環球健康 (UHS) 2007 Q2 法說會逐字稿

Good morning. My name is Hamilton and I will be your conference operator today. At this time I'd like to welcome everyone to the second quarter 2007 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.

Good morning. Thank you.

I'm Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this Review of Universal Health Services results for the second quarter ended June 30, 2007.

As discussed in our press release last night, the Company recorded income from continuing operations per diluted share of $0.97 for the quarter. After adjusting for the prior year impact of a favorable adjustment to reduce our professional and general liability self-insurance reserves and hurricane-related items, our adjusted income from continuing operations per diluted share for the quarter ended June 30, 2007 was $0.79 compared to $0.78 per diluted share during the comparable prior year quarter.

During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2006.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. Revenues for the second quarter increased 13% over the prior year. Exclusive of the impact of new facilities, most notably Texoma, and the revenues related to construction management contract whereby we are building a new hospital for a non-related third party, revenues have increased by 6%.

Effective July 1, 2006 the pharmacy services for our acute care facilities were brought in-house from an outsourced vendor. During the second quarter, this transition resulted in an increase to supplies expense of approximately $27 million, or 230 basis points, and increased the salaries, wages and benefits expense of approximately $11 million, or 90 basis points and a decrease to other operating expenses of approximately $40 million, or 340 basis points.

The transition of our pharmacy services favorably impacted our pre-tax income by approximately $2 million during the second quarter of 2007.

On a same-facility basis in our acute care division, revenues increased 5.8% during the second quarter of 2007. The increase resulted from admissions growth and an increase in revenue per admission.

Admissions to our hospitals owned for more than a year increased 1.9% for the quarter. On a same-facility basis, revenue per adjusted admission rose 1.7% during the second quarter of 2007. Admissions growth in the Las Vegas market was measurably softer than in the first quarter, as our hospitals have suffered the loss of some non-Sierra business due to capacity constraints.

We define operating margins as operating income or net revenue less salaries, wages and benefits and 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 owned in both the second quarter of 2007 and 2006 decreased to 13% in the quarter just ended as compared to 13.5% in the prior year's quarter, as a result of the loss of some non-Sierra business in Las Vegas and higher levels of uninsured patients throughout the acute hospital portfolio.

On a combined basis, the total of bad debt, charity care and the uninsured discount as a percentage of revenue was significantly higher during this year's second quarter as compared to the same prior year period.

On a same-facility basis at our behavioral hospitals, admissions increased 3.5% during the second quarter of 2007 over the comparable prior year quarter, and net revenue per adjusted admission increased 3.3%. Operating margins for our behavioral hospitals owned more than a year were 25.5% in the quarter ended June 30, 2007 compared with 25.2% in the quarter ended June 30, 2006.

Cash flow from operations for the second quarter of 2007 was approximately $60 million as compared to $79 million during the second quarter of 2006. Our cash flow from operations during the second quarter of 2006 was favorably impacted by an IRS granted postponement of income tax payments extended to companies that owned Hurricane Katrina-effected businesses During the second half of 2006 we paid all income taxes that were deferred as a result of this postponement.

At June 30 our ratio of debt to total capitalization was 38.6% and the ratio of debt to EBITDA was 1.97. We spent $85 million on capital expenditures during the second quarter of 2007.

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 opened late in 2007, a new 171-bed hospital in Palmdale, California, that is scheduled to be completed and opened in 2009, as well as a replacement facility for our Hartgrove behavioral hospital and the major renovation of our Manatee, Florida, hospital, both of which were completed in the second quarter.

In California, we have opened 44 new acute care beds at our Inland Valley campus and are under way with a major expansion of our emergency room and women's services at our Rancho Springs campus.

During the second quarter, we acquired Dover Behavioral Health System in Dover, Delaware, which has 50 beds, and last week we acquired Foundations Behavioral Health in Doylestown, Pennsylvania, which has 54 acute behavioral beds and 48 residential beds. Our behavioral facilities have operated at a very efficient 78% available occupancy rate for the quarter.

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 115 new behavioral health beds at existing facilities during the quarter.

We're pleased to answer questions at this time. Hamilton?

Yes, sir.

We're ready to answer questions.

Yes, sir. Our first question comes from Darren Lehrich of Deutsche Bank.

Thanks. Good morning. Can you hear me?

Yes, Darren.

Hi. Good morning.

In Las Vegas, obviously you've noted the change in pace there with some of the non-Sierra patients. I just try to dig a little deeper here. Are you see any changes at all with regard to in-market physician recruiting by your competitors or anything that might suggest that some of the business is now more strongly aligned elsewhere? Just trying to understand that trend a little bit more.

Darren, I don't think it is as much changes in sort of permanent patterns as much as what, frankly, you might expect when there's a real, the kind of, it's very significant surgeon volume that we had at the beginning of the first quarter when the Sierra contract with HCA terminated.

Our facilities got extremely busy, our emergency rooms got busy, our surgical suites got busy and I think there was some natural, frankly, gravitation of business away from our very busy facilities to facilities that, frankly, were less busy. In fairness to our competitors, I think they've also been aggressive in marketing to both the physician and the patient community, the fact that they all of a sudden have relatively significant amounts of excess capacity and more attractive OR times and less waiting times in their diagnostic facilities, et cetera, and I think they've done all that with some success in the second quarter.

So I don't think we've seen sort of wholesale shifts of physician practices, et cetera, as you suggest. That kind of thing has not really occurred.

Okay. Thank you.

And then, I guess just a question with regard to your, the adjustment you made with your medical malpractice reserves. It sort of went the other direction then a competitor recently announced.

So first of all, are you, how often are you doing your actuarial studies and what was the driver to the reduction? And, Steve, would you expect this to have an impact on other operating expenses on a go-forward basis? Just to give us a little bit of help there.

We are doing actuarial studies twice a year now and the reality is as I think you know, I mean I think that we're, frankly, making this, favorable adjustment after a number of our peers made similar favorable adjustments over the last few years. We've been, I think, fairly conservative in our approach to it.

I think that for us, at least, the favorable impact on our malpractice is coming from two main things. One is that of the states in which we operate, and those that are most important to us, several of them have had meaningful tort reform in the last few years.

Florida, Nevada, Texas have all had meaningful tort reform and we certainly have seen the impact of that, just in cases that we've settled in the last few years that have clearly settled for amounts that are less than they would have settled to pre-tort reform in those states.

Secondly, which is kind of a more internal issue, several years ago when we noted that a significant portion of our malpractice losses were coming from our obstetrical units and delivery units, we had a focused effort to really kind of a drive to quality in our obstetrical units throughout the acute care hospitals where we had large obstetrical units and, again, we've seen, clearly, a positive result from that and the number of OB claims and the amount, and the magnitude of those claims have clearly decreased over the last few years. So I think that's what, you know, you can attribute this to.

And I think by definition, there's obviously a prior year impact that we've recognized and essentially discarded for the quarter, but there'll be an ongoing impact that we think will be sustainable certainly at least in the near future.

And as a percentage of revenue, what is it running now versus last year, just to get a sense for that?

I think, and this I'm doing off the top of my head, Darren, that we were running somewhere between 1.5 and 2% of revenue. Our best guess is we'll save somewhere between 3 and $5 million a year off of our, what had been our run rate of malpractice expense.

Okay. That's great. And just one more and I'll jump off here.

Alan, just with regard to your priorities for free cash flow and, you know, did they change at all over the near-term with the potential for a buyout of the old Triad position in Las Vegas? Obviously that's something that I think community might be interested in over the near to intermediate term. Can you just help us there with regard to how you view that in relation to your priorities for free cash flow?

We've not heard from them and so we've had no discussions in that regard. In fact, we've not heard anything from them. So they must think we're doing a fine job and we'll talk to them soon.

No, I don't think so. If they have an interest we will consider it, but other than that, we have other uses for our capital and it hasn't changed much.

Okay. And Steve, when can you be back in the market? When does your buyback window reopen?

Our buyback window reopens a couple of days after the end of the quarter. I think that we have been, you know, from a buyback perspective, fairly quiet.

As you know, Darren, there've been a lot of changes in the industry. There's been a lot of speculation that there will be assets for sale.

You mentioned the community interest in our Las Vegas hospitals, but there's obviously speculation that there will be a lot of other assets for sale and there's speculation there'll be some not for profit assets for sale that, for which the acquisition fervor may be somewhat less than it has been over the last few years because so many of our peers have really levered up over the last few quarters. So we've been trying to take a little bit of a wait and see attitude and just try and get a measure of the landscape before kind of embarking down a particular path.

Darren, on the other hand, activities in the market currently impact our thinking and I'm sure it impacts yours as well.

Do you want to expand on that comment, Alan?

Excuse me?

Do you want to expand on that? Do you mean with regard to your buyback specifically?

No, I'm just saying that our, as our price, as our shares sell off and the market had a horrendous day yesterday (inaudible) the price of the shares is down, it just makes it more attractive in our thinking, that's all.

Okay. Thank you.

Our next question comes from the line of Adam Feinstein of Lehman Brothers.

Okay. Thank you. Good morning, Alan. Good morning, Steve. Few questions here.

Steve, maybe just the revenue per adjusted admission. I know you spoke about the charity care going up as well as just the negative mix shift in Vegas. I was just trying to strip out the Vegas impact.

I was just curious, you know, if you had any ballpark estimate in terms of what the revenue per adjusted admit was or how much of the kind of weakness, if you will, in that line item was related to Vegas. And I have a few follow-up questions.

Well, actually, if you don't mind, I'll go at it the other way, Adam, and tell you, I mean, the charity care numbers are sort of a little more straightforward and you can see the magnitude there. Charity care, same-store acute charity care in the second quarter of '07 was $113 million compared to $100 million in the first quarter and $88 million in the comparable prior year quarter.

So we did have a significant increase in charity care, not so much in bad debts and our uninsured discount, but certainly in charity care. So I think if you kind of factor those numbers in and see their impact on revenue per admission, you can get a sense of probably what the Vegas numbers, you know, had their impact in pushing down our revenue per admission.

It's a little hard to get those numbers quite as precise, but I think the two, it's those two factors together that clearly had the downward pressure on revenue per admission in the quarter.

Okay. And just a few follow-up questions, if I may.

Maybe just, just sticking to that topic. So what do you view as a normalized revenue per adjusted admit as we view that as a proxy for pricing, I guess? What is your outlook there?

You know, going into the year, Adam, we felt that sort of long-term sustainable kind of blended pricing in the acute business was 4 to 5%. You know, we continue to believe that that's the case, and we're sort of there for the six months, but obviously it depends on these two factors.

I mean it requires some improvement in charity care, it requires us to recapture some of that non-Sierra business in the Las Vegas market. We think that that both of those phenomena will occur but we can't predict that with any certainty. 4 to 5% blended pricing is kind of what we thought was a normalized number and we continue to think that.

Okay.

And then just with respect to the charity care, if you could just elaborate a little bit there. I don't know if you have any data in terms of your uninsured volumes in the quarter relative to your overall volumes or self-pay, just in general, but just trying to get a sense in terms of just, I guess just what's driving that and just, you know, certainly any numbers there would be very helpful.

Sure. I think that in our case, what's driving the increase in charity care is purely an increase in self-pay admissions. Our self-pay admissions in the quarter increased at more than twice the rate of our overall admissions, so our overall admissions were up 1.9% same-store, and our self-pay admissions were up a little over 4%.

After several quarters where self-pay admissions were sort of just tracking kind of on point to our overall admissions, so that was a disappointment in the quarter, but it's that increase in self-pay admissions that clearly seems to be driving that charity care number.

Okay.

And then just lastly, just on the new Vegas hospital, Centennial. If you could just give us some thoughts in terms of how we should think about the earnings impact. I know it's later this year, so it probably won't be much of an impact for '07, but just thoughts in terms of the ramp-up there, what we should look for going forward and just any other updates related to this new hospital.

Well, in the beginning of the year when we gave our 2007 guidance, Adam, we had talked about potential dilution from our new hospitals in 2007, you know, somewhere in the $0.08 to $0.10 range. That includes a couple of behavioral hospitals that have opened, but it was mostly Centennial.

Probably at the time we gave that guidance our expectation was that Centennial would open in the sort of September-October timeframe. We're now probably pushing that back to the November-December timeframe. So there'll be a little bit less dilution that we anticipated, but there'll still be some dilution in the late third quarter and early fourth quarter in start-up costs as we ramp up to open and then when we open in either late November, early December, there'll certainly be operating losses and they'll continue into the early part of '08 as well.

Okay.

And just in terms of what is your expectation in terms of just getting that facility to a, I guess to, you know, what a normalized margin would be? Do you have any ballpark estimate there?

You know, obviously these things are difficult to predict. One of the advantages we have in Las Vegas is we have some recent history. I think when Spring Valley opened in the fall of 2003 and we went for three or four quarters where it had somewhat of a dilutive effect on our margins in the market, there was some cannibalization of business, et cetera.

But I would say after about a year Spring Valley got up to kind of our market level margins and, you know, our expectation is that that sort of timeframe is the appropriate expectation for Centennial Hills as well.

Great. Thank you very much.

Our next question comes from the line of Gary Lieberman of Stanford Group.

Thanks. Good morning.

Question for you on your other operating expenses. When I back out the benefit from the self-insurance reserves, it looks like is both sort of a percent of revenue and a per patient day basis, your other operating expense went up significantly from the first quarter and certainly the year-ago period. So I was just wondering if there's anything specific that was in the quarter that won't be throughout the rest of the year or if that is sort of a run rate basis?

Well, the one sort of nonrecurring, or at least discreet item, Gary, is that we've got this construction management contract that I alluded to in my opening comments and that contributed, I think, $26 million to other revenue in the quarter, and frankly, contributes a like amount to other operating expense as we're recording sort of our construction expenditures and revenue gross on that contract and then we have our sort of construction management profit built in there.

But, you know, that's -- and that number, those other operating expenses related to the construction management contract are probably 7 or $8 million higher in the second quarter than they were in the first. I think other than that, the only other dynamic that's making those other operating expenses look high is that in the first quarter we had 5% same-store admission growth and at that level, we get a lot of leverage on the other operating expense line, which tends to be the line that has the most fixed and semi fixed costs.

You know, in the second quarter we dropped down to a 2% same-store admission growth and we just don't get the same leverage on that line with those kind of admissions.

Okay. But even on a per patient day basis it did go up significantly?

Right, and my only point is that as admissions go up, we just get more efficient on that line. You know, there is an exponential benefit there to having increased volume and, obviously, our volume fell off in the second quarter.

Okay.

And then could you just give the incremental discount number? You give the charity care number, but was there an incremental discount number that you have for the quarter?

The uninsured discount was, I believe, $26 million in the quarter. I know it was $25 million in the first quarter. I don't recall what the number was in the comparable prior year quarter, but I know we've disclosed it before.

Okay.

And then finally, maybe Alan, could you just update us on your thinking in terms of the potential acquisition for new properties? It sounds like you guys would be interested in anything that comes to market and historically I think you've been pretty opportunistic in terms of what you've purchased. Would that sort of be your game plan going forward or are there assets in specific geographic areas that you might be interested in?

Well, as Steve mentioned, we've heard that there will be packages coming out and we are, obviously, going to evaluate those and we're waiting to see exactly what. We think, as Steve also mentioned, our competition may not be as strong, may not have as much available capital as they've had in the past, so maybe pricing may be a little better.

We have been very active in the behavioral health area, as we mentioned, just made, announced two acquisitions. We're looking at a number of others. So we are opportunistic, as you point out, and we are -- we think we're in pretty good position, so we are happily waiting to see what the market presents to us.

Great. Thanks a lot.

Our next question comes from Eric Chiprich of BMO.

Hi. Good morning. Thanks for taking the call.

Questions on volume growth for the quarter. Was that mostly from Vegas or are you seeing any other markets performing particularly well also, at least on the [adjusted] admissions side?

Unlike in the first quarter, Eric, where our admission growth in Vegas market clearly outpaced the rest of the acute portfolio, in the second quarter, it pretty much tracked the rest of the portfolio. So same-store admission growth in Vegas was 2% in the quarter, roughly 2%, and the rest of the portfolio was roughly 2%, and as you might expect there were some facilities that were a little bit over that and some that were a little bit under, but for the most part, the facilities gravitated around that number and we didn't have that big gap that we had in the first quarter.

Could you discuss maybe a little bit the trends throughout the quarter, I guess maybe as some of your competitors in Vegas? You said they stirred the market maybe a little more heavily. Was there much of a difference in April as compared to June and any thoughts on you how July's been looking?

In the second quarter, I think it was a function of volumes starting out pretty strong in the quarter and then kind of weakening as the quarter went on.

And as far as July volumes, they look pretty good. You know, it's hard to know and it also is dependent on patient mix, et cetera, but volumes in July have been fairly strong.

Thanks.

And a final question on the pharmacy change. Now that that's annualizing could you discuss maybe what your expectations are for cost benefits going forward?

I think for the most part, you know, we now had at the end of the second quarter, we've had a year of bringing the pharmacy in-house, so kind of the major one-time savings have been realized. I think we do think that we'll be able to control the sort of the inflationary and utilization sort of costs going forward a little bit better on our own than we did with an outsourced vendor, which is what really drove the change to begin with.

But those sort of one-time savings, I think, have now been realized and we're obviously anniversarying that beginning with the third quarter. So I don't think there'll be significant savings going forward in that sense.

Okay. Thanks for the update.

Our next question comes from the line of John Simon of River Capital Advisors. And John has withdrawn his question. Our next question comes from the line of Jason Gurda of Bear Stearns.

Good morning.

Steve, you mentioned that you thought you'd gained some of the non-Sierra business back in Las Vegas. Do you have a particular strategy to put in place?

I think that this is very much sort of a blocking and tackling exercise, Jason, I mean it's not kind of a grand initiative. I think you literally work doctor by doctor and patient by patient and ambulance company by ambulance company to assure them that you can accommodate the volumes, you know, managing literally service line by service line, making sure that doctors and patients get in and out of ORs and cath labs, et cetera, as quickly and efficiently as possible.

And I think, frankly, that's easier to do in the upcoming months when these are just seasonally the less busy months, so you have a little bit more excess capacity to work with. So I think we need to do all those things and I think our operating folks in Vegas are very much focused on that.

And is this a step-up from what you've been doing over maybe over the last few months?

Look, I think the reality is, and I think the first quarter reflects this, everybody was dealing with sort of a new dynamic in the first quarter with this dramatic shift in patients and we were dealing with all kinds of capacity pressures originally and our competitors were dealing with the loss of capacity, and everybody, I think, was sort of formulating their response, and not much happened in the first quarter other than the shift in the Sierra patients.

In the second quarter, everybody started reacting and counter reacting and I think you saw a little bit more jockeying for position and, frankly, I think, we drew the short straw a little bit in the second quarter, but I think our guys are actively reacting to that and we've got a number of things under way to try and, as I said, I don't think we'll recapture the volume to the level we had to the level in the first quarter, but I think we'll do better than we did in the second.

Okay.

I think your Manatee hospital completed an expansion project during the second quarter. Wanted to see how that was trending.

It did. We opened that renovation literally at the very end of the second quarter. I think it's probably not the best time of the year to really be able to tell the effect of that.

This is obviously the slow time of the year in Florida, but we're very much thinking that come the fall and the winter, we will do much better this coming busy season than we've done in the past, partly because the facility is just much nicer, much more conducive to efficient operations and partly because it was very much disrupted during the construction phases.

Okay. And then just a last question.

Have you seen any unusual trends or pickup in contract labor costs or physician professional fees?

I mean I think we have seen upward pressure on both over the last few years. I don't know that we have seen a dramatic -- we certainly haven't seen a dramatic increase in the last couple of quarters. Those are two areas where particularly in markets like Las Vegas, for instance, we've seen pressure on contract labor as our volumes have increased.

And on professional fees, you know, that's been throughout, but I know LifePoint talked about that a lot. I think some of the professional fee pressure they're talking about is probably more specific to smaller hospitals and smaller markets. You know, we've had some of that pressure in our south Texas markets, but, clearly, not to the magnitude that LifePoint reported.

Okay. Thank you very much.

Our next question comes from Matthew Borsch of Goldman Sachs.

Yes, hi. Good morning.

And I might have missed a little bit of this, but can you just comment on, you know, across your markets the volume trend towards the end of the quarter, and just an early read on what you're seeing so far for July?

Yes, I mean, Matthew, we did say that basically volumes kind of weakened throughout the second quarter and that at least at first blush July looks like it's rebounding a little bit.

Okay. Great. Fantastic.

And if I heard you right, it sounds like the charity care revenue, or the charity care amount was up by 28% year-over-year, from 88 to 113. Can you sort of break that down into, you know, what the components of that increase were?

I'm not exactly sure I understand the question other than we did say that, I think, the bulk of that increase is driven by an increase in patients coming to the hospitals with no insurance. And we've always said that charity care and bad debt is driven primarily by uninsured patients rather than by patients who have copays and deductibles and we still believe that to be the case.

I guess what I meant was if it's 113 in the charges versus 88 a year ago, how much of it is volume-driven and how much of it is driven by the change in charges?

You know, my guess, and I don't have these numbers in front of me, is that our gross pricing is probably increased 6 or 7% over last year. There's nothing extraordinary about our gross pricing.

I think this is more an issue of, you know, just pure admissions volume and we did say that our self-pay admissions in the quarter were tracking at about twice the rate of growth of our overall admissions.

Right. Do you see any reason -- well, okay. Let me -- sorry. Let me just ask you a different question.

You know, you guys, obviously, Vegas is a big market for you and you're watching things there. Do you have any sense as things developed, you know, whether you think the United-Sierra merger is going to be approved at this point?

You know, Matt, I certainly have no particular insight into that. Obviously, you know, as I think both of those companies have reported, both federal and state regulators are taking a place look at it. They've taken a few different cuts at it and asked for more information.

It is a fairly large concentration of market -- heft in the market, but I certainly am in no position to handicap the likelihood of a transaction or, you know, what form the transaction will take. I'm sure there are a lot of people smarter than I can who are following that.

Well, let me ask a last question.

You know, you talked about differentiating between the uninsured and the cost sharing on the insured. Can you just update us on how well you think your hospitals are doing in terms of collections, cost-sharing collections from the insured, you know, and do you ever sort of try to benchmark that against competitors?

Matt, you know, my sense is that, frankly, all of our peers say and report much the same information. I think we all say we collect somewhere in the neighborhood of $0.06, $0.07, $0.08 on the dollar of patients who have no insurance whatsoever and we collect somewhere around $0.50 or $0.55 on the dollar on patients who have payments after insurance. I don't know that those numbers have changed dramatically.

You know, to be perfectly honest with you, I think that most of our techniques for collecting those amounts are very similar to our peers. I can't imagine that any of us do it terribly better than anybody else and I think it is more a macro issue than something that one company or one hospital excels at more than another.

Okay. Thank you.

Our next question comes from Frank Morgan of Jefferies.

Hi. One quick question.

Back to that contract, the development contract on the hospital, I think you mentioned revenues there. What kind of embedded profit was there in the quarter for this and how long will that flow through your numbers? Thanks.

There's probably a couple of million dollars of operating profit in the quarter, Frank. The contract, or the construction process goes in earnest really through the end of this year, maybe it carries over a little bit into next year, but the contract will largely be finished at the end of 2007.

Our next question comes from Matt Ripperger of Citigroup.

Hi. Thanks very much.

Steve, I think your Cap Ex spending for the year was originally around $450 million and you're about 184 year-to-date. Can we just talk about whether we should adjust down sort of the Cap Ex for in this year and what's contributing to that?

I think it's mostly a timing issue, Matt. You know, as we look at our projects, it's not like we've abandoned any significant projects. I do think it's possible the pace will pick up at the end of the year as we finish off Centennial and buy the equipment for Centennial, but, you know, certainly I don't think we are going to get to that 450 and to some degree, we've tried to manage that number a little bit from a timing perspective.

I think it's more likely that we finish the year in the kind of 390 to 410 range. Most of that capital on, will get spent, however, next year because, as I said, most of the projects that we had based that estimate on are still going forward and at their original estimated costs.

Okay. Great. And then second question.

As it's related to McAllen, I know you were ramping up a new pediatric hospital there and on the last call I think you mentioned, I think, that you were looking to employ more physicians. Can you just give an update on some of how those initiatives are going and whether it's affecting the market share in that market?

The pediatric hospital did, in fact, open in March of this year, March of 2007. It has been pretty busy. It has captured the vast majority of the pediatric business in the market.

You know, the most significant challenge that we have in the McAllen market, Matt, remains a payor mix challenge because of the physician to ownership dynamic at our competitor hospital. It is still difficult for us to get anything other than sort of a minimum amount of the better paying commercial and even better paying Medicare business in the market.

We do continue to look for ways to do that, including physician employment, our own joint ventures with physicians, et cetera. But, you know, as we said kind of when we gave guidance in the beginning of the year we didn't expect to make tremendous in roads in McAllen.

In the second quarter I think we were a little bit ahead of last year. We were pleased with that but in terms of making any great strides, it's more of a, kind of an inch by inch battle rather than when we're going to make -- take big steps.

Okay. Great.

And then lastly, when you look at growing the behavioral business, do you see more supply in terms of the acquisition supply on the residential treatment side or on the inpatient psych side, and do you have a preference for one versus the other?

I mean I think if you look at the recent history, there have been more residential facilities for sale or for purchase, however you want to look at it. And in fact we have increased our share of the business, or the share of the business that's residential, clearly, over the last few years, most notably by the Keystone acquisition, which is primarily almost all residential.

But, you know, I think it's a little hard to predict going forward. We tend to sort of look at hospitals just in terms of their market position, the potential for revenue improvement and enhancement, et cetera, rather than say, well, we really want acute facilities or we really want residentials.

You know, the one aspect of the residential business that gives us pause when we do look at it is it tends to be relatively limited payor sources. You're getting paid by one or two major payors as opposed to an acute facility where you probably have a broader base of payors and that provides certain risks that you don't have in the acute business, but certainly doesn't mean that we're not interested in the residential business, doesn't mean we haven't done well in it. It's just that, it's just an aspect of it that we watch carefully when we evaluate an acquisition or an opportunity.

And it seems like mental health parity is gaining momentum both in terms of expanding the SCHIP program, as well as something broader. Can you -- have you thought internally about what that could potentially mean in terms of incremental utilization and an uptick in utilization?

You know, we certainly encourage and are philosophically in favor of mental health parity legislation at the federal level. We have had mental health parity legislation passed in a number of states over the past few years, so we have a little bit of an experiment, a live experiment that we can evaluate.

I think our general sense at this point is that, you know, the market and private insurance has already done a lot of what mental health parity legislation will ultimately do. I think what we have found in the states that passed it is that in certain service lines and for certain diagnoses it may be helpful, but in terms of, I think, a real needle mover that will sort of change the landscape of the business, I don't know that mental health parity legislation really creates that sort of an opportunity. But certainly it should be incrementally favorable and we certainly are very much in favor of pushing for it.

Great. Thank you.

Our next question comes from Paul Watson of A.G. Edwards.

Good morning.

Steve, could you talk a little bit about the second half and what we might expect in terms of margins, any opportunities for improvements there? I know we've traditionally seen as volumes are maybe lighter in the second half that expenses are spread more thinly across on lower volumes. Any idea on margins there?

I think it's hard to predict, Paul. I mean I think that we have, you know, clearly identified sort of what the critical variables are. I think in order for us to turn around the margin decline that we saw in the second quarter, we need to regain some of that Sierra- non-Sierra volume in Las Vegas, we need to hope that charity care moderates, or uninsured volume moderates as it had in the latter half of '06 and the first quarter of '07, and we need to hope that overall acute care volumes kind of stay in that 2 to 3% range at least.

And I think those are the critical variables in terms of thinking about whether we can have margin improvement in the latter half of the year, and we haven't been particularly pressing in forecasting those things, nor I think have many others, so we're going to just keep watching it very closely.

Okay. Great. Thank you.

And I don't know, you've talked about Centennial quite bit, but any idea of the impact on the payor mix or any forecasting that you've done there, how that might impact the Las Vegas market?

Yes, I mean we like the location of Centennial probably even more than we do the location where we opened Spring Valley. It's a good demographic. There are, frankly, a lot of Sierra patients up in that marketplace, so, you know, our general sense is that within the Vegas market, it is well located.

Now, the Vegas market faces the same uninsured issues and, frankly, as we've disclosed over the years, in the last few years, in some respects faces some of those uninsured issues more acutely than other markets. And we're no different than anybody else in that sense, in that market but the actual location of Centennial should lend itself to fairly, decent, a fairly decent payor mix.

Great. Thank you very much.

Our next question comes from Tom Gallucci of Merrill Lynch.

Good morning. Thanks.

I don't have much incremental at this point, but just following up on that last question, I would be curious how do you think the new facility opening up sort of plays into the issues that you're seeing in Vegas, either the other guys marketing against you in terms of being more crowded? How do you think that that plays into the strategy as you get deeper into the year? Will that help you, or is that just more business that you need win back in order to sort of breakeven, if you will?

I mean, again, I think that Centennial is well located. It serves the sort of growing population in the northwestern part of Las Vegas.

Obviously I think that having a hospital in a market that is somewhat underserved is helpful, Tom, in terms of being able to sell to doctors and physicians convenience for them, you know, sort of quick in and out, it obviously will not be at capacity when it first opens, so you'll have the ability to offer less waits in the emergency room and less waits for your diagnostic and other outpatient areas. So, you know, I think all that's helpful to address the problem that we talked about, which is that our other hospitals are operating at very high levels of occupancy at the moment.

Okay.

And then on the bad debt, I'm sure if there was something obvious you would have mentioned it, but are you able to tie that increase in self -- or uninsured admissions to anything specific that you can tell in any given market, or is there really nothing that you can really put your finger on?

You know, Tom, I mean I think we haven't been terribly accurate about finding a leading indicator for bad debt, nor has anyone else, frankly, as you know, in this industry. Look, I think that probably the most telling metrics even after the fact is that, you know, there are a lot more people today that don't have health insurance through their employer than there were seven or eight years ago.

That number seven or eight years ago, if people got health insurance through their employer was something like 70% and today it's 60%. And I think that probably than any other metric, that has really changed the landscape for hospitals.

Unfortunately, I don't know that there's any great data out there which accurately sort of projects where that number is going, you know, with a quarter or two's view. So, I don't know that we're in a position to make any real accurate projections at this point.

Sure, sure. And then just one housekeeping item.

I might have missed it, but I guess I'm assuming that you're sort of reiterating the guidance that you've had in the past at this point.

Yes, our guidance, which we originally issued for the year of $3 to $3.05 is still a number that we're comfortable with.

Okay. Thank you.

Our next question comes from the line of Christine Arnold of Morgan Stanley.

Hi, there.

I'd like to probe Vegas just a little bit more. Did you have in your estimation 15 to $20 million from Sierra this quarter consistent with last quarter?

I think our Vegas revenues and volumes, Christine, were pretty consistent between the two quarters.

For the Sierra.

For Sierra, yes.

So is it possible to quantify the dollar decline in paying volume kind of first to second quarter? From the other payors in that market?

Yes, I think it is. I don't necessarily have it in front of me, but I think, for instance, we did try and calculate what the loss of Medicare business might have cost us in the quarter and we think that number's probably 3 to $5 million in terms of lost Medicare business in the second quarter.

Okay. And how do we think about the other commercial payor loss?

I think we can go through that exercise, and we have for every payor. I just don't have that data in front of me.

Okay. And then I wonder if part of the issue with the price per adjusted admit was acuity? Did your acuity come down in the quarter? Is there some way to quantify that?

You know, our acuity, Christine, really has not changed much at all over the last few years. We see very little change quarter-to-quarter and we didn't see a great deal of change in the second quarter either.

Okay. All right. Thank you very much.

You're welcome.

Our next question comes from the line of Margo Murtaugh of Snyder Capital.

I just wondered how many psych beds you have now, how many are you adding over the next two years, and what's happening on pricing of psych acquisitions?

Margo, I don't have the exact number of beds that we currently have. That's obviously publicly out there, but I don't have it in front of me.

So how many are you adding over the next--

We have talked about being able to add, because we have roughly, you know, 7000 beds out there that we can roughly add 5, 6% of that total each year for the next couple years. Some of that's dependent on construction time tables and zoning and CON regulations, et cetera, but, you know, that just gives a sense.

I think we have added about 5 or 6% a year in incremental beds just from construction over the last couple years. We think that's a pace that we can keep up for a couple of more years.

As far as acquisition pricing, as you know, I mean it remains competitive. Not surprisingly, it's a good business. We're doing well.

Psych Solutions is doing well. There certainly are a couple of private equity financed small companies that have entered the space, so, yes, I don't see the pressure on behavioral acquisition pricing easing up any time soon.

Okay. So you haven't been able to find any real bargains in the market?

Well, you know, everything is relative, Margo. Five or six years ago we were buying behavioral facilities for three and four times EBITDA. We certainly have not been finding those kinds of bargains in the last few years, but we've bought a number of facilities in the last few years at 7.5 to 8.5 times EBITDA and we've done well with some of those.

I mean it continues to be a fundamentally sound business, but those kinds of bargains and the lack of competition for those acquisitions that existed four or five years ago clearly does not exist today.

Okay.

The issue also is not only what you pay going in, but how you do subsequent to the purchase. And that, if you can really do a good job with the hospital, then obviously, you're bringing down what the overall cost of the hospital was to you.

Okay. So that's a 5, 6% internal growth rate and then acquisitions on top of that, or--

Yes, that's been our history, Margo, over the last couple of years and I think it should continue for at least another couple of years.

Okay. Okay. Thanks a lot.

You're welcome.

Our next question comes from the line of David Bachman of Longbow Research.

Good morning. I think just a couple of things left here.

Not to go over this again, but can you just clarify the discount in charity care numbers? Because I'm not sure if the 113 is the same-store charity care, and if so, what the other, what the overall acute care charity care number is.

113 is the same-store number. The only thing it excludes is Texoma. That's the only sort of non-same-store facility we have in the quarter.

And I apologize, I don't have Texoma's charity care number in front of me, but 113 was the same-store number, as were the other numbers I gave, which was 100 of charity care in the first quarter, and $88 million in the comparable prior year quarter.

As far as our uninsured discount, I gave those numbers too. Those are also same-store numbers, $26 million in the second quarter, $25 million in the first quarter, and $21 million in the comparable prior year quarter.

Okay. So just Texoma would not be in there.

That's correct.

Okay.

And I guess my only other question, then, is just with negotiations with commercial payors, are you seeing anything different there, whether it's pricing trends or, you know, willingness to exclude specialty hospitals in certain markets? Just kind of anything different going forward there that's changing the dynamics?

You know, it's difficulty I think sometimes to make broad observations about his managed care contracting because it tends to vary by payor, by market. I think we feel like we continue to get fairly robust managed care increases, you know, certainly in kind of the 6 to 7% range on average.

Again, in terms of some of the dynamics you've asked for, integrator, exclusivity, et cetera, that really varies market by market based on our market share, based on their market share, based on the amount of capacity in the market, and I don't know that there's any kind of broad conclusions I can give you or suggest to you about that.

But just generally, I think we feel pretty good about our managed care pricing. I think, frankly, our challenges as we've identified them previously in the call are coming in other areas, not necessarily in our managed care pricing.

Okay.

And so just in terms of exclusivity, you're not really seeing a change, you know, from what you've been able to negotiate in the past?

No. Look, I've heard it suggested that the managed care companies are going to return to a managed model, you know, more similar to what we saw four or five years ago where they will seek lower rates in order for greater exclusivity from a limited number of providers.

Again, we certainly have seen that in one or two instances, but it's not something that I would say we've seen wholesale across the portfolio.

Okay. That's helpful. Thank you.

Our next question is from the line of Gary Taylor of Banc of America.

Hi. Good morning. Most of my questions were answered.

I was just thinking it must be satisfying to some decree to be this deep in the conference call having spent so little time talking about McAllen. I guess that market has finally behind you a little bit.

My one remaining question, Steve, was I think the only number we didn't get, or at least I didn't hear it on the bad debt side was just the acute care only bad debt, which I think you have given historically.

Yes, I mean the acute care only bad debt was $93 million in the second quarter compared to $88 million i the first quarter compared to $82 million in the comparable prior year quarter. And that's, again, all same-store doesn't include Texoma.

Okay. Great. Thank you.

Sure.

Our next question is a follow-up from Darren Lehrich of Deutsche Bank.

Yes, just real quickly, Allen, just wanted to, if you're still in the room, just get your thoughts, you know, we're hearing a lot about your payor mix and the impact you're seeing in charity care and, you know, I guess the next few projects that you have in the works are in markets that may give you an opportunity to improve your payor mix or maybe shed some of the county hospital image you have in some of your legacy markets.

Allen, do you see that as a possibility in Palmdale and with Centennial Hills and, I guess, with Texoma? Is that part of the game plan, and can you just give us a sense for how you think mix might change because of those projects?

And then just Steve, can you just comment, was Texoma accretive in the second quarter and by how much?

Texoma was accretive and as we sort of suggested, it almost certainly would be in this first year of acquisition because, as you know, the structure of the Texoma deal, Darren, is that the bulk of the consideration there is our promise to build a replacement facility.

So in the beginning, until we build that, it's a little bit of an easier task for us to have an accretive result. Obviously once we spend 130 or $140 million on a new facility, we'll be a little bit more challenged. We certainly believe we'll be able to have an accretive result at that point, too, but Texoma is really basically meeting our expectations kind of right on our model.

As to your other question about payor mix and some of our new projects, I mean, certainly, as we think about where we're going to employ capital in the future we think about markets that are, again, tend to have a better payor mix. You suggested quite correctly that some of our hospitals and markets have kind of a county hospital legacy to them.

Vegas is not one of those markets. There is a large county hospital in Vegas that we do not own, and so, you know, yes. As I said in response to a question before, we do expect kind of a better than average payor mix at Centennial.

In Palmdale, California, you know, we really -- it's a demographically attractive market. We compete with only one other not-for-profit hospital. We like the payor mix there. We've been hampered by sort of a sub par physical facility there, so we do think that that investment is a play for a better payor mix.

But I think in general, this whole payor mix issue and getting beyond the issue of uninsured patients is kind of a macro issue that the industry is going to have to solve on a macro basis and we're not going to solve it by simply, you know, building and relocating to different markets. I mean we can incrementally address that issue, but it's not like we can get around that issue where somebody else can't.

Sure. Okay. Thanks.

And I'm showing no further questions at this time, sir.

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

Thank you for participating in today's conference. You may now all disconnect.