環球健康 (UHS) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Universal Health fourth-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Mr. Steve Filton, you may begin your conference.

Good morning. I'm Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services' results for the full year and fourth quarter ended December 31, 2005.

As discussed in our press release last night, the Company recorded income from continuing operations per diluted share of $1.91 for the year and $0.17 for the quarter. After adjusting various operating and recovery expenses at our acute facilities in New Orleans, resulting from damages sustained from Hurricane Katrina, the gain on the sale of land, and certain other nonrecurring items, primarily being hurricane-related tax credits, our adjusted income from continuing operations per diluted share for the quarter ended December 31, 2005, were $0.45.

During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on pages 18 and 19 of our Form 10-Q for the quarterly period ended September 30, 2005.

We would like to highlight just a couple developments and business trends before opening the call up to questions. UHS recorded revenue growth of approximately 8% during the full year and 6% during the fourth quarter ended December 31, 2005, as compared to the comparable prior-year periods. This revenue growth was achieved despite the closure of our acute care hospitals in New Orleans for the last four months of 2005. Excluding these hospitals in New Orleans, admissions to our acute care hospitals owned for more than a year increased 2.7% for the full year and 3.4% in the fourth quarter.

Offsetting the relatively strong admissions in the fourth quarter were the loss of revenues and income from our acute facilities in New Orleans, which remain closed; increased pressure on salaries in certain markets; the diluted effect of integrating the Keystone and Brown Schools acquisitions; and the continued high levels of uninsured patients. Admissions growth remained particularly strong in the Las Vegas market, but operating income declined from levels earlier in the year, due to increased levels of uninsured patients.

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. The operating margins for our acute care hospitals owned during both periods were 13.7% for the full year of 2005, as compared to 15.1% during 2004; and 12.1% for the fourth quarter of 2005 as compared to 12.9% during the prior year's fourth quarter.

The operating margin decline for the full year was primarily caused by the continued increased competition in the McAllen-Edinburg market and the increased level of uninsured patients. Our margins in the fourth quarter were further negatively impacted by salary and wage pressures previously discussed.

The provision for doubtful accounts at our acute care facilities owned during both periods increased to 11.4% in the fourth quarter of 2005, as compared to 9.1% in the fourth quarter of 2004.

On a sequential basis, we did find that the level of uninsured stabilized some in the fourth quarter of 2005, as compared to the third quarter of 2005.

Our acute care hospitals recorded a 5.3% increase in revenue per adjusted patient day for the full year, and a 6.4% increase per adjusted patient day in the fourth quarter.

Results in the McAllen-Edinburg market were slightly behind last year's fourth quarter. This is the last quarter to anniversary the new capacity opened by the physician hospital in the market. It is possible that the physician hospital may add more capacity late in 2006 with the potential to further erode our business. Our new pediatric facility in the McAllen-Edinburg market will open in another week; and our behavioral hospital is scheduled to open in April.

Admissions to our behavioral health hospitals owned for more than a year increased 5.9% for all of 2005 and 7.4% in the fourth quarter. Operating margins at our behavioral hospitals owned during both periods increased during the 2005 fourth quarter to 22.4%, from 19.0% in the 2004 fourth quarter. In total, however, our behavioral margins were negatively impacted in the quarter by the effect of the new acquisitions, which were slightly dilutive as we began the process of integrating the Keystone facilities and reopening the acquired Brown School properties. Our behavioral health facilities experienced a 4.3% increase in revenue per adjusted patient day for the full year and an increase of 6.9% in the fourth quarter.

Cash flow from operations for the fourth quarter of 2005 was approximately $69 million, as compared to $79 million during the fourth quarter of 2004. Cash flow from operations for the year ended December 31, 2005, was approximately $425 million, as compared to $393 million during the 12 months of 2004.

Reducing our cash flow from operating activities during 2005 was approximately $31 million of payments made in connection with building remediation costs and other expenses incurred in connection with Hurricane Katrina. Favorably impacting our cash provided by operating activities during 2005 was a postponement of our 2005 estimated federal income tax payments, which were originally scheduled to be made on September 15 and December 15 of 2005. Pursuant to Internal Revenue Code section 7508A, the Internal Revenue Service has postponed payment deadlines for companies that owned Katrina-affected businesses in the most severely-damaged parishes of Louisiana. Since our acute care facilities in Louisiana were severely damaged by and closed as a result of Hurricane Katrina, we qualify for the income tax payment postponement until August of 2006.

At year-end our ratio of debt, net of cash, to total capitalization was 35%; and the ratio of debt to EBITDA was 1.43. Alan will now discuss some of our recent activities and our outlook.

Thank you, Steve. Good morning, everyone. As you know, our Chalmette and Methodist facilities have been closed since Hurricane Katrina, and no revenues are reflected in the accompanying financial statements for the posthurricane period. These hurricane losses have been recorded net of what we believe to be the minimum level of expected commercial insurance proceeds.

We should note that our ultimate insurance claims for hurricane-related losses will far exceed the recoveries we have recorded and received to date, and we hope to collect substantially more in insurance proceeds than we have currently recorded.

Our River Oaks behavioral facility in New Orleans has reopened and has already regained about three-quarters of its prehurricane volumes.

During the fourth quarter, we repurchased approximately 500,000 of our own shares, and 3.6 million shares remain under our current authorization.

UHS spent approximately $70 million on capital expenditures in the fourth quarter. The 108-bed replacement for our Fort Duncan facility in Eagle Pass, Texas, will open next month. A major renovation to our Manatee facility in Florida will be completed late this year. Our projects in Aiken, South Carolina, which have added critical care beds and which expanded our emergency room capacity, opened in 2005.

We have multiple projects in-process to add capacity to our busiest behavioral facilities. Those facilities have operated at a very efficient 83% available occupancy rate in 2005. In addition, we broke ground on our fifth hospital in Las Vegas. This facility is scheduled to open with 170 beds in approximately 15 to 18 months, in the northwestern part of the city.

We expect to earn $2.60, $2.65 per diluted share from continuing operations for the full year of 2006. This guidance presumes that volumes grow modestly and the number of uninsured remains at 2005 levels. We implemented a formal policy-wide uninsured discount policy on January 1, which will have the effect of lowering both bad debts and net revenues, but should have no impact on operating income.

The 2006 guidance includes approximately $0.10 per diluted share for stock option expense. It assumes no revenue from our acute care facilities in New Orleans. While we believe that our ultimate insurance claims for hurricane-related losses will exceed the recoveries we have received to date, the uncertainty regarding collections and timing have led us to exclude any additional recoveries from our 2006 guidance. Additional hurricane-related expenses have also been excluded from our guidance.

The 2006 guidance also does not include the potential favorable impact of Texas Medicaid supplemental reimbursements that we may be entitled to during 2006, should the appropriate federal and state approvals be obtained. There can be no assurance these additional reimbursements will be approved. However, if approved, we may be entitled to additional reimbursements ranging from $5 million to as much as $21 million covering the period of June 1, 2005, through August 31, 2006. We would be happy to respond to questions at this point.

(OPERATOR INSTRUCTIONS) Adam Feinstein with Lehman Brothers.

I just wanted to ask a couple of questions. Just maybe just to start, Steve, I just wanted to get the charity care figure. Do you have a charity care figure for the quarter?

It was $85 million for the quarter.

Okay, great. Then just about the McAllen, Texas, market, could you give us a quick update there? Clearly there's been an ongoing issue there. But just was the quarter consistent with what you guys were thinking? Did things get a little bit better relative to what you were thinking, a little bit worse? Just want to get some updated thoughts in terms of what is going on specifically in the McAllen, Texas, market.

Just as you answered that last year, in the first quarter you saw a big improvement. So I was just curious as when we think about modeling in terms of the seasonality there also. Thank you.

Last year was unusually strong. We will see what happens this first quarter. But overall, I would say that we are optimistic that we're making progress. They are still a strong competitor. But as Steve mentioned we are opening a Children's Hospital next week. We have already had the dedication at the end of last week. We are very excited about it. The market is very excited about it.

Our behavioral facility is out of the ground, looks beautiful. That is going to open shortly. We're making a lot of progress, and we are generally optimistic about how we are going to be doing in that market, although we have, as you are well aware, we have had a very strong competitor.

Yes, okay. In terms of just the volumes, if we think about your overall volumes, excluding the McAllen market, could you just give us a ballpark figure, Steve? Would you have a number handy?

I'm sorry, Adam; are you talking about for 2005?

I was just talking about for the fourth quarter. I was just trying to get a sense in terms of just what the volume impact from McAllen was.

I think, clearly, McAllen's admissions were off in the fourth quarter, probably around 10% or so. So obviously, the remaining division would look stronger, Adam, exclusive of the McAllen numbers.

Okay. Then just in terms of when you guys had the call last month you talked about labor costs in another quarter, and it came in a little higher than anticipated. Any updated thoughts there in terms of some of the drivers? Just wanted to see whether you anticipate that trend will continue here in the first quarter; or if that was just a blip in the fourth quarter.

I think, as we said in the prelim call, Adam, we viewed some of the pressure on wage rates in the fourth quarter to really sort of be an acceleration of wage rate increases that we anticipated in 2006 and have embedded in our guidance.

Those pressures we think occurred for a variety of reasons, including spikes in volume in certain markets, particularly out West, and union pressures in some of those markets, et cetera. But as I said, for the most part, we viewed those increases as really accelerations of expected increases, as opposed to something that was sort of clearly a surprise and out of the blue.

Okay, thank you very much.

Darren Lehrich with Deutsche Bank.

Just a couple things here. I wanted to get, Steve, some additional commentary on the discount policy. As you think about the impact of 2006, and I realize what you have said in terms of it will impact operating income, but just a little bit more flavor for the impact on unit revenues and bad debt. Where do you think that might settle out?

Sure. Again, the policy is in its simplest form is to offer a 20% discount to patients who come into our hospitals with no insurance. The effect of that, as I mentioned in our prepared remarks, it will be to reduce bad debt and to reduce net revenue by a like amount. We don't believe it will have any impact on the net line.

Our guess, which I think we talked a little bit about in the prelim call, Darren, as well, was that it would probably reduce bad debt by about 200 basis points, at a guess in advance. Obviously it would reduce net revenue by a like amount.

Okay, very good. Then just with regard to CapEx, can you just fresh us on what the plan is for '06?

Alan, I know you went through a number of major expansion projects. Can you just give us any update in Riverside County and if there is any other kind of preliminary work being done to add any new hospitals elsewhere in the portfolio?

Darren, the capital -- our plan for capital spend in 2006 is in the neighborhood of 275 to $300 million. That includes some large projects, which I think all of which we have discussed before, the biggest of which is the new -- the fifth hospital in Northwest Las Vegas. It includes a major renovation of our Manatee hospital, which Alan mentioned. It includes the beginning of a construction of a hospital in Palmdale, California, which essentially is a replacement for our facility in Lancaster, California.

You asked about the Riverside County market. We have a project to add 44 beds to our Inland Valley campus, which we would hope would be completed later this year.

They know about the new hospital.

We also have process to get approval to build a new hospital in Temecula, also in Riverside County, California. That process sort of remains in the local approval phase. We've gotten sort of tentative approval; but there have been some appeals et cetera that we have to work through.

So that new hospital -- that is what I was referring to -- that would be perhaps an '08 kind of project?

That is probably the best guess, Darren.

Okay. Then just one last thing here. Your total corporate overhead costs in 2005, just what to get a sense for what that was.

I don't know that number exactly, Darren. My guess is it is in that $30 million range. I think you can get a decent sense of that by looking at our segment information in the 10-Q and 10-K.

Great. Okay, thanks very much.

John Ransom with Raymond Brothers.

Raymond James. I don't know Raymond, actually. In your 2006 guidance, what are you thinking in terms of pre-corporate EBITDAR margins in your behavioral and your acute division?

I think, John, that obviously our guidance presumes relatively flat earnings in '06 compared to '05, and as a consequence relatively flat margins in both of our divisions as we sort of work our way through another year of continued relatively high levels of uninsured. And on the behavioral side we work our way through some of the integration of the new behavioral facilities, particularly like the Brown Schools et cetera, which will be somewhat dilutive in the year.

What would you expect the dilution to be from the Brown Schools deal in the first half of the year?

Again, I don't have those budgets right in front of me, John. They're not huge numbers, but they are probably a couple of pennies of dilution.

Right. I assume you had a monster 1Q last year, obviously, with the flu. But would you expect the back half of the year, then, to be growth? There would be some growth in the back half of the year from an earnings standpoint, once you get past your tough first quarter?

Well, I think, as Alan mentioned sort of in response to a previous question, the tough comparison for us in the first quarter of this year is we had a very, very strong performance in McAllen last year in the first quarter. While volumes are seasonably up in the first quarter, not at the levels that we saw last year.

Also last year, if you back and look, there was sort of the last quarter of a relatively lower uninsured level and lower bad debts. Obviously we don't expect that to repeat in the first quarter this year.

So I think you are right, John. The first quarter will certainly be a challenge from a comparison perspective. Then I think the comparison will get easier as the year goes on, where we are expecting at least that the bad debt/charity care levels will flatten out compared to last year and we will have easier comparisons in the McAllen market.

Okay, thanks a lot.

Kemp Dolliver with Cowen & Company.

A couple questions. You have mentioned the pending openings of the behavioral and pediatric hospitals in McAllen for some time. Could you help me understand what this will do for you strategically in that market? Does it help you lock up certain patient flows that have been going to the competing hospital? Or how exactly does this play out for you?

We talked a little bit about this before, Kemp. But I think one of the -- we have done, as Alan mentioned, many, many things to try and respond to and more effectively compete with the physician hospital and the other competitors in the market.

One of the things we tried to do with both the pediatric hospital and behavioral facility is really capitalize on franchises that for the most part we own in the market. We have the vast majority of pediatric patients in the market already. We also have almost exclusively all of the behavioral patients in the market. We do lose a number of patients from both of those specialties who leave the market for more specialized treatment in Houston, and Corpus Christi, and San Antonio, et cetera.

By building a dedicated children's facility, and by building a replacement behavioral facility that is about twice the size of what we currently operate, it allows us to offer a wider breadth of services, more specialties, et cetera, that we believe will keep a number of patients home in the McAllen market who previously were out-migrating to these other larger cities. That is really the strategy behind those two particular projects.

We also have an affiliation with Driscoll Children's, which is a very high-quality big name in that part of the country. That will really establish our children's hospital as a pre-eminent hospital in the whole area. That obviously impacts how people view McAllen overall.

The behavioral hospital not only, as Steve mentioned, is the size of it; but this is brand new. The other facilities were very old. We did very well in a very inadequate physical planet. So we are excited about both of those and the impact it has on the overall viewing of the McAllen complex.

Okay, that makes a lot of sense. The second question is -- it relates to, I guess, bad debt in '06. How much is your charge master going up this year?

That is a decision that is made locally at each individual hospital. Again I don't have all that data with me. My guess is the average gross price increase for 2006 is probably 5% or 6%.

Okay, and that would be pretty much in line with what you're getting in your managed care contracts?

Yes, I think we expect in that 6%, 6.5% range for managed care.

Okay, thanks a lot.

A.J. Rice with Merrill Lynch.

Just a couple quick questions if I could ask them. On the bad debt, maybe to follow up, I think when you guys did your Q4 preview, you said that you were thinking that Q4 bad debts would be similar to Q3. You didn't really define that. But did Q4 end up a little bit better than you thought? And if so, what accounted for that?

I think that the comment that we made, and repeated actually in the prepared remarks today, was that we saw sort of a stabilization in the level of uninsureds. That is certainly true.

I think what we were referring to, and it was hard when people didn't have numbers in front of them, was our total bad debt and charity care sequentially was relatively stable from the third quarter to the fourth quarter.

Obviously, when you look at the face of the income statement, you can see that bad debt was actually down in the quarter. But I gave the charity care number before; that was actually up sequentially. In total they were relatively stable between the two quarters, and that was really the message we tried to deliver.

Okay, I see. On the bad debt, do you have the breakdown between the acute and the psych business?

Well, I know I said in the prepared remarks that the acute bad debt percentage was 11.4 in the quarter; and I will look for the behavioral percentage while I answer these other questions.

All right. Can you give us a sense about when you think you will hear on the Texas Medicaid?

The only change, I guess, from our remarks a month ago was that we were expecting -- and I think CMS was sort of obligated under their own rules -- to respond to the various Texas municipalities in kind of the mid-March time frame.

We now understand that CMS has asked Texas for an extension to their response; and they have been granted that by Texas. So whereas we were expecting perhaps to hear something as early as a couple of weeks from now, that response now may be weeks or months away. We really don't have as a good a sense as when we might actually even hear.

Okay. Then to the extent that you found that you get some of this money, and it relates to care that started to be given back in June of last year, how will record that when it comes in?

We will record it all as current-year revenues, although I think, as been our practice, we will separate out or define what relates to the current period and what relates to prior periods.

Okay. Then maybe just lastly to go back to the seasonality question a couple have tried to get at before. Obviously last year the swings in McAllen, the New Orleans impact, distorted what's your traditional seasonal pattern on earnings, as I know you do tend to have quite a bit of seasonality.

Can you sort of tell us, in a traditional year, if there is such a thing, how the earnings tend to flow out quarter-to-quarter, percentage wise, if you have that? I think I have heard you talk about that before.

Then are there other factors? I know we've talked about the way the Brown Schools acquisition starts to contribute later in the year. Is there anything else that you think we should know in trying to think about seasonality this year versus just a traditional pattern?

Sure. First let me just go back and answer your previous question. I think our bad debt percentage for the behavioral division in the fourth quarter was 2.4%.

As far as your seasonality question, again, I think over the last couple of years we have seen sort of greater seasonality than we have even seen historically. Certainly last year we saw, again as we have talked about at some length, an extremely strong first quarter; and then really after that kind of a decline quarter-to-quarter as the year went on.

It is a little hard to guesstimate, because so much is dependent on what happens to levels of uninsured, what happens in the McAllen market, et cetera. But I think our expectation is that -- and this is sort of, I think, what we were talking with John Ransom about before -- first quarter unlikely to be as strong as it was last year. Then on the back half of the year I think we probably pick up a little bit.

Obviously, our overall earnings guidance is relatively consistent with last year. So a little bit is just trade-offs among the quarters. So not quite as strong in the first, getting better as the year goes on.

We're watching -- and we answered a few questions about this in our prelim call -- we would watch to see if there is any additional capacity added by the physician hospital in McAllen late in the year, although at this point, that would probably be certainly no sooner than a fourth-quarter impact and maybe not at all.

Okay, all right. Thanks a lot.

Bill Bonello with Wachovia.

Yes, a couple follow-up questions, first of all, just going back to the Keystone and Brown Schools acquisition. I just want to clarify that I know you talked about the dilution from the Brown Schools, but on a combined basis do you still expect that acquisition to be net accretive? Or are those acquisitions to be net accretive in 2006?

Yes, and they're two separate acquisitions. The Brown Schools, if you recall, were four facilities that we acquired out of bankruptcy, three of which were closed, in Idaho. We have reopened all those facilities; but have anticipated that they will go through a startup process and will be largely dilutive for the first 12 months. They open late in 2005.

Keystone, we have said publicly, we expect to be accretive in 2006. Even though they got off to a slow start in the fourth quarter of '05, we still believe that the Keystone acquisition will be modestly accretive for us in 2006.

Okay. On that you had talked about, on the prior guidance call, some issues that you had had there in terms of collections and some negative clinical events et cetera, that you thought would be able to reverse pretty quickly. Is that still your thinking?

Yes. Obviously we only have about one month of actual results under our belt here, Bill. But we are encouraged by the performance of the Keystone facilities early in '06. Like I said, we continue to be relatively comfortable with our initial sense of their accretive impact in the full-year '06.

Right, okay. Then on the insurance proceeds, has there been any change in how much insurance proceeds you have collected or recorded?

No. We collected, I think, maybe $75 million of insurance proceeds in the fourth quarter. We may have collected another couple of million subsequent to that. I think the only change -- we talked about this a little bit, I think, in our previous call -- is we are literally days away from filing formal claims with our insurance carrier.

We will file those claims. We will certainly then ask for additional recoveries. But we will have to wait and see what the -- how the carrier responds to that.

Okay, that's great. Thank you.

Gary Taylor with Banc of America.

Steve, on a couple of the questions, I just wondered if you had the year-over-year numbers. If you don't, I will come back to you. But on the acute care bad debt, 11.4 this quarter; do you have the 4Q '04 available?

I think -- I actually thought that was in our prepared remarks -- I think it was 9.1. But go ahead and ask your other questions and we will look for it.

I was going to ask charity as well. I got the 85, but maybe I missed the prior year.

Okay, we will take a look. Was that it, Gary?

And then I don't know if you have talked about self-paid percent of admissions on the acute care side. I was interested in those numbers in the fourth quarter, and then a year ago as well. I don't think you have given those numbers on the call.

No. Well, first of all, let me go back. The comparable number to the $85 million of charity care this year's fourth quarter was $83 million in last year's fourth quarter.

Again, I think that the acute percentage of bad debt was 9.1 last year compared to 11.4.

I don't have those self-pay numbers in front of me. I can sort of give the directional comments that I have given previously; which is that clearly our self-pay admissions were as a percentage a great deal higher in the fourth quarter of this year versus last year. But sequentially, from the third quarter to the fourth quarter, we found them to be only up slightly.

Okay. Then one other kind of conceptual question on the acute care side. I know Vegas is certainly doing better; you can see that in the minority interest numbers, at least year-over-year. Everyone is very focused and you've given a lot of disclosure about McAllen. But really, ex those two markets, your other acute markets really don't appear to be growing the EBITDA on a year-over-year basis, if at all, as far as I can calculate.

So, could you talk about just in general, in your other acute care markets, are you being plagued by just some of the same industry issues in terms of patient mix, I guess primarily? Is that the reason why the rest of the acute care operations outside of those two markets isn't really growing so much?

Yes, I think, obviously our admissions have been generally strong. I think even if you ex out McAllen and Las Vegas our admissions are probably stronger than most of our peers.

As you point out, clearly the biggest difference after that between this year and last year is the levels of uninsured, as reflected in either bad debt or charity care. Those pressures have been felt pretty uniformly throughout portfolio. I think that is probably without a doubt the single biggest reason that we haven't seen the sort of growth that we would have otherwise expected in most of our other acute care markets.

Okay. My last question, and I appreciate the time, is -- a year ago on your fourth quarter '04 call, you talked a little bit about seeing a commercial patient mix towards lower-paying commercial contracts, particularly in Texas. I think you thought you had seen enough of it that it appeared to be a new trend.

I don't think we have talked a lot about it or you've talked a lot about it in '05. So I just wanted an update in terms of what you are seeing with respect to that phenomenon.

I think, Gary, as I recall, that question came up because one of our peers had talked about it in a quarterly release and sort of highlighted that issue.

I think what we have said was that was kind of a trend that we had seen now for a couple of years, that in a market where a managed care company would have four or five plans, that there tended to be a trend from the higher-reimbursing to lower-reimbursing plans.

We didn't necessarily view it as a single-quarter phenomenon. It was more of something that we had seen for a while. Frankly, we didn't view it as sort of a remarkable sort of thing. I think that is why we haven't talked about it a great deal since. We were responding to specific questions at the time.

I think, again, it is a trend we have seen. But just generally within the whole managed care phenomena, managed care pricing remains relatively strong; and even though that trend exists, I think we're still comfortable that managed care pricing -- as somebody had asked earlier in the call -- will still hang in there in that 6%, 6.5% range in 2006.

Okay, thank you.

Margot Murtaugh with Snyder Capital.

Can you quantify what kind of increasing capacity and new beds you're having this year and next year? And then how much growth will you get from new capacity?

Well, there's two different, I think, questions. I don't know that there is a lot of new capacity coming on in the acute care division in 2006. The Eagle Pass or Fort Duncan beds are generally replacement beds. The Vegas beds will not come on till '07. The Palmdale beds will not come on till '07. Even the Riverside County beds at Inland Valley won't come on till late in '06.

So I [know] there's a lot of new capacity, Margot, in the acute care division. In the behavioral division, there is probably between 4 and 500 beds of new capacity that come on during -- scheduled to come on just from capacity expansion in 2006.

The Brown Schools, can you separate out the operating income of Keystone? I guess there's not much for the Brown Schools. If you can talk about what you can get that operating income up to when you fill the schools. Can you give us a little -- what you are looking for in the next couple years from this acquisition in earnings or operating income or however you want to express it?

When we did the Keystone acquisition, and we have talked about it a few times, I think our projections for 2006 are approximately $165 million in revenues and $30 million in EBITDA.

The Brown Schools are a much smaller entity. They had, when they were operating sort of at full capacity before the bankruptcy, like $15 million of revenues. We think we should be able to get back to that level of revenues after about 12 months of building it up. We should get to sort of a normal operating margin at that point. Obviously, those numbers are not terribly needle-moving, if you will, within the Company.

Okay, great. Just what is depreciation and amortization for 2006? What are you estimating?

I will see if I can find that while -- if you have any other questions, Margot, or answer the next question. I guess it is in the neighborhood of 165 to $170 million.

Okay. The beds that are coming on in 2007 for the acute care, how many beds are coming on?

Again, I don't have a precise number; but I don't think it's a lot.

Not in 2000 but in 2007.

2007, I'm sorry. We talked about 170 beds at the Vegas project; probably another 170 beds in Palmdale. Obviously they don't come until probably the middle and latter half of '07. Those are probably the two big projects in 2007 adding beds.

Now in terms of acquisitions, what are you thinking about these days? Are there any interesting acquisitions out there? You obviously have capacity. What is your thought on acquisitions at this point?

We are always looking for interesting, compelling, reasonably-priced acquisitions in both the acute and psych divisions. I think that the recent past is reflective of the fact that I don't there are a great many acute care acquisitions out there; and those that are, for a variety of reasons, fairly expensive.

We have done a few acquisitions in the last couple years. On the psych side obviously we think there are more opportunities, because to some degree there are less bidders and the pricing has just not risen as much as it has on the acute side. We still think there's opportunities for behavioral acquisitions in 2006.

But we don't have any of those embedded in our guidance. We never do. We continue, however, to look for acquisitions in both businesses all the time.

The managed care has had a nice price increase this year. What do you foresee over the next few years?

Well, I think that we are seeing, probably, since for us 2003 or so, a slight deceleration in managed care pricing. We probably reached a peak of 8 or 8.5 in 2003 or so. It's dropped maybe 50 basis points a year since then. It strikes me that that trend probably continues for another couple of years; and beyond that, it's a little hard to predict.

On the insurance, so you will submit the claim, and then you wait back to hear from them. Do you have any sense of timing on that? Then I guess if they don't agree with you, then could there be litigation? Can you give me any sense on scenarios on when you might recover some money?

It's hard to do, Margot, which is why, as I said, we have not recorded anything further. Again, we will submit a fairly significant claim to the insurance company. It's a claim that we have spent a lot of time on and have strong feelings about, in terms of its being supportable et cetera.

So we would hope to get a very large portion of that claim settled with the carrier. We hope that we can do that in the normal course. If not, then obviously we would have to explore other options. But it's really impossible to predict the response of the carrier or the time frame, which again is why we have taken the accounting position we have taken, which essentially is to only record what we have received so far.

Okay, thank you Steve.

Sheryl Skolnick with CRT Capital.

While we're on the subject of the insurance receivable, in the third quarter you had an $81 million asset, which I guess was the receivable. That has not turned into cash yet, has it?

It largely has, Sheryl. We have received, I believe, $77 million in cash on that receivable.

Okay; you have received the $77 million. Then I don't quite understand what happened to be cash between the end of the third quarter and the end of the fourth quarter. It looks like it dropped to about $8 million from 80.

I'm sorry, what cash?

Cash and equivalents at December 31, 2005. It looks like it's about $8 million on your balance sheet; whereas September 30, 2005, it was about $82 million. So since we don't have a cash-flow statement, and the cash flow year-over-year for the quarter was $69 million, can I gather that there were some payments made in the quarter for CapEx or something else that ate into the cash?

It was the Keystone acquisition, Sheryl.

I'm sorry, okay. That makes sense. That makes perfect sense. I was missing something, and it just wasn't making sense on that. Okay, so I got that.

Now, I guess what I am troubled about is a more strategic question and also a statistical question, which is -- you're spending a lot of money in Las Vegas, but there seems to be a significant increase in -- there seems to be a fairly significant increase in the uninsured in Las Vegas.

I guess I'm a little bit troubled that, since the uninsured is a key -- appears to be a key reason for what seems to be significantly lower margins than anyone would like to see from your facilities, I'm sure including yourself, that you don't have those statistics to share with us.

But I'm also troubled that you are now investing more capital in a city where the uninsureds seem to be growing pretty rapidly and eating into what the profits ought to be at those facilities.

So can you help me understand why the market remains attractive to you, number one? Number two, why we don't have an uninsured or a self-paid percentage of admissions number from the Company on the conference call?

Sheryl, I think that Las Vegas has been an attractive market for us for the entire history of the Company. It's been so for basically the same reason. It's an extremely fast-growing market. Our investments in the market have generally yielded over time significantly high rates of return for us.

So even a hospital like Summerli, which we built seven or eight years ago, and certainly has experienced some of the very same uninsured levels that you've talked about, has earned an extremely high rate of return in its lifetime. We expect that Spring Valley will do the same; and we ultimately expect that Centennial Hills will do the same.

High levels of uninsured, first of all, are a price of doing business everywhere in the hospital business in the United States. In Las Vegas, we have seen those rates grow faster than they have grown elsewhere; but they are not necessarily among the highest rates that we have experienced in the Company.

As far as the levels of uninsured, I think we have disclosed the levels of growth of uninsured. I just don't have those absolute numbers. We certainly can provide them in the future.

Okay, that would be helpful. You mentioned that you're going to be -- you were able to defer the taxes due to the special ruling for companies significantly affected by Katrina and the hurricanes. How much will be due and when will you pay it?

We guesstimate that approximately $80 million will be due; and I think I said in my prepared remarks that would be in August of 2006.

So there should be he sufficient cash flows between now and then to cover it, without having to borrow? Because I am just concerned you're starting off the year $8 million in cash. It seems a little thin.

I think if you go back and look at our historical balance sheets, you'll see that we always have very small cash balances. All of our available cash generally goes towards repaying debt.

Okay, all right. Thanks very much.

Glen Santangelo with Credit Suisse.

Steve, I have just got a quick question about the behavioral business. We talked on your call in January kind of about the decline in patient -- or the growth rate in patient days, which seems to be obviously a function of declining length of stay. Can you just comment on what that maybe says about the patient mix in that business?

Because when looking at the same store margins, I am kind of surprised. Because we saw a spike in the revenue per adjusted admission within that behavioral health business; and I'm surprised given the decline in length of stay.

Then looking at the four quarters of last year, you had been averaging about 50 to 100 basis points of same store margin expansion; and then you post 340 basis points in the December quarter. So I'm just trying to reconcile all the moving parts and just trying to make sense of it all. So any comment would be helpful. Thanks.

Okay, you asked a lot of questions, Glen. I'm not sure I will answer them all, but I will try. I think part of the issue, the way you see the large growth in the fourth quarter, is that we did disclose in the fourth quarter of 2004 that we had to reverse approximately $3 million of Pennsylvania [distbro] related to our behavioral facilities. So I think that if you adjust for that, you'll see the margin expansion between this year's fourth quarter and last year's fourth quarter to be sort of more in line with what the normal annual growth has been.

As far as your question about length of stay and how that affects revenue per admission, I am not sure I followed it exactly. But I will say this. I think length of stay in the behavioral division is far less likely to affect revenue per admit -- length of stay changes. Only because virtually all of our reimbursement in the behavioral division is on a per diem basis. So changes in length of stay in and of themselves do not necessarily affect revenue per admission the way they do on the acute side.

Generally, I think we have seen our pricing increase. Now, again, if you are looking at fourth-quarter '05 behavioral pricing to fourth-quarter '04, you've got to factor in that $3 million change, again, which makes the revenue growth per unit look extremely high in the fourth quarter of '05. But if you adjust for that $3 million, I think it looks more like it does for the full year.

I'm not sure if this makes a difference; but just kind of looking at the revenue per adjusted admission in the December quarter, it still looks much higher than September, June, and March of last year as well. Or am I incorrect in that conclusion?

I think it has been growing as the year has gone on. We have gotten decent managed care commercial price increasing on the behavioral side. We feel generally pretty good about both our same store commercial pricing and some opportunities in our acquisitions to do a little bit better on pricing than the facilities were doing under their previous management.

So, no, I think there absolutely has been some improvement, Glen, and we feel pretty good about that.

Okay, thanks for the comments, Steve.

Vivek Khanna with Argus Partners.

I just had a question. Steve, do you have a guidance for operating cash flow for '06?

It is probably about $200 million, after capital spending.

So free cash flow of about 200?

Yes.

Thanks.

Vivek, you just have to keep in mind that tax payment as well.

Right.

Andreas Dirnagl with JPMorgan.

Steve, maybe you can just help me quickly. I'm chasing a penny here, and it specifically seems to be in the Gulf Opportunity Zone Act, employee retention tax credit of $1.5 million. Is there a different share count you're using for that? Because it comes out to a little under $0.03 rather than $0.04 according to my calculations.

I think the issue, I think we say on that line that it is largely that Gulf Zone tax credit; but there are some other items in there that are pretax. Also, Andreas, you sort of have to keep in mind that we have this sort of impact of the fourth-quarter share count not including the converts because they are antidilutive, but the full year including them.

Okay, I will have to get to you off-line for that then. Thanks.

Sir, at this time there are no further questions. Do you have any closing comments?

No, we thank everybody for their time and we look forward to speaking with everybody after the first-quarter results. Thank you.

Thank you for participating in today's Universal Health fourth-quarter 2005 earnings release. You may now disconnect.