環球健康 (UHS) 2006 Q2 法說會逐字稿

Good morning. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services second quarter 2006 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] Thank you. 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 second quarter ended June 30, 2006. As discussed in our press release last night, the Company recorded income from continuing operations per diluted share of $1.05 for the quarter. After adjusting for various hurricane-related insurance recoveries and expenses at our acute care facilities in New Orleans resulting from damages sustained from Hurricane Katrina and for prior period cost report settlements, our adjusted income from continuing operations per diluted share for the quarter ended June 30, 2006 was $0.78 per share. The $0.78 includes approximately $0.02 of stock option expense.

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 risk factors on pages 24 to 30 and the section on forward-looking statements and risk factors on pages 39 and 40 of our Form 10-K for the year ended December 31, 2005.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. We implemented a formal Company-wide uninsured discount policy on January 1, which has had the effect of lowering both bad debts and net revenues by approximately $15 million in the second quarter without any significant impact on net income. The second quarter of 2006 included-- excuse me, the second quarter of 2005 included approximately 64 million of revenues from our acute care facilities in New Orleans, which remain closed as a result of damages sustained during Hurricane Katrina. Exclusive of the impact of the uninsured discount and the loss of the New Orleans facilities, revenues would have increased by 13% over last year's second quarter.

Revenue growth in the acute care division came mainly from admissions growth and an increase in revenue per day at our same-store facilities. Excluding the hospitals in New Orleans, admissions to our hospitals owned for more than a year increased 1.3% for the quarter. Admissions growth was particularly strong in the Las Vegas market. Excluding the impact of the uninsured discount, revenues per adjusted admission rose 8.2% in the quarter and 5.7% during the six months of 2006.

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 for our acute care hospitals owned in both the second quarter of 2006 and 2005 were 13.5% in the quarter just ended compared to 12.9% in the prior year's quarter.

On a combined basis, the total of bad debt, charity care and the uninsured discount as a percentage of revenue increased substantially in this year's second quarter, as compared to the same prior year period. Compared to the latter half of 2005, however, we have begun to see stabilization in the number of uninsured patients coming to our hospitals in the first six months of 2006.

On a same facility basis at our behavioral facilities, admissions increased 1.7% during the second quarter of 2006 over the comparable prior year quarter. Net revenue per adjusted patient day increased by 6.9%, aided by another scheduled increase in Medicare rates effective with the January 1 second year phase-in of the PPS system.

Cash flow from operations for the second quarter of 2006 was approximately 87 million as compared to 96 million during the second quarter of 2005. Reducing our cash flow from operating activities during the quarter was approximately $4 million of payments made in connection with building remediation costs and other expenses incurred in connection with Hurricane Katrina and a $9 million deposit made to our pharmacy supply distributor in connection with our pharmacy services that were brought in-house from an outsource vendor effective July 1, 2006. At June 30, 2006, our ratio of debt, net of cash, to total capitalization was 18% and the ratio of debt to EBITDA was 0.78. Alan will now discuss some of our recent activities and outlook.

Thanks, Steve. As Steve indicated, our Chalmette and Methodist facilities remain closed. During the second quarter, we did receive another 25 million in insurance proceeds, which has been recorded in the current financial statements. Our insurance claim far exceeds the proceeds we have received to date and we continue to believe we are entitled to collect substantially more in proceeds, although the amounts and timing are difficult to predict.

As we expected, the second quarter results in the McAllen Edinburg market were ahead of last year's second quarter, although I point out they remain behind for the six months. The 120-bed Edinburg Children's Hospital opened in March and the 134-bed replacement facility for the South Texas Behavioral Health Center opened late in June.

UHS has spent approximately 69 million on capital expenditures in the second quarter. The 104-bed replacement for our Fort Duncan facility in Eagle Pass, Texas has opened. A major renovation at our Manatee facility in Florida is underway and while it is proving to be somewhat disruptive to our current operations, it will be completed late this year. In Las Vegas, Centennial Hills, our fifth hospital, is scheduled to open with 170 beds in the fall of 2007 in the northwestern part of the city.

Our behavioral facilities have operated very efficiently in the second quarter. The high occupancy rates are suppressing our admissions growth in certain markets, but we have multiple projects in process to add capacity to our busiest behavioral facilities. Park Grove Hospital, for example, in Chicago, recently began construction on a 134-bed replacement facility. Additionally, during the second quarter, we opened a 60-bed residential treatment center in Alaska, a 26-bed addition to our Roxbury facility in Pennsylvania, and a 32-bed residential treatment facility in Oklahoma City. During the third quarter, we plan to open a 24-bed addition to our Anchor facility in Georgia and an 80-bed adolescent addition to our Lakeside facility in Memphis.

On June 23, our call of the convertible debentures was completed. Approximately 90% of the holders exercised their option to convert their debentures into shares. As a result, approximately 5.9 million shares of the Company's B-class common stock were issued. During the second quarter, we repurchased approximately 1.4 million shares and we repurchased an additional 1.8 million shares during July. A new authorization will allow the Company to repurchase the additional shares of Class B common stock, which were issued as a result of the conversion by debenture holders, as well as replenish the Company's previous authorization. We're pleased to answer questions at this time.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Adam Feinstein with Lehman Brothers.

Hi, thank you. Good morning, Alan. Good morning, Steve. Very strong quarter here. Just a few questions. Maybe just to start off, just to talk about your key markets, Las Vegas and McAllen, you mentioned Vegas was very strong. McAllen was up from prior year levels, but it was somewhat weak. Could you just provide more detail, just in terms of volumes, in terms of relative to the Company average for those key markets and even any sort of commentary about margins, and I have a quick follow-up. Thank you.

Sure, Adam. I think that the McAllen market and the results in the McAllen market are playing out as we've expected and as we've talked about in our previous calls. We envision that the year in McAllen will sort of play out with a first quarter that would be well below last year, which was so strong, and then over the balance of the year, the quarters would be improved over, over 2005 and we would finish the year somewhat flat in the market, and I think that's the way it's played out. As we had reported in the first quarter, we were well behind in the McAllen market. The second quarter was slightly ahead, and, again, our expectation is that without dramatic changes, we should be ahead in the third and fourth quarters and finish the year sort of close to a wash.

Our admissions in the market are down slightly compared to last year, but that's probably the most favorable comparison we've had in some time. In the Las Vegas market, as I mentioned, our admissions are up. It's not the only market where our admissions are up, but our admissions continue to be strong in that market. We benefit from some of the newer capacity that we've added over the last few years and obviously, as Alan described, we're adding additional capacity in the fall of next year when we open our fifth hospital. Volumes are strong in Las Vegas. Pricing is strong. I think the underlying dynamics range is relatively solid.

Previously you touched on bad debt in Vegas being higher. So how were the margins in Vegas?

I think that the margins in Vegas remain strong based on mostly the very efficient occupancy rates that our hospitals run in the market. It's a competitive market as you well know from a managed care perspective, so pricing is, is always a challenge. But, again, volume-- the volumes make up for a lot of other pressures we have in the market and the facilities run very, very full.

Okay, and just maybe one big picture question for Alan. Just be curious to get your perspectives, a lot going on in the industry now. Pretty typical industry operating environment. Just what are your thoughts just comparing this to in the past and do you think we see volumes in the uninsured get better over the next year?

Well, there's some cycles involved in the business. I thought you were going to ask me about HCA.

I'm saving that one, yes.

We're hopeful that going forward, that the bad debts have stabilized. I think the uninsured-- the good thing about that, Adam, you've been reading is Massachusetts and now California seem to be addressing the uninsured on a state by state basis. So I think that's very positive and if we don't get anything out of the federal government, we're hopeful that the states will be stepping in and we'll see some good positive things there as well.

Yes. And do you have a point of view in terms of why we haven't seen more pressures from the not-for profits, so we're hearing about all of these issues, yet as I think back to '99, we had a lot of not-for-profits going bankrupt, not seeing that here. So I mean do you have any comments there in terms of why there hasn't been the same pressure?

Yes, they seem to be a little healthier and I know there's a lot of construction going on. So I guess they have, they have gotten a little healthier. I don't think there's been a lot of building over the previous past, so perhaps that's strengthened some of those situations in the nonprofit sector. That's about all I can think of.

Yes, they have had a pretty favorable financing environment, Adam. Obviously interest rates have been very low for the last few years and at least up to recently, I think their endowments have performed well from a stock market perspective, so I think that has allowed them to undertake a lot of the construction issues that Alan referred to. Certainly their operating margins have improved a little bit, but as you know, I mean you're talking about starting from a pretty low base. So an average of 1% margin's going to an average of 2% margins, et cetera.

Interest rates don’t really mean a lot. You know, with the tax [indiscernible].

Okay. So, all right, and, well, very good. Thank you, guys.

Our next question comes from the line of Glen Santangelo with Credit Suisse.

Yes, Steve, just two quick questions in the acute division. I was curious about the big spike we saw this quarter in revenue per adjusted admission. Could you maybe give us some comments around maybe what's driving that trend and then secondarily, we continue to see a drop in supplies expenses in percentage of revenues. Maybe if you can give us some clarification there as well, that would be great.

Sure, Glen. As I mentioned in my prepared remarks, I purposely commented that revenue per admission was up 8% in the quarter and only 6% for the year. We were only up 4% in the first quarter. I think our revenue per admission in the first quarter was among the lowest, if not the lowest, of the companies reporting in the first quarter. I think if you go back and look at 2005, the exact opposite trend was true. We had a very strong revenue trend in the first quarter and weaker in the second. So that's part of the comparison dynamic. Part of the issue last year was we had such a strong first quarter in the McAllen market last year and looked unfavorably in the first quarter this year. Now in the second quarter, we're getting a much more favorable, or much more sort of normalized look at it. I think that as we look around, I mean besides sort of anniversarying the impact of the Physician hospital in the McAllen market and that's helping our pricing look better, we, in a couple of markets like McAllen, have improved our case management, so we're driving down Medicare, Medicaid length of stay, which is helping improve, not necessarily our revenue per admission, but at least revenue per day.

We've started some new programs like an open heart program at our Summerland facility in Las Vegas, which obviously boosts acuity some. Just generally, we're seeing managed care pricing remain fairly solid, so I think all those things contributed are contributing to this sort of a little less than 6% admission growth for the six-month, which is a number that frankly fits more in line with what our expectations are. Four was a little low in the first quarter and 8 was a little high in the second, but a little less than 6 seems just about right to us.

I think when you look at the supply number, quite frankly, that's more a comment on the revenue piece of it than it is on supplies. Obviously with an 8% increase in supplies and our (indiscernible) is just doing a nice job of controlling costs, all the costs look, look nice in the quarter, but I think that's as much a function of the revenue as it is any real initiatives we have in the cost areas.

Steve, just one follow-up question. In the outlook section, you didn't comment at all on guidance. I think you're standing at 2.60 to 2.65. Any comments to make on that?

I don't think we're prepared to make any changes in our guidance today. I mean obviously we're pleased with the first half of the year. I will say that I think that the Street expectations were a little bit lower than our own internal expectations. We looked at the way the Street had allocated the year and thought they were a little light in the first half of the year, a little heavy in the second half, but I think in fairness, the first half of the year has been above our own expectations as well, but as you know, we've, we've had a pretty volatile go of it over the last few quarters and we're content with just trying to see how this plays out, trying to stick to our knitting here and hopefully continue these positive trends, but I don't think we're prepared to make any change to our guidance this morning.

Okay. Thanks for the comments.

Our next question comes from the line of Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everyone. Few things here. I guess just starting out with behavioral, the margins there continue to improve nicely and I guess with the 27% same-store margin, I just have to ask the question, was there anything unusual in there? And then, Steve, if you could just help us think about how much corporate overhead could be directly attributed to the behavioral segment.

Darren, I think that in some respects, the answer to your first question, similar to what I said to Glen on the acute side, I think the improvement in margins on the behavioral side largely driven by strong pricing. We were up over 6% in the quarter, almost 7. I think-- by the way, I think to some degree that's the other side of the coin of the softer admissions. I mean we-- in facilities that are particularly operating close to capacity, I think they are doing a better job of changing the mix of their patients for higher paying patients, a shift towards higher paying patients. If they can't generate more admissions, they can be a little bit more selective in the patients that they do, that they do treat. I think we also saw in some of our hospitals a reduction in denials and things like that. Again, I think a function of when you're operating at full capacity, you can be a little bit more selective on those sorts of things. So no, other than the pricing, I don't see anything necessarily unusual or nonrecurring, et cetera, from a margin perspective on the behavioral side.

Okay, and then corporate overhead, is it – (multiple speakers).

I think-- I don't know that there's a precise science to this. I think when we think about allocating corporate overhead, we generally do it based on a percentage of revenue, et cetera, between the two divisions.

Sure. All right. And then Alan, we would love to just get your thoughts on the schools business and the progress there. I know that's somewhat of a new line of business in the behavioral segment, so just want to see what the experience has been with that. Thanks.

Exactly right. It's a new line of business for us. They have not been doing well. We thought we had purchased them opportunistically, but it's going to take a while for us to really be satisfied with where they are going to ultimately wind up. So it's, it's a process that we're at the beginning of it.

Okay, and then, Steve, I know you mentioned the startup of the pharma operations in-house on July 1. I guess a little bit of help there in understanding the change and any expectation with regard to savings or maybe lack thereof in the third quarter as you integrate that new operation.

Okay. We have-- for a relatively long period of time, frankly as long as I can remember, outsourced our pharmacy operations to third parties, and starting with July 1, as we indicated in the remarks, we have taken that process and function in-house. We've hired all the pharmacists and are buying the drugs directly. What you'll see, I think, in the third quarter that would be most notable is just a geography change, if you will, on the income statement. Previously the amounts that we paid to our third party outsource vendor in pharmacy were all recorded in operating expenses and so what you'll see in the third quarter is a reduction in operating expenses and most notably, an increase in supply expense and to some degree, an increase in salary expense. I don't know that we anticipate a great deal of savings in the latter half of this year, but obviously over the long-term, frankly one of the main drivers for making this change is that we do think that over the long-term, we'll have some savings in this area, but again, given the startup sort of costs that we have in bringing this in-house, I don't know that we expect to see a lot of it in the latter half of this year.

Okay, and then I guess one last thing here for me and I'll jump off. The acute care margins did come back pretty nicely. I know you give a lot of segment data in the 10-Q, but, Steve, are you prepared to maybe give us a sense for consolidated acute care expense items on the call here?

I'm not exactly sure what question you're asking.

So bad debt in the acute business, supply costs in the acute business, salary and benefits directly attributable to your acute care segment.

Yes. I know that off the top of my head, because I looked at it this morning, that bad debt expense after adjusting for the uninsured discount change on a same store basis is 12.3% in the acute business. Again, I think that sort of back, harkening back to the comments I was making to Glen earlier on the call, I think when you see our segment data in the Q, you'll just see that revenue drove much of the improvement, the revenue per admission, and therefore I think all the expense, all the other expense categories look pretty favorable, as you look at them. But I think that's, again, largely a function of that 8% revenue per admission increase.

Sure. Okay. Thanks very much.

Our next question comes from the line of Chris McFadden with Goldman Sachs.

Thank you. I'm wondering if you could just spend a little bit more time talking about the dynamics in the markets that you've obviously identified as being stronger. Clearly you've gotten some nice sequential improvement. Are there either competitive dynamics in those markets that you think can kind of extend into the second half of the year and/or contracting elements on pricing that you're looking at that you think can make things slightly more positive from kind of the run rate we saw here in the quarter? And then secondly, Steve, you sort of alluded to that while you're not changing your stated guidance, you still felt like you were probably running a little bit ahead of your own internal first half forecast, and I was wondering if you could perhaps put some context about how far ahead of your own first half internal forecast you might be standing right near as we kind of get to the midpoint of the year. Thanks.

Okay. Well, it seems to me that you have asked a lot of questions. We could probably spend a significant amount of time discussing them in detail. In terms of the sort of competitive landscape and our markets, I'll make sort of some broad comments. I don't know that the competitive headwinds that we face are terribly different than any of our peers face. As Alan indicated, many of our not-for-profit competitors are aggressively expanding. We've seen certainly an increase in construction and capital spending over the last few years, and we see that in a number of our markets. We certainly see an increased level of physician and kind of what I'll describe as a niche provider competition. Obviously we've talked about it at great length in the McAllen market. I think one of the dynamics that we discussed is that we're seeing some stabilization in the McAllen market as we've now anniversaried clearly a full year of the impact of a physician-owned hospital coming in and opening in the market and taking away a good portion of our paying business. The Las Vegas market, again, I don't know that the competitive dynamics have changed a great deal. It's just a very strong market that continues to have strong demographic growth, populations growing, our market share, which is now the leading market share in the market, continues to sort of increase incrementally, but nicely every quarter, and so we feel good about that.

From a pricing perspective, again, we mentioned that from a managed care perspective, pricing has been good in the first half of the year, has certainly met our expectations, if not exceeded them a little bit. We don't really have any reason to believe that the second half of the year should be dramatically different. Probably the one dynamic that we watch most carefully in the managed care environment is the impact of consolidation. I think when there are some of these major consolidations, I think they do have an impact. We continue to watch carefully the impact, for instance, in our western businesses, on the merger of United and Pacificare.

As far as the guidance question, again, I'll try and sort of restate what I said, Chris. I mean I think the first half of the year is a bit ahead of our own expectations, but I think that it's not ahead enough that would cause us to, to restate our guidance at this point in time, and that's what I was trying to say, is that while we're pleased with the way we did in the first half of the year and while it's a little bit ahead of where we expected it to be, not enough given the clearly volatile operating environment that we've been in over the last couple of years for us to make any changes at this point.

Thank you for that, Steve. And then just a short follow-up. To be clear on the new pharmacy relationship, or your new pharmacy operational approach, will that be neutral, positive, negative, to the second half of 2006? Thanks.

I think that our sense is in the second half of '06 it will be somewhere between neutral and slightly positive over the longer-term, and probably when we sit down and give 2007 guidance we may be willing to speculate that we'll see a little bit more significant impact once we've had half a year under our belt, but I think for the balance of this year, neutral to slightly positive.

Thank you.

Our next question comes from the line of A.J. Rice with Merrill Lynch.

Thanks. It's actually David Supros for A.J. Since the topic's been broached and you guys seem to fit some of the characteristics for potential LBO, can you just address that maybe, looking at it, anything to that extent?

David, I mean I think that all I can say is we're not currently having any conversations about a significant financial transaction. I think that like any Company, we certainly consider everything that comes our way in terms of opportunities to improve shareholder value and I think that it's fair to say, however, that what we've been focused on in the past year or so has been improving the core operations of the business. We've had some challenges. The industry's had some challenges. We feel that the results in the first half of the year are a positive reflection on those efforts that we've made in the past year or so to focus on our specific market competition issues and on the industry headwinds. We are looking for ways to grow our business both, in both business segments, both internally and externally and through acquisition and capacity expansion. So that's been the bulk of our focus and as I said, no current conversations underway, but again, we're always open to every avenue that's out there, both internal, external, financial and strategic, to improve the business for our shareholders.

All right. Leads into my second question, then. Your debt to total cap is as low as it's been in a while. Are you thinking about increasing the leverage to do any of the expansion, maybe on the acquisition side, and if you were to acquire, would it be in the behavioral health, like you've been doing recently, acute care, ambulatory surgery center area?

Well, obviously I mean the main reason that our leverage is at this sort of all time low is because of the conversion of the majority of our debentures at the end of the second quarter, and as we've indicated, Alan indicated in his remarks and we indicated in the press release a couple of weeks ago, our intent is to buy back most of those shares that have been converted. There's that particular issue that's leading to the sort of deleveraged position.

I think just broadly, more broadly in the latter half of your question about how we look at ways to spend our cash over the next few years, I think we've said the way we're likely to spend over the next few years is probably going to be reflective or will reflect the way we've spent over the last couple of years. We continue to look for acquisitions on both sides of the business. We think that, and the environment is such that it has been easier for us to find reasonably priced, appropriate behavioral acquisitions. We continue to believe that there are those out there, but we look for acute care acquisitions as well and on both sides of our business, we've aggressively pursued capacity expansion in areas and in markets where we have either had a history of success where we feel we're going to do well, expanding in Las Vegas, adding beds in many of our behavioral facilities, as Alan mentioned, that are operating at capacity. I think that's the likely way that we'll continue to spend our cash flow over the next few years.

Are there any particular markets that you would consider expanding into-- well, going into now that New Orleans is kind of off the map?

I think that, again, we're always and our development people on both sides of the business are looking for opportunities. It is not always easy to get into new markets and a lot of the expansion that we've done has been sort of broadening our geographic franchises in certain markets, and-- but we look at new markets. We've certainly entered into some new behavioral markets over the last few years. It's not like the way we approach the business, we don't take a map and say this is, this would be a fabulous market to get into because you really have to see what the opportunities are. That's the way we approach our development activity on both sides of the business. We look and see where there are opportunities and then we try and evaluate how we think those opportunities fit our market profile and how much it would cost us to get into business in that market.

All right. That's great. Thank you.

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

Hi, thanks. Couple of questions. First, am I right in estimating that the pretax prior period adjustment is about $6 million and that probably flowed through the acute care segment, Steve?

A little less than 6 and, yes, it would flow through the acute care segment.

Okay, super. Second question is you all mentioned a number of capacity expansions in the behavioral business. What is the timing for these expansions to come online, say, during the balance of this year and then in '07?

I think that, Kemp, we probably have 7 or 800 beds set to come online sort of ratably over the-- annually over the next couple of years. It could be a little bit higher than that, depending on the pace at which we get mostly zoning types of approvals and things, but it's, it doesn't come on exactly ratably. It's based on construction timing and, as I said, kind of local approval timing, but that gives you the kind of an order of magnitude sense of the sort of expansion we think we can accomplish.

Okay, and then finally on the stabilization in uninsured admissions, has there been a particular delta in, say, Texas or Las Vegas or is it a little more broad than that?

Again, as with most sort of phenomena, you see ups and downs within the portfolio. Obviously, I think one of the things that contributed to our uninsured issues last year was in the McAllen market. Not that we were necessarily seeing a significant increase in uninsureds, but because we were losing our better paying business, the percentage of uninsureds looked very unfavorable and, again, that dynamic has sort of stabilized as we've anniversaried the impact of the physician hospital. Other than that, I think we kind of see general stabilization throughout the portfolio, although some markets are up a little bit and some are improved a little bit more. But I think we see the trend, which began kind of in the latter half of last year, sort of continuing. Although we see some volatility quarter to quarter and it's not something that we don't watch carefully and we remain concerned about it. It's a real phenomena obviously.

Okay, and how is the Aiken hospital performing, because you had some issues there sometime back?

Aiken's a market where, again back to Alan's point about the not-for-profits aggressively expanding, that's a market where the not-for-profits in our closest competitive market, which is Augusta, Georgia, have expanded significantly. They are very strong players and we've clearly lost some market share to them and, you're right, Kemp, that we talked about that a couple of years ago. I think since then, we've done some significant expansions of our Aiken facility. Aiken clearly, I know in the second quarter was ahead of last year, so we've seen some payoff from those physical expansions in some of the market steps we've taken there. But Aiken is clearly a facility that at least over the last few years has definitely faced a much higher level of not-for-profit competition.

Okay. Thanks a lot.

Your next question comes from the line of Margot Murtaugh with Snyder Capital.

Could you say more on the competitive situation in McAllen, Texas, whether the physician hospital's going to add capacity, whether you're gaining market share, any more color on that situation?

Margot, I think the situation sort of as we described it is that the physician hospital opened and sort of became fully occupied sometime in the second quarter of last year, so, again, just for no other reason, the comparisons begin to look better. I think they remain busy and full. They also continued to say that they are going to expand the, the latest version of their expansion is that they say they are going to build a women's hospital and enter OB services or get into the OB business, which they have not previously done. We view that as somewhat of a threat, although quite honestly, our competitor hospital in the market does more commercial births than we do, many more commercial births. Our OB business tends to be heavily weighted towards Medicaid, so quite honestly we're not sure that the physician hospital has their eye on taking our Medicaid business as much as they do on taking the commercial business in the market. They remain a threat. Physician competition is a threat throughout our portfolio of facilities, and I believe it will continue to remain that way, but that's-- the earlier comments I made about the McAllen market, in the latter half of this year we certainly don't expect any new capacity and that's why we continue to expect period to period improvement in the McAllen market over the latter half of the year, which is kind of the way that we lay the year out at the beginning.

Right, and on the insurance recovery, any more detail you could provide us on what’s the timing and what you might expect in the next?

As Alan said, the timing and the amounts are difficult to predict. We have said that we have coverage for the losses in that market up to $275 million. We've received about 130 million of that amount already. We believe we have a claim that frankly exceeds our coverage limit and our-- we are going to work hard to collect most of that coverage. Now, in fairness, while our insurance company, insurance carriers have paid us that amount of money, they have really taken no formal position on the various policy language issues and claims issues, et cetera, and so it's difficult for us to predict when or if they are prepared to pay us or if we are going to have to litigate, but, again, we feel strongly about the legitimacy of our claim and we're going to aggressively pursue it.

Okay. So you-- you do have-- you're entitled to 275 million?

We have coverage for 275. We believe we're entitled to most of that.

Yes.

We've been paid a little less than, or just about half of that.

Okay. Okay. Thanks a lot, Steve.

You're welcome.

Next question comes from John Ransom with Raymond James.

Hi, good morning. Just wondered if you could comment on the Florida market. We've seen some other providers struggle with the state’s, some of the state's issues around bad debt and in particular having to use a little heavier cycle on the temp nursing. Just wondering how Manatee's going, particularly with the new hospital there and comments there, and I have one follow-up. Thanks.

Obviously, John, we don't have quite as big a Florida presence as some of the other companies. We have two major markets, acute care markets in Florida, one on the east coast, one on the west coast. From an admissions perspective, both markets were ahead of last year in the second quarter. You're right, Florida has always been a state, or has been a state over the last few years at least that we've seen more bad debt pressures. It's one of the top three or four states with the highest levels of uninsured in the country. We face the same issues I think our peers do. It is a market where temporary nurses are expensive. I think, as Alan mentioned in his remarks, probably the biggest dynamic we're facing at least in the Manatee market is the big construction project we're doing in Manatee, which we think in the long run will position the hospital favorably for, for competition, but in the short run is pretty disruptive on the campus and has clearly impacted some of the volumes at Manatee, although we've made a little bit of that up in Lakewood.

Okay. And then secondly, Community Health was talking about-- and I know they are much more acquisitive in their rural focus, but they were talking about the fact that some of the new venture-backed companies are actually driving price up in some of these competitive situations. Is that-- I know you guys are very patient buyers and you tend not to chase fields, but given the, given the falloff on the acquisition side and with ATA going private, et cetera, do you think, is the market going to finally circle back to where your kind of long-term prices are and do you think you might become more acquisitive on the acute care side down the road or should we continue to look for you guys to divest, spend most of your acquisition capital on the behavioral side? Thanks.

John, as you know, we're patient, but we've made acquisitions over our history and the market appears to be high at the moment in the acute end of it. It's really not-- it's actually doubled in the behavioral end as well, but I suspect that some facilities may become available from HCA, perhaps there will be additional selling from Tenant. There are facilities that come on the market from time to time in the acute end in both sides. So I can assure you we are very active looking and talking to people and where we find one that suits us and all other things being equal, with regard to future growth in the market, et cetera, we-- I would not be surprised if we do an acquisition in the acute end as well as the ones we've done in behavioral.

Great, and, Alan, I guess, you've been around this industry as long as anybody. The conundrum for people outside looking in is that if you look at the S&P upgrade, downgrades, and the Moody’s data, it would suggest that the not-for-profits are strengthening operationally, certainly they're spending a lot of capital. What's your take on that? Why do you-- at a time where the for-profits have been going through a tough earnings cycle, how do you explain the sort of zig pattern that the not-for-profits appear to be going through and do you think this is temporary or do you think this is a new structural reality that we're looking at in this business?

Well, I think you have to-- there is a couple of things. First of all, a lot of their plant is old. I don't think they are building, for the most part, for growth because for the most part, they've been stay-home kind of operations.

Right.

So where they have to replace their plant as it's aging, et cetera, we looked at this a number of years ago. There's an awful lot of plant that has to be replaced and obviously most of it in the non-profit sector. That's accounting for a lot of it. It's not the growth that comes out of the for-profit sector necessarily.

Okay.

The other thing, of course, is that they don't have to worry about their margins. They don't have to worry about making a profit. They don't have to worry about profit year-over-year. They just have to break even and they are happy.

Right.

So their situation is very different than our own. I mean talking about our industry.

Sure.

And they have to replace the plant, so they have got to, they have got to do the building and for the most part, and that's what they are busy doing. The other thing, of course, Steve mentioned interest rates have been favorable, and they have picked up a little bit, but that, I think that's the whole situation and we still see a number of these not-for-profits having problems and coming on the market. Corridion in Virginia did a pretty fancy deal and they were about 8 or 10 hospitals. So overall, I think that's about the situation on that end of it.

You would concede, though, that they probably have picked up a little bit of share here in the last couple of years?

Yes, I think they have. I think they have gotten stronger. Just generally my feeling is they have gotten stronger over the last few years. They were-- as a rule, pretty, pretty down a few years ago and they picked up and they have done a lot of construction and the rates have been favorable. Reimbursement rates have been pretty good. I guess that about covers it.

Sure, okay. Thank you. Thank you.

Your next question comes from the line of Patrick Swindle with Avondale Partners.

Good morning. A quick question on the behavioral segment. Net revenue as a percentage of gross increased to 54% versus 49 last year. Is that just a function of the Keystone facilities, or is there something else also driving that?

Could you repeat the dynamic you're asking about?

Sure. On the behavioral segment, net revenue as a percentage of gross revenue. It increased from 49% in the second quarter of '05 to 54% this year and I guess I'm asking if that's a function of the addition of Keystone, which would shift the mix, or if there's some other factor driving that increase and net as a percentage of gross.

Patrick, I have to concede that that's not a metric that we watch very carefully. I mean we tend to evaluate revenue on a per day or per admission basis, and don't pay a lot of attention as a percentage of gross. But my guess is that you are correct and that the big change this year over last year is the addition of the Keystone facilities, where there probably are smaller contractuals as a percentage of gross.

Okay. Thank you.

Once again, if you would like to ask a question, it is star-one on your telephone keypad. Mr. Filton, there are no further questions at this time.

Okay. We appreciate everybody's time and we look forward to speaking with you next quarter. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.