環球健康 (UHS) 2007 Q4 法說會逐字稿

Good morning. My name is Hamilton and I will be your conference operator. I would like to welcome everyone to the fourth quarter 2007 earnings call. All lines have been placed on mute to prevent 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. I'm Steve Filton. Alan Miller, our CEO, is also joining us. Welcome to this review of Universal Health Services results for the full year and fourth quarter ended December 31, 2007. As discussed in our press release last night the Company recorded income from continuing operations per diluted share of $3.18 for the year and $0.75 for the quarter. After adjusting for certain operating and recovery expenses at our acute facilities in New Orleans resulting from damages sustained from Hurricane Katrina our adjusted income from continuing operations per diluted share for the quarter ended December 31, 2007, was $0.74.

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 and risk factors in our Form 10-K for the year ended December 31, 2007, which we filed with the SEC last night. We would like to highlight just a couple of developments and business trends before opening the call up to questions. Revenues for the fourth quarter increased 12% over the prior year. Exclusive of the impact of new facilities most notably Texoma and revenues related to construction management contract whereby we had built a new hospital for an unrelated third-party, revenues have increased by approximately 80%. On a same-facility basis in our acute divisions revenues less provision for doubtful account increased 7.4% during the fourth quarter of 2007. The increase resulted primarily from an increase in revenue per adjusted admission. Admissions to our hospitals owned for more than a year were flat for the quarter as we had previously indicated that we expected during the fourth quarter of 2007 newly constructed capacity at the physician owned hospital in McAllen, Texas unfavorably impacted our admissions in that market. On a same-facility basis revenue per adjusted admission rose 4.8% during the fourth quarter 2007.

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 revenue. On a same-facility basis, operating margins for our acute care hospitals increased to 13.9% during fourth quarter 2007 from 12.1% during the fourth quarter 2006. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to 130 million and 117 million during the three-month periods ended December 31, 2007 and 2006 respectively. On a same-facility basis revenues in our behavioral health division increased 9.5% during fourth quarter 2007. This increase resulted from admissions growth and increase in revenue per adjusted admission. Admissions to our behavioral health facilities owned for more than a year increased 7.3% during the fourth quarter and revenue per adjusted admission rose 2.8% over the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 23.4% during the quarter ended December 31, 2007, as compared to 22.8% during the comparable prior year period. Our cash flow from operating activities was approximately $26 million during the fourth quarter of 2007 following the third quarter when it was $164 million. As we discussed last quarter we were favorably impacted in the third quarter by adds $48 million change in other working capital accounts due primarily to the timing of certain accrued payroll and accounts payroll disbursements which were funded in early October. At December 31, 2007 our ratio of debt to total capitalization was 40%, and the ratio of debt to EBITDA was 1.98. We spent $76 million on capital expenditures during the fourth quarter.

Included in our capital expenditures were the construction costs related to our new 165-bed Centennial Hills Hospital in Las Vegas that opened in January and a new 171-bed hospital in Palmdale, California that is scheduled to be completed and opened in 2009. Also in California we are underway with a major expansion of emergency, imaging, and women's services at our Southwest Healthcare Campuses in Riverside County, California. Our behavioral facilities have operated at a very efficient 77% 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 approximately 400 new behavioral health beds during 2007, expect to open a similar number in 2008. During the fourth quarter of 2007 we repurchased approximately 1.2 million shares of our Class B common stock and we repurchased another 1.7 million shares in the first quarter of 2008. We currently have 3.9 million shares remaining under the previous authorized share repurchase program. We would be pleased to answer any questions at this time.

(OPERATOR INSTRUCTIONS) . Our first question comes from the line of Justin

Thanks. Good morning. Couple questions. First on the behavioral health side, the admissions there were much higher than most of us were looking for. Anything you can tell us as far as what you saw go right in the quarter and how sustainable you expect that run rate to be into 2008?

I mean, obviously we were extremely pleased with that growth rate, Justin. I don't know that I would venture to say we're sustainable at that level but our admissions have been strong, they averaged a little over 4% for the year. We've talked about being able to sustain behavioral same-store admissions in the 3 to 4% range and I think that we should be able to. That 7% number, I think reflected strength throughout the portfolio. It wasn't really just focused on a few markets. I think it reflects the benefit that we're getting from this ongoing capacity expansion program that we've been talking about now for several years. It reflects our efforts in certain cases to convert residential beds to acute beds, one of the keystone facilities we did that with great success so I think it's a function of just a lot of the strategy execution that's been in place for a number of years and just general strength throughout the portfolio.

Let me add something to that. The business, since it's largely directed by managed care and various governmental authorities, it's a trust business in part. People have to get to know you and trust that the Company is a solid Company, does a very good job quality-wise, and that's how I view this. It's just a compliment to the professionalism of all of our people, and the trust that they have in their markets.

That's helpful. Maybe a couple of bigger picture questions. The 10-K you put out last night gave some color around Las Vegas and McAllen, obviously Vegas is doing extremely well. Given the Sierra impact that benefited '07 as well as Centennial of that maybe you have a little bit of a drag in 2008, at least the first half, can you tell us, that facility base in Las Vegas has been growing something like 20% a year over the last couple years. Given what you saw in '07, which we know is going to happen in '08, can you tell us what kind of growth you expect to see out of Las Vegas when you put out your 10-K next year?

I think you touched on sort of the moving parts in the market, Justin. We have talked for some time in our 2007 guidance. We had anticipated that Centennial would actually open a little bit earlier than it has, and we had included in our 2007 guidance $0.08 to $0.10 of dilution for Centennial. We probably realized a couple cents of that in the fourth quarter just with pre opening costs and now I think have shifted $0.07 or $0.08 of that into 2008. Centennial has gotten off to a fast start in its first few weeks.

We're very bullish about its prospect but it certainly is going to incur operating losses in the first half of the year and we fully anticipate that and have embedded that in our guidance. But again, generally feel very bullish about its long-term prospects. As far as the Sierra situation, that's a little bit more up in the air. We need to renegotiate our contract and we're in the process of doing that with Sierra by late Spring, early Summer, and I think our view is we're relatively well positioned regardless of how that turns out. If we renew our contract at reasonable rates and HCA remains out of the network, then I think that will be a positive for us. If, however, Sierra and HCA decide to renew their historical relationship and HCA gets back in their network I think we feel there's an opportunity for us to go out and replace some Sierra business with other Medicare, Blue Cross, other managed care business that we've lost by accommodating that Sierra business and frankly, as we've talked about for awhile now that other business is better paying business.

So we'll have to manage through all that, and we don't know at this point exactly how that's going to sort out, but we're relatively pleased with our position. Obviously we can't replicate in 2008 the same earning surge that we had from the incremental Sierra volume that we got in '07, but we think we can maintain that profitability and then we talked about the dilution we will get from Centennial in the short-term.

Okay. Just one more big picture question for Allen, the other piece you disclose in the K is the McAllen facility. Obviously that's seen its share of issues. Looks like it continues to deteriorate. Is there anything you can tell us as far as timetable when you expect some of the initiatives to see improvement, when would you make a decision whether you want to continue in that market given it looks like it's now at a net operating loss for you in 2007 and probably continues that way in '08?

Let me try and answer that question. I think as we've talked before there is still a great deal that we like about the McAllen market. It remains a fast-growing market. It is not necessarily an over bedded or market that has an excessive capacity that the facilities there operate relatively full, so the challenge for us is to regain some of the better paying commercial and better paying and better margin Medicare business that has been lost over the last few years. We think we have strategies in place to do that but we're very conscious of the fact that McAllen has turned into a negative contributor for us, and it's something we're watching very carefully as we employ these strategies and execute our plan.

Okay. So no specific timetable you can share with us?

No, I don't think so. I think that in general we rarely set sort of firm or hard and fast deadlines for ourselves, but I can assure you that in terms of the dynamics that you've noted, we're very well aware of them and following them closely, and they're affecting how we think about investments in the market, et cetera.

Great. Thank you very much.

Our next question comes from the line of Ken Weakley.

Thanks and good morning. We spent a lot of time on bad debt over the years. In looking back at my model labor cost of 43% is relatively high over history. If I went back to 2000 your labor costs were only about 39%. I know some of that is going to be because of pricing deceleration and some of the gross charge issues but can you maybe disentangle the pricing deceleration versus what's ever happening on the labor side, help us understand that 400 basis points of erosion, if you will, on labor margin?

Ken, it sounds to me like your question is a more long-term question. I think you referenced going back to 2000. I think clearly a few things have happened since 2000, more so sort of from the 2003 time period we've seen a, as an industry, kind of a deceleration in volumes as well as increased in uninsured that has driven revenue down and that has made it more difficult to gain the source of efficiencies that we were gaining in the 2000, 2001, 2002 time period. Clearly that's also a time period in which there has been significant wage inflation. Again to remind everybody, I think the industry really saw an explosion in its use of temporary nurses and registry nurses in that kind of 2000 - 2001 time period. I think those pressures have at least moderated, but they certainly have resulted in just higher base level wage rate structure for our nurses. I'd also point out to people who are sort of following us specifically that when we brought our pharmacy services in-house in the middle of 2006, we obviously moved a significant salary expense from other operating expenses to salary expense.

Right.

But I think the other factor that we mentioned certainly have all had a factor in squeezing those margins in that time period.

Is there any expectation or goal to get that back down over the next few years, or is it it something that sort of gets embedded into the cost structure and you just have to learn to live with it until revenue growth accelerates?

I think that some of the factors are probably beyond our control in terms of the nursing shortage and the shortage of other clinical personnel, and while I think that those are factors that should again moderate as the years go on, and we see that nursing enrollment figures have increased and so we'll see a greater pipeline of nurses coming into the system, none of that happens immediately. I think we're back to and I think you see it, in the periods when we have decent volume growth and better payer mix, our salaries as a percentage of revenue look better and I think that will be the dynamic that continues to sort of be visible, at least in our results.

Okay. One last question on the acquisition side. It's been awhile since you have acquired an asset or at least had an active profile in that regard. Do you -- I mean, is the cost per bed getting to a range where you're comfortable looking at more assets? Is the marketplace more interesting? I know there's a lot of companies out there trying to sell assets. So just curious about your acute care expansion plans going forward.

Our last acute care acquisition of note was just about a year ago when we bought the Texoma assets, and we were pleased with that and like the prospects of that asset, but I think you know our history, Ken. We are a pretty disciplined and opportunistic acquirer. We are going to acquire assets, either acute or behavioral, when we think they make sense, when we think they fit our profile, when we think they're reasonably priced, and we're not going to acquire if they don't fit the criteria. We continue to look for asset potentials and asset opportunities. Most of the assets that have been for sale that you kind of alluded to have been other for-profit assets. Historically, that has not been a great interest of ours. We just don't view them as having great opportunity, although there have been a handful of for-profit deals that we've done over the years, like in Aiken and Rancho Springs out in California that we've done quite well with, but generally we prefer to look for not-for-profit assets. We continue to look but part of the reason we became an aggressive acquirer of our own shares again in the fourth quarter '07 and first quarter '08 was that we viewed the acquisition of our own earnings stream to be the most of, sort of prudent economic investment that we could make so we are constantly reevaluating all our opportunities and we will continue to do so.

Ken, you're really talking about growth as well, and I'm in Las Vegas, Centennial, and we're going to really like this. Other than being concerned about your brethren with fees for the acquisitions, this is 165-bed acquisition, developed, no fee, and you're going to like the results. Very excited about it. Next year we have another one. So we've got Palmdale. We view it as both. We view it as either development or acquisition. As long as there's growth in the Company, and you also know that we've made a few acquisitions in the behavioral health end of it it this past year, but we do that, again, very selectively. We're not looking to just pile in numbers. We do it very selectively.

Thanks so much. Take care.

Our next question comes from the line of Darren Lehrich.

Thanks, good morning Alan, Steve. This is the second year in which you've come in slightly above your annual guidance. Both years you left that guidance untouched unlike most of your peers. My question is do you think this is the result of any kind of improving visibility in your markets? And, Steve, could you help me think about whether there's been any note worthy changes to your budgeting or planning process that gives you any more precision than you had before?

Well, I think you know, Darren, some of what has caused the volatility in our space in general over the last few years certainly has affected us back in 2003, 2004 we saw our volumes decline on the acute side. And we certainly have seen an increase in uninsured. Our volumes have come back I think stronger than just about any of our peers but we still, although we did well in the fourth quarter we still have some unpredictability and volatility that occurs with our uninsured volume. Some of the stuff that's been specific to us that's caused volatility I think, has clearly moderated or mitigated itself. We've lost significant profitability in the McAllen market in '04 and '05 but it has been relatively stable in the last couple years, and that's been helpful to our results. We obviously add significant loss of EBITDA in '05 in New Orleans market when we lost two facilities as a result of Hurricane Katrina. We obviously view that as a nonrecurring item. So I think things have stabilized in the acute portfolio. Half of our earnings, or thereabouts, come from the behavioral business, which has been more stable. So I think in that concern, as you point out, we've met or slightly exceeded our annual guidance in '06 and in '07 and are just feeling generally that the business is a little bit more stable and predictable, at least on longer-term basis. There may still be quarterly bumpiness, but on a longer-term basis, we sense greater stability than we did a few years ago.

Okay. Thanks. Then with regard to your new group purchasing organization, how quickly do you expect to convert, and can you give us a sense for some of the higher value supply cost items, like implants, just what kind of percentage savings might be possible?

We will change our group purchasing organization affiliation effective April 1st. As you suggest, Darren, it is driven almost entirely by an expectation on our part that we will get improved pricing by doing so. It will be a little bit of a transition to do that. I think we're making every effort to transition as completely as possible, but does it take a little while to do so. So we think we'll enjoy some modest improvements in our supply pricing in 2008, but probably get the full benefit of that, frankly, in 2009 and going forward. And I think it it the's largely across the board. I don't know that it's in any particular supply category or any particular service line.

Okay. That's helpful. Just back to Las Vegas, Allen, sounds like you're there, when it comes time to renew the Sierra contract, do you have a sense from your people there whether United will bring you the combined business and product to recontract, or is it still just the Sierra business at this point?

Most of the current conversations, and as you know, obviously the merger was just effective in the last few days. Most of the current conversations; however, have really been about the legacy Sierra products. United does not have all that big a presence in Las Vegas, and our expectation, I think, Darren, quite frankly, is what will happen over time is that the United products will probably sort of phase out and most of those people will move into Sierra products in one form or another, and that's the way that the United/Sierra entity will achieve their savings and achieve their goals. So we see that as kind of more something that takes place over a little bit of an extended time line rather than something that kind of -- there's an on and off switch to.

We have a very good relationship with Sierra, and they are going to be driving the combined business here. So we feel good about that.

How is Centennial Hills ramping, Alan, and I'll jump here.

I'd say ahead of expectation. I think this is extraordinarily well placed in terms of growth of the community, and generally all around, everybody who has been involved with this, very bullish.

Great. Thanks very much.

Our next question comes from the line of Tom Gallucci.

Thank you, good morning. Maybe just following up on the last part of that last question. Steve, obviously, when you open a new facility there's some cannibalization from some of your existing. Is there any way to put in perspective or measure the ramp-up at Centennial, how much of an impact that's having as we think about same-store numbers for your volume trends versus maybe you're just taking market share from others?

Our expectation, Tom, is that there will be some cannibalization, but probably not as much when we open Spring Valley four years ago, when we opened Spring Valley the nearest hospital to us was one of our own, Summerlin, where as when we opened Centennial, the nearest hospital of note is an HCA facility. I think we're just in better position this time around not to cannibalize quite as much, but there will be some of that. It's a little hard to tell. Centennial has been open for a few weeks. There's no sort of precise way to know exactly where your business would have gone had it not come to Centennial. We're seeing a little bit of softness in the market all around in Vegas in the early part of '08. I don't know that it's due to Centennial's opening. Some of it is we're seeing record ER volumes throughout the market, but not necessarily seeing that all convert into admissions, and I suspect that may just be a temporary issue, and may be a function of a flu season that's resulting in a lot of ER traffic but not a ton of admissions.

Also, up, another dynamic is that there's a Blue Cross contract in the market that now includes Catholic Healthcare West as a provider, and they were not a provider before, so we'll -- I think we feel like we've lost a little bit of business, Blue Cross business to that but generally, as Alan said, the Centennial volumes are very strong. They don't seem to be affecting our other hospitals in any great way, and so we're -- that's pretty consistent with our expectation, and we're pleased with the way it's gotten off the tracks in the first few weeks.

Okay, Good, maybe just on behavioral health side. Two things there. You're obviously adding significant amount of beds, and that's fostering the growth. Is there any particular services or programs that there's a real demand out there for, or does it just vary by market? And then wondering what you're seeing on the pricing side in that business.

Well, as far as pricing goes, or price tin fourth quarter was pretty strong, and frankly throughout the year we've been pleased with the admissions, but there have been a few quarters where we would have liked the pricing to be a little bit higher but certainly the pricing in the fourth quarter is well within kind of what we think are the sustainable sustainable levels for next couple years. So we were pretty pleased with that. I think as to your first question, it is really a market by market issue.

I mentioned in one of our keystone facility we converted residential to acute beds and have seen a really dramatic increase in admissions as a result of that, but we've got other residential programs that are doing quite well, and quite honestly, I don't think you can have 7% same-store admission growth amongst 85 inpatient facilities unless you have relatively strong performance across a pretty wide swath of facilities, and I think that's what we got. So I don't think it's specific to any particular program, and I'd echo what Alan said. I think we feel like we've got some real solid franchises, and in a quarter like this we just feel like all that blocking and tackling that you do and choosing the right facilities, et cetera, pays off.

Maybe just one last one. The investigation down in Texas, am I sensing maybe some progress there?

As our 10-K disclosure indicates, we are having conversations with the government, and I would say probably for the first time in -- really since the investigation began, Tom, we feel like we may be at least seeing the light at the end of the tunnel, meaning that, I would say maybe we're at the beginning of the phase of trying to bring this to a conclusion. I think it is still way too early for us to predict precisely or even he remotely what the outcome would be, but we at least seem to be entering that phase where the government is ready to talk about a resolution, and we're anxious to do so under the appropriate terms.

Okay, thanks a lot.

Next question comes from the line of Christine Arnold.

Good morning. Couple questions. Earnings progression I'm a little challenged with. It looks like behavioral health year-over-year kind of first half of the year looks strong, Centennial, some dilution but looks good. Do you see first-half earnings kind of in the way you're looking at things up year-over-year in the first half of '08?

I think you raise a couple of issues, Christine. We will have that Centennial dilution, it will clearly be front half loaded in 2008, particularly in the first quarter our comparisons with last year are difficult. We had a very, very strong first quarter in 2007, largely as a result of a surge in Sierra volume at our facilities without sort of any commensurate loss of other volume which occurred later in the year, and we had a very positive bad debt performance, which then kind of weakened in the second and third quarter then improved again in the fourth quarter. I think our underlying guidance presumes that uninsured volumes will rise again modestly in 2008, but we don't give quarterly guidance, and we're not about to start, I think particularly in this environment where sort of quarter to quarter changes can be a little bit tough to predict, et cetera. So we're sort of comfortable with our annual guidance, obviously, and we'd caution people that we do have a tough comparison in the first quarter and just to keep that in mind. The Centennial dilution will be front end loaded, but other than that we're not going to give a lot of precise guidance about how the quarters are going to look or how first half is going to look.

Okay. Coming at this from a different angle, and feel free to say you don't want to comment. Just something I'd like to know. As you look at kind of your guidance for '08 you're kind of guiding up relative to consensus expectations. Where do you see the up side relative to the models that you've seen from the sell side?

Well, and I'll answer the question, I think a little differently, Christine, in that when we give our guidance and we're doing our budgeting and our models, in deference to you all, we're not paying much attention. I rarely look at sell side models. We have enough trouble running our own business, let alone keeping track of how other people view it in that sense. So the way I think about it is we've got two businesses, and our behavioral business we've said we kind of expect and our guidance implies 3 to 4% same-store volumes, 3 to 4% pricing on the acute side, 2 to 3% volumes, 4 to 5% pricing. That, I think, translates to right around double-digit EBITDA growth that is embedded in the guidance, and that's how we're thinking about the business with the centennial dilution in there, et cetera, but that's how we get comfortable with the guidance that we've given, and again, we don't do a whole lot of reconciliation. I would venture to say we do no reconciliation with what the sell side models are.

Fair enough. Final question on the economic outlook and what we're seeing in terms of consumer restricted access to credit, the housing crisis, the economy. How do you think about that when you put together your expectations?

Well, we certainly are watching the overarching economic situation nationally, then in our local markets closely, but so far feel like it has not had, in most of our markets, a terribly significant effect. I'd say probably the markets in which we have seen the most softness so far have been in Florida where, we have a couple of markets, but even though Vegas has been kind of very visible, sort of nationally with headlines about leading the foreclosure rate crisis and everything else, the Vegas economy seems to be holding up and at least from our perspective, we don't seem to be suffering as of yet. We're doing okay in California even though that's also cited as a market that's been hard hit by the credit and housing crisis, so we're watching carefully.

One suggestion has been, and I think it's too early to tell whether this is true or not, but one suggestion has been if there is a softening economy and people lose their jobs, that some of those people who lose their jobs in industries like construction and related businesses are people who probably are most likely to have lost their health insurance over the last few years anyway, and so we may be somewhat more insulated in this economic downturn as an industry than we've been historically, but I don't know if that's -- intuitively that makes sense to me but we'll wait and see. But at least so far, and again, I think our fourth quarter results are to speak to. That we have it not seen a tremendous correlation between softness in the housing markets and the subprime crisis and our results.

great. Thank you.

Our next question comes from the line of Erik Chiprich.

Wonder if you could give us an update on Manatee, how that's ramping up and the accretiveness of the Texoma assets now?.

As far as the Manatee market we've talked about a fairly disruptive construction project there that finally finished up at the end of the second quarter. As I just mentioned to Christine or in response to Christine's question, the Florida market is one in which we sense some sort of underlying softness. Interestingly, in that Manatee market, when we talk to our peers down there, we feel like we're probably doing a little bit better than most of the other reported numbers we get from our peers. We feel like that's clearly a benefit of this construction project that's finally finished. As far as Texoma, I think Texoma is pretty much meeting our expectations. The structure of the Texoma deal, we acquired a profitable hospital, and expected to make some modest improvements there, but the big improvements we expect to occur when we open a replacement facility which at this point is probably in early 2010. So we're improving a little bit there but expect the opportunity to take real amounts of incremental market share when we open the new facility.

Great. Could you talk a little bit on the construction project that you guys were conducting during 2007, how the revenues and costs matched up? Was there fourth quarter that allowed more profitability to flow through on that project than maybe earlier in the year?

I don't think so. Ultimately we wound up recording maybe $6 or 7 million of EBITDA in connection with that project, most in 2007, but I think pretty much ratably over the year.

Okay. And then finally, on the Centennial Hills, could you talk about expectations where you think maybe in a year's time target for revenue or EBITDA margin on that facility?

I think our expectations, Erik, again, as we've said a couple of times in the call that Centennial will be EBITDA dilutive in the first half of the year and maybe through the Summer and then by the back-end of the year maybe becomes EBITDA positive. As we go back to our Spring Valley experience and even our Summerlin experience ten years ago, I think within 18 to 24 months we think the facility is operating at market wide average EBITDA margins. That's kind of been our experience in the market and I think if Alan's remarks have indicated we might be hopeful that Centennial gets there a little bit earlier but I think it gives you sense of what the time line looks like.

Thanks for the information.

And our next question comes from the line of Adam Feinstein.

Okay, thank you. Good morning. I guess, Steve, just question here, I'm just trying to think about the fourth quarter. I heard your outlook and everything for Vegas, but was just trying to think about the overall volumes for Vegas fourth quarter relative to the flat number you reported, I guess assume Vegas would have been higher than that but just wanted to get confirmation. In answering that question my thought just being here that your revenue per adjusted admission accelerated so I was just wondering if you had back-filled some of the non-Sierra patients, maybe saw less Sierra volume which helped to lead to the higher revenue per adjusted admit. Any comments there?

As I kind of -- I alluded to in my opening remarks, probably the single biggest driver of the flat admissions was our experience in the McAllen market in the quarter, as we have talked about expecting now for any number of quarters, the physician owned facility in McAllen opened up their OB service early in the fourth quarter, and we have seen our OB volumes decline. Now, most of that decline is in not all that profitable business, so it hasn't really affected our profitability as much as does it just the visibility of admissions. But if you take out the McAllen admissions for the quarter we were up about 1.5%. And I think the Vegas admissions were sort of consistent with that, probably up by about that amount. We didn't really see any shift in the Sierra volume during the quarter. Your question about what contributed to the better revenue per unit in the quarter is a function of better payor mix, which we've talked about a few times now, then a couple other small things. Some better Medicare management, Medicare utilization in a couple of market, more effective. At Manatee, we actually in the back half of the year had a Medicaid rate increase that was specific to the hospital, not a broad rate increase in the state. Actually, we've seen a rate decline overall in the state. So there were a couple other things that really pushed up revenue a little bit but payor mix was probably the main issue in the quarter.

Okay. With respect to bad debt expense, I guess clearly you saw some improvement here in the quarter relative to the third quarter. So just as we think about the run rate going forward, just trying to think about what your expectations are. I'm not sure if you had an uninsured volume number for the quarter. I heard you say something about that but I didn't hear a number.

Uninsured volumes were down in the quarter. Self-pay or non-pay admissions were down 2% in the quarter compared to last year's fourth quarter. It's a little bit hard to do this with great precision certainly on a quarterly basis, but at the end of the day, I think our 2007 uninsured experience was relatively consistent with what our expectations were, and that was we said going into 2007 that we expected a modest increase in uninsured volumes not nearly as dramatic as we saw '05 and '06, but still going up a little bit, and I think that that's how we go into 2008 with that same expectation that we'll see a modest increase in uninsured, probably along the lines of what we saw in 2007 but not as dramatic as '05 and '06.

Okay. And then just on the psychiatric side, just, I guess, couple questions. In terms of adding new beds, you guys are adding some new beds, Psychiatric Solutions is also. What are you seeing? Are you seeing other providers adding new beds? Just curious in terms of whether you think we're going to see a big increase in beds in the next couple of years. So any thoughts there? Then at the same time, want to know how the schools that you guys purchased a couple years ago are doing. That was a new business for you, so just curious in terms of how the numbers have shaped up there.

Right. As you know, Adam, because I know you follow the behavioral industry closely, there was virtually no new capacity added to the free-standing behavioral industry for probably 15 years from the early '90s until 2004 when I think we really sort of on the cutting edge of providers who started to add capacity for the first time. There are, as you suggest, now some other providers who are jumping into that as well, but I don't sense that it's having a significant effect on overall capacity in the behavioral industry. Certainly in our market in which we operate we don't sense -- frankly, as we do on the acute side, that there's just a general up-surge capacity additions all around. So I think people are still doing it relatively selectively, and the fact that it's occurring after so many years of no, expansion at all means that it's no really being overdone the way that it was 15 plus years ago.

Adam, let me add in also that every provider is not exactly the same, and there have been a couple of start-ups that have looked at how well we've been doing over the past few years, and what we're seeing is that they're buying up facilities to get started that we have no interest in, at prices that we would never pay. So that's what they're doing rather than adding capacity. It's really a change of ownership.

I got it. Great.

I'm sorry, Adam, I was going to try and answer your school question.

Yes, please.

We acquired some day schools in California as part of the Keystone acquisition back in October 2005. I think we said a few times that that was a business, as you indicate, Adam, that was sort of new to us, we were experimenting with it. It has been not something that, frankly, we have found particularly successful, and I certainly don't think we have any desire to expand that business. It was a relatively small part of keystone's business, and obviously as a result, is a very small part of our overall behavioral business, but not something that I think we would look to expand in any significant way.

Okay, thank you for the comments.

Our next question comes from the line of John Ransom.

Hi, good morning. Behavioral health bad debt was up a little bit. Is there anything to note there?

No, I don't think so, John. I think bad debt in the behavioral business, it's a little bit different dynamic than it is in the acute. We sometimes make decisions to take patients who don't have insurance as an accommodation to referral sources or because we think we might be able to qualify somebody, et cetera, and we can't, but, no, I mean, I think we're very judicious about how we handle that, as I throbbing bad debt expense for the quarter it wasn't up in any particular market, and didn't seem to be bad result in any event, obviously given the overall results.

Okay. Can you remind me, I guess you're taking a $0.07to $0.0 8 hit this year for Centennial. What is your expected hit '08 over '07 for your construction management revenue? I know that's kind of an odd line item but do have a little pressure there this year?

Not too much measurable. I mentioned before we probably record 6 million or so of EBITDA related to that contract, which will finish up in the first quarter of '08, but we are in the process, and I think pretty far along in negotiate ago second contract, which we'll have going in 2008, or we expect to have going in 2008. While I don't think we'll be able to replicate those exact same EBITDA numbers we should be able to replicate at least half of it, maybe a little more, so there shouldn't be any real material fall-off in the contribution of that little business.

Maybe a couple million?

Yes.

Okay. Thirdly, what's your share count assumption for 2008 and how much do you have left on this buyback?

As I said in my opening remarks, we bought back approximately 3 million shares between the fourth quarter '07 and the first quarter of '08. We have included those buybacks in our assumptions. We have a little under 4 million left on our authorization, and as is our practice, we have not assumed any of those shares bought back as part of our guidance.

So if we were to do end of the quarter share count fourth quarter end of the quarter share count, first quarter, just based on what you've announced, can you just give some numbers there, make sure we're straight?

51 million at the end of the first quarter with the 3 million shares bought back between the fourth and the first quarter.

51 million. Okay. But no further -- just to reiterate, no further buyback? Even though you have 4 million left, you're not assuming any further buybacks in your guidance?

Right. And that's been consistent with the way we have always done guidance.

Two other things. Less important. In Florida the governor has proposed to eliminate CON, also we've been reading about Sarasota Memorial trying to cross the County line and encroach on your Manatee. Any comments on those two?

I think that we are sort of evaluating the position to take, vis-a-vis CON, probably our position at the end of the day doesn't make a hook difference in the grand scheme. I think you actually know our Florida facilities pretty well, John. We think obviously CONs provide some protection and a barrier to entry, but at the same time, like at our Wellington Hospital, it has prevented us from adding capacity over the years that clearly we felt was needed, et cetera, so I think it cuts both ways. I don't know that it's going to have a huge impact on us one way or the other. You're right --

You guys are making some pretty scary comments in the paper, so that's good positioning.

Don't believe all that paper stuff. The issue of the CON, we're in two markets, and we have some pretty good competition there right now. So I don't think there would be any more people coming into those markets. And you're very familiar with them, John.

Sure.

Wellington has HCA up the street, Sarasota -- and Boca and a couple others down the street, so the only thing that I'm looking at, frankly, there's a couple opportunities that I've been looking at for years in terms of new construction. Great growing markets. That would enable us to get in. But that's speculating.

Okay. And then I haven't had a chance to go through your 10-K but is there any update of note in disproportionate share or any State Medicare developments that you've got your eyes on?

No, disproportionate share I think at this point has largely been renewed for -- the states where it's important to us, most notably Texas, and secondarily South Carolina, with slight decline in '08 but not dramatic. Again, all that is embedded in guidance. What we don't know at this point is what happens at the end of '08 since the state's fiscal year is kind of restart at that point. And as you know, we've been talking about this Texas UPL issue for three or four months in Texas where CMS is reviewing the programs in our south Texas counties that we participate in. We've said all along that we think there's -- we're fairly confident that the programs will be upheld and we'll continue to receive this money but we still don't have any sort of can he fin active feedback from CMS, so we await that, but we feel pretty good about that.

Okay. I just want to -- as a general comment, in a tough industry, you guys have certainly exercised very good judgment over time, especially relative to your peers.

Thanks, I appreciate that John.

Thanks.

And our next question comes from the line of Jeff Englander.

Good morning, guys. Wondering if you could give a little more color on the other operating expense line and supplies line and in particular sustainability of that improvement. I apologize if I missed it. I hopped on the call a little late.

No, I don't think anybody has specifically asked that question. I think again, the reason that supplies and operating expenses look as good as they do in the quarter is because revenues look good, it was a good pricing quarter on both ends, and a good volume quarter obviously on the behavioral end especially. But I think generally we think the risks, if you will, are on the top line in terms of volumes and in terms of uninsured volumes and uninsured risks. I think we feel pretty good about most of our expense categories. Darren Lehrich asked the question about change in GPOs. We think that will help us to continue to sustain some improvement in the supply line. The other operating expense line is largely our fixed costs and so I think how that line looks is very much dependent on how revenue looks more than what's happening on the line itself. So we're feeling generally good about expenses and our ability to control expenses in general.

Anything in terms of the supply line in terms of -- that's going on -- a number of your competitors have reported similar experience maybe in terms of implantable devices, or anything like that that's going on that you're seeing there?

No, I think we saw for awhile a decline in drug-eluding stent usage. That I think was being reported industry wide. Then in recent months that volume has started to pick up again, but I don't know that that's significant enough to really move the needle. Other than that, and again, I think acute care hospitals in general have really -- because we've faced a lot of competition on the less sort of intensive side of the business, we've tended to focus on the more supply-intensive parts of the business. Cardiology, cardiology surgery, orthopedics, neurosurgery, and all those are supply expense-intensive lines of business, and I think we'll continue to see that trend occur, but I don't know that it will necessarily put pressure on our supplies as a percentage of revenue. I think we feel pretty good about our ability to improve that relationship.

Great, thanks very much.

Next we have Kemp Dolliver.

Question related to self patrons. Are your outpatient self-pay volumes deviated much from what you've been reporting on inpatient?

Kemp, I don't have those numbers in front of me at the moment, but historically we've found they move pretty similar. The real outpatient volume from self-pay basis is the emergency room, and usually, however that volume is moving, inpatient or admission volumes tend to move the same way.

Okay. The other question relates to if there's something structural in your markets, because you're in states such as Nevada and Texas and Florida which have above-average uninsured populations, yet once you got through the issues in McAllen, your uninsured volume growth hasn't been nearly as dramatic, versus many of your peers who overlap with you geographically. Have you ever -- have you looked at what may account for those differences? Is it just simply better zip codes, or something more subtle?

The only things, and you already mentioned one that come to mind, at least in the last few years, is obviously we've benefited in the Vegas market by obviously a very significant increase in Sierra volume, so we have this kind of unusual increase in paying volume that's not accompanied by a commensurate increase in nonpaying volume, then in McAllen we had an unfavorable payer mix trend in '05 and '06, where we lost paying business, but that kind of has leveled out in '07 -- in '06 and '07, and so I think on both those scores, we've probably had maybe perhaps a little bit more mod deer ranges the last year or two than perhaps our peers have had in their markets.

That's great. Thank you.

And next we have Bill Bonnello.

Can you comment on the managed care contracting environment outside of the Vegas market? Is it pretty much status quo? Are you seeing any change in behavior?

No, I mean, I think, Bill, that generally managed care sort of contracted pricing has been pretty strong. Remains in that sort of 6 to 8% range of increase, probably, less of a concern than contracted pricing because I think we think we're doing pretty well there. We certainly see in almost all markets continued focus and attempt by both payors and employers to move subscribers and employees from more generous plans to less generous plans, et cetera. So to some degree that can undercut what our contracted price increases are, but managed care pricing generally, even with those trends, are holding up pretty well. And so no great changes other than, like you said, in the Vegas market, and I think anyplace where we see payor consolidation, that could threaten to disrupt sort of what is happening in the normal course, but we don't see that happening in too many markets.

That's helpful. The other question is just, you mentioned a couple times your own stock maybe being your best use of capital right now, and I guess with you guys pretty much executing on all fronts, and I might make the argument the stock is not really reflecting that, would you consider a more aggressive repurchase? You still have a lot authorized, but would you consider doing something at a bigger pace or levering up a little to buy more stock?

I think that the honest answer to that, Bill is that we always are considering sort of all of our alternatives, and one of the things that we sort of talked about with the share repurchase in the fourth quarter and the first quarter -- fourth quarter '07, first quarter 0 eight, was that we would sort of complete that -- what we had planned, then we would kind of sit back and take a breather and look at where we were and what our opportunities were and make some judgments at that point.

Okay. Thank you.

And next we have Gary Lieberman.

Thanks. Good morning. I guess maybe just to continue the last question on the share repurchases, maybe ask is it another way. In the past you have been -- or relatively rapidly completed the authorizations you've had. Is there anything that's changed either from a stock price or from a leverage perspective that would make you less aggressive in terms of repurchasing the shares at this point than you were in the fourth quarter and so far in the first quarter?

Well, I would make just a couple of comments, Gary. The last time that we were very aggressive in buying back shares in '04 and '05 when I think between the two years we bought back something like 11 million shares, we were largely using proceeds from asset sales to do that, the sale of our French and Puerto Rico facility. There's no similar dynamic at the moment. My only point being, I think you can perhaps read too much into what happened in '04 and '05. Other than that, again, I think we try and evaluate, and we will evaluate our opportunities. I will also say this, if we were to borrow money it at this point to do anything, to do share repurchases, or acquisitions of any material amount, we would see a pretty significant increase in our borrowing costs from where we are now, because we remain at the moment an investment grade credit, but a whole lot more leverage and we would lose that rating, and in this credit environment that would have a pretty significant effect on our borrowing cost. Just another factor that we certainly have to think about as we decide how best to use our proceeds.

Okay. And then just a quick follow-up on the AR securitization that you guys have done. Is there any impact at all on what you're carrying from a receivable perspective because of that, and therefore would any of it actually impact the bad debt line on the income statement?

No. Those receivables are not factored, they're not sold. They're simply used as securitization for the issuance of that commercial paper. So it has no impact on sort of the underlying level of receivables or our accounting or anything else.

Okay, great. Thanks a lot.

You're welcome.

And our next question comes from the line of Matthew Borsch.

this is Shelley Gnall on for Matt. Understanding there's variability quarter to quarter on the bad debt, can you give us update on your collections? Are you seeing traction in your up-front cash collections or anything you're doing differently on the bad debt?

No, I mean, I think we're doing a lot of things, Shelley and have focused in the last few years on, as you suggest, up-front collections and making sure that we do our best in terms of credit analysis up-front, but the reality is when we have a good quarter like we've had this quarter I think it has more to do with an actual reduction in the number of uninsured patients than does it with improved collection rates, et cetera. So -- and I think that cuts both ways. In the quarters where we've seen our bad debt or charity care rise, it's because we've seen an increase in uninsured patients. In a quarter, like the fourth quarter where we see it go down, I think it is primarily because of a reduction in the number of uninsured patients.

Great. Thanks. Then on the CapEx guidance, it looks like it's implying up tick from 2007 levels. Can you talk a little bit about what's driving that? Is that largely the construction costs?

No, it's really a timing issue. For those of you on the call, we had originally said that we were going to spend upwards of $450 million of CapEx in 2007, and we spent considerably less than that, 110 million or so less than that, so it's mostly a shift of committed dollars really from '07 into '08.

Okay, thanks, I'm all set.

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

Okay. We'd like to thank everybody for their time, and we look forward to speaking with you again at the end of the third quarter.

Thank you.

This concludes the conference call.