環球健康 (UHS) 2004 Q2 法說會逐字稿

Good morning. My name is Amanda and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Universal Health Services second 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.

Thank you, Amanda.

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 second quarter ended June 30, 2004.

As discussed in our press release last night, the Company recorded earnings per share of 78 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 factors as set forth in "Forward-looking statements and risk factors" on pages 14 and 15 of our form 10-Q for the quarterly period ended March 31, 2004.

We would like to highlight just a couple developments and business trends before opening the call up to questions. UHS recorded approximately 16% revenue growth in the second 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 second quarter. As we have previously noted, we believe the slowing economy has induced lower healthcare consumption trends in many of our markets. Unfavorable economic conditions are more prevelant in certain markets such as Puerto Rico, Amarillo, Texas, and Seattle, Washington which has been particularly hard hit by layoffs at Boeing.

Additionally the opening of two new hospitals in the Las Vegas market since last October has adversely affected same-store comparisons in that market. We estimate that the impact of the Spring Valley opening, in cannibalization of admissions from our existing hospitals, was 100 basis points in the quarter.

We also identified the erosion of some business, including surgeries in better paying, higher acuity patients in certain markets, such as McAllen, Texas and Aiken, South Carolina, as a result of increased hospital and physician competition. While same facility surgeries throughout the acute business were only down approximately 2% 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 selects markets. Finally, in some cases, the volume declines are a result of conscious operating decisions. At George Washington University Hospital, for example, we terminated a managed Medicaid contract whose rates had dropped precipitously. Despite a negative impact on our same-store volumes in the quarter, George Washington's profitability was not impacted. We believe that the slowing economy has accelerated health benefit design changes in which employers shift costs to employees in the form of higher cost sharing. While these changes my continue to have a noticeable effect on healthcare consumption going-forward, we believe that as the economy approves, our acute care hospital volumes should continue to recover toward a normalized trend line of modest growth.

Admissions to our behavioral health hospitals owned for more than a year increased by 6 1/2% in the second quarter. The strength in admissions was reflected largely throughout the entire portfolio and, in some cases, reflected previously undertaken capacity expansion and certain newly implemented programs.

Our acute care hospitals recorded a 3.8% increase in revenue per adjusted day in the second quarter. Managed care contractual increases were solid. We continued to see increases in managed care pricing of 6 to 8%, although, over all unit revenue was suppressed somewhat by a decline in surgical proceedures in certain markets.

Our behavioral health facilities experienced a 2% increase in revenue per adjusted day in the second quarter. Earnings before depreciation and amortization, interest and tax, or EBITDA, were 126 million for the second quarter, essentially flat with the prior year quarter.

Net income and earnings per share diluted for the quarter were 48 million and 78 cents reflectively. Cash flow from operations for the quarter was $130 million. With this cash flow, we made approximately $48 million of capital expenditures. We also spent $105 million on the acquisition of 5 behavioral health facilities.

At quarter end, our ratio of debt to total capital, net of cash, was 41%, and the ratio of debt to EBITDA was 1.71. The operating margins of our acute care hospitals were pressured in the second quarter by the soft admissions, by an increase in uninsured patients and increased copayments and deductables, as well as 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 16.7% for the second quarter, a decline from the second quarter of 2003.

Our behavioral health and French facilities continued to help moderate our bad debt exposure. Additionally, in the second quarter we recovered approximately 2 1/2 million in Medicare accounts which had been recouped and recognized as bad debt in the first quarter.

While we were encouraged by the stabilizing trend in bad debt in the second quarter, we acknowledged that sustained improvement may be difficult to consistently maintain as we are still in the early stages of this job recovery.

From a salary perspective, most of our hospitals reduced staffing levels in the second quarter, although the impact of those reductions were partially offset by severance payments and increased benefit expense. Increased utilization and a relatively inelastic pricing environment in both orthopedic and and cardiac implants caused upward pressure on supply costs in the second quarter.

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 24.5%. Alan will now discuss some of our recent activities and our outlook.

Thanks, Steve.

UHS spent approxim - - approximately $48 million on capital expenditures in the second quarter. The new 120 bed Lakewood Ranch Hospital in Manatee County, Florida will 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 has sequential admissions growth from the first to second quarters this year. Even with the opening of the new HCA facility this past March.

Our behavioral hospitals in particular, have operated at a very efficient 82% available occupancy for the quarter, and we have undertaken several projects to add capacity at our busiest facilities.

In the regulatory arena, we still expect that a final rule on psychiatric PPS will be forthcoming shortly. While we cannot definitively predict the ultimate implementation schedule, we continue to press very hard for CMS to implement the rule as quickly as possible. It's already been delayed far too long.

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 exam - -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 acquired three hospitals from Vista Health Care, including Corona Regional Medical Center in Riverside County, where we already have an existing presence with 2 other hospitals.

Also during the second quarter, we purchased the Stonington Institute in Stonington, Connecticut that includes a 63 bed behavioral hospital, school, partial services, group homes and detox services. We also purchased 4 behavioral health facilities from Keystone Education and Youth Services. The facilities include 112 bed hospital in Savannah, Georgia; 70 - - 77 bed hospital in Benton, Arkansas; 82 bed operation in Las Vegas, Nevada; and a 72 bed hospital in Bowling Green, Kentucky.

Consistent with our original plan during the second quarter, we sold the other 2 Vista hospitals and, of course, kept Corona. In addition, we sold certain under performing assets, including the operations of Doctor's Hospital of Shreveport, a 136 bed leased acute care hospital in Shreveport, Louisiana, and River Parishes Hospital in La Place, Louisiana. In addition, immediately following the second quarter, we sold 160 bed Caribbean Pediatric and Surgery Hospital in Puerto Rico.

All of these hospitals are reflected as discontinued operations in the second quarter income statement. We disposed of these assets because they did not fit our profile of dominant facilities in rapidly growing markets and were generating margins well below our Company average. 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 acute care, behavioral health and our French operation.

The last few quarters have been challenging as the overall economic sluggishness has kept volumes low and the level of uninsured patients high. All providers have been impacted and competition has intensified. We believe, however, that our hospitals have rapidly conformed their operating strategies to meet the new volume trends, and we have reconfigured the overall hospital portfolio to make it more competitive. The changes in the healthcare market landscape, including things like the shift to more consumer driven health plans, reinforces our belief that our strategy of market dominant positions in rapidly growing mid sized markets positions us well to respond to the continuing challenges in the businesses.

Steve and I would be pleased to respond to questions.

I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster.

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

Okay, great. Good morning.

Good morning, Lori.

A couple of questions. The first, Steve, you had mentioned that the sequential reduction in bad debt ratio that came from recouping Medicare dollars that were written down to the reserves in the first quarter was about 2 1/2 million. And by my math, that implies there was an underlying true moderation still in the ratio of around 30 or 40 basis points. So what I was wondering is if you could give us some insight on what happened to your underlying collections in the quarter? How materially did they improve? You know, can you give us any insight on whether the collection rates on self-pay in particular improved in the quarter?

Sure. Well, I think that our overall collection rates as you point out, Lori, are up. It was a real strong cash flow quarter. Cash flow from Ops was up at a time when our earnings were - - were essentially, our EBITDA was essentially flat. And what I think that's a result of is a concerted effort on our part to sort of redouble our efforts in the collection area. Focusing on up-front collections, focusing on the efficiency of all of our outsource collection agencies, making sure that accounts get out to collection agencies promptly when they appear to be uncollectible, et cetera.

I don't have the data - - precise data on our collection rates for self-pay accounts in the quarter itself. But my just general sense is that our overall collection activity was improved in the quarter and that's what contributed to the tremendous reduction in bad debt above and beyond the specific $2.5 million of Medicare you mentioned.

Okay, great. And then also, as a follow-up, on the Puerto Rico facility. When Alan was talking about the facility sales, was that one in particular, which was sold after the end of the quarter, can you tell us what the gross proceeds were and what that facility was producing in annualized EBITDA at the time it was sold?

Our proceeds were a little less than $10 million on that facility, and it was generating actually, negative EBITDA, so it's a positive move for the company to have disposed of that particular asset.

Great. Thank you.

Your next question comes from Darren Lehrich with Piper Jaffray.

Hey everyone. Just to followup on the bad debt. I'm wondering if you could go through the bad debt expense by segment, breaking out the acute and behavioral sides for us. And maybe just give us a sense for what the outlook might be for the back half of the year for your bad debt expense given the pretty big sequential improvement we've seen here?

Okay, Darren.

The breakout in the quarter was - - our acute care hospitals ran in total 9.4% of bad debt, on a same store basis, 9.2. And the behavioral hospitals ran 2.7%. Obviously the big change is in the acute side, we ran about 10 1/2 in the first quarter.

You know, I don't know, Darren that anyone - - certainly not in our Company, or anyone else in the industry, has been terribly adept at predicting and really identifying bad debt percentages very precisely in this past year, it's a pretty volatile area. But our sense is, we've seen bad debt improvement fairly consistently over the first half of this year. It's been getting better as the year's been going on. And our hope is that, you know, we're starting to see the impact of the overall economic and jobs recovery on the bad debt line in our income statements.

So my guess is that we saw the worst of bad debt, at least for us as a Company, in that first quarter at that 10 1/2 level for the acutes. As we talked about, I don't know that the 9.2 is sustainable as we move forward. But, you know, my guess is that we settle somewhere comfortably in between as the back half of the year plays out.

Okay.

And I guess just to follow-up then, you know, given the earnings sensitivity here, it would seem that if that's the case, that the guidance that you have out there is probably pretty conservative at this point. So I'm just wondering if you might want to comment on that specifically, and whether the improvements in bad debt might lead to, you know, a change in your view on the guidance?

I think your comments are on point, Darren.

Obviously if the improvement in bad debt is sustainable over the rest of the year, it should, all other things being equal, make it seem like there's upside on our previous guidance of 2.75 to 2.85 for the year. We're not prepared to formally revise that guidance at this point both because, as I said, bad debt's been a fairly volatile area, you know, in the last 12 months or so, and also, we're not really, I think, inclined to sort of be in the habit of revising guidance every quarter. But I think your comments are - - are, you know, right on target in terms of how bad debt ,and how it plays out, should impact our overall earnings for the balance of the year.

Fair enough.

And then if I could just follow up on one thing in the behavioral side. You know Alan, low 80% occupancy rates on very strong obviously. But I guess we might begin to get concerned about efficiency. And as your occupancy rates get higher and turnover, patient turnover increases, maybe diminishing, you know, margins in that business. Maybe could you just address that concern with the occupancy rates so high here?

I'm not prepared to say that the margins are going to go higher, but it really works the other way, because the more occupancy you have, the more efficient the operation. So it really works the other way.

And as I mentioned, we're looking to put more capacity on where we can in the markets that are very strong. So it's just the strong picture. And it wouldn't work. It wouldn't work to our detriment.

Great. Thanks.

Your next question comes from David Dempsey with AvondalePartners.

Hi, guys. Staying with the behavioral side, and the length of stay improve - - increased from 11.8 to 13. Is it fair to say that that's a fair amount more residential treatment center beds and residential treatment centers? And does that mean we should look for that stay to stay that high the rest of the year?

Some of that is the new acquisitions, David, the new acquisitions are weighted toward residential. The reality is, part of our strategy in those acquisitions is to add more nonresidential beds, so I don't know that over the long term we'd expect it to be that mix to remain that way, although, it may be for the next couple quarters.

All right.

And then just looking at the rates on the behavioral. It looks like they're moderated it a little more to 2% growth, is that just a function of a more mature basis or, you know, what's happening with pricing on the behavioral side?

Yeah, I mean it moderated a little bit from the first quarter. I mean our view going into the year was rates in that 2 to 3% range. I don't know if you can read a huge amount in the 2% in the second quarter versus a little bit closer to 3 in the first. You know, I think that, you know, managed care rates particularly have lagged - - in the behavioral division they have lagged the acute. But I think, you know, we think obviously with those kind of rate increases and the volume increases we're experiencing, there's still a huge amount of leverage off that top line, as Alan alluded to.

It's really mixed, and what we've been doing is diversifying across all of the areas within the behavioral health spectrum. So it's really a question of mix from quarter to quarter. But overall, it's very strong.

It is. In France, is that - - is France - - can we infer from this that France is going well? How much of that is coming from monetary? And where's that business headed if you don't mind?

We had about I think the operating margins in France in the second quarter are about 100 basis points higher than they were in the second quarter of last year. So the business remains fairly consistent, fairly strong, we get a benefit from the strong euro, but, you know, the overall France numbers are only about 5% of our revenues, so it doesn't move the needle a whole lot for our consolidated results.

Thanks a lot.

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

Hello, everybody.

Steve, you mentioned on the managed care contracting you're seeing rate increases of 6 to 8. Maybe this is just grasping at straws, but in our notes we had had previously that you had talked about 5 to 7%. Is there a little bit of improvement there?

And then maybe just comment on how you stand relative to looking at your '05 contracts? Or is there any trend to maybe even multi-year contracts or any changes in the nature, beyond just price, of the types of contracting you're being asked to take on by some of the managed care guys at this point?

A.J. to - - to your point, you're absolutely correct. I think in the first quarter we quoted a 5% - - a 5 to 7% increase and we're actually finding our contracts coming in just slightly stronger than we were expecting.

We're not seeing huge changes in the types or nature of contracts. Although, as a company, I would say that maybe a year ago the vast majority of our contracts were single-year contracts. We're probably entering into more multi-year contracts at this point in time, although I would say, still the majority of our contracts are one-year contracts. But there's probably, maybe a third of our contracts now are multi-year, where we're willing to do that if we feel like we can lock into a rate in the second year that's - -that's still a fairly strong one and it provides - - still provides us some decent - - some visibility. But we're not going to trade off what we think is a decent rate for increased visibility.

Other than that, I don't know that we see any - - any great changes in our managed care contracting in most of the markets that we operate in. There are relatively low levels of available occupancy, and, therefore, you know, I think it's still a fairly balance between the provider and the payer in those markets. With the market dominant position in most of those markets, we feel that we have a reasonable amount of leverage at the negotiating table.

Great. Thanks a lot.

Your next question comes from Ken Weakley with UBS.

Thanks, good morning, everyone. Steve, in those markets where competition has perhaps become the most intense because of the surgery centers or what have you. What's been the response from not for profits in terms of their pricing?

I imagine they've probably been more adversity affected than you have in terms of occupancy. Are you starting to hear any talk in the markets about, I don't want to call it irrational pricing, but just call it modestly more aggressive pricing or anything like that? Just in those specific markets.

It's interesting, Ken, I think actually, you know, the market that is we've talked about facing increased competition, specifically like a McAllen market or an Aiken, in the McAllen market, we've been reasonably successful in - - you know, the competition in that market is not coming at all from not for profits, all the competition in that market is for profit, both from HDA and from physician owned facilities.

Okay.

And in that market we've been somewhat successful in excluding some of those smaller physician-owned facilities from managed care panels. And the physicians have been somewhat successful to date in taking the business, as out of network business, and getting paid a discounted percent of charges. But their charges are so so high that they're still able to make a decent profit. I think that the managed care companies are going to come around to understanding what's happening and we're helping them point out that dynamic. And it's going to put a little bit more pressure on some of the physician-owned entities.

In a place like Aiken, I think the increased competition is really not been driven by pricing, but by, sort of capacity issues, lack of physician availability, et cetera. So in the markets where I think we're facing the most competition, I don't know that pricing has been a big driver, at least in markets that is we're in. I think the Vegas market has been and always is a very competitively priced market. It's been that way for a long time. Again, that market is dominated by mostly for profit, so we don't see -- you know, we don't see the not for profits introducing as, what you describe as, sort of irrational pricing.

So it's funny, I don't see that irrational behavior on the part of - - on the not for profits, so much on the revenue side. We'll see it sometimes on the expense side, in terms of what they're willing to pay nurses or what they're willing to pay for on-call pay. It's not as evident on the revenue side and the contracting side.

Okay. One more question.

You mentioned some confidence in the volume trends going-forward because of the improving labor market. And I was just wondering, do you have a specific statistical model, actuarial model, that you are using to come up with those productions, or is it just your hope - - that - - you know, that - - that - - is that that will happen? I'm just wondering how you get to that level of comfort.

What we're seeing Ken, is, in the data we get from our individual markets that - - that obviously measures the economic activity in the market or the jobs activity, mostly unemployment rates, et cetera, we are noting that in the vast majority of our markets, unemployment rates are improving, et cetera.

To your sor of second question, I do not have any kind of regression model that, you know, can accurately predict the tie-in to that improvement in the economy, and in the jobs picture in those specific markets, to either a specific improvement in admissions or how that translates into profitability in those markets. But we are heartened by just the general improvement economically in many of the markets that we operate.

Well, one more follow-up, I just - - I wonder, with the folks who lost their jobs at the beginning of the business cycle may not be the same type of people that get their jobs later, if it was like a manufacturer that closed down, and now service based with different kinds of benefits, or different personnel with different health characteristics. How carefully do you tract the employment in the market? Or is it something that's too granulated for you at this point?

Again, Ken, it probably is a little too granular to be able to track. I mean I'll say this, and I know you appreciate it, I think what you've said - - there's some validity into what you said. But you know the real challenge for a hospital is when a patient comes there with no insurance. If a patient, you know, be he a service worker, et cetera, comes to the hospital with insurance, whether it has a higher copay or whatever. It may make it a little bit harder to collect that copay from a worker who's making a little bit less money, but the fact that he or she might have insurance through his employer makes a big difference.

Okay. Thanks so much.

Your next question comes from Adam Feinstein with Lehman Brothers.

Okay. Thank you. Good morning Allen and Steve. Just a few questions, one housekeeping item, Steve.

Do you have a charity care number for the quarter?

A charity care for the quarter was $63 million, and that's a slight sequential decline from last quarter ,when I think it was about 67.

Okay. Just another follow-up here. On the labor side, you know, the last quarter you guys spoke about being a little bit over staffed in terms of not being able to anticipate the weakness in volumes. I know you were working hard to bring down the staffing levels. Labor costs were a little higher than I was looking for for the quarter, so can you give us an update in terms of what's going on with staffing levels? And I have one more follow-up.

Sure, Adam I think your comments are on point.

One of the things that we realize we have cut back hundreds of FTE's across our acute care portfolio. Not all of those reductions were implemented at the very beginning of the quarter, they were implemented at various times during the quarter. So I think that in following quarters we'll get more of a full impact of those reductions.

We also, they were offset a little bit as I think I mentioned in our prepared remarks by some severence payments, et cetera, that were - - that accompanied those layoffs, obviously those will not recur in the future. So I think that to some degree, we might see some of that benefit.

We'll also, obviously, one of the challenges is, as we cut FTE's in the quarter, we did so at a time when we were seeing a seasonal and therefore sequential reduction in our volumes, so we were not keeping up from an efficiency perspective in that sense. I think as the year goes on, if we're slow to get the recovery in admissions from the job's recovery, we'll get the normal, I would believe, seasonal uptick in volumes. And I think our salaries will clearly look better, we'll be well positioned for that, because many of the reductions we've made are in nonclinical areas, they're in general and administrative, fixed areas, so that when we get a little bit of a pickup in volumes that should help our efficiency a great deal.

Okay. And then just one more as well.

Just, with the asset sales it seems like you guys have been selling off some of the under performing assets. And you have some slight benefit from doing that. Are there other assets you may be looking to sell in the future? And when would you anticipate doing that if you are - -

Adam, we don't have anything else on the table. We had been looking at these for a while. One of them was a lease that we had a chance to either renew or walk away from. The one in Puerto Rico, we had converted it over to a Children's Hospital. We still think it's going to be successful, as such. But we didn't think we wanted to wait for the time to progress, so we took good advantage of opportunities with these and as you see, the sales turned out very well. And we're happy with what we have right now.

Okay. Thank you, Alan.

Your next question comes from Kemp Dolliver from SG Cowen and Company.

Great, thanks. A couple questions. First, Steve, could you give us some statistics or financial data on the 5 behavioral acquisitions with regard to their annual revenue, their profitability versus the existing operations? Did they contribute anything to the bottom line this quarter?

Sure.

We're not going to get, I think into disclosing specific revenues. I know when we acquired them, we talked about the fact that these were all relatively successful facilities, they operate at margins that may not be up to our - - precisely up to our divisional averages, but they operate at pretty healthy margins. And the, sort of, strategic business play here was not to necessarily make them more efficient or really improve a facility that was struggling, but to really have some more top line improvement.

We think, and I - -I - - I think alluded to this in my answer to David earlier. We think that there's an opportunity to add nonresidential services in a number of these facilities, to expand capacity in a number of these markets, and the real play here is to grow the top line which we think we can do. But the answer to your question is, they are decent performing facilities and they did contribute immediately to earnings even in the couple of months that we owned them in the quarter.

That's great, thanks.

Secondly, with regard to the - - I guess the physician recruiting and other efforts in Texas and South Carolina. Could you address the timetables in which you think you would have essentially replaced the physicians involved- - that - -that- - that you've lost. And also, are you recruiting physicians out of medical school, or are you getting - - is it established physicians from other markets?

No simple answers to those questions, Kemp. In the Aiken market, as an example, we saw same-store growth this quarter. We- -we- -we- - our admissions in that market were actually above where they were in last years second quarter, and that's despite some of the physical limitations we have there. As we've discussed last quarter, one of our limitations there is our emergency rooms got very crowded. We've got a project to expand the emergency room and to expand our critical care capacity in the hospital. And that will open in the fourth quarter of this year. But even without that, and even with our ER visits down compared to last year, our overall admissions were up in the quarter. And I think that's reflective of some of our physician recruiting efforts, et cetera in the - - in that at market.

To your question about who are we recruiting? It varies, in some cases we're recruiting new graduates, in some cases, Aiken's an example, where we've recruited some doctors from the Augusta market to come in and begin practice in Aiken. Si it works both ways.

In the McAllen market, and you talk about a time line, we're aggressively recruiting in that market. At the same time, the physician competition goes on, and they're adding more capacity, et cetera. So it's hard to measure, you know, precisely when something's going to have an impact. When you're going to see a turn, but we continue to aggressively do what we can.

We talked about, you know, our managed care strategy in the McAllen market. To aggressively do what we can in those markets to counter the competition, I think we said in the first quarter that neither, you know, that Aiken or McAllen was an instant fix. It was probably a 12 to 15 month process as we recruited new physicians, did physical expansion, et cetera. I think we believe that time line is still probably accurate.

That's great. Thank you.

Your next question comes from Gary Liebermann with Morgan Stanley.

Thanks.

I was hoping you could maybe talk a little bit more about the pricing. It sounds like your managed care pricing trends are stronger - - or even a little bit stronger than you expected. In light of the overall adjusted - - the same store revenue adjusted being about 2%, can you talk a little more about what's driving that? The 2% increase is all the business seeing that on the managed care side, that strength, or is it, perhaps inpatient and not outpatient, or is there some other kind of mix shift that's taking place there?

No, I don't know that our - - well, let's put it this way, Gary. I think we see more competition obviously on the outpatient side. You know, most of the physician competition as an example is almost exclusively, in most markets, on the outpatient side. McAllen is it one of the markets where we actually have inpatient physician competition, and that's holding it down. So I think you know our managed care pricing is offset a little bit by a - -a - -, you know, softness in mix as we lose the -- you know, just the kind of the edge of those surgeries, some of the - you know, the more straightforward more profitable surgeries. But I don't think there aren't any great changes in mix other than that.

Okay. Thanks a lot.

Your next question comes from Sheryl Skolnick with Fulcrum Global.

Thank you. I'm sorry to harp on an issue that I think we've all heard a lot about, but just a couple questions on self- pay and some of the trends that you've been seeing. First of all, you mentioned both of you, that you did see increases in self-pay admissions. Can you give us the underlying numbers for the, either total admissions or adjusted admissions, and give a sence of whether or not you are also seeing increases in acuity. If it's at all possible to get a sense of how much of your acute care revenue actually came from self-pay sources that would also be helpful.

Sheryl, we don't necessarily track admissions and visits, et cetera by self-pay, but we do track self-pay revenue. I think that in the quarter we found there was an increase in self-pay revenue, gross revenue, of a little over 10%. And, you know, in that kind of 11, 12% range attributing about half of that to price increases. You know, the way I think about it is, that we've probably had somewhere in the neighborhood of a 5% to 6% increase this year's second quarter over last year's second quarter in just self-pay volumes. And, you know, that's our general sense of what it looks like across the portfolio.

Okay. And self-pay or a payer mix as a percentage of revenue, do you give that out?

I think our self-pay as a percent of revenue is also right in that kind of 10% - - about 10% of our revenue comes from self-pay.

Okay. That's very - - self-pay, of course, is over stated to the extent that it's booked at the gross revenue per charge per unit rate, right?

It is, and then obviously, it's written down. Generally if it's pure self-pay or indigent it's written down as charity care, and obviously ,if it's a collectible in some form or fashion, then the balance may be written off as bad debt.

Right. No, I understand that part. Okay.

And then, if we look at your DSO's which are nicely, comfortably 51 days, albiet up from last year. In an environment such as this, I say 51 is pretty good. But I have to imagine that most of that is due to acute care AR as opposed to behavioral AR.

One, because of the difference in the sizes of the revenue streams from the two businesses. And two, because my sense is, that you probably have more government business in the psych business, which tends to pay you a little faster. Are those assumptions correct?

Not - - I don't necessarily think so, Sheryl. Actually, I'm not sure that the percentage of our non-government business in behavioral is a whole lot different than it is in the acute. The mix is a little bit different. I mean obviously acute's weighted a little more towards Medicare, and the psych business is weighted a little more toward Medicaid. Bbut I think our total Medicare and Medicaid is not all that different in the two divisions. And both of those payers pay fairly quickly, as you know. So, you know, probably the amount of commercial managed care type business in both the acute and behavorial business is in that 40 to 45% range. And so, no, I don't think that the days are dramatically different in - for that reason in either division.

Okay. So - - but the acute care days would also be at about 51 then, just to make it specific, you think.

Yes. I think both divisions run days that are fairly close.

Right. And do you 150-day cliff reserving policy?

We do, but we also reserve for accounts that we know are uncollectible before they ever get to that cliff. I mean one way we sort of have as a sanity check is - - and we've certainly been doing this for the last few quarters, is to make sure that the great portion of our self-pay accounts are reserved for. Our bad debt reserve at the end of the first quarter covered 93% of all of our self-pay accounts. And - - and again, in the second quarter, just about 93% of all of our self-pay accounts were covered by our bad debt reserve.

The self-pay accounts incurred in the second quarter?

No, the self-pay accounts on the balance sheet.

On the balance sheet, okay.

The bad debt reserve that we have on the balance sheet covers 93% of - -

Got it.

the total of all of our self-pay accounts on the balance sheet at the end of the second quarter.

Okay. Because there's a subtle difference there. Thank you. There's a subtle difference there and I appreciate you you so much clarifying it. Thank you so very much, I appreciate it.

You're welcome.

Your next question comes from Derrick Winger with Jeffries and Company.

Yes, thank you. Capital expenditure outlook for the year, are we still at $200 million?

I think that number is increased a little bit for a couple of reasons. One is, you know, we're probably thinking back to our original estimates of about 2 and a quarter for two reasons. One is, in a couple markets like McAllen, Aiken we've talked about, we've accelerated some of our capital projects to respond to the competitive activity that we've noted. And secondly, we've seen a little bit of an increase in construction costs because of some of the over arching increase in construction materials like steel and things like that. They're having a - -moving the needle a little bit on our projections for captial spending.

So 225? So 225 would be a better number?

That's a bid, Steve.

Yes, yes, 225 is good.

Okay. Thank you.

Your next question comes from Joseph Cerrelli with Oppenheimer.

Hi, thanks.

Just first, I want to commend you on doing a great job of managing your costs and recovering for the first quarter. I think it's a tribute to the way you've operated the business to be able to respond so quickly.

Two questions, though. One, I know Congress is looking at creating a fund to pay basically a billion dollars for undocumented aliens over the next few years. And I was wondering you have any sence of how that will affect your operations, particularly in McAllen and some of the other areas?

And two, if you have any intention of adjusting how you - - your policy for the self-pay or the uninsured in so far as how you will record the - - hte charges, basically along the lines of what was discussed at the House subcommittee meeting.

Sure, Joe. A couple things. I mean one is, CMF, I think just came out with a draft rule on this billion dollars of care for the undocumented aliens. The rule is still fairly vague and in our reading, of it it's impossible to determine what the specific impact would be at any of our or any specific hospital. We certainly treat a fair amount of undocumented aliens at hospitals in McAllen and Loredo and - - and just feel generally that we will benefit from however the rule is implemented. But it's impossible at this point to predict what the precise benefit might be.

As to your second question. I think we're in much the same boat as most of the other companies. I think you testified at those congressional hearings. We are working on implementing a charity policy that would provide for a uniform discount to charity patients across our hospital portfolio, probably based on some percentage of Medicare reimbursement, or something like that.

We're really just tinkering with what we can do from assistance perspective, from sort of that information system perspective, and a billing perspective. But our intent is to do that, we do that, frankly, in most of our markets already in some form or fashion, either through a county program or whatever. But our intent is to formalize that in a - - in an across the board program at all of our hospitals in the relatively near future.

On both of those items, do you have any sense of timing as to, one, when you'll get sufficient rules to know when it would be implemented on the undocumented aliens? And then on the second item, when you would have the policy implemented to where there would be changes? When you implement that, will you do a retroactive to adjust revenue or will it just be prospective?

To the first question, Joe, we're still struggling with psych PPS. So now I'm not going to start speculating on when they'll have a final ruleout on the undocumented alien regulation. I'll let the government get one regulation that's important to us out first.

And secondly, I think you know sometime in - - you know, by the end of this year or early next year is when we would hope to implement a charity policy. And I think it would have to be prospectively, Joe, I don't think we would want to really go through the time and effort of trying to go back and restate financials for it.

Okay. Thanks a lot.

Your next question comes from Shawn Gordon with ENSO.

Yeah, Shawn Gordon, from ENSO (ph) Capital. Thanks for taking my question. I guess I was it hoping you would comment a little bit on France and I guess how trends were, and also with the DRT implementation in France there, what - - how you have think this might affect your hospitals?

Sure.

As we mentioned a little bit earlier, our French operating margins were up in the quarter. They're probably about 100 basis points higher in the second quarter this year than they were in the second quarter last year. Most of our newer acquisitions in France continue to perform well. Generally, solid performance from those hospitals as they've been. For the most part since we've owned them, it's consistent, reliable performance for the most part.

The DRG system which has been proposed in France is also, I can - - there must be something about bureaucrats the world over. There's really not sufficient information that's out there yet for us to be able to predict what the impact on our hospitals would be. We do know that our hospital is run very efficiently in France. So our expectation is it that they would benefit from a prospective system that goes into place. The French government has talked about having a fairly significant transition period in their DRG system so hospitals are not impaired very much in the beginning. So I don't know how much of an impact ,even for those who benefit from the DRG system there'll be in the beginning. But, it's too early to tell. And there's not enough granularity to the regulations yet to know that.

Yeah, but the overall feeling with our management over there is that the government views our sector the same as the nonprofit sector, and that this will be across the board and the more efficient operators will benefit. So we're looking forward to it.

And then as far as outpatient care in France? Do you have any comments there? I've heard from other operators there that they saw a big shift towards outpatient. And given that the cost efficiency on the private side, that you should have more bed capacity in there for margin increase in the private sector in France.

I think that our hospitals in France already do a significant amount of outpatient business. The nature of the - - the hospital system in France is that the government-owned hospitals tend to be the larger, more tertiary hospitals. And the private hospitals, like the ones we own, tend to focus on, kind of, more general surgery, a lot of outpatient diagnostic procedures, et cetera. So I think that we would continue to benefit from any, you know, additional shift to outpatient. Which I assume, you know, we'll see in France just as we have seen here in the States.

Okay. Thank you very much.

At this time, gentlemen, there are no further questions.

Okay. Well we'd like to thank everybody for your time and look forward to speaking with you next quarter.

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