環球健康 (UHS) 2004 Q1 法說會逐字稿

Good morning. My name is Tina and I will be your conference facilitator today. At this time I would like to welcome everyone to the Universal Health Services first quarter 2004 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, then the number one on your telephone keypad. If you would 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 joining us this morning. Welcome to this review of Universal Health Services' results for the first quarter ended March 31, 2004. As discussed in our press release last night, the company recorded earnings per share of 74 cents for the quarter. During this conference call, Alan and I will be using words such as believes, expects, anticipates, and similar words that represent 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 section on page 22 of our form 10K for the year ended December 31, 2003.

We would like to highlight just a couple of developments in business trends before opening the call up to questions. UHS recorded approximately 17% revenue growth for the first quarter of 2004. The majority of the increase resulted from newly opened or acquired hospitals. Admissions to our acute care hospitals owned for more than a year decreased approximately 1% in the first quarter. The widely reported early flu season seemed to have minimal effect on the hospitals in our markets during the first quarter.

We continue to attribute the majority of the admissions weakness to a slower economy which has induced lower healthcare consumption trends. This is particularly evident in a market like Puerto Rico, whose local economy has been notably hard hit during this economic downturn.

Additionally, the opening of two new hospitals in the Las Vegas market since last October has adversely affected same store comparisons in that market. Although it's not possible to precisely quantify the admissions that Spring Valley has cannibalized from our existing hospitals, we estimate the impact to be about 120 basis points in the first quarter. Finally, we also have identified in the first quarter certain trends indicating the erosion of some business, surgeries for example, in certain markets such as McGowan, Texas and Aiken, South Carolina as a result of increased hospital and physician competition. While same store surgeries throughout the acute business were down -- were only down approximately 3% in the quarter, this lost business represents some of our better paying and higher acuity patients. To replace certain lost business, newly recruited physicians are already in place in a number of cases. In others, doctors will begin practice shortly and in a few others aggressive physician recruiting is in process.

Additionally, we have entered into agreements to operate surgery centers in partnership with physicians in selected markets. Given the lag effect of an improving economy, we believe that admission trends for the company's acute hospitals are unlikely to improve dramatically in the near future. Admissions to our behavioral health hospitals owned for more than a year increased by approximately 10% in the first quarter. The strength in admissions was reflected largely throughout the entire portfolio and in some cases reflected previously undertaken capacity expansion. Our acute hospitals recorded a 2.7% increase in revenue per adjusted day in the first quarter. Managed care contractual increases were solid. We continue to see increases in managed care pricing of 5 -7%, although overall unit revenue was suppressed somewhat by an increase in the Medicare length of stay and a decline in surgical procedures in certain markets. Our behavioral health facilities experienced a 2.8% increase in revenue per adjusted day in the first quarter.

Earnings before depreciation and amortization, interest and tax or EBITDA were $123 million for the first quarter, a decrease of 4% over the prior year quarter. Net income and earnings per share diluted for the quarter were $46 million and 74 cents, respectively. Net income decreased 13% for the quarter and EPS decreased 12%. Cash flow from operations for the quarter was $95 million, an increase of 17% from the prior year. We estimate that cash flow from operations in the quarter was adversely impacted by approximately $20 million as a result of Medicare recoupments related to a discharge disposition initiative and to certain routine billing issues at our new acquisitions. With this cash flow, we made $70 million of capital expenditures in the quarter and we also spent $38 million on hospital acquisitions. At quarter end, the company's ratio of debt to total capital was 43% and the ratio of debt to EBITDA was 1.8.

The operating margins of our acute care hospitals were pressured in the first quarter by the soft admissions, by a cyclical increase in the volume of uninsured patients being treated at our hospitals, and increases in salary and supply expense. We define operating margins as earnings before depreciation and amortization, rent, interest, minority interest and taxes divided by net revenues. The operating margin for our acute care hospitals owned for more than a year was 14.5% for the first quarter, a significant decline from the first quarter of 2003. With people losing health benefits given the unemployment rate we have been witnessing, employers shifting more of the healthcare burden to employees and many small employers opting to no longer offer health benefits, bad debt as an issue is likely to persist for at least the remainder of this year. Over the longer-term, we view this as an opportunity for margin expansion if the economy improves or the number of uninsured patients returns to move normal levels.

From a salary perspective as discussed previously, some of our hospitals staffed up for an expected seasonal surge in business that in many cases did not materialize. Consequently, several hundred FTEs have been reduced throughout our hospitals although the majority of these expected reductions will not be reflected in the financial statements until the second quarter. The increase in supply costs for the quarter was driven by higher cost for orthopedic implants and stents. Bolstered by stronger admissions, operating margins in the behavioral health business improved for the quarter for those hospitals we owned for more than a year to 24.1%. Operating margins in our French operations improved for the quarter from 11.6% in the prior year to 18.4% in the current year, mainly due to the positive contribution of several 2003 acquisitions and the favorable exchange rate. Alan will now discuss some of our recent activities and our outlook.

Thank you, Steve. UHS spent approximately 70 million on capital expenditures in the first quarter. The new 120 bed Lakewood ranch hospital in Manatee county, Florida should open in September of this year. Additionally there are a number of smaller projects designed to add capacity in our existing markets. Our Spring Valley hospital in Las Vegas, opened this past October, continues to progress nicely and generated a positive operating margin in the first quarter. Our behavioral hospitals in particular have operated at a very efficient 83% available occupancy rate for the quarter and we have undertaken several projects to add capacity at our busiest facilities.

In the regulatory area, we still expect that a final rule on psychiatric PPS will be forthcoming shortly and expect that our hospitals will begin realizing the benefits starting in 2005. While we cannot definitely predict the ultimate schedule, we continue to press very hard for CMS to implement this rule as it has been delayed far too long in our opinion. We continue to look selectively for acquisitions where we think our skills and knowledge can improve the quality of care and financial viability of the hospital. So far in 2004, for instance, we've acquired a 90% interest in Methodist Hospital, as well as Lakeland Medical Center, in Louisiana, strengthening our competitive position in the east New Orleans market, where we have successfully operated our existing Chalmette Medical Center for many years. In California, we have acquired three hospitals from Vista Healthcare. One in particular is in the Riverside county market, where we already have a successful existing presence with two other hospitals.

Consistent with our original plan we have previously announced, we have signed a definitive agreement with Catholic Healthcare West to sell the other two Vista hospitals. We expect sale of these two facilities to be completed during the second quarter of '04. In addition, subsequent to the end of the first quarter, we sold the operations of Doctor's Hospital of Shreveport, a 136-bed leased acute care hospital in Louisiana. Combined proceeds for these sales are expected to total approximately $40 million. The two Vista hospitals in Shreveport are reflected as discontinued operations in the first-quarter income statement. We are disposing of these assets because they do not fit our profile of dominant facilities in rapidly growing markets and we're generating margins well below the company averages.

During the first quarter, we signed a letter of intent to purchase the Stonington Institute in Stonington, Connecticut that includes a 63-bed behavioral health hospital, a school, partial services, group homes and a detox service. We expect this transaction to be completed within the next week. We also signed a letter of intent to purchase four behavioral health facilities from Keystone education and youth services. The facilities include a 112-bed facility in Savannah, Georgia, a 77-bed hospital in Benton, Arkansas, an 82-bed operation in Las Vegas, and a 72-bed hospital in Bowling Green, Kentucky. These are all behavioral health hospitals. We expect to close this transaction by April 30, of 2004. The combined purchase for these five facilities is approximately $100 million.

In most of these markets we already have a strong existing presence and believe that the potential for growth and service expansion is significant. We are currently reviewing additional opportunities in our acute care, behavioral health and French operation. The last few quarters have been challenging as the overall economic sluggishness has kept volumes low and bad debt high. All providers have been impacted and competition has intensified. We remain confident in the skills and strength of our people in the company and the quality of services which we provide and believe they will help us recover our earnings momentum. Steve and I would be pleased to respond to questions at this time.

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 Adam Feinstein with Lehman Brothers.

Great, thank you. Good morning, everyone.

Good morning, Adam.

Just, you know, a couple of questions here. One, could you talk and maybe say just a little bit about the bad debt and, you know, I guess last quarter you had spoken a little bit about changing your policy slightly in order to pick up, you know, the increase in the uninsured patients. Talk a little bit about what your current reserving policy is now for bad debt. Then my second question being for Alan, just if you could talk a little bit about what's going on in Vegas, you know, if you could help us just think about, you know, not so much from a volume point of view, because with the new hospital cannibalizing some of the volume, I know those numbers are a little bit hard to follow but just in terms of the just the overall trend in terms of what you're seeing in the competitive environment with some new hospitals opening as well. Thank you.

Adam, in terms of bad debt, we continue to use what I think most people describe as a cliff methodology and that is we reserve for all accounts after a certain period of time has lapsed. The average of that is approximately 150 days. We may in the last 30 days or last quarter or so lower that cliff or reduce the cliff just a little bit. The one thing that we are doing that we weren't necessarily doing before is we've got some what I would sort of call verification procedures in place, Adam, to make sure that we're tracking the increase in uninsured patients, which has clearly been the dynamic that has most affected us as well as our peers in this industry. We try and make sure that we are reserved for somewhere in the neighborhood of 88 to 92% of all of our self pay accounts at any point in time.

At the end of the third quarter the bad debt reserves that we had on our books represented about 93% of our total self pay accounts and that's certainly within maybe even a little bit above the range that we want to make sure that we're reserved at. So policy really hasn't really changed much. We're just trying to make sure that we are keeping as current as possible with reserves for any increase in the uninsured business and it has been an increase in the uninsured business that in our minds has largely driven the increase in bad debt that we've experienced as well as what many of our peers have experienced. I think Alan can comment on your Las Vegas question.

Yes. We are very satisfied with Las Vegas. We continue to see it as a growing market. The market population continues to grow at about the same rate, 60-70,000 people a year. Two hospitals opened, our hospital and HCA in the southwest quadrant, but that area had been under served and I think we're seeing now the patient load evening out to accommodate those hospitals, so we're pleased with what's happened with Spring Valley and yes, there's been some movement.

Desert is doing very well. Our hospitals are doing well. You know, in the overall and Iasis has come into the market, they bought the hospital from Tennet and I think that hospital is in the process of dissolving. So while we have two new ones, I think that hospital is -- has a limited future and the market continues to grow and as you know, we've announced we're going to be putting something in up in the north, which is growing now very rapidly. The market continues to grow and, Steve Winn is building this enormous hospital, this enormous casino, called Winn, Nevada and they're also adding to the other casinos. It continues to grow.

Okay. Thank you.

Your next question comes from David Dempsey with Avondale Partners.

Good morning, guys. Staying on the bad debt theme for a while. If the percentage of 8.4%, which is a little bit up, can you kind of break that down a little bit in terms of the acute side, the psych side and then on the acute side, are you seeing anything in terms of demographic information that would tell you that the bad debt's coming from a certain age group, certain population sector, regions of the country and the like?

David, just to break the bad debt down for the quarter, our acute care hospitals ran about 10.5%, for the quarter. The behaviorals ran about 2.9% for the quarter. I think I would assume most of the people on the call have listened to, you know, HCA's call, et cetera, and some of their comments, you know, they ran I think 11.7 or 11.5 for the quarter. They talked about it being kind of fairly widespread among a number of markets, markets that, you know, we have felt it too, Florida, Texas, I know they mentioned. They actually mentioned Las Vegas. We've actually saw a little bit of a mitigation in our bad debt in Las Vegas in the quarter. But it's fairly widespread. I think that -- I don't know that it's among various -- you know, it's centered on any demographic groups as you suggested.

I think, as I mentioned in my prepared remarks, you're talking about people who, you know, lost their job and therefore have no longer insurance through their employer, people who might have qualified for Medicaid before but are being squeezed out of tightened Medicaid eligibility roles in any number of states and I think the one thing we are seeing more and more of in recent months, David, is the working uninsured. People who are presenting themselves at our hospitals who are employed but either their employer has dropped healthcare coverage all together or the employee because it has gotten so expensive has opted out of health care coverage. So we are seeing more and more folks who come in employed but without health care coverage through their employer. I would say that may be the single biggest change that maybe we've seen in the last few months. Those are I think sort of the dynamics that are at play right now.

Are you doing anything at your facilities to try to capture that data just to see if there's something -- because I forget, I think, HCA talked about 60% of the uninsured coming from the working uninsured, which is a dramatic number. Are you doing anything to try to capture that and what would that -- what that might be for you guys?

I'm not sure that we have the exact -- we have that data. I think also to some degree -- I'm not sure that it does a whole lot of good to know exactly where the business comes from. The real issue that we're spending time on is to just make sure that we are collecting absolutely every dollar and every penny that we can from the patients who come through our door that we're not doing anything to encourage patients who, you know, need not be in the hospital to come there, et cetera. I think, you know, our focus is more on maximizing collectability and the reality is we have found that our collection percentages have remained fairly stable throughout this. I know, again, that at least HCA has talked about a deterioration in collection percentage on some of these patients. We have seen the increase in uninsured volumes but not necessarily a diminution in our ability to collect. So we feel like our attention in that area is at least paying off.

Thank you.

Your next question comes from Gary Lieberman with Morgan Stanley.

Just to stay with the bad debt theme for a little while longer. Would you give the amount of charity care that you booked in the quarter?

I believe, Gary, that it was in the neighborhood of about $65 million for the quarter.

How does that compare with the year ago quarter?

I think we've seen an increase in our uninsured business in general of about -- in the mid teens, you know 15% or so.

Okay. So the charity care would have gone up about the same at about the same rate?

I believe so.

Are there any changes that you're considering making to the charity care policy to get the -- to get the bad debt and never book it as revenue?

I think we think that general, we do not have sort of a consolidated charity policy. Each of our hospitals has their own. I think they're fairly similar. I think that our hospitals do a fairly good job of capturing true charity care and recording it that way and recording bad debt properly. You know, it has become a little bit more of a focus of attention but, you know, I'm not sure that you're ever going to get it exactly precise and again, I think, you know, our attention is more along the lines of making sure that what's really collectable is collected, not that we're not concerned about properly classifying something as either bad debt or charity appropriately but we're still going to spend the bulk of our attention on making sure that we can collect what's due us.

Do each of the hospitals have a fair amount of autonomy in terms of what they book as charity or is there a corporate policy that everybody adheres to the same way?

Well in a number of localities, Gary, there's some local regulation like in Las Vegas, Clark county has its own sort of indigent policy in the market where they define what patients qualify as indigent and then they get a 30% discount in the market. So in those markets we follow the local policy. In the markets that don't have a regulatory policy, the hospitals have some amount of autonomy, but again the charity care guidelines are fairly standard. They're usually based on some sort of multiple of the federal poverty income guidelines and are generated from that.

Okay. Thanks a lot.

Your next question comes from John Ransom with Raymond James.

Hi. Good morning. How would you characterize the trends in same store surgeries, vis-à-vis the trends in same store admissions? In other words, do you think admissions may recover before surgical volumes do?

I think that the dynamics affecting them, John, are a little different. You know, admissions for the most part as we said, you know, are impacted by things that we've talked about, the sluggish economy, et cetera, whereas surgeries to some degree I think have been more impacted by some of the competitive dynamics. Just from a pure number standpoint, as I think I had mentioned in my prepared remarks, the numbers are not off that much – (technical difficulty) – them and our admissions, same store admissions, acute admissions are down 1%, same store surgeries are down 3%, not a big difference. But I think, you know, we're -- you know, we've identified markets where we're losing some of those surgeries to physician competitors or other hospital competitors. I think that getting the surgeries back is more a function of recruiting physicians, in some cases doing some ASC development of our own or, you know, some managed care leverage, all of those kind of things where as I think overall admissions are going to be more a function of a rebound in the economy which hopefully we're starting to see right now.

Okay. And then just secondly, I apologize if I missed this, but could you address the behavioral health business in terms of the disconnect between the growth in volumes and the growth in revenues? I mean, you had great volume growth but I was surprised to see revenue growth actually be below the level of reported volume growth. Thanks.

Yes, I think,, John the issue there is part of the increase in admissions is a function of a decline in length of stay. We had a drop of I think 4% in our length of stay for the quarter and that was a reflection of a little bit of a shift in business to a little bit more adult business and less adolescent business. As a result, you know, what you're seeing is an increase in revenue per day of about -- little less than 3%, but a decline in revenue per admission which I think is just a function of the declining length of stay and I think that's the disconnect that you're referring to.

So in other words, patient days year-over-year were down, or I'm sorry, patient days were up about, you know, --

Patient days were up 6% while admissions were up 10%.

Got you. Okay. Thanks very much.

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

Thanks. Could you discuss the financials of the pending acquisitions in the behavioral area?

Yes, I mean, I think in both -- in the case of both the Stonington acquisition which is the Connecticut acquisition and the four Keystone acquisitions, Kemp, these are hospitals that have decent historical earnings. They're not troubled hospitals in any way. I think that our -- the attraction of these facilities from our point of view are several fold. One, in many cases they're in markets that we already have a presence. All four of the Keystone markets we have a presence in. Three of the markets we draw from those markets from some of our behavioral facilities, the Las Vegas market although we don't have a obviously a behavioral presence, we have a strong acute care presence. Connecticut is a new market for us but we think there's a lot of potential for growth in capacity and expansion in both of these acquisitions in adding more adult services in both and also just adding more capacity in all these acquisitions. That's the attraction for us to sort of solidify market positions and to take advantage of some opportunities for growth and expansion.

What was their revenue and EBITDA?

I'm not sure that I have that right in front of me, Kemp. Again, I think their margins are, you know, not inconsistent with what our operating margins are but I don't have the detail revenue and EBITDA numbers in front of me.

Okay. Just also briefly, when you all previewed the quarter, there were three themes that were problem areas. I think you touched a little bit on actions taken so far but between then and now, what kind of progress or changes have you made with regards to those big -- the challenges you've seen?

Well, I think when you refer to sort of the three groups of issues that we discussed in our preannouncement early in March, we talked about, I think, sort of the macro issues in the industry being bad debt and softer volumes and I think we've addressed those already in the call. I think that you know our notion is over the long-term both of those items or issues mitigate and improve some although we're not necessarily expecting that to happen in the immediate future. The -- you know, the second issue that we discussed was market competition, particularly in markets like McGowan and Aiken, and we're taking the steps that we described in our call six weeks ago, in that we're recruiting physicians in those markets, we're doing some physical expansion that I think will help us.

We're resolving issues about call pay, et cetera, that have alienated some of the physicians. So I think we have begun the process of recovery in those markets that will allow us to build back some of the market share that has eroded and then finally, I think the last of the three sort of broad items that we had discussed in the preannouncement was more operating issues, an increase in Medicare length of stay and some, you know, over staffing and salary pressures. Again, we see -- we continue to see that in the quarter and obviously the early part of the quarter was worse than the later part. We've made some progress on both the staffing and the Medicare length of stay front although I think we'll see more progress as the year progresses.

Thank you.

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. Your next question comes from [Derek Winger] with Jefferies and Company.

Yes. Thank you. Just one quick question, what is your capital expenditure outlook for the year?

Derek, I think that we've talked about CapEx for the year in the range of about $200 million. The $70 million in the first quarter, I think, is on the high side. One of the items in there, there's -- I think there's about $20 million of certain nonrecurring items in that 70. One, Alan referred to a project that we have in north Las Vegas. We've had a piece of property in north Las Vegas for some time and in the first quarter we -- we bought a piece of property that we liked a little bit better. So we'll actually sell the one that we have some time later in the year, so that will be a net -- no net new expenditure but there's a good 15 million in the quarter that you see for that. And then we've got about $4 or $5 million of IT expenditures in the first quarter that related mainly to a new payroll conversion that we did on January 1, that I don't thing you'll see recur. So, you know, I think the kind of recurring expenditures we saw in the first quarter were about 50 million and that's sort of the track we're on for the year. We're watching our CapEx pretty carefully just given the pressures on the business.

Great. Thank you very much.

And your next question comes from Ellen Wilson with Sanford Bernstein.

Yes, I was wondering if you could break out your acute same store admissions if they were down in total by 1%, could you break that out between how much of the uninsured same store admissions were down versus all other payors?

Ellen, we do not track -- I know some of the other companies track, you know, uninsured admits and uninsured ER visits. We do track as I had mentioned I think in response to an earlier question our uninsured revenue. Our uninsured revenue was up about 15% in the quarter. But I can't give you any hard data on uninsured admissions.

Okay. Then I guess it would be helpful, what percent of your total revenue comes -- is the uninsured revenue?

I think that our uninsured patients are somewhere in that sort of 8 to 12% range of total revenue.

Okay. Thanks.

And your next question comes from A.J. Rice with Merrill Lynch.

Hello, everybody. A couple of questions if I could ask, just first to clarify on the guidance for the remainder of the year, for the full year, there's -- I guess the comment is that this guidance incorporates increasing bad debt expense and softer volumes. You had 10.5% of the acute business on a percent of revenues into bad debt and then a -1% roughly on the admissions. Is that sort of what the trend is expected to be or is the bad debt percentage expected within your guidance, you're thinking about guidance to worsen before it gets better?

A. J., I think that the guidance presumes that our experience in the first quarter will be reflective of what we see in the rest of the year and then obviously the correlary to that is to the extent that bad debt or admissions were to worsen from what we experienced in the first quarter, then that would, you know, make those -- you know, the guidance estimates a challenge and obviously to the extent that they improve, that would hopefully provide some upside. But the guidance, you know, largely presumes that what we saw in the first quarter would sort of stabilize then for the year.

Okay. And I guess there's -- the comments were that there's increased competition and physician competition I guess in McGowan and Aiken. I wondered if you could just give us a little more flavor as to -- I know there was a speciality hospital a few years ago in McGowan, but I thought you guys bought that out. What exactly has happened in those two markets to create more competition?

Well, we touched a little bit about this in the preannouncement call but just to refresh everybody's memory. I think in the McGowan market your recollection is correct, A.J., MedCath had built a heart hospital in McGowan several years ago and we in fact bought that out, I believe back in 2001.

Right.

But since then, there have been any number of smaller, sort of these boutique hospitals which can be glorified surgery centers sometimes with some overnight capacity of 10 or 12 beds or, you know, a handful of beds but there's also been one full-service acute care hospital that opened in the market that's physician-owned and that has provided some competition. There's also been some physical extensive physical additions and capacity additions at the HCA hospital in the market and, you know, all of those have provided competitive challenges for us in the McGowan market.

In the Aiken market, I think it's not so much physician competition as it is hospital competition, significant physical additions and renovations at our competitive hospitals in Augusta, Georgia and given the fact that we run relatively busy at Aiken, people have started to drive to Augusta for ER treatment and also we've lost a couple of physicians just kind of from the normals, either retirement or leaving the market in that Aiken market and it's been, you know, a process to get them replaced. So, you know, in that market, the dynamics are a little bit different but, you know, it's increased competition in both markets have hurt us and we've got the processes and the plans in place to recover those.

That's what I was going to ask you about. Is there some obvious fixes or is it sort of a market that will be just more competitive on an ongoing basis?

I think that, you know, the markets will be more competitive. There's no question about that. You know, obviously once new capacity is built in a market, it's there and it will be more competitive. But we're responding in Aiken for instance by -- with our own CapEx projects. By the end of the year we'll have fully renovated our ER, our critical care beds, a number of the ancillary areas. We'll have -- we have already recruited, you know, new neurosurgeons to the market. That was one of the service voids that we had. You know, we've got other recruitment activities in place. So yeah, I think we can react and we are reacting to that.

In McGowan, same thing. We've bought a surgery center in McGowan and we're doing that project with some of our doctors. We've recruited in that market too a number of new specialists to replace those who have left. We're working with managed care companies for exclusivity where that's available. So I think, you know, in all cases, a lot of the lost volume is recoverable, A. J. you know, I think the only issue is it just takes some time. It's not an overnight fix but I think, you know, it's already underway and the -- you know, we're in process of trying to get a lot of that business back.

Okay. Thanks a lot.

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

Thanks. Two questions just first on the South Carolina DSH prior period adjustment, what percentage of those dollars does the adjustment represent, just given the time period involved? I would have thought that you would have actually had a larger adjustment.

What we recorded, Kemp, was $4.1 million of South Carolina Dispro in the first quarter of 2004 and that related to the period from July 1 of '03 to March 31 of '04, so obviously two-thirds of that number, approximately 2.8 million, you know, arguably was related to the last six months of '03. And then obviously we'll record another third at a, you know, the state's fiscal year runs from July 1 to June 30, so we'll record another third of that in the second quarter of '04.

Okay. I guess what I'm driving at is the annual payment amount any different from other years?

No, I think that sort of 5.5 million in total for the fiscal year is fairly consistent with what we've been receiving in the last few years.

Okay. Also, you mentioned in the cash flow discussion some Medicare recoupments because of, I guess, some initiatives on CMS part. Could you provide a little more color on that?

Sure. As I understand it, CMS has undertaken sort of a national initiative to make sure that hospitals are coding discharge dispositions correctly. And just to sort of to simplify it, you know, what happens when hospitals discharge to home health or long-term care, et cetera, it might reduce their DRG payment by a small amount of money as a portion of that have will be going to the after care provider. What Medicare had found or CMS had found was that hospitals were in often cases not coding properly, in large part just from a provider point of view because in some cases we don't know where the patient is going after they're discharged from the hospital. But what CMS does as part of their routine activity is rather than take back the small amount of the DRG that was over paid, they take back the entire amount of the payment, you then have to rebill and you get -- so let's say the payment is $100. They take $100 back. You rebill and get $95 of it back. So we think that at the end of the quarter there's about $10 million of recoupments that we have yet to -- we've rebilled but have yet to recoup from CMS.

Great. Thank you.

Your next question comes from Lori Price with J.P. Morgan.

Hi, Steve. Just a quick follow up on the McGowan market when you were commenting on some of the competitive issues there. You had said that there's a new full-service physician-owned hospital and a few small speciality hospitals that have opened. Are any or many of the physicians that are part of that full-service physician-owned hospital docs that were working with you that have now become competitors?

I think it's fair to say that -- I mean, obviously we have a fairly significant position in that market, so that some of the docs who have left to practice in both the smaller boutique hospitals as well as the larger, full-service hospital were docs who were practicing at least part of the time at McGowan or Edinburg.

And, you know, just in terms of giving us some ideas to the percentage of physicians that might have worked with you that are now competing, is it a small percentage or a larger percentage and can you give us some idea as to what that percentage is?

I don't know the -- when we talk about numbers of physicians, Lori, I'm not sure I can give you any great data. I think just generally our admissions, same store admissions in that McGowan/Edinburg market are down in the single digit range, or in the mid single digit range. So you're not talking about huge, huge numbers. Unfortunately, as you can imagine, obviously when physicians leave, particularly to compete on their own, they're going to take with them the better paying business and that's -- you know, that's probably what's hurt most significantly in that market.

And have you been able to isolate, you know, whether -- to the extent that they are still referring some business to you, whether it is the junkier business and they're taking the better patients with them?

Oh yes, I think we can absolutely say with certainty that they have taken -- it's both an intuitive and a proven fact that they've taken the better-paying business and I think in response to what I was saying to A. J. before, the way that you deal with that is you recruit new physicians to try and fill that void. You know, one of the things that we're sort of left with now is we're actually referring patients from our emergency room to physicians who are competing with us, which is obviously something we're not going to do over the long-term. So we're recruiting physicians to replace the ones that have left and to, you know, to rebuild that business.

And to prevent them from giving you the junkier patients are you once they do leave and start competing against you refusing to accept admissions from them?

No, I don't think -- first of all, I don't think we can necessarily do that but I think one of the things that the physicians will have to deal with one dynamic is once you open a full-service hospital, you can sort of in your mind hope to have it be kind of an upscale hospital, et cetera, but if you run an emergency room, the people in the community will start presenting themselves to an emergency room in the same, you know, fashion that they present at McGowan and I think that will in the long term provide a challenge to the docs who think that they are going to be able to run a full-service hospital without having to deal with treatment of indigent patients and non-paying patients that other large providers have always had to deal with.

Okay. Thank you very much.

Your next question comes from Darren Lehrich with Piper Jaffray.

Thanks, good morning everyone. I wanted to just key into the behavioral business a little bit more and, you know, Steve, you mentioned that you had a little bit of a shift to more adult business in the quarter. Can you just elaborate on that point and discuss with us whether, you know, that was Medicare patients and if so, what your Medicare mix is at this point and then I've got a couple of follow-ups.

I think it's really just a function, Darren, of given the fact that we've been running at such high capacity levels, you know, we replaced in a few cases some of the more residential, which is longer-stay business, with shorter stay, which is usually adult business. You know, that allows us to take advantage of, you know, greater throughput. We can have more patients, et cetera, and, you know, in this interim period while we're adding more capacity, that was one way of being able to increase our admissions at a time when we didn't actually have the capacity, all the capacity available that we needed. So I think it's a shift from sort of residential to more acute, if you will, and a little bit from adolescent to adult.

Okay. And you're still running at the 20 to 21% Medicare patient mix at this point or has that continued to move up a little bit?

And I don't have the figures for the quarter right in front of me, Darren but I mean, the last few quarters what we've seen is that percentage sort of just creep up a little bit each quarter, kind of in anticipation of, you know, Medicare PPS being implemented. So my guess is that was -- that probably happened in the quarter, and we'll probably continue to see that sort of creep up every quarter until the PPS is actually implemented.

And then Alan, maybe just a quick comment or two on France with, you know, all the issues obviously that you're wrestling with domestically, I'm just wondering if you can just talk a little bit about France and why at this point, you know, we should be thinking about more consolidation and growth of the acquisition there, thanks.

Alan has stepped out for a second, Darren, I only heard the second half of your question, so I just, Darren's just asking for some overall comments on France and, you know, the consolidation opportunities there.

Yes, the French system, I think we may have mentioned this before, has hundreds of hospitals that are owned by doctors. It's very much like the United States many years ago. And the doctors are getting older and as technology requires that they put more capital into it, there are very good opportunities for acquisitions and we've made some very good acquisitions over the period that we've owned the company and we're continuing to look at them. And there's any number of good opportunities. They go slowly. It's difficult -- to make an acquisition is very time-consuming in France. The French move slowly and, you know, they're very precise, let me put it that way, on both sides. But we've done well with it. And I know we have a very excellent group, so we're continuing to look and we've found some excellent facilities.

Maybe just one last thing, if I could. On Medicare PPS, there was an awful lot of chatter a few weeks ago about, you know, some kind of major rewrite being contemplated and I just wanted to get your thoughts on whether you think that's indeed the case and you know, whether we should still be thinking about an '05 implementation.

We're a little frustrated because of the timing. It's done. There has been a -- an extensive comment period. There's a lot of comment letters in and my sense is that there's not going to an enormous, any enormous changes. There may be some little change having to do with giving a few dollars to the general hospitals for their units but I think it's just a question of they've got a lot to do in getting it out and we are trying mightily to just get the regulation. It will come out -- it will come out when it comes out but we're putting a lot of let's say pressure -- we're trying to get them to issue it and that's where we stand. It's ready to go and that's where we are with it.

Okay. Thanks very much.

Your next question comes from John Ransom with Raymond James.

Hi, again, I may have missed this but did you give out self pay admission growth in the quarter, both self pay admit and self pay ER?

John, I think Ellen Wilson had asked the question. We don't have -- we don't track self pay admits and self pay ER visits. What we do track is self pay revenue. And I think our self pay revenue increased during the quarter by kind of a mid teen size percentage of 14 to 16%, something like that.

What's -- what was the increase in your charge master over that period of time?

I don't necessarily have that right in front of me, John, but I would guess that we increased prices during that period probably 6 to 7%.

So if you take the revenue less the charge master increases it's fair to think of it maybe growing at 6 to 8%?

That's probably reasonable.

Okay. And what is your self pay reserve situation on your balance sheet, self pay AR and reserve as a percentage of self pay AR on the balance sheet? Do you have that?

Yes, I did mention that before. At the end of the quarter, we believe that our bad debt reserve covers about 93% of our total self pay receivables at the end of the quarter.

Okay. Now, do you have a comment -- your reserves as a percent of total AR are much lower than most of the other hospitals. Do you think you're just writing them off up front or writing them off quicker, is that the reason for that?

Well, I think it's a couple of things, John. First of all, as follows our bad debt expense, obviously our reserves on the behavioral side and our reserves in France, et cetera, are much lower than they are in the domestic acutes because, you know, we just have much lower experience. And then, you know, you get to the other point in terms of write offs. I don't know, it's really hard to know how quickly we're writing off compared to others. We do make an effort to write off fairly quickly mainly because we're anxious to get self pay accounts out to third party collection agencies which is generally how we handle them and our, you know, internal sort of processes generally require us to write those accounts off as they go out to third-party agencies. So there's kind of a business reason for getting them written off fairly quickly.

Got you. Thanks a lot.

Your next question comes from Joseph Chiarella with Oppenheimer.

Thanks. Steve, in your opening remarks, you indicated that Puerto Rico was more economically challenged than most of your markets. Could you give us some sense of the relative difficulty there versus the other markets that you've experienced difficulty in and then I guess as the -- as a follow on, how much longer you think it would take for Puerto Rico to rebound or if it would be quicker versus what you're doing with your other markets?

Joe, just an order of magnitude, I think that, you know, our same store admissions in Puerto Rico are probably down again in the single -- the mid single digits. You know, just order of magnitude. It's not a huge, huge number but it obviously is impacting the overall -- our overall numbers. In terms of how quickly they recover, again, I think they've been hurt by you know specific issues you know I think kind of a lagging economy in general, specific issues, I think some of the tax breaks for the pharma companies have been taken away and they have reduced operations on the island. I don't know how quickly all of that recovers. I think -- my presumption is that the Puerto Rico economy will recover, you know, kind of at the same time that the U.S. economy does. My sense is it's been hurt a little bit more so it may take a little bit longer to rebound. But my sense is that over the next X number of months as we see the U.S. economy improving, which people seem to you know, generally believe is going to happen, we'll probably see that same dynamic in Puerto Rico.

I if I can ask one other question. Alan had mentioned looking at some acute care acquisitions. I realize that you don't give any guidance as to LOIs or whatever. Could you give us some sense as to the types of facilities you're looking at? Are they at the George Washington University level or are they more at the tertiary or community hospital level or is it across the board?

Joe, I think that, you know, we have been fairly consistent with our acquisition targets over the last maybe even 10 years and that is we're essentially going to look for relatively large hospitals in, you know, midsize, rapidly growing communities, hospitals that have a fairly significant market presence in their markets. You know, I don't know -- I don't think GW certainly has not been reflective of other acquisitions we've done and I doubt that we will do, you know, many other teaching hospital type acquisitions. I think it will be more of the kind that you're accustomed to seeing. Which again, community hospitals, relatively large in decent mid-size communities and rapid growth communities.

Thanks.

At this time there are no further questions. Are there any closing remarks?

No, we'd just like to thank everybody for their time and we look forward to speaking with you over the next couple of months.

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