環球健康 (UHS) 2006 Q4 法說會逐字稿

Good morning. My name is Bradley, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter earnings 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, and good morning. Alan Miller, our CEO, is also joining us this morning. And welcome to this review of Universal Health Services' results for the full year and fourth quarter ended December 31, 2006. As discussed in our press release last night, the Company recorded income from continuing operations per diluted share of $4.56 for the year and $0.63 for the quarter. After adjusting various operating and recovery expenses at our acute care facilities in New Orleans resulting from damages sustained from Hurricane Katrina, the retroactive effect of supplemental reimbursements, and a reserve recorded in connection with a lawsuit, our adjusted income from continuing operations per diluted share for the quarter ended December 31, 2006, was $0.60. The $0.60 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 and forward-looking statements in risk factors in our Form 10-K for the year ended December 31, 2006.

We would like to highlight just a couple of developments in business trends before opening the call up to questions. As previously disclosed, we implemented a formal company-wide uninsured discount policy on January 1, 2006 which has had the effect of lowering both bad debts and net revenues by approximately $15 million in the fourth quarter without any significant impact on net income. Exclusive of the impact of the uninsured discount, revenues would have increased by 12% over the last year's fourth quarter. Effective July 1, 2006, the Pharmacy Services for our acute care facilities were brought in-house from an outsourced vendor.

During the fourth quarter, this transition resulted in increase to supplies expense of approximately $26 million, or 250 basis points, an increase to salaries, wages and benefits expense of approximately $11 million, or 100 basis points, and a decrease to other operating expenses of approximately $39 million, or 360 basis points. On a same facility basis in our Acute Care division, revenues less provision for doubtful accounts increased 7.7% during the fourth quarter of 2006. The increase resulted from admissions growth and an increase in revenue per adjusted admission. Admissions to our hospitals owned for more than a year increased 2.4% for the quarter, and on a same facility basis, revenue per adjusted admission rose 4.8% during the fourth quarter 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. On a same facility basis, operating margins for our acute care hospitals remain unchanged at 12.1% during each of the fourth quarters of 2006 and 2005. On a combined basis, the total of bad debt ,charity care, and the uninsured discount as a percentage of revenue increased during this year's fourth quarter as compared to the same prior year period.

On a same facility basis, revenues in our Behavioral Health Division increased 8.2% during the fourth quarter of 2006. This increase resulted from admissions growth and an increase in revenue per adjusted admission. Admissions to our behavioral health facilities owned for more than a year increased 3.7% during the fourth quarter, and revenue per adjusted admission rose 3.8% over the comparable prior year quarter. The revenue increase was aided by another scheduled increase in Medicare rates effective with the January 1, second-year phase-in of the PPS system. Operating margins for our behavioral health hospitals owned for more than a year increased to 23.5% during the quarter ended December 31, 2006, as compared to 19.7% during the comparable prior year period.

Our cash flow from operating activities was approximately a negative $81 million during the fourth quarter of 2006 as compared to a positive $69 million during the fourth quarter of 2005. Reducing our operating cash flow during this year's quarter was the payment of $168 million of income taxes during the fourth quarter of 2006, approximately $95 million of which is previously disclosed, was deferred pursuant to an IRS postponement related to Hurricane Katrina. And an unfavorable change of $30 million in accounts receivable related primarily to revenues earned during the fourth quarter of 2006 in connection with supplemental programs in which our acute care hospitals located in Texas participate. The majority of these revenues are scheduled to be paid to us prior to June 30, 2007.

We spent $108 million on capital expenditures during the fourth quarter. Included in our capital expenditures were the construction costs related to our new 170-bed Centennial Hills Hospital in Las Vegas that is scheduled to be completed and open in the fall of 2007, a new 171-bed hospital in Palmdale, California that is scheduled to be completed and open in late 2008, and a replacement facility for our Hartgrove Behavioral Hospital in Chicago which will hope in the second quarter of this year. On January 1st, we acquired certain assets of the Texoma Healthcare System located in Denison, Texas, including a 234-bed acute care hospital, a 60-bed behavioral health hospital, a 21-bed freestanding rehabilitation hospital, and TexomaCare, a 34-man physician group practice structured as a 501-a. We plan to build a 220-bed replacement facility which we expect to open late in 2009.

Our behavioral hospitals have operated at a very efficient 83% available occupancy rate for the year. These high occupancy rates are suppressing our admissions growth in certain markets, but we have multiple projects to add capacity to our busiest behavioral facilities. We opened a total of 232 new behavioral health beds at existing facilities during the quarter. Also during the quarter, we acquired Lincoln Trail Behavioral Health Hospital, a 77-bed facility, located in Radcliff, Kentucky. In the first quarter of 2007, we expect to finalize the acquisition of Jones Center, a 50-bed behavioral health facility located in Dover, Delaware and to open the Highlands Behavior Health System, an 86-bed facility, in Denver, Colorado.

During the fourth quarter of 2006, we repurchased approximately 2.3 million shares of our Class B common stock. We currently have 2.1 million shares remaining under the previously authorized share repurchase program. At December 31, 2006, our ratio of debt net of cash to total capitalization was 37%, and the ratio of debt to EBITDA was 1.87.

We're pleased to answer any questions that you may have at this time.

[OPERATOR INSTRUCTIONS]

Your first question comes from Darren Lehrich of Deutsche Bank.

Thanks. Good morning, everyone. A couple questions, here. If I am reading your 10-K right, I just want to clarify something you're disclosing. If looks like you're expecting about $16 million or so of reduced funding levels in Texas Medicaid in a number of counties. Can you just clarify that and confirm that that's correct in terms of the '06 to '07 change and whether that's final or not?

Darren, I think we're fairly confident that those are the numbers. I would just clarify by saying that while we're receiving -- or we expect to receive $16 million less in cash in 2007, that if you look at our adjusted number for the year, we've taken $8 million of that out of 2006 already, saying that that related to prior years. So, if you look at our as adjusted numbers, we're expecting an $8 million decline but a $16 million decline in cash.

Okay. Very good. And then, as far as the Las Vegas market goes, obviously, lots of change going on with the big payer in the market. I am just hoping you can comment a little bit more on a couple things with regard to that situation. First, what are you seeing so far year-to-date in Las Vegas, and, really, how much of an improvement are you embedding in your guidance as it relates to Las Vegas? I guess, $900 million or so revenue market according to your 10-K disclosure, so how much growth would you expect Sierra to add to that number?

Darren, it is a little bit hard to say at this point. Obviously, we have just one full month of experience and financial results since the formal termination of the HCA, Sierra contract. We have, obviously, volume numbers in February but no financial statements. We certainly, as we expected and have talked about before publicly, have seen a measurable and substantial increase in our volumes from Sierra patients in 2007. We expect that that will lead to greater profitability for us in the Vegas market, and we have incorporated, what I would describe as, a modest amount of that expectation in 2007.

I would caution people, because I have seen some projections and estimates out there that I think are sort of dramatically optimistic about what the impact of this business could be. It's good, it's incremental business, we're happy to have it. But just keep in mind that Sierra has a very competitive rate with us in Las Vegas. It is an expensive market in terms of temporary nurses, et cetera, so the margin on that incremental business, I think, is not quite as high as, at least, some of the estimates that I have seen out there. But we certainly have incorporated some amount of improvement in our Vegas hospitals as a result of increased business, much of which we attribute to Sierra.

Okay, great. Just one last thing, and I will hop off here. Alan, I am just hoping you can comment a little bit on Manatee, the disruptions that you've seen in that market from the construction, when do you expect that to start to actually turn around?

You're exactly right. There has been a big disruption in Manatee, and we have been anxiously awaiting the end of the construction period. We are anticipating that things will improve. In fact, currently, they look better than they have been.

Darren, I think we're looking to finish that construction sometime in the second quarter.

Great. Thanks very much.

Your next question comes from Tom Gallucci of Merrill Lynch.

Good morning, thank you. I'm just wondering in terms of the assumptions for 2007, 300 to 305, I guess, can you give us a little color on the key drivers there when you think about the volume or bad debt or even the pricing or share repurchase assumptions?

Tom, I think that, just sort of broadly and, obviously, we'll answer any more detailed questions that you have. The basic assumptions, I think, for next year, particularly from an acute care perspective, are that we'll continue to see admission growth comparable to what we saw this year, that is, in the 2 to 3% range, that we will see bad debt/charity/uninsured, or the amounts of uninsured, continue to rise, but at a less dramatic rate than we've seen over the last few years. Pricing generally remains strong for Medicare, whose rates are, obviously, locked in through October or through September, and our managed care pricing we expect to be in that 6% to 7% range again. Medicaid pricing remains the pressure point throughout the business on both of the behavioral and acute side, and we really don't expect any increases, in general, in Medicaid pricing.

We've got, as Darren asked in his first question, the presumption that we're going to lose about $8 million of supplemental reimbursement in Texas embedded in our guidance. And we probably have about $0.09 or $0.10 worth of dilution in our guidance as a result of the opening of new facilities next year, which include Centennial Hills in Las Vegas and two behavioral facilities, one in Denver that we mentioned in our prepared remarks and one in Orlando that will open a little bit closer to the end of the second quarter. So, as I try to go through the mental checklist in my mind, those are probably the main assumptions. If anybody has specific questions or clarifications they want, they can certainly feel free to ask us.

Maybe if I can follow up on that, just in terms of cash flow, obviously, you made your first acute care acquisition in awhile. Do you see acquisition -- more acquisitions on the landscape? And then, any thoughts on the pursuit of the buyback? Thank you.

In terms of, I think you're asking capital structure questions. I think, as our disclosed numbers indicate, that even by the end of 2006, our leverage numbers, particularly as you measure them as a debt to EBITDA ratio, are approaching more in line with what our historical numbers have looked like. And then, right after the first of the year ,we completed, and in the first quarter we'll complete, about $80 million of acquisitions, which is mainly Texoma and also the small behavioral facility in Delaware that we mentioned.

Our leverage has increased quite a bit already since the third quarter. We think, probably like every other company in the industry, and probably every other company in America are certainly continuing to evaluate what are the absolutely appropriate leverage levels for us, and we haven't made any firm decisions. We continue to look at all sorts of alternatives in terms of what the acquisition market looks like, how we can return the most value to shareholders, et cetera. But, again, I would just point out that our leverage levels have already crept back fairly quickly to what have been more in line with our historical levels.

Your next question comes from Ken Weakley of UBS.

Thanks. Good morning, everyone. Steve, if it wouldn't be too tedious, could you spend just a few minutes going through the Texas and South Carolina programs and walk -- I'm noticing, it looks like about 17% of your pre-tax income is coming from the program. I know you've talked about some of the issues this year, but just walk us through exactly how these payments are derived and how they change over time?

Sure. Ken, I will do that, but I also would just remind people that we did file our 10-K last night, and there is, yes, I think discussion of all these items in there for those who want to go back and take some time to look at the numbers, et cetera, because they sometimes, they are or can be a little confusing. I think there are at least two pieces to this, Ken. We do, as I think you just alluded to, we receive disproportionate share of monies in both Texas and in South Carolina. We received roughly $43 million of disproportionate share money in 2006 in those two states, and the great majority of that is in Texas. That's compared to about $38 million last year.

We also received, and this gets back to Darren's question. We received about $35 million in other supplemental reimbursements in Texas, approximately $27 million of which we say, in our adjusted income statement related to 2006, $8 million, essentially, we tossed out and said was related to prior years. Those amounts also are specifically in Texas and relate to what would be upper payment limit programs whereby we take funding that we were getting for our indigent patients, either from the county or from the local health district. And the county or the local health district makes payments, instead of directly to us, they funnel those payments through the state, who then makes them to us, and those payments are then available for federal matching dollars, and we get some portion of those federal matching dollars as well.

So, there is a substantial amount of those kinds of payments in Texas. And, quite frankly, the reason that there is a substantial amount is that we are treating, in almost all of our Texas hospitals, a fairly large number of uninsured and Medicaid patients, and in one form or another, that's how these reimbursements are calculated.

If the Bush administration does away with disproportionate share, which maybe is not realistic, but if that were to happen -- First, what's your sense on the politics of this program going forward, and then what are the contingencies should things change from that?

Well, again, I think you raise the point, Ken. I don't know that just because the Bush administration has proposed it in their budget that it is, by any means, a certainty. And as you know, there is a great deal of political support and, frankly, on both sides of the aisle for those programs continuing. By the way, as you know, also what the Bush administration essentially proposes is that they would take those dollars that come out of the federal government and just give a significant portion of them back to the states and have the states distribute them however they see fit.

Again, our opinion is that the states will continue to attempt to fund hospitals that treat a very significant number of indigents and Medicaid patients, et cetera, and to try and give them some amount of special funding. That's not to say that their reimbursement methodology and funding methodology won't change, won't be tinkered with, et cetera, difficult for to us predict. But our sense is that there is a commitment at both the state and federal level to continue to support hospitals that treat a large number of indigent and Medicaid patients.

Of all the programs that the Bush administration has put forth, I think, if you look at what others have been saying about it and by way of comment, this doesn't appear to be going anywhere at all.

Okay. One last question for you, Alan. If you look at the percentage of profits, or the composition of profits, if you will, between acute and behavioral health, obviously, you're more levered to the behavioral health now in terms of profits, at least, than you have been historically. If you look out five years from now, do you think you will get back to an 80/20 composition the way it was in the past, or is the composition of profits now changed forever, if you will?

It is hard to say, because we pursue these without a plan with regard to the percentages.

Okay.

But we've been opportunistic, and I think that the Texoma acquisition has reset the table. And it is a big facility, it is a big network. And we had not made an acquisition in the acute end of it. We were looking for something exactly like this. I think when that starts really moving, it is going to impact us on the acute side very positively.

Good enough. Thanks so much.

Your next question comes from Matthew Ripperger of Citigroup.

Great. Thanks very much. Just a couple questions. Looking at your 10-K last night, it looks like the McAllen market has stabilized from a revenue standpoint, it was about 8% of revenue in '05 and '06, but continued to erode on a pre-tax contribution standpoint. Can you just commented in terms of the margins in that market and if there is anything else going on there and whether in your guidance you assume any kind of stabilization of growth in that market?

Matt, I think that the numbers speak for themselves. And to some degree, the problem that we have faced in McAllen for the last few years has been that we have lost, not a great deal of our volumes, as you indicate. Our revenue growth is still fairly significant, but we have lost our best paying and better margin business. And, to be perfectly frank, it has been difficult for us to recapture and gain back any measurable amount of that business, and that remains our challenge in that market.

I think you're also correct in characterizing it as having stabilized. I think we have certainly seen the most dramatic declines in profitability in that market. But as we look to the future this year and next year, et cetera, our guidance does not presume any great recovery in the McAllen market. It presumes a very incremental climb back in market share on these better paying, better margin patients, but it is very incremental. And, frankly, I think there is a lot more upside that we think about it in other markets for the foreseeable near future.

Related to that, can you comment on the expansion of the investigation in that market and whether you think that could have any impact on the fundamentals of the facilities there?

Subsequent to our initial press release on February 16th, which was the day the search warrant was executed, we did clarify in the 10-K issued last night that we were told by the U.S. Attorney that the expansion of the investigation was centered on what they described as the production of documents, implying to us that they were somehow not happy or not satisfied with the way that we were producing documents in the civil case. That came as a surprise to us. We felt like we were cooperating fully with the government, and that we had, in fact, produced tens of thousands of documents that we thought were responsive to their subpoena. So we don't know a whole lot more other than that small piece of clarification that the government has given us.

In the ten or twelve days that have transpired since then, Matt, we have certainly seen no impact on our operations in McAllen. It has been a pretty strong month. It is a busy month in the market, all around. A number of the hospitals are on diverged status, et cetera. But there doesn't seem to be any immediate reaction from an operating perspective, and it appears to be largely business as usual in that sense.

Great. Thanks. A follow-up, Steve. If you could comment, broadly, on the outlook for '07 in terms of cash from operation and CapEx spending. And if you could give some granularity in terms of CapEx, in terms of new development versus maintenance versus behavioral?

Sure. I think that our earnings guidance presumes a cash from operations or before capital spending of somewhere in the neighborhood of $325 to $375 million. Our capital plan for next year is as robust as it has been for some time. And I think it is because, in large part, of some of the projects that I mentioned in my opening remarks, and that is, we've got about $150 million of new hospital construction and expansion, of the 450.

That includes, again, the hospitals I enumerated, Centennial in Las Vegas, Palmdale, California, Hartgrove, a behavioral facility in Chicago, and the very beginnings of the Texoma project. And then our -- both normal routine capital, operating capital, as well as, again, what I would call normal expansionary capital, will come to about $300 million for the total of 450. That 300 includes continuing capacity expansion in the behavioral business as well as other projects to add capacity and upgrade technology, et cetera, in our acute care business.

Is that Matt?

Yes.

Hello, Matt. How are you?

Good. How are you, Alan?

Good, good. Haven't seen you in a long time. Following your career.

Thank you. Great. Thank you very much.

I wanted to mention that our development program has been very successful, and some of our most successful hospitals are new developments, and we're excited about the ones we have under construction. If you just recall, Summerlin was totally new, Spring Valley totally new, Wellington in Florida totally new. Those hospitals are some of our most successful. We have Lakewood Ranch which is maturing, and then, as Steve pointed out, Centennial Hills in Las Vegas is under construction, far along, and doing Palmdale in California. We're excited about our new developments and the investment of our capital in these kind of projects.

Great. Thanks very much.

Your next question comes from Raj Kumar of Lehman Brothers.

Thank you. This is, actually, I am filling in for Adam Feinstein. I had a couple of questions. Can you please talk about the volumes, the potential to see good volume growth? And can you specifically talk about some of the key markets like Las Vegas and McAllen and talk about what are the key drivers in those markets? Thank you.

Raj, I think we've had some discussion about volumes. Our volumes in the Vegas market have been strong all along. They, obviously, increase in the first quarter of 2007 when the HCA, Sierra contract terminated. We expect we'll get another boost in volumes when Centennial Hills opens late in the year. Although, just as when Alan eluded when Summerlin and Spring Valley opened, there may be a couple of quarters of disruption and some cannibalization of volumes in the first few quarters that it's open.

And, like I said, we have some of that dilution baked into our guidance. In general, we expect Centennial to develop much the way that Summerlin and Spring Valley did, which is to quickly ramp up. The McAllen market, as we mentioned, we've lost volumes there for the last few years. Again, the volumes don't really tell the full story, because what the real impact has been is our better-paying better margin volumes. And, again, baked into our guidance for next year is no tremendous recovery there, but just kind of a very incremental claw back from loss.

Okay. All right. A follow-up question. Can you just talk about the impact of the nurse strike at your value hospital in Desert Springs?

Sure. We did have a work stoppage of about five days at Valley and Desert Springs in, I believe, the beginning of December. It probably cost us a couple million dollars in temporary nurse expenses, et cetera, which we haven't really carved out separately in any way because we have added other small positive items going the other way in the quarter which we think largely offset that. The good news, from our perspective, is that we have subsequently reached a contractual agreement with the union out in Las Vegas at those two hospitals, and we have a contract that will now be in place for the next three years. So we don't anticipate any further labor actions or disruptions through the term of that contract.

Okay. Thank you very much.

Your next question comes from [Shelley Nall] of Goldman Sachs.

Hi, thanks. This is Shelley Nall for Chris McFadden. I was wondering if I could get an update on where you see the mental health parity legislation, whether you have expectations it would be passed this time around, maybe expected timing, and what it could mean to utilization of behavioral health services?

Shelley, as you probably know in asking the question, obviously, mental health parity legislation has gotten second wind or second life, here. The Democrats seem to be more strongly supportive of it than the Republicans were. You know, hard for us. We're never very good at projecting or handicapping the likelihood of legislation, but I think it seems more likely now than it ever did. And we certainly are pushing it and would welcome it. We think it is a good thing. Very difficult to, in any way with any precision, try and quantify what its impact would be. I think it would certainly -- we would view it as a net positive if we were to get mental health parity legislation at the federal level.

Could you also, can you comment on which states that you have exposure to had the most robust parity loss?

I am going to have to be honest, Shelley, and tell you that I am not sure at a state level -- I am probably not fluent enough to discuss that, but our behavioral people, I am sure, at the appropriate time could go through that in some detail.

Okay. Appreciate it. Thank you.

Your next question comes from Gary Lieberman of Stanford Group.

Thanks. Good morning. I was just hoping you could maybe talk in a little bit more detail about what the uninsured trends you saw across the Company in the fourth quarter and maybe in specific markets?

Sure, Gary. Again, I think that, as we've seen throughout, for the most part, uninsured trends have been a macro issue, and in one market and one quarter they will go up a little more, a little less. They're certainly not real specific to a market or not. And I think what we saw in the fourth quarter is that, as I mentioned before, instead of increasing at very dramatic rates and at rates that are much higher than our overall admission growth, in probably the worst quarters, our self pay or uninsured admissions were going up 400 or 500 or 600 basis points ahead of our overall admission growth. In the fourth quarter, we saw that it was really an incremental tens of basis points that our self-pay admissions were increasing above our overall admissions.

It is hard to know whether that is reflective of a trend, obviously. Several of our peers seem to have reported similar experience in the fourth quarter, and we take some comfort in that. But over the last few years, there have been individual quarters which have provided head fakes in terms of the real trends here. So before we declare a trend under way, we certainly would like to see another quarter or two of positive, either stable or slightly increasing uninsured rates, before we make some sort of call about that.

Is there anything specifically that you see in the macro trends or in the macro data that would cause you to believe that, maybe, it would continue from here, and that it is not just a one-time blip?

Specific to our own hospitals, we did see, and I would say more anecdotally than not in the fourth quarter, that we were having some more success in certain markets in qualifying patients for newly available county-like programs, et cetera, which are, I think, trying to, have developed, and trying to provide a greater safety net for these patients. And, as you know, many states and local municipalities are trying to tackle the uninsured problem in a vast majority of ways. It may be that we're seeing some impact from those actions. Again, I still think it is a little too early to make broad judgments about that.

Great. Just a quick follow-up on Las Vegas. Did you see any benefit in the fourth quarter, perhaps, in December in anticipation of the contract terminating? Did -- had Sierra started to shift patients away from HCA, or is it really a one-one event?

I think, for the most part, it is a January event, Gary. We did see some shift of patients as, I think, Sierra was preparing for the contract termination. But I think there is no question that the real dramatic shift in patients began after January 1.

Okay, great. Thanks a lot.

Your next question comes from Eric Chiprich of BMO Capital Markets.

Hi, good morning. Thanks for taking the call. I had a question or two on the psych side. Curious to know where we are now on the path of getting the Brown Schools accretive? And also, I believe you added some resources to the assets in the Keystone acquisition. Was curious how that was shaping up towards hitting your initial expectations for accretion. Thanks.

Eric, I don't have the specific numbers in front of me. My recollection is that we continue to make progress at the Brown Schools . They were not, frankly, all that materially dilutive to us in 2006, and I know we've got them projected to improve in 2007. I don't think either way that the Brown Schools are big enough to be a needle mover either way.

Keystone, and those of you who review it or look back at the fourth quarter of '05 results and whatnot, Keystone was a real drag in the fourth quarter of '05. That was our first quarter of ownership. We had some bad debt issues. We just had some other issues in the fourth quarter of '05, and they were real drags. So part of that big improvement in our behavioral margins, same store behavioral margins, which for the first time in the fourth quarter of '06 include Keystone, is an improvement in the Keystone results. We're still not quite at the levels that we had anticipated and had baked originally into our 2006 guidance. We, I think, continue to make incremental improvement in getting there.

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

Hi, good morning. A few questions. Steve, on the number of items in the AR, you highlighted in the 10-K, upper payment limit, supplemental Texas Medicaid monies you're expecting, at least by the mid-year, it looks like. Does it -- have you classified those in private pay, though? It doesn't look like in your gross AR disclosure you classified those as Medicaid.

I think that's right. I don't think those receivables or that revenue appears in those tables, Gary, because we don't consider that patient receivables. It is not detailed patient receivables.

So it wouldn't even -- in your gross AR aging schedules, these dollars would not even appear?

I don't believe so.

Okay. Then I might -- I'll think through that and then I might -- I'll have a follow-up with you later, maybe. And then on the CapEx, so the 450 does not include the acquisition spend for Texoma and the other acquisition?

No. The 450 is just capital spending -- now, projected capital spending for '07. Now, it includes a small amount of projected capital spending for the Texoma replacement, but no, it doesn't include the acquisition dollars for Texoma.

I don't suppose you will want to make any public comment on the resolution of the strike, any terms with respect to that, and understandably so. But should we expect any visible labor costs uptick, either percent of revenue or adjusted patient day basis because of the new three-year contract in Las Vegas?

I don't think so, Gary. The reality is, the contract had expired back in the spring in April or May. We had been accruing all along for what we expected to be the ultimate negotiated increase. That negotiated increase came in very close to what our expectations were. Frankly, we never felt like that was what was at issue. There were a number of other, I will describe them as peripheral issues, involving nurse staffing and union organization rules, et cetera, that were really, I think, at the heart of the dispute.

I think the wages were never really in dispute. So, I think, essentially, our wages in that market for the second half of the year already reflect the increase, and I think it is in line with what our expectation was. I don't think there should be any surprises in 2006 in that regard.

I don't want it leave it, though, without the comment that we're very satisfied with what happened. We hung tough in there and got a settlement we're pleased with it.

Right. Another question. Obviously, the behavioral business is doing very well on the acute care side. We all tend to focus on Las Vegas and McAllen because it is your largest market. I have asked this question before, so I will try again. The Company -- I mean, the earnings are flat for four years, despite the fact that the behavioral business is going gangbusters, and all of the, I guess, the under-performance in acute care cannot be attributed to McAllen. But I guess the question is, if you look at your acute care total business, and you've certainly lost some earnings power with New Orleans, essentially, going away for you, you've lost earnings power in McAllen. Does that explain everything that's happened to the acute business or, when you look at some of your other assets, are they challenged as well?

I think you've largely summarized it accurately, Gary. But the last -- beginning in 2003, we've, obviously -- our acute care business has, obviously, been subject to the same headwinds and challenges as all of our peers, and I think that's pretty obvious to everybody. We had softer admissions and down admissions, in fact, in 2004 and 2005. They bounced back in '06. We've had a significant increase in uninsureds, and I think, obviously, our profitability has been impaired during that period the way that everybody else's has.

In addition to that, as you point out, we have had our second most profitable market, meaning McAllen, see its profitability dramatically decline in that period. And I think in -- otherwise, you can look through our markets, and some are up a little bit more than others and some are down a little bit more than others. But there is really nothing, I think, extraordinary in the rest of the portfolio in terms of result. And I think it is sort of the two macro factors that everybody has faced, and our specific experience in McAllen, that have been our acute care story for the last few years.

Okay. And then one question for Alan. If I might, obviously, there has been a lot of discussion over the last few years of where the psych assets might trade on a pure play basis. There has probably been less discussion of how relatively under-levered your balance sheet is and, at the very least, what sort of accretion could be driven by recap and share repurchase. There is certainly untapped power in that balance sheet.

But many of my clients see that value in your stock but complain that because of the voting structure, they can't exert influence to make any of those changes happen in the near term. So I guess the question is, is there anything in your thinking that would motivate you to change your short-term strategy, or do you intend to stick the course with the long-term strategy of these development projects, which have done very well in the very low levels of leverage on the balance sheet?

A couple of complicated questions.

Yeah.

I think that -- we're shareholders as well, and very interested shareholders. We're all very interested in moving the Company forward, and we look at everything -- every possibility and review everything. And Steve mentioned earlier, we continue to do that, and at the same time, we continue to build the Company, as you point out, with -- or as I mentioned, the development projects. And I think on balance, we actually have steered the Company quite well, if you really think about the impact of losing, really, four hospitals in New Orleans, the earning power from that, as well as this particular situation in McAllen. I think the Company has responded very positively.

Okay. Thank you.

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

Hi. Thanks and good morning. On the facilities that will open later in the year, is there any, I guess, particular quarterly flow in terms of how the dilution will hit your earnings?

I think, Kemp, I've just talked about rough time frames. Denver opens in, literally, I think the next week or so. Our new facility, a behavioral facility in Orlando, opens, I think, in sort of a June timeframe, and then Centennial opens in the October/November timeframe. On the behavioral side, there is not a tremendous amount of start-up costs. But I think we're projecting negative operating income for the first few quarters and, certainly, the balance of '07 for both of those facilities. In the case of Centennial, there will be some start-up costs in the third quarter and then, again, projected operating losses in the fourth quarter. So, you can take the $0.09 or $0.10 dilution that I mentioned earlier and, I think, allocate it amongst the year in your model that way.

Right. And fair to say that something like 80% of this is related to Centennial as opposed to the behavioral?

Yes. I don't have the numbers in front of me, Kemp, but that's certainly fair to say that that -- obviously, the numbers in an acute care hospital are far more significant.

Right. Okay. Just, also, one question on Las Vegas. Looks like the settlement did include a process for, at least, the discussion about staffing levels and maybe other work rule changes. Over what timeframe will that process play out?

Again, what you read, Kemp, is really a description of just that, of process. We've agreed to continue, frankly, a process that was already in place and just have it occur more frequently and have it occur with some sort of third party mediation, but the challenge -- and, frankly, part of the reason we resisted staffing ratios, et cetera, in Las Vegas and in some other markets as well as. We've had this experience in California where there are mandated state staffing requirements, and the problem is, there just aren't enough nurses. It is not a willingness to comply or not comply. There simply aren't enough nurses. And Vegas is another market where there is a tremendous nurse shortage.

So, look, our point of view about all of that is that staffing ratios in any hospital ought to be determined by hospital management and nursing staff, et cetera, and not by some prescribed formula that either a legislator come derives or that a union derives. We think that that's what's going to continue in Las Vegas, and that's our preferred way of proceeding. So we're comfortable with that.

Okay. Thank you.

You're welcome.

Your next question comes from John Ransom of Raymond James.

Hi, good morning. Just a couple of questions about the behavioral side. Are you seeing any difference in the managed care pricing increases there versus your acute side?

John, I think our managed care pricing on the behavioral side has historically lagged the acute side by, probably, 200 or 300 basis points. Mainly because, I think, there has just not been the cost acceleration on the supply and on the nursing side that the managed care companies on the acute side have been reimbursing acute care hospitals for. But I think that trend has been in place for a long tome.

Is that -- so, you're looking at maybe 7, 8 on the acute side and 4, 5 on the behavior side?

Order of magnitude, I think that's right.

Okay. Secondly, as Medicare continues to make the inpatient unit business less and less attractive, is there any thought toward moving some of your inpatient psych beds into a Pavilion or relocating them to a behavioral development? Or is that, essentially, what you're already doing?

We do have that in place at certain of our facilities. I think we responded. Our acute care hospitals have responded to psych PPS the same way that most hospitals around the country have. In some cases, we've had contract providers, and we've renegotiated our contracts with them to lower their fees. In some cases, we've reduced the number of beds or closed them. And in some cases, we've changed our cost structure. And in some cases, as you suggested, we've changed the whole ownership structure to make the facilities freestanding. So, we have that whole menu of options, and we've explored all of them and tried all of them in different markets.

Okay. And then, not to -- you're probably tired of talking about McAllen. But, I guess, 20/20 hindsight or maybe even looking forward, are there any strategic options there to try to collaborate with your competitors there that maybe weren't on the table a couple years ago? It seems like the rhetoric -- you guys were pretty hot, I remember, a couple years ago, seems like the rhetoric from your side has certainly moderated. Is there any potential collaboration out there, or is it still going to be tooth and claw competition?

I don't know, John. The reality is, I think that we're open to all sorts of options in the market in terms of improving our position. The doctors-owned hospital has expanded a number of times. They are in the midst of their current version of their expansion, which focuses on OB services, so, I think they seem to be fairly set on going their own way. But we're open to conversations with anybody in any market about alternatives that could be mutually beneficial to us and to another party. So, I think we're very open to anything, and, in the meantime, we'll continue to compete vigorously with all of our competitors in the market.

Okay. And then, lastly, I know, not a huge market, but the Manatee market has been a bit of a struggle, with Lakewood getting off to a slow start and then all of the problems in Florida. Are you -- what are you forecasting in '07 versus '06? Is that market going to be a contributor on an earnings growth standpoint in your model?

Yes. I think, because of the issues that we've already touched on, as Alan said in response to a question before, Manatee has suffered some over the last few years because they've had this disruptive construction project. And we think when that finishes in the second quarter, that should make things a little bit more stable in that market. Lakewood has certainly, as we've disclosed before, gotten off to a slower start than we anticipated, and I know you're familiar with that market, John. We do love the market, generally. It is a very fast-growing attractive demographic, et cetera, and so, we think over time, Lakewood will become a real strong contributor. But it will be a slow go down there, and I don't think 2007 will be a remarkable year at either hospital in the market, but it should be a year of incremental improvement at both.

Okay. And, I know Texas has got something like 25% uninsured, national average about 16. Is the Texoma market somehow different than that, and what was it that you saw there? I guess I was a little surprised to see you guys come out of your acquisition shell and go right back into a Texas market that other -- some of your peers are complaining about. So I just wondered about what you saw in that market that makes you confident that it is not going to turn into another bad Texas market?

The two big markets that we currently operate in in Texas, being Amarillo and McAllen, essentially, are markets that have relatively high rates of uninsured but, probably even more importantly, obviously, we essentially operate the county-like hospital in the market. In both those markets, we operate what used to be the County Hospital and, for the most part, have that mix of patients. Of course, that's been exacerbated in McAllen with the opening of a physicians' hospital that has then carved out the better-paying business that we did have.

Texoma, I think, is a much different market. It is about -- it is the exurbs of Dallas, about 60 or 70 miles north of Dallas, demographically does not have a large number of indigent or Medicaid patients, is a relatively fast-growing market, et cetera. And so, as Alan pointed out, it is the kind of market that we've always targeted. And while, as you know,Texas is a big state, it is very different than either the Amarillo or the McAllen market. The fact that it is in Texas, in our minds, is not a terribly important variable.

Okay. Have you been tempted -- I mean, a couple of your peers, HMA, notably, has changed their bad debt recognition methodology where they essentially write everything off at the point of service. And some of your peers who tried these lookback methodologies, they have always been way off and have taken these big bad charges, and it makes people like me mad to try to figure out the numbers. But have you guys been tempted, at all, to change your bad debt methodology, or are you -- I know the uninsured trend is stabilizing, but what is it about your methodology that gives you confidence you're not going to have to stare down one of these charges one quarter?

Well, you know, John, one of the things I'd point out is, that over the last few years, we have been criticized by some investors for having some of the more volatile earnings in the space. And I think that if you trace that volatility back, it is almost -- it is primarily related to changes in the uninsured, et cetera. And so, I think, had some of our peers who had taken these very large one-time charges been recording their bad debt and charity care in the appropriate periods, I suspect their earnings would have been equally as volatile. I think for whatever reason, our methodology has probably been somewhat more reflective of current changes in numbers of uninsured.

One of the interesting disclosures that HMA made in their recent announcement was that, for the first time, they had done a lookback, and that was largely what drove their very large catch-up adjustment. We've been doing this lookback methodology for the last three or four years. We feel like we track that very closely. We reserve force in excess of 90% of all of our self-pay revenue, which, when I look at the public disclosures of my peers, it certainly seems to be on the high end of what others are doing in the industry.

Our days sale -- in sales outstanding have been, and remain, among the lowest in the industry. So, there is a bunch of different methodologies, tests, and analysis that we go through to give ourselves a comfort level. And I would also say, our outside accountants who spend an enormous amount of time in this area, that we're recording uninsured discounts and bad debt and charity care as best as we can, and I think as closely to reflect current activity.

I do commend you for not taking a big bad charge, because it makes it impossible to determine what the true earnings are. So, thanks for that.

One wonders how the analysts have accepted over the years everything and anything that HMA had to say and now is greatly upset about a surprise charge. Just a comment. Doesn't need an answer.

Your last question comes from [David Bachman] of Longbow Research.

Good morning. Several of my questions have been answered, so I just, really, have one quick one here on the behavioral side to wrap up. Operating margin, same facility operating margins, have continued to show strong improvement. And just, how do we think about that opportunity going forward? Are we at a point now where those are -- can be expected to stabilize, or does there really remain any further opportunity?

I apologize if you made this clear, but are you asking about the acute business or the behavioral business or both?

On the behavioral side.

Sure. I think that we've talked a lot about our efforts to expand capacity in our existing facilities. We've added 500, or so, beds in 2006, and looked at something comparable in '07. I think as long as we're able to do that, the demand for behavioral services seems to be increasing. And where we're adding capacity, frankly, is in markets where we feel like there is already pent-up demand and, perhaps, waiting lists for patients, et cetera. So, I think that as long as we're able to do that, there should be an opportunity for some modest expansion of behavioral margins. Although, as you point out, we certainly had a real strong run over the last four years -- last few years. So I don't know that our margin growth will be quite as dramatic as it has been over the last few years, but I still think there is opportunity for some improvement.

And just, in terms of capacity, I guess it is more of an industry-wide question on the behavioral side. Just where do you see that headed over the next two or three years in terms of beds coming on line or going offline on the behavioral side?

Well, unlike the acute business, I think that for many years -- First of all, in the late 80's and early 90's, a lot of behavioral capacity was taken out of the system. Some industry observers estimate that somewhere between a third and a half of the behavioral beds were actually taken offline in a five- or six-year period in the late 80's and early 90's. And then, I think, not a whole lot of capacity was added in the mid-90's and, really, until very recently. So, unlike the acute business, where I think there has been capacity expansion all along by both the acute and non -- excuse me, both the profit and not-for-profit providers, I think the behavioral side has seen little capacity expansion.

We're seeing more of it now. I think we're probably doing it more aggressively than anybody, but, certainly, others are doing it. But I think that it is still probably not enough to create a concern about over-capacity in the market, et cetera. We're operating at occupancy rates in the behavioral division in the low 80's, and those are pretty darn high occupancy rates. So, we may, as we add capacity, we may see those numbers drop a little bit, but I don't see a real glut of capacity in that industry.

Great. That's helpful. Appreciate it.

There are no further questions at this time.

Okay. We thank everybody for their time this morning and look forward to talking with you again in the first quarter.

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