30, 2003, net revenue per adjusted admission in our acute care hospitals rose 9.4%, and net revenue per adjusted patient day rose 7.8%, reflecting the higher prices being paid by private sector payors. Operating margins or EBITDA margins of our acute care hospitals owned in both the second quarter of 2003 and 2002 were 18.3% in the quarter just ended compared to 17.6% in the prior year as a result of solid top-line growth and a slower rate of increase in salaries and other operating expenses. We believe that managed care pricing remains strong in part as a result of the strong bargaining positions that many of our hospitals enjoy due to sizable market share. Price increases in the behavioral health division followed their pattern of being more modest than acute care division.

Net revenue per adjusted admission to our behavioral hospitals rose 3.2% in the quarter ended June 30, 2003, while net revenue per adjusted patient day increased 3.7%. Operating margins for our behavioral health hospitals owned for more than a year were 23.8% in the quarter ended June 30, 2003, compared to 21.2% in the second quarter of 2002. Our bad debt expense as a percentage of net revenues continues to remain stable, and our days sales outstanding improved to 48 days in the quarter, down from 53 in last year's second quarter.

Admission activity in the second quarter continued to moderate, as compared to levels realized in recent periods. In the acute care hospitals owned in both the second quarter of 2003 and the second quarter of 2002, admissions were essentially flat. Exclusive of a change in strategic direction related to the scope of services at one of our Puerto Rico hospitals, acute care admissions actually increased approximately 1%. We believe that the sluggish economy as a key driver to the admissions, weakness and that modifications in health benefit design may be leading to changes in utilization patterns.

We also note, however, that our hospitals that had experienced the most dramatic admission declines, have consciously eliminated lower margin services, and there are only a few of these.

Admissions to our behavioral health hospitals owned in the second quarters of both 2003 and 2002 increased 3.2%. The behavioral health hospitals have achieved rapid admission growth for many years and operated at a very efficient, 78% available occupancy rate in the second quarter. Demand for behavioral health services has expanded sharply, and we continue to see solid opportunities for additional growth. Alan?

Thank you, Steve. We are continuing to look for acquisitions where we think our skills and knowledge can improve the quality of care and the financial viability of the hospital. During the quarter, for instance, the company announced it's intent to acquire the assets of three acute care hospitals in California from the Vista Health System, closing most likely within the next six months. We are currently reviewing additional acquisition opportunities in our acute care, behavioral, and French operations, and we're hopeful that we'll be able to include a few of these transactions this year.

We spent about $58 million on capital expenditures in the second quarter compared to $56 in the second quarter of last year. We currently expect capital expenditures to be about $200 to $225 million in 2003. The company expects to complete construction of the new 176-bed hospital in Las Vegas, and a 90-bed addition to its Northwest Texas Hospital in Amarillo later in the year. The new 120-bed Lakewood Ranch hospital in Manatee county, Florida should open in the spring of 2004. We are quite pleased with the performance recorded in the second quarter of 2003, and are still looking to earn between $3.10 and 3.20 per share on revenues of approximately $3.5 to 3.6 billion for the full year of 2003.

We are grateful for the dedication of our physicians who recommend our hospitals to their patients and our over 30,000 employees who constantly strive to improve quality and the safety of care available to our patients. Steve and I would be pleased to respond to questions at this time. Hello?

At this time, I would like to remind everyone in order to ask a question, please press star, 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Lori Price of J. P. Morgan.

You had, Steve, in your prepared comments about higher pricing being paid in the private sector by private sector by private sector payors. Can you tell us what kinds of price increases you are getting on average and tell us if there's been any kind of meaningful change in the nature of your contracts in terms of more stringent scrutiny of stop loss language or limits on charge master increases, you know, is the duration of the contract stretching out or getting shorter, anything along those lines? Thanks.

We had talked earlier in 2003 of looking for a 6 to 8% price increases on our commercial pricing, and Lori, I think that we're clearly realizing that, maybe even at the high end of that. We're not seeing any significant pushback or changes in the attendant provisions of those contracts, stop loss or carve-outs, in fact, we're successfully incorporating the carve-out for instance of job eluding stents in those of our contracts. We tend to negotiate contracts that have a one-year duration. We tend to like that, the majority of our contracts have a one-year term because we like our market position in most of our markets. We're comfortable renegotiating and taking a fresh look every year.

We also find that we're increasing the yield a little bit on our contracts, just carefully monitoring underpayments, the use of silent PPOs in certain cases and that sort of thing, which is also helping to push up the pricing that we're getting from commercial payors.

OK, that's great. And just one more clarification, if I could. When you had commented that your underlying same-store admission growth rate excluding the conversion to a pediatric facility in Puerto Rico was around 1%, does that include just that Puerto Rico facility or does it also include some of the other terminated services in other facilities?

No, just -- that was just a reference to Puerto Rico. We had made that same reference in the first quarter, and that in and of itself is worth about 100 basis points in the year-to-year admission comparison. We also allude to the closing of some other services, didn't quantify the impact of that. We've closed, for instance, a psychiatric unit in one of our Texas hospitals, we closed the orthopedic service in one of our Las Vegas hospitals. When you factor those in, you probably pick up another 75 to 100 basis points in admission growth between the years.

Great. Thanks. Nice quarter.

Thank you.

Your next question comes from Darren Lehrich of SunTrust.

Thanks, good morning. Just wanted to get your thoughts with the opening of Spring Valley coming up, and wondering if you can address two things. First, should we be anticipating any margin disruption in the third or fourth quarter on consolidated results as you ramp this facility up, and can you give us a feel for the expected ramp-up time to profitability at that facility? And then second of all, in terms of cannibalization with your other facilities, what's the expectation for that hospital in relation to the other hospitals in Las Vegas, and given the additional capacity that we're seeing coming online by some of your competitors, should we expect overall total market growth in your Las Vegas hospitals, I guess looking forward over the next 12 months? Thanks.

Let me answer part of your question starting at the end. Las Vegas continues to grow, and we are very pleased with that market. We have held the property at Spring Valley for, I don't know, it may be 10 years, waiting for that area to develop. It's a wonderful area. It's in the southwest of Las Vegas. It is now very developed, and we have an excellent site. You know, once an area starts developing, finding 30 or 40-acre parcels is near impossible. So we have held on to this quietly for a very long time. It's going to open about October. We'll be in business certainly by the end of the quarter and anticipating the full year of 2004, and we think we'll reach profitability very rapidly in that facility. There appears to be great demand in that area, and the staffing is going very well, and we are very excited about that facility.

Darren, just to add a couple of points. While you're correct, there's a lot of activity and capacity expansion in Las Vegas, we're obviously adding a facility as is HCA. It continues to be an underbred market. The national average for capacity is three beds per thousand of population, and even after, these two new hospitals come online in Las Vegas, they'll only be at about two beds per thousand. So we're not concerned about an excess of capacity in the market.

Also, because of the rapid growth in the market and the relative under bedded situation there, we expect a relatively quick ramp-up. The last hospital we opened was Summerlin in late 1997, and that ramped up probably as quickly as any hospital that we've ever opened, and we're expecting similar results from Spring Valley. And again, similar to the Summerlin situation, I think that by nature, we will take a little bit of business from our own hospitals, but the whole location of the hospital and the design, et cetera, and its placement is really designed to largely take market share from our competitors, and frankly new market share that is just growing in that section of the market. So we're very bullish about the prospects for Spring Valley.

Great. Thanks a lot. Nice quarter.

Thank you.

Your next question comes from Ken Weakley of UBS.

Thank you, and good morning. Couple of questions. First, do you have your case mix and maybe what happened to case mix on a year-over-year basis?

Ken, I don't have case mix numbers available today, but I do know that just anecdotally from looking at individual hospitals, that some of the benefit on the top line came from increased intensity in the quarter, but I don't have the overall consolidated states.

OK. I'll call back. That's fine. In terms of revenue per adjusted admission, in the quarter I think it was up 9.4, and that's a pretty rapid acceleration from the first quarter trend and I'm just trying to get my arms around what may have happened there, how much of it was, you know, accelerated managed care pricing, and secondarily, given that Medicare revenue per admission is, you know, 3%, that would imply that your commercial or non-Medicare, if you will, revenue per admission is really strong, and I'm just trying to -- if you can maybe break out that 9.4 and give us some background information on, that would be great.

Well, I think it gets to already some of the issues that we touched on. It's just some base pricing increases that we're getting on the high end of that 8% or 9% that was our expectation going into the year. Some of those contracts are kicking in the quarter. I also mentioned before, Ken, the fact that we were particularly in certain markets enjoying increased yield on our contracts by clamping down on underpayments, clamping down on silent PPO usage, that sort of thing.

OK.

Increasing the carve-outs. One of the things that probably has a small effect in the quarter, as some of the new carve-outs like drug-eluding stents start to be used, we see that revenue and expense in the quarter.

So do you think 9.4 is a sustainable number, or should we -- what's the sustainable revenue per adjusted admission growth for the second half and maybe for 2004?

Well, we had talked about for 2004 as continued managed care pricing growth in the 6-to 8%, which I think sort of leaves you a blended growth in the probably 4-to 6% range. I think that's --.

OK. One last question. In terms of in markets where you face -- the greatest degree of competition, have you begun to see any pricing pressure, per se, as occupancy maybe would appear to be under pressure? I mean, if volume growth is decelerating and supplies beginning to increase that I would think, you could start to see maybe some of your not for profits maybe getting a little less rational with pricing. Has that begun to manifest itself or no?

I don't think, think so, Ken. I think that our experience has been leveraged in managed care pricing negotiations has more to do with market share in a particular market than it does with overall occupancy rates moving by a couple of percentage points.

OK.

So when we sit down at a negotiating table with a managed care payor, we've got a third market share more than that. We're usually pretty comfortable with those negotiations, and we don't generally get a lot of sort of interim push back based on relatively short-term changes in occupancy rates.

No, I don't expect you to get pushed back but I'm wondering if the not for profits, maybe, start to respond faster if their -- I mean, their financial position isn't as strong as yours and they may -- maybe more willing to cut price if their occupancy is falling.

In most markets, as you know, we're in a market with perhaps another hospital or two hospitals.

Sure.

Certainly with the exception of George Washington, we're obviously now with a premiere hospital or Las Vegas, the rest of our markets, as you know, are all one or two-hospital markets with our competitors. So we really don't see that. I think your point is well taken in a metropolitan area, people on the end of the line are going to start getting desperate.

Right, right.

But you know, we're sharing the market, and we don't see much of that.

OK. Thanks so much.

Your next question comes from Adam Feinstein of Lehman Brothers.

Great. Thank you. Good morning, everyone.

Good morning, Adam.

Just a couple of questions for you. Just on the volumes, just could you give us any sense of whether June was stronger than April and May, just any sense of that? And then secondly, other companies have talked about increased self-pay, you know, recently. I want to see whether that was the case for you guys, and if so, do you anticipate that bad debt expense going higher over the next year here? Thank you.

Adam, we did experience I think what, some several of our competitors have already disclosed, which was a relative uptick or boost in admissions in June as compared to April and May, so that seems to be consistent with what others have reported. As far as some pay utilization trends, we have been tracking that very carefully. We actually think that our self-pay utilization as a percentage of overall utilization is pretty much pancake flat between 2003 and 2002 and have not seen significant changes. So in terms of feeling comfortable from a bad debt perspective historically, we are, your notion about what we would anticipate in the future, a little bit hard to predict. I think some of it depends on to what degree the economy recovers or doesn't and to what degree the unemployment rate continues to persist at a relatively high level. So, we're very comfortable with where we sit right now, and we'll just continue to watch it closely as it develops.

OK. And just one quick follow-up question, if I may here. Just the minority interest expense number, you know, moved up a lot end of the quarter, so obviously that would apply to both Vegas and George Washington had a very strong quarter, and, you know, could you just give us some details there? Obviously I know you don't provide point on numbers for the markets, but just if you could just talk, you know, in broad terms just about, you know, some of the things that really drove the strength there in the quarter. Thanks.

Adam, those are two markets where we are actually seeing volume growth, so with G.W. and specifically, we're obviously comparing a quarter being in the new hospital this year with a quarter in the old hospital last year, and so we have all the attendant benefit that comes with that. All the new attraction of the new facility, new doctors, new patients, new managed care contracts, we've seen -- we get a juice from intensity and G.W. is one of those markets where we're clearly seeing that, and generally that continues a sequential improvement that we've been seeing at G.W. now for some time. In Vegas, again, good quarter at the hospitals we own in Vegas, good volumes, strong managed care pricing, and a moderation there specifically of sort of this premium labor pay that had been problematic, particularly in Vegas in terms of registry usage and overtime pay, et cetera, and those issues have been addressed very efficiently in Las Vegas.

Great. Thank you.

Your next question comes from John Hindelong of CSFB.

Thanks. Good morning. A couple of quick questions on volumes, not to beat a dead horse to death, but it does seem to be the issue du jour. Appreciate you breaking it out in the sense that June was better than April and May. I'm wondering if you could quantify what admissions were on April, May and June on a monthly basis. And then secondly, were admission trends in Las Vegas very different from the company in general? And then last, just to be clear, if admissions stay about where they are, essentially flat, I assume you're still comfortable with the 310-320m range that you've talked about, Alan?

Yeah, well we think we're up -- I don't know if you were on the call earlier, John, but Steve quantified some changes that we've made by dropping services in a few markets and particularly in Puerto Rico, so I'm not going to quibble, we're not up at the admissions level that we had come to enjoy, but, you now, we're up about probably 1.5 or so, something like that, and with June up -- I don't want to go into a month-by-month, because --

Maybe just this once?

Well, June is up. June is up a little, which is good, so we're not going to go on a month-by-month, and as I pointed out, as Steve pointed out that we're really -- if you look at some of the specifics on one of the Puerto Rico hospitals, some of the other services, I say we're up 1.5 towards 1.75, so, you know, it's not absolutely flat, and we'll hope that that will pick up.

John, just to address one part of your question, I think we are comfortable with this volume level, and we did reiterate our earnings guidance in that 310-320m range for the year.

I guess my real question, though, is, you're not expecting an improvement in volumes to get to that range? I guess that's what I'm asking.

We're not expecting that we need an improvement in volumes to get to that range. I wouldn't discount the fact that we wouldn't expect an improvement in volumes, but we don't need it to meet our estimates.

OK. Thanks a lot.

Your next question comes from John Ransom of Raymond James.

Good morning. Wondered if you could give us an update on both Texas Medicaid as well as Texas Dish, and what sort of impact, if any, that's having in your outlook. Thanks.

John, Texas Medicaid rates for their next fiscal year, which starts in September, have not been absolutely finalized. The legislature passed a bill, but it's been bounced back to them by the state comptroller, and I believe they're tweaking it a little bit more. That bill calls for a 5% reduction in basically the base Medicaid rates. Going into 2003, both in 2003 and 2004 modeling, we modeled Medicaid rates nationally to basically be flat. If Texas comes in at about a 5% reduction, we think that with the small increases we've gotten elsewhere, that that will comfortably fit into what we've modeled.

As far as Texas Dish goes, there really has been no word on that. We often do not get the Texas Dish numbers until later in the all, even though they're effective September 1, we often do not get them until sometimes October or even late into November. So there's really been no conversation about Texas Dish one way or the other.

And just following up on Medicaid, with respect to your behavioral health business, I recall last cycle, that was in the area for cross-savings. Are you seeing any higher than normal pushback from some of your states on the behavioral health coverage side, either in terms of days they cover or eligibility or number of hospital days or that sort of thing?

The states where we have heavy Medicaid utilization on the psych side, Pennsylvania, Massachusetts, have had some small reductions in Medicaid pricing, but nothing that's really affected the division in any significant way.

OK. Thanks a lot.

Your next question comes from Frederick Holsworth (ph) of Jeffries and Company.

Just a quick number here, do you have gross interest expense for the quarter?

Our interest expense is gross.

OK. Thanks.

Your next question comes from Frank Morgan of Jeffries and Company.

Good morning. Couple of questions, one on the volume side, the other on the expense side. Could you comment about what you saw specifically in terms of outpatient surgical volume trends in the quarter? And then secondly, perhaps a comment about contract labor usage in the quarter, and as volumes have, you know, softened, have you been able to reduce that exposure on the contract labor side? Thanks.

Outpatient activity overall was relatively flat in the quarter. Outpatient surgeries were probably off a couple of percentage points as compared to last year's second quarter. As far as contract labor goes, those numbers have been dramatically reducing and continue to diminish in the second quarter. We went from kind of a high of spending over $50 per adjusted patient day in summer of 2001 down to -- we're into the low $20's in the second quarter of this year.

Thank you.

Your next question comes from Kemp Dolliver of SG Cowen Securities.

Thanks. Could you update us on the repositioning plan in Puerto Rico? I think from the last call, I was under the impression that, that hospital was to have re-opened now. Could you just run through that?

Kemp, we converted right around the end of the first quarter, beginning of the second quarter, one of our hospitals in Puerto Rico from a general acute care facility that really largely treated a very elderly Medicare population, almost a nursing home population. We converted that because of the extremely low reimbursement, to a pediatric facility, and so we've got a few months under our belt as a pediatric facility. The volumes have been increasing. I think it's still a little too early to tell whether the new strategy is one that will on a long-term bases be viable and whether we'll be able to generate enough volume to make it work. Clearly, the reimbursement for those patients is better than it was for the Medicare patients. It's a question of whether or not we can get enough critical mass.

And assuming that this makes your plan eventually, would it essentially replace the volumes or is this just going to be a lower volume facility at the end of the day?

No, I think that even the best case plan is that we'll be a lower volume, higher margin facility, but in any case, it will clearly be lower volume.

OK, super. Second question is with regard to Vista Health. Can you update us on, I guess, the process of whether you're going to keep the two hospitals in San Luio Visto (ph)? Thank you.

We are evaluating that, and the question is what kind of bids we might get for them. So, we haven't made a determination, but obviously we're going to keep the one in Corona.

Great. Thank you.

OK.

Your next question comes from David Steinhock (ph) of Worcester Capital.

I got on the call, little late. So I am not sure if you have already addressed reimbursement rates. But if you could just comment in general, when do reimbursement rates come out? I understand that they in general could have a very positive impact on your would bottom line, so I was just wondering if you could just touch on that in general.

David, are you talking about any specific reimbursement rates?

Just as a generality.

OK. I guess it's the couple big components of reimbursement, Medicare reimbursement for the next fiscal year is still kicking around Congress as a prescription drug bill, but the good news is that the difference between the bills is, one of the bills is market basket and one is market basket minus .4. So, we expect next year's rates effective October 1, to be roughly somewhere in the neighborhood of 3% higher than they were last year, or this year. Medicaid rates, talked a little bit about before. That's on a state-by-state basis, and we're essentially expecting Medicaid rates to be flat for the balance of this year and into 2004. And there's been some conversation that we've had with this group about psychiatric PPS or prospective payment system. We're still expecting a draft rule on Medicare reimbursement for psychiatric patients to come out soon, and we expect those rules to be -- to yield a favorable result to us.

Is there a way to look at it when you add it all up, what that means for the bottom line, or is it too hard to say?

Well, back to, I think, the question that Ken asked before, I think when we factor in what we expect to get from commercial pricing and Medicare and Medicaid, I think the reasonable model for next year is pricing increases in the 4-to 6% range. That does not include psych PPS because we don't know when that's going to be effective.

Thank you.

You're welcome.

Your next question comes from Joel Wright of Wachovia Securities.

Good morning. Most of our questions have been answered, but I was wondering if you could go and do us a favor and give us a little bit more information on your operations in France, specifically I'm wondering about what pricing and volume trends are like there. In general, what EBITDA margins we're achieving there versus domestic?

Volumes in France are not, frankly, the operations in France are not terribly different than here in the states. Volumes are relatively flat as compared with the prior year. Pricing, we're getting some reasonable price increases there, and, I mean, the other thing that you see, these are relatively small numbers, but we're getting a boost from the exchange rate in terms of juicing up the revenue numbers, but obviously also the expense numbers, and we're also getting an impact from some significant acquisitions that is we did at the beginning of the year.

And again, was it fair to assume your margins in this market are very comparable to the rest of the business?

They're a little bit lower than our acute care margins in the states.

OK. Thank you.

You're welcome.

Your next question comes from Gary Taylor of Bank of America.

Good morning. Couple of real easy questions and then maybe one harder one. I guess from your comment on the psych regs, you're just waiting for those to be published like all the rest of us. You don't really have any good insight into when those are coming?

You said psych?

Yeah, psych regs.

Those regs have been promised. They come out on Friday. They've been promised for the last two Fridays.

Yeah, I know.

Now we hear they're coming out by the end of the month. We're getting involved in, you know, pushing that a little bit. So, you know, it's imminent. It's already law, so we're just waiting.

Sure. A jump in minority interest sequentially, which I guess just means either Vegas, G.W., France or maybe all three are doing better. Was there any one particular piece that pushed up that minority interest number in the quarter?

Talked a little bit before, Gary, about the fact that I think both Vegas and G.W. had extremely strong quarters.

OK. And then the last, just currency benefit 2Q '03 versus a year ago, do you happen to have those numbers?

In terms of a bottom line impact of the currency or the exchange rate, there's not a material bottom line impact. You see it at the revenue line, but because it's relatively small overall and because we have fairly significant capital costs in France, there's not much of an impact on the bottom line.

And then I think you mentioned you did something with orthopedic at one of the Vegas hospitals. I missed that. Could you just clarify that?

We may have talked about this a little bit in the first quarter, and maybe it's been in the news, but we closed one of our hospitals to or, two orthopedic services, I think, late in the first quarter of '03, and that has actually proved to be sort of a mini boon to the hospital as we've replaced that business with more profitable business and, you know, better -- more capacity in the O. R.'s, et cetera. I want to make the point that this was a hospital that had fairly minimal orthopedic service to begin with. I mean, we generally find orthopedics to be a good business, et cetera, but at this particular facility, it really was a small part of the business when we closed it, and we were able to fill in with equally as if not better business, and frankly pick up some of the lag in our existing hospitals.

Doctors were not particularly cooperative either with regard to the implants they used and various things, so we left. We left them.

So you closed them. I mean, did you lose a surgeon there or something or -- I mean, generally orthopedics is higher margin stuff.

Again, I reiterate, Gary, we didn't do very much orthopedic business there. The orthopedists really wanted us to pay them to take call in the emergency room. We didn't do enough business to make that economically viable, so we chose not to do it, and we simply chose not to offer the service in the emergency room.

We do orthopedics in our other hospitals in Las Vegas. This place had been primarily known for its excellent heart programs and all.

OK. Last question and I'll let you go. I guess this is the third or fourth time people have come back to this, but the net revenue per admission jump of 9.6%, I mean, I guess what I'm getting to is, you really -- you must have seen commercial revenue per admission jump 15 or 16% year-over-year to get a blended number as high as 9.6%, and I know you've given a couple explanations for it, but it sounded like those were pretty modest changes, so, I mean, am I right that commercial revenue per admission jumped that much year-over-year?

Well, again, it's important to keep in mind, Gary, that the increased intensity would be impact, full across the board on all payors, Medicare, Medicaid and commercial. That's one thing to keep in mind. Two is, yeah, I mean, you know, I think, we said up front that our commercial pricing was clearly on the higher end of what we had been talking about, but it's not just sort of contracts, it's increased yield, it's all the other things that we talked about.

OK. Thanks.

Sure.

Your next question comes from David Dempsey of Avondale Partners.

Good morning. Let's go back to outpatient volumes for a minute, particularly on the surgery side. You referenced, Steve, that you think that compared to the last quarter, it was a couple of percentage points off. Are you seeing a lot more competition, especially in some of your urban markets from other ASC entities, and then what then would be your response to that?

David, I think that, you know, we are seeing physician competition. Again, we don't necessarily view that as anything new. I think if you look at the couple of places where we've experienced the biggest outpatient surgical declines, it's generally been where a G. I. group has sort of moved its business almost in toto out of the hospital to their office or to an outpatient surgery center. As has been with most of our softness in volumes, the stuff that we seem to be losing on the outpatient surgery side seems to be the lower margin stuff, so I'm not sure that from our perspective, it calls for sort of any sort of compelling or immediate response. I think our response, just as sort of I've described it in the Vegas situation is to try and fill in the holes hopefully with sop with some even better business. The story for us first and second quarter has been pretty much the same. Softer volumes, but the stuff we're missing tends to be the lower volume stuff and we're trying to fill it in with frankly higher margin stuff where we can.

True. One quick thing on the behavioral side in terms of expectations for the near term in terms of volume, you're expecting the continued improvement in that business and continued demand from those customers?

You know, obviously future demand is hard to predict, but we like the positioning of our behavioral hospitals very much. They tend to be market leaders in some very strong markets, so we think that the longer-term prospect for them remains very good, and, in fact, we're adding capacity in a number of our markets in anticipation of continued demand.

Thank you very much.

Thanks, David.

Your next question comes from Sean Gordon. Mr. Gordon, your line is open.

Hi. I was just wondering if we could get a little bit more color on the monthly volumes. I know you guys had told us total, but I was hoping maybe you could give us a little more color there.

I think we had said before when asked the question that our June volumes were clearly an improvement over April and May, which seem to be consistent with what some others had disclosed, but we are going to pass on disclosing monthly details on volumes now or in the future.

OK. Thank you.

Your next question comes from Gary Lieberman of Morgan Stanley.

Hi. This is Stacey Reitch for Gary Lieberman.

Hi, Stacy.

Hi, how are you?

Good.

Two questions, the first of which is, looking at the expense items, I mean, as a percentage of revenue in the quarter, they were really managed quite nicely. But when we looked at them on a per-adjusted-admission basis across the board, they were trending upward, and wondered if there was anything particular behind this. Was it that you just couldn't react in time to lower volumes or is it just anomalous or some other factor?

Stacy, I think that the answer to that to some degree is the intensity piece of this. If some of the top-line growth is coming from an increase in intensity, which we certainly believe it is and that the evidence shows that it is, I think it's natural to expect that the variable piece of supply -- piece of expense like supplies, drugs, staffing, direct nurse staffing, are going to increase consistently with that, and as we look at the numbers, that seems to be what's happening.

That makes sense. So going forward when we model our expense line items, should we continue to expect that intensity will either stay at this level or increase?

Well, I think that what we've said is the revenue growth in the quarter was clearly on the high side, intensity and otherwise.

OK.

I think it's not realistic to expect us to be able to continue that revenue and, therefore, I think the expenses should moderate a little bit as the revenue does too.

OK, great. And one more question which may have been answered because I jumped in late, but behavioral health EBITDA margins were up pretty substantially sequentially. Is there something particular, the pharmacy cost, the contract savings going for behavioral health as well?

The behavioral health hospitals really use a much smaller percentage of pharmacy drugs, et cetera, than the acute so that doesn't have much of an impact.

OK.

The behaviorals are benefiting obviously from a little bit better admission growth than the acutes. The comparison to last year is a little bit favorable because last year in the second quarter, we were reserving a little bit for the Magellan accounts. Our Magellan accounts receivable when Magellan was undergoing some of its financial difficulties. And just in general, the behavioral business gets a lot of juice out of their top-line growth, so even though their pricing was a little more moderate, their admissions growth was decent and they tend to be able to control their expenses very effectively, so you get a lot of juice from just even modest or moderate top-line growth, and I think that's what you saw in the second quarter. And again, because our hospitals operate at such high occupancy levels, they operate very efficiently.

Great. Thank you so much.

You're welcome.

Your next question comes from Travis Meyer (ph).

Hi. Did you guys repurchase any shares this quarter? And if so, what price did you pay for them?

We repurchased about 750,000 shares in the quarter, Travis, at a strike price at of about $41.

What's the status of your program? Just ongoing?

It's ongoing, and we watch the pricing. We have a little over a million shares left on our current authorization and certainly feel like if appropriate, we can have that increased in relatively short notice, and we just continue to evaluate our own stock as an investment opportunity as compared to alternative investment opportunities that we have.

Great. Thank you very much.

You're welcome.

Your next question comes from Mike Berone (ph).

Hi. Can you provide a little more detail on the enormous jump in cash flow, cash from operations, and what your outlook for the entire year is?

Cash flow obviously, Mike, was extremely strong in the quarter. Most of that is just sort of the basic blocking and tackling, strong collections, et cetera. We did have a few unusual items that boosted up a little bit in the quarter, both from our fiscal intermediary. We had added growth of about maybe $20 million in cost report receivable last year because CMS had delayed the filing and, therefore, the settlement of cost reports. As we started to file and settle those cost reports in 2003, we've recovered, I think, most of that $20 million of receivable in the first half of 2003. And then secondly, Mutual Of Omaha, our fiscal intermediary, was preparing to use a new remittance system effective July 1, so at the very end of the quarter in anticipation of that, they accelerated payments to the provider. So we probably got about a $10 million boost from that. But obviously even if you factor in that 20 to $30 million of sort of one-time cash acceleration in the quarter, it was still a pretty strong cash quarter all around.

OK. Do you have an outlook for the entire year in terms of cash from operations?

We generally don't give guidance on cash generation. I think last year, we generated close to $150 million of free cash after CAPEX, and I've seen people model sort of along those lines, and that certainly seems reasonable given our results.

OK. And what do you intend to use your free cash proceeds for? I noticed that wasn't reduced that much. If You've got the share repurchase program outstanding, but what other uses for cash do you guys have with what looks like pretty strong free cash generation?

Well, we have, I think as Alan indicated in his opening remarks, a CAPEX program in which we expect to spend 200 to 225 million for the year. We've obviously got one significant acquisition that we've announced that we hope to close before the end of the year, the Vista acquisition that Alan touched on. We have some other acquisitions that are sort of in the pipeline and in various stages of conversation, and then I think as the last caller had mentioned, we continue to look at buying back our own stock as an alternative for our free cash.

OK. Any room for a dividend in there?

That's a consideration for the company.

OK. Thank you.

Thank you.

Your next question comes from A.J. Rice of Merrill Lynch.

Hi. Thanks. Just a couple questions. First of all, Steve, do you by chance have your sort of annualized revenue run rate in France at this point?

I think, A.J., that by the end of the year, based on the acquisitions we've done, et cetera, we will probably be generating about $200 million a year in annual revenues. That will be our run rate which by the time we get to the end of the year.

OK. I guess Texas passed some malpractice reform. Any comments on whether that's going to meaningfully move the needle for you going forward?

Probably not immediately, but we are delighted with that. It was $350,000 cap, and we're very happy with that. That's one of the states that we needed to see something happen.

OK. Do you have the payor mix data for the acute and behavioral businesses and maybe the year-to-year trend on that as a percent of revenues or admissions or wherever you do it?

Don't have it in front of me, A.J., but I'm not thinking that we're seeing any significant changes from our historical patterns.

OK. And then just a final question about any comment on labor trends, both nurse rates or productivity improvements that you're seeing or changes?

I think that the biggest impact, A.J., is what we touched on before, which is that, you know, it's kind of perhaps an unintended consequence of the softer volumes, is that we're really seeing a dramatic reduction in, again, what I characterized as premium pay. Agency usage, overtime, shift differential. As far as base nurse salaries, they're still, you know, a relatively real nursing shortage out there, and nurse rates continue to grow at 5 and 6%, so it's the reduction if premium pay and the efficient response to the volume decline that I think is probably the most significant trend that we've seen in the first six months of 2003.

OK. All right. Thanks a lot.

Thank you.

Your next question comes from Marco Murtagh (ph).

Can you go over your rationale for the California acquisitions again and what you pay for them --

Speak up, please.

Could you go over your rationale for the California acquisitions and what you paid for them s a multiple of EBITDA, and also what you're seeing in the acquisition market? Were prices stable, et cetera?

We disclosed in our first quarter 10-Q that the purchase price for the California acquisition was $125 million. We've not disclosed an EBITDA multiple. I will say that the revenues generated by those hospitals are in excess of 150 million, so we think the pricing was fairly reasonable on that acquisition. The rationale behind the acquisition was largely designed behind, as Alan mentioned before, the hospital in Corona that's in Riverside county, where -- in a market where we already have two existing hospitals, and we think there are significant efficiencies both on the managed care pricing side as well as on the cost side, and it's just a market that we've done quite well in, and, you know, are very bullish on the opportunity to expand in that market.

OK. Any further comment on the acquisition environment at this point, how competitive it is, what's happening with pricing?

We think that there continue to be lots of acquisition opportunities, largely driven by the not for profit sector's financial challenges and their ability -- inability to meet capacity expansion and capacity replacement requirements. Pricing sort of varies. We continue to see certain deals that appear too pricey to us, but I think our history has been where we have a competitive advantage, where there's some in-market advantage or some other competitive advantage, we're finding attractive deals.

OK. Thanks.

Thank you.

Your next question comes from Howard Freitner (ph).

All right, thank you. On the payor mix, can you go over what the percentage is from Medicare and Medicaid?

Howard, I think when I answered A. J.'s question, I don't have second quarter utilization data, but I will just say generally, our Medicare utilization as a company is in the low 30's, Medicaid is 12 to 15%, and then our commercial utilization is in the high 30's, and to the best of my knowledge, there were no significant changes to that in the second quarter.

Great. Thank you.

Your next question comes from Travis Meyer.

Hi. What's the total capital that you've invested in projects that have not opened yet as of 6/30/03?

I don't know that number exactly, Travis. My guess is, at this point, it's in excess of $100 million.

OK. Got it. Thanks.

At this time, I would like to remind everyone in order to ask a question, please press star, 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. At this time, there are no further questions.

OK. Thank you very much. We look forward to talking with you next quarter.

This concludes today's conference call. You may now disconnect.