環球健康 (UHS) 2005 Q1 法說會逐字稿

Good morning. My name is Bonnie. I'll be your conference facilitator. At this time I'll welcome everyone to the Universal Health Services First Quarter 2005 Earnings Conference Call. All lines placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] Mr. Filton, you may begin your conference.

Thank you. Good morning, I'm Steve Filton. Alan Miller, our CEO is also with us. Welcome to this review of Universal Health Services results for the first quarter ended March 31, 2005.

For the quarter the Company earned $0.99 per share diluted. Theses earnings represent a 34% increase over the earnings per share in last year's first quarter.

Included in the reported results for the quarter ended March 31, 2005 were the following items, one a $3.8 million after tax $6 million pre-tax gain on the sale of two acute care hospitals located in Puerto Rico. Two, a $2 million after tax gain, 3.1 million pretax, on the a sale of a home health base is Badenton, Florida. And three a $2 million after tax impairment charge, 3.1 million pretax, related to a women's hospital located in Edmond, Oklahoma.

Included in the reported results for the quarter ended March 31, 2004, was Medicaid disproportionate share hospital revenue, DHS, related to a prior period which favorably impacted net income during the first quarter of 2004, by $1.7 million after tax, 2.8 pre-tax. Excluding the items listed above for the three month period March 31, 2005 and 2004, our adjusted net income increased 30% to 57.6 million during the first quarter 2005 as compared to 44.5 million during the 2004 first quarter, and our adjusted earnings per diluted share increased 29% to $0.93 during the quarter ended March 31, 2005, as compared to $0.72 during the comparable prior year quarter.

During this conference call, Alan and I will be using words such as believes, expects, that represent forecast projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend the careful reading of the section on pages 25 and 26 of our form 10-K for the year ended December 31, 2004.

I would like to highlight just a couple of developments and business trends before opening the call up to questions.

Revenues for the quarter were $1.09 billion, an increase of 11% from the revenues in last year's first quarter. EBITDA or earnings before interest, tax, depreciation and amortization, and income from discontinued operation was $145.1 million, 21% higher than last quarter. Net income of $61.4 million was 33% higher than last year's quarter.

Cash flow from operations for the first quarter of 2005 was approximately $135 million, an increase of 41% from the prior year quarter. With this cash provided by operating activities as well as the pretax proceeds of approximately $120 million generated from the sale of our Puerto Rico facilities, we made net debt repayments of approximately $169 million, and spent approximately $57 million on capital expenditures. At quarter end, our ratio of debt, net of cash to total capitalization was 34%, and the ratio of debt to EBITDA was 1.3.

Revenue growth in the acute division came mainly from admissions growth and increase in revenue per day at the same store facilities. A busier flu season, and the exclusion of the Puerto Rico hospitals, which have been reflected as discontinued operations, helped the positive admissions trend. Admissions growth was particularly strong in the Las Vegas market, which has been benefited from the higher occupancy rates at Spring Valley, which opened late in 2003 and by additional capacity open at Summerland in the summer of 2004.

Revenue per adjusted patient day rose 7.2% in the quarter, and revenues have been bolstered by the Medicare increases effective October 1, 2004. Managed care contractual increases continue to be strong. Additionally, in the first quarter of 2004, revenue was suppressed somewhat by issues with our medicare case management and by a measurable decline in our better paying, higher margin procedures in certain markets. Those dynamics were stabilized in this year's first quarter.

We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. Operating margins of our acute care hospitals owned in both the first quarter of 2005 and 2004 were 17.2% in the quarter just ended compared to 14.6% in the prior year's quarter, as a result of the solid top line growth and the leverage that increasing admissions allows on operating expenses, particularly salaries. On a combined basis, the total of bad debt and charity care as a percentage of revenue declined slightly in this year's first quarter as compared to the same prior year period, reflecting the fact that we believe the level of uninsured patients coming to our acute hospitals is also relatively flat with last year's first quarter.

First quarter operating income in the McAllen Edinburgh market was relatively flat as compared to the prior year quarter. During 2004 we experienced significant erosion in our business in this market.

On a same facility basis at our behavioral health facilities, revenues increased 5.4% during in the first quarter of 2005 over the comparable prior year quarter. Admissions to our behavioral hospitals owned for more than a year was relatively flat in the first quarter, although patient days increased 4% as a result of an increased length in stay. Admission comparisons to the first quarter of 2004 are very difficult as our behavioral hospitals experienced 10% same store admission growth in last year's first quarter. Additionally, several of our hospitals continue to experience capacity constraints.

Net revenue per adjusted patient day increased 2.8%, aided by the increase in Medicare rates effective with the January 1 implementation of the new PPS system. Operating margins for our behavioral health hospitals owned for more than a year were 24.8% in the quarter ended March 31, 2005, compared with 24.0% in the quarter ended March 31, 2004, reflecting the higher patient days.

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

Thank you, Steve.

As you know, in March we sold our two remaining acute care hospitals in Puerto Rico and just last week we announced that we had signed a definitive agreement to sell our 81.5% interest in [Medi Pontinair]. The French sale is subject to regulatory approvals. We expect a closing to occur by the end of May. We expect the total after tax proceeds from these two transactions to be approximately $340 million. We are currently evaluating the appropriate use of these proceeds. Considerations include repayment of debt, acquisitions and development projects, share repurchase, and increasing the dividend.

We're encouraged during the first quarter by the stabilized performance turned in by the McAllen Edinburgh market and the improving metrics at Lakewood ranch. These results were EBITDA positive for the quarter. Additionally, we're in the early stages of a major renovation to our Manatee memorial hospital, to be completed in '06, which will further fortify our presence in this important market.

The financial results in our Eastman Williams market including Methodist hospital, which we acquired in 2004, were behind last year, but we expect improvement as the year goes on and a major renovation of our Shell Met facility is completed later in the year and as service expansion and physician recruitment activities continue in that market.

UHS spent approximately $57 million on capital expenditure in the first quarter. The replacement for our fourth Duncan facility is Eagle Pass, Texas should open early next year. We also have multiple projects in progress to add capacity to our busiest behavioral facilities. Those facilities have operated at a very efficient 83% available occupancy rate in the first quarter.

Given the strong performance of the first quarter, we're revising our earnings estimate. We now expect to earn between 3.10 and 3.20 per diluted share from continuing operations for the full year of '05. This revised guidance continues to reflect caution regarding sustained improvements and bad debts over the course of the balance of the year. Steve and I would be pleased to respond to questions at this point.

[OPERATOR INSTRUCTIONS] Your first question comes from David Dempsey of Avondale Partners.

Good morning, guys. Question on the behavioral side. Steve, you said capacity issues. I was kind of guessing that -- are there a number of facilities, wide spread with 83% average occupancy. That's some pretty strong occupancy. Where do you see the best opportunities?

Well, David, as you suggest, with 83% occupancy, it implies that we have a number of facilities Operating in the high 80s and some in the low 90s. That really amounts to being pretty full in those facilities. We probably have expansion plans that are underway in some form, either in the planning stage or the construction stage at a good third of our behavioral facilities. We've already completed some capacity expansion and maybe a half a dozen of the facilities, but there's still quite a few more to come. And you know until we get there, some of the facilities it's going to be tough to have any measurable improvement in admissions. I will say that I think the length of stay improvement reflects the fact that our managers in the behavioral division have gotten I think more skilled at managing their business and in, you know, the behavioral business is a little bit different than the acute business. We tend to get paid for our increased days. If you can get paid for an increased days, it's easier and cheaper than generating another admission, and I think they're doing a good job of that in this tight capacity environment

Sure. Are you still looking to spend 50 to $60 million in terms of expansion opportunities in these hospitals this year?

Yeah. That was our original capital budget. That will tend to be weighted toward the end of the year, but yes, that's still our plan.

How's the pipeline? Not just for behavioral, but also for acute care hospitals in terms of going forward and what's the likelihood you guys might add additional facilities as we go forward?

We continue to look for additional acquisitions on both the acute and behavioral side. I believe in both businesses there are acquisitions available and acquisitions that will become available. I think that probably the biggest variable in both -- in both businesses is the price. I think there is increased competition for acquisitions in both the acute and behavioral business. I think that you know with a history of being a disciplined acquirer from a pricing perspective, we'll retain that discipline. We'll continue to look at acquisitions that are reasonably priced and therefore, allow us to gain a reasonable return.

Thanks very much. Well done.

Your next question comes from Adam Feinstein with Lehman Brothers.

Great. Thank you. Good morning, Alan. Good morning, Steve. Just several questions here. Maybe just to start, could you talk more about the labor costs in the quarter. That was much lower than what we were looking for. I know last year you guys were working very hard to bring down the labor costs. Just want to see what caused it to really get so much better here on the quarter and whether you think we'll see that trend take place throughout the year. Then I have a couple of follow-up questions.

Adam, I think part of the comparison is that if you recall from last year's first quarter when our volumes dipped, and we were losing some of our business in competitive situations and markets like McAllen, he conceded that we were caught a little bit off guard and we certainly didn't make the staffing reductions in the first quarter that we needed to. They were made clearly later in the second quarter and then in the third quarter.

So, I think that what you're seeing in the first quarter of 2005 is sort of the double whammy of having those salary reductions and staffing reductions made throughout 2004. And then the benefit of that being reflected in somewhat stronger admissions and pretty a robust pricing environment.

We're finally getting the leverage on the salary line that we predicted all year last year that we would get once we had a pick up in admission. And I think you're seeing that clearly in the first quarter. Obviously, they'll some pressure on salaries as we move forward if the admissions growth is sustained. We're in a pretty good position to -- I think it's easier to sustain Salary levels once cuts have been made then to get there originally. Clearly, our operating guys have done the hard work of making the appropriate reductions.

Okay. And just second question here, just on the McAllen market. Could you just provide some more commentary there. You had a very difficult fourth quarter there. I think you said it was flat this quarter. I just want to make sure I heard that correctly, or are you referring to the volumes or the EBITDA, and just any updates on the some of the things you're doing there. Then I have one more question after that.

When I talked about flat in my comments, Adam, I was referring to the operating performance in the market compared to last year's first quarter. And, I think what we've seen, and as we've talked about throughout last year, late in 2003 and early in 2004, we lost a lot of our better paying, better margin, higher revenue business in the McAllen, Edinburgh market. We feel like we've done a lot of things as 2004 progressed to respond to that competitive threat. We find our volumes still down slightly in the beginning of 2005 in the first quarter. But we don't see our revenue per unit off any more in that market. Which I think is a reflection that the real sort of creaming dynamic that occurred last year, the doctors creaming the best business, to some degree has stopped. Even though we've lost a little more business in the quarter, I think our operating results are relatively flat because we responded by becoming more efficient and adjusting our cost to our lower volume levels.

Okay. Just finally, could you just comment some more on the guidance, I guess, does the guidance -- does the guidance incorporate the sale of France and what does the guidance imply in terms of margins? Higher margins on the year-over-year basis? Just any additional commentary?

I think what the guidance implies about France, first of all, Adam, is that the French transaction will largely be a wash in one form or another that we will take the operating income that France contributed and, however we reinvest the proceeds, we will replace that income in large part.

I think as regards to the rest of the assumptions, when we talked about in our year end call as we gave our guidance, is that the guidance implied for the full year, that admissions would be relatively flat. Bad debt would be relatively flat. Obviously admissions were better than we expected in the first quarter. We're not prepared to say that we're comfortable that that's a given for the rest of the year. You know, I think there's been a level of seasonality in the first quarter in this business that has been somewhat muted over the last couple of years. We're not sure that we won't see that kind of return and be more obvious again this year. So, we're still being relatively cautious about the balance of the year. The industry is obviously coming off, you know, seven or eight tough quarters. You know, we'd like to see whether a lot of the improvement was from the flu or any other sort of transient metrics that are affecting our business before making any more positive assumptions about how the balance of the year looks.

Okay. Thank you.

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

Hello, everybody. A couple of questions as well. Just following up on your comment now, Steve. Do you have a flavor for how much of the volume improvement was flu related versus underlying strength and admissions?

A.J., I don't know that we have a precise number. We think that certainly some of the improvement in volumes, particularly in certain markets was from the flu. We really had virtually no flu business last year at this time. And clearly in some markets like Las Vegas, there seemed to be much more of a flu season this year. But we certainly feel like a good portion if not the majority of the volumes was not flu related and I think that's reflected in the very strong pricing performance you see in the quarter. If it was all flu related, you wouldn't see the robust pricing that we had in the quarter.

On the other hand, as I said, we're a little cautious about how much of that is seasonal in nature and how much of it is perhaps a long-term kind of secular recovery in the business. So, you know, I think we're taking a little bit of a wait and see attitude as the next quarter or two unfolds.

I wanted to follow-up on Alan's comments about the proceeds coming in, what you're going to do with them. Obviously, you got 129 from Puerto Rico in house now. The rest is going to get in toward the end of May. On the one hand, in terms of degree deployed in the proceeds, you have to wait until you get the French proceeds in house before you make a decision on which way you're going to go on these four items? Or is that something that's a little more front burner? We might see an announcement prior to the end of May?

And then I was going to also just throw out the other question. You've been very good at picking your spots of monetizing these assets in Puerto Rico and taking advantage of a hot market in Europe. There's obviously a very hot real estate REIT market right now. I know UHS has a 7% stake in Universal Health Realty, you've got very long-term leases on your key properties. Apparently there's been some indication of interest on the part of - around UHT. Would UHS consider from the UHS perspective monetizing that asset as well and taking advantage of the hot real estate market?

A.J., let me answer the proceed question first. You know, I think as Alan indicated, we're going to take pretty disciplined approach to the redeployment of proceeds and taking a hard look at our various options that he outlined I don't know that timing wise though, we're limited by timing one way or the other, I think it's more of the effect that we don't want to rush into a decision of any kind. And obviously it's a lot of proceeds and it could be allocated among the various options that Alan mentioned. I don't think we're obligated by timing.

As far as the uHT question and monetizing our investment in UHT. I don't know that we're anxious to do that necessarily. We know that there has been obviously some interest expressed in UHT. That share price has gone up. That's a long-term investment from our perspective. That's not something that's front burner for us for any terms of any desire to monetize our investment there.

Okay. Thanks a lot.

Your next question comes from Oksanna Butler with Citigroup.

Thank you, good morning. Could I ask you, please, to give us a few more details on the McAllen market, in particular what you're expecting for the rest of the year? Are you still assuming you're going to see flat a operating performance, or do you now expect to see an improvement to the rest of the year?

Oksanna, I think that we are still comfortable with our original, you know, presumption that was incorporated in our initial guidance, and the McAllen market operating performance would be relatively flat in 2005. As we said in our last call, and we reiterated today, we're encouraged by the performance of McAllen and Edinburgh in the first quarter of 2005. But we're aware of the fact that all of the hospitals in the McAllen market were very busy in the first quarter. All of the hospitals ran relatively full, et cetera. So, I think we're anxious to see as we get into the traditionally slower volume periods of the year and months as we get into June and July to see what volumes look like and how market share sort of sorts out in that market. A little bit later in the year when the seasonal volumes decline as we expect that they will. We're still pretty comfortable with the original guidance that we're expecting McAllen to be relatively flat for the year.

And you've mentioned that you believe the level of seasonality has been muted over the last couple of years. Can you explain why you think this might not be the case this year? Is it the lower growth in co-pays and the deductibles at the beginning of this year or other factors?

I think it's just that. As you know, as everybody knows who follows the industry, the first quarter is traditionally a very strong quarter. I'm not sure that's been exactly the case in 2003 and 2004 in part because there were so many other dynamics affecting the industry. As you suggest, Oksanna, there were significant changes in benefit design plans in 2003 and 2004. Much greater portions of financial burdens of hospitals bills being shifted to the consumer, the employee in the form of higher co-pays and deductibles. There was this increasing, dramatically increasing load of non-paying or uninsured patients that affected the business the last couple of years, et cetera. While those two dynamics have moderated, I think it's possible that we see a return in 2005 to kind of the more seasonal sorts of fluctuations than we have traditionally seen.

All right. Thank you. And can you give us the charity care number in the quarter, please?

You know, I will look for it as we're talking, Oksanna. As I mentioned in the call -- as I mentioned in my comments, the total of bad ket in charity care as percentage of revenue were slightly lower in 2005 first quarter than in the 2004 first quarter. You know, maybe contributing to an improvement of $2 million or $1 million between the two quarters. If I can't find the numbers, I think you can figure them out from that. I'll look for them while I answer other questions.

All right. Thank you very much.

Your next question comes from Darren Lehrich of Piper Jaffray.

Good morning, everyone. Just a few questions on France. Wanted to get a little bit more detail, if I could, in terms of transaction value. And Steve, if you could just provide us with what you think was the normalized EBITDA number for France in '04? And then I guess a question, just if terms of the financial statements going forward. Will any historical financials be presented without France to the analyst community? I guess if the answer is no, can maybe just single out any notable P&L impact on expense items going forward.

Okay. Your question maybe more complicated than I can answer.

The first part was just gross transaction value, enterprise value for France. Just so we can have that. And then normalized EBITDA for that business.

Let me answer the question this way. I think we have previously disclosed that our French revenues in 2004 were slightly less than $300 million.

Right.

We have also previously closed that our EBITDA margin in France was between 15 and 16%. So, obviously the EBITDA, historical EBITDA is calculable. I think our purchase price, therefore, translates to about a 10 times multiple.

Right. Okay. I just wanted to sort of bridge that with the pre-tax income that you disclose in your 10-K segment reporting. That 15 to 16% is consistent. And then the gross transaction value equates to 10 times the EBITDA?

That's correct. And I think when you play those numbers out, Darren, you get to a contribution to earnings and the sort of 16, 17, $0.18 a year range. And obviously in terms of calculating kind of the prospective impact of the transaction on the Company, obviously, that really gets back to how you think the proceeds are redeployed. And you know, you have to make assumptions about that to get there. As I said, our guidance presumes that however we redeploy the proceeds, it will be, at a minimum of a wash.

Okay. Good. And then in terms of P&L impact, I mean, any expense items that just, you know, would be abnormal or different in a material way?

I don't think so, Adam. Darren. As I'm thinking about it, I don't think that there were expense buckets in France that are materially different than here in the states. But if we realize later that's not the case, we'll certainly let people know.

Okay. Just one thing to follow-up on with regard to your guidance. In terms of the components of the guidance. I just want to make sure I'm hearing you correctly. You know, the characterization, I guess, from what I can tell is that volumes will be flattish for the remainder of the year? And I presume that margins will actually -- you're assuming they'll move down slightly from what we saw in the first quarter. Is that a fair characterization?

That's fair, Darren. Again, our original guidance for the year presumed that admissions would be flat for the year. We did better than that in the first quarter, but we're, in giving our revised guidance, assuming that they will flatten out for the balance of the year and that margins will come down from where they were in the first quarter. Again, a lot of it is just the seasonal impact that we've talked about already.

Okay. Just one last thing for Alan. Can you update us on the search for Ed French's successor? Thanks.

Ongoing. I don't think anything much has changed. Just talking to more people. And things have been going well. We are going to take our time and get what we hope to be a very excellent replacement.

Great. Thanks.

Your next question comes from Matthew Kanofsky of Sanford Bernstein.

Good morning. I was wondering if you could talk about the volume improvement you're seeing, specifically if you've seeing strengthening cross payers in commercial and government, or if there's some sort of skew in there?

Matthew, the strength seems to be across the board both in terms of markets. Obviously, some markets are stronger than others. We highlighted Vegas as being one of the strong markets. We've certainly seen strength throughout the portfolio. And there doesn't seem to be a bias, if you will, towards any particular payer class. We've seen sort of a leveling out of uninsured population. We've seen pretty much pro-rated growth among Medicare around medicaid and the managed care payers. Doesn't seem to be skewed in any particular direction.

Okay. One other just quick question. What's the diluted share count that you're assuming in the guidance number you gave?

We have not in the guidance that we've given really changed our share count, et cetera, other than as I said, to presume in a general way that we replace our French earnings in some sort of comparable way. We really haven't defined what that is. We haven't really made a specific projection as to how our share count might or will change.

Okay. Thanks very much.

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

Hi, good morning, guys. Two quick questions. Steve, wondered if you could provide charity care in the quarter versus prior quarter? And then also allowance for doubtful accounts on the balance sheet?

Gary, I don't think I have the balance sheet allowance in front of me. I think, again, total bad debt and charity care was a little over $154 million this quarter. That's the same-store number compared to $143 million, a little over that last quarter. And as I think I indicated earlier to Oksanna, when you calculate the percentages, that's a very slight decrease as a percentage of revenue this year. We think that the change in total bad debt and charity contributed maybe $1 million or $2 million to the quarter.

Okay. Sorry I missed that. And then just on Las Vegas in general. Could you sort of characterize how that market has performed, obviously, from Triad's minority interest and their piece, that would suggest that Vegas did very well for you. Any particular reason going forward to may be be a little more optimistic that your sort of better than flat in Las Vegas?

Well, I think we always presume that we would be better than flat in 2005. You know, we took a different view of Las Vegas than, perhaps, some of the investment community. That is, a lot of concern in 2004 as new capacity came on to the market. We opened Spring Valley late in '03, and HCA opened Southern Hills early in '04, about whether that new capacity would really change the dynamics of the Vegas market long-term. We continue to say that all of the growth prospects in Las Vegas were excellent and that we felt that over time the new capacity would be absorbed by the growth in the market. I think that the first quarter performance seems to bear that out. I think those metrics will continue in Vegas. The market will continue to grow. At the same time, Gary, there will be periodic additions to capacity. So, it won't be kind of a straight line growth. There'll be some disruptions, but it remains a very fast growing market and still a relatively underbeded market, even, I believe, as the new capacity comes on. We're generally bullish about prospects in Las Vegas.

And just last question on Vegas. How are your managed care yields, stable in the market? We've heard mixed commentary from some other folks. You had renegotiated not to long ago.

The largest contract that was most recently negotiated with what's called the Healthcare Coalition. And certainly those rates were very strong, in excess of 7% for three years, I believe. You know, our other large contracts, I think, we'll get renegotiated later in the year, including PacificCare and Sierra. It's a -- on a relative basis, a difficult managed care market, managed care rates are on the low side in Vegas as they are in, let's say, Southern California. I think we believe that the rates of increases will not be dramatically different in Vegas than they are elsewhere in the country. They'll remain relatively strong.

Okay. Thanks.

Your next question comes from Ken Weakley of UBS.

Thank you. Alan, I was wondering if you could spend a little time on corporate strategy in light of the decision to get out of Europe. I sort of forget what the reasons were for going in. This is a relatively quick turn around for you. Is it just price that led you out of there or was there other pressing needs back here domestically. Or maybe just spend a little time on that.

It wasn't a particular need. But the -- our partner was interested in the prices that were being paid in Europe. And we think they're very robust. And it was an opportunity to make a very good sale.

Sure.

And that was really it. We were happy the investment. I'm sure the purchasers will do well with it. They have intended to use it as a platform and go further into other countries. We had no desire to do that. That's all there really was to it.

Okay.

We just think it was a great investment and a great return.

Sure. Okay. Steve, can you just spend a a little I I am on incremental return. With the softness of the last couple of years, it's hard to know how much of the -- you're RLIC's declined just a little bit, as you would expect. But I'm just wondering in terms of incremental capital going into the business, what sort of returns are you seeing there relative what what you've seen historically?

I think, Ken, from our perspective, we think about return on capital from a long-term perspective. Obviously as you point out, assuming our returns have declined over the last few years as the operating metrics in the business have been pressured, particularly by lower admissions and higher bad debt. I think we have always viewed those metrics, as somewhat temporary in nature, and expect that a long-term rebound in admissions, and to some degree a rebound in bad debt, although not necessarily in either case to the levels we were experiencing notice late '90s and a couple of years in the early 2000 decade.

But I think, you know, our view of returns as we think about acquisitions and think about development projects has not changed a great deal. We look for average returns and sort of the 13, 14% after tax range. And I don't think that that our view of what returns should be attainable and what we look for has changed a great deal, despite the kind of operating metrics in the business over the last couple of years.

Have the developments over the last couple of years in terms of the uninsured and the surgery center development altered which sort of capital projects you're willing to go into? Or more specifically, have they been directly a factor in terms of locate market variation in terms of returns?

Well, no. I think obviously changes in the competitive landscape certainly affect the way that you approach your business. You know, in markets where we have lost and believe and can't compete let's say for outpatient surgery as effectively as we once could, you know, we're probably not necessarily investing in that business the same way.

Would say how many markets where that condition has occurred?

I mean, again, there has been some level of pressure on outpatient both diagnostic and surgeries in every one of our markets. Again, market by market, it varies. Some markets in which we still do a fairly robust number of outpatient surgical business and outpatient diagnostic business. Other markets where frankly we do very little of it. If you look at our investment in the past couple of years, capital investment, and as we think about the next couple of years, I think it's generally to expand capacity and add beds and add private rooms especially, in markets where we've seen growth, it's to add to our emergency room capacity, which has remains a very significant source of our patients. It's dedicated towards adding critical care beds, intensive care and cardiac care beds. You know, to adding surgical capacity, particularly for the more intensive surgeries in areas like orthopedics and cardiology. I think that the niche that acute care hospitals have always occupied has really just been a little bit more focused in the last couple of years. That's tended to be where we're dedicating our capital dollars.

One last question. Medicaid risk, would you care to quantify what you think's going to happen over the next year in light of both what's happening in the Bush budget but also in terms of Company-specific risks with South Carolina and Texas?

Um, I think when you talk about South Carolina and Texas, you're specifically talking about Medicaid disproportionate share. It's always been difficult for us to predict that. I think that we're bit more -- our risk is somewhat diversified in Texas in that all of our facilities receive Medicaid disproportionate share in Texas. So that we have found that, historically as the state has tinkered with the disproportionate share formulas, we are somewhat hedged in that we'll go up in one facility and down in another.

South Carolina, we have only one facility that receives disproportionate share, it's Aiken, and therefore I think we're always at risk in South Carolina that the state will change the disproportionate share formula in a way that could at some point potentially exclude, Aiken. We don't think that's likely. We think that the formula for this next coming fiscal year has been agreed upon, and Aiken should receive something fairly close to what it has received this past year. In that sense, we don't necessarily view disproportionate share as any terribly riskier than in the past.

I think generally, as far Medicaid rates go, we've gotten very few Medicaid increases on average in the last couple of years. We've reported that essentially we've got no Medicaid increases on average in the last couple of years, and frankly, don't expect any increases over the next couple of years as states continue to focus on their medicaid's budgets as a way of reducing state deficits or just reducing state spending overall. So I don't think Medicaid isn't going to be a source of pricing improvement anytime soon.

What are your annualized Medicaid disproportionate share payments? Store number?

It's disclosed in the 10-K, Ken.

Okay.

I think we're talking about in the low 30s. That number is a publicly available number in the 10-K.

Thank you so much.

Your next question comes from Joseph Chiarelli with Oppenheimer Solutions.

Thank you. I'm just wondering, Allen and Steve, if you could talk a little bit again about Las Vegas. I know in the fall of last year, you had announced you would be building another facility. I was wondering what the status is giving the cash influx into the Company. There has been some talk that Sierra is making a lot of noise, saying that the rates they're paying are too high. Wondering if you could comment on that. Just separately, if you can give us an update on where George Washington is, just how it's going and if it's meeting your expectations, and what you see for that in the future. Thanks. Are you there?

To to respond to the Las Vegas questions first, as far as building, we've talked about -- we've said that we own a piece of land in the northwest part of Las Vegas in a the midst of probably the fastest growing part of Las Vegas. We have plans to build a new hospital there. We continue to do the architectural and design work to complete that. And expect that we would probably build that hospital to open sometime in the next 18 to 24 months or so. I don't think -- to your question, that our cash inflow is really influenced that decision or anything like that. We want to build in Las Vegas when it's appropriate to take advantage of the growth in the particular community that we're located, et cetera. And, again, we view the building and opening of a new hospital as a long-term decision. And one that's based on local Demographics, as opposed to the availability of cash.

As far as Sierra goes, as everybody knows, Sierra has a very significant market position in the Las Vegas market. They certainly have been helped from a negotiating perspective by the additional capacity that's been added to the market. But in general, I think the market remains as I mentioned before, relatively underbeded. There are many periods of the year until which all of the hospitals are running at fairly high capacity levels that ambulances often have to bypass four or five hospitals to get an emergency room that's not on divert status in the busy months of the year. So, I think that's the one advantage that as a provider, we have, as well as the fact that we have in excess of a 30% market share in that market. You know, as I mentioned before, we're negotiating a new contract with Sierra. I suspect it will be a tough negotiation. Our view is that the outcome will be fair and not one that will be disappointing. Frankly for either party.

Steve, on the new hospital. When you open it, would that be about the size of Summerland when it was open or smaller or bigger?

I think that probably the Summerland and Spring Valley models have been similar and would be likely the same model we would use the northwest part of the city. That is, we would probably open something like 150 beds. But build a hospital with a chassis to accommodate another 50 or so when that becomes appropriate. That's how Summerland was built. That's how Spring Valley was built. And I don't see that we would do it any differently.

One last question about Las Vegas. Valley hospital itself. Are there any projects for renovations that are either in process or in the works currently or do you see you're doing any additional projects in the immediate future?

Valley, which was our original hospital, we've owned in Las Vegas for 25 years, remains a very significant contributor to us. It's obviously the oldest facility. So it requires lots of new capital. We did major renovation over our emergency room facilities in Las Vegas in 2004, that's been completed. We've got plans underway to do a major renovation of our surgical capacity in that facility. We remain very committed to the Valley facility and continue to reinvest in it and the physical plant gets some what older.

When would the surgical capacity renovation start and about how long would that take?

It's probably 9 or 12 month project. Likely to get started in the next quarter or two.

Okay. Thanks. Just about George Washington.

For those of you who followed the Company for awhile, they know the George Washington history. We bought the George Washington hospital from the university back in 1997. We paid very little for it. The real consideration was a commitment on our part to build a replacement facility, which we did. We opened that in the summer of 2002. In sort of the run up to the opening of GW in 2002 and then in 2003, we saw a tremendous growth in our volumes and our earnings in that facility. And we've seen that sort of level out in 2004 and 2005.

And one of the things that distinguishes Washington, D.C. from some of the other markets in which we operate like Las Vegas and McAllen, is that it's not a terribly fast growing market. The real way that we grow in the market, by taking market share from the other providers. We did a lot of that in 2002 and 2003.

I think we're poised to do that in certain service lines as we continue to recruit doctors, the hospital continues to have a good reputation, et cetera. We're very pleased with the performance of GW,we've earned a very nice return on our investment in the new hospital there. Again, I think we view it as a real foundation of the Company on a go-forward basis for many years to come.

Any need there to expand on that facility in immediate future?

I mean the physical facility is obviously much newer than it is in most of our marks. So, I don't think there's any kind of broad need to, you know, renovate or expand. We're expanding as appropriate. We're doing a very large outpatient surgery project there right now. That's that's a project, that's a market that, getting back to Ken's question before, that's a market where actually, we don't face as as much outpatient competition as we do in other markets. And we feel like, by expanding our outpatient surgical capacity, we can actually increase our market share in that very important service line. So we have a major outpatient project underway at GW.

I think most of the other capital spending, Joe, tends to be on a very directed capital equipment standpoint. Obviously, as it's a teaching hospital, you have a lot of sort of cutting edge technology and procedures that are taking place there. We have a lot of requests for cutting edge surgical. We have our only robotic surgical system at GW. We have a lot of cutting edge radiology with equipment there, and I think we'll always continue to invest on the high end at the facility.

One final question, I promise. When would that outpatient surgical project be completed?

I believe, Joe, it's scheduled to be completed eater at the end of this year or very early in 2006.

Okay. Thank you.

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

I joined late. Sorry if these have been asked. The gross interest expense for the quarter and the capital expenditure out outlook for the year?

Our capital spending for the year we projected, you know, our guidance was in the 275-ish range. We haven't departed from that.

And the gross interest expense for the quarter?

Bonnie, can you cut that call off?

Your next question comes from Ken Weakley of UBS.

Thanks. I'm sorry I just wanted to get back in cue and ask a couple of more questions. What are the ideas regarding the growth of the uninsured or retirement relative to the forefather hospital has been that the traditional safety net facilities, perhaps either consolidated or altered their strategies or been in less of a position to accepted a missions. Can you comment just on maybe some of your key markets, if there is any merit to that thesis or not?

Well, Ken, for us --

Yeah.

Part of the UHS strategy that some of our hospitals in their markets are in fact the safety net hospitals. Clearly McAllen and Aiken and Manatee and northwest Texas all are the safety hospitals in their market. And then so I think those hospitals have borne an -- a disproportionate share of the uninsured growth that's taken place over the last couple of years, so there's no question about that. I think as well, we have seen in some markets like, we certainly have talked about this previously in markets like East New Orleans, I think where we have been fairly effective over the years in redirecting some of that uninsured business to the safety net hospitals, to the charity care hospitals in New Orleans, those hospitals have also gotten in some cases more aggressive about controlling that business and collecting cash up front, et cetera and so we've seen -- to some degree in those markets, some of that business return to us that have been directed away in previous years

Okay. I guess the last question if you could. I did go to your 10-K. And it looks like Medicaid disproportionate share for first quarter of last year, was $10 million, do you know what it was in in quarter?

Yeah, we'll have to get back to you on that, Ken. I don't have that number in front of me.

Okay. Thank you.

At this time, there are no further questions. Mr. Filton, are there any closing remarks?

I want to respond for a question that Darren had asked before. He asked if the French numbers were in any way different than the otherwise acute care numbers. The only thing I would add Darren, we have, as we've disclosed before, virtually no bad debt expense in France. And our supply expense tends to be somewhat higher than in the States. Again, our French revenues are only 6 or 7% of our total revenue, so I'm not sure if the numbers skew very much. I did think of that after you asked the question.

Other than that, no we do not have any further comments. We look forward to talking to everyone next quarter. We thank you for your time.

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