環球健康 (UHS) 2008 Q1 法說會逐字稿

Good morning. My name is Bradley and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter 2008 earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Filton, you may begin your conference.

Thank you. Good morning.

I'm Steve Filton. Alan Miller our CEO is also joining us this morning, and welcome to this review of Universal Health Services results for the first quarter ended March 31, 2008.

As discussed in our press release last night, the Company recorded net income per diluted share of $1.20 for the 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, 2007.

We would like to highlight just a couple of developments in business trends before opening the call up to questions.

Revenues for the first quarter increased 8% over the prior year. Exclusive of the impact of new facilities, most notably Centennial Hills in Las Vegas and the revenues related to a construction management contract whereby we have built a new hospital for an unrelated third party, revenues have increased by 7%. We anticipate that a second construction management contract will be finalized shortly.

On a same facility basis in our acute division revenues increased 6.9% during the first quarter of 2008. The increase resulted primarily from an increase in revenue per adjusted admission.

Adjusted admissions to our hospitals owned for more than a year were up 1.5% for the quarter. These admissions were clearly supported by a busier than expected flu season.

As we have previously indicated that we expected during the first quarter of 2008, newly constructed capacity at the physician-owned hospital in McAllen, Texas unfavorably impacted our admissions in that market. Additionally, the opening of the Centennial Hills hospital in Las Vegas negatively impacted our same store admissions comparisons to the extent that it cannibalized some of its volume from our existing facilities.

Finally, we remind you that admissions in the first quarter of 2007 were particularly strong due to the termination of the Sierra HCA contract in the Las Vegas market.

On a same facility basis revenue per adjusted admission rose 5.3% during the first quarter of 2008 for our acute hospitals. We define operating margins as operating income or net revenue less salaries, wages or benefits, other operating expenses, supplies expenses and provision for doubtful accounts divided by net revenues.

On a same facility basis operating margins or our acute care hospitals increased to 17.1% during the first quarter of 2008 from 15.1% during the first quarter of 2007. The margin improvement results from an increase in flu-related and commercial payor volumes, the opening of several new projects and capacity additions in Florida and California and the reduction of registry, malpractice expense and overall operating efficiencies.

Our acute care hospitals provide a charity care and uninsured discounts based on charges that establish rates amounting to $151 million and $124 million during the three-month periods ended March 31, 2008 and 2007 respectively. As a percentage of net revenue, bad debts, charity expense and the uninsured discount for the first quarter were consistent with those levels we experienced for full-year 2007.

On a same facility basis revenues in our behavioral health division increased 9.2% during the first quarter of 2008. This increase resulted from admissions growth and an increase in revenue per adjusted admission.

Adjusted admissions to our behavioral health facilities owned for more than a year increased 6.4% during the first quarter and revenue per adjusted admission rose 2.6% over the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 23.7% during the quarter ended March 31, 2008 as compared to 22.7% during the comparable prior year period.

Our cash flow from operating activities was approximately $132 million during the first quarter of 2008 as compared to $99 million in the first quarter of 2007. At March 31, 2008 our ratio of debt to total capitalization was 41% and the ratio of debt to EBITDA was 1.95.

We spent $82 million on capital expenditures during the first 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 open in 2009.

In California we are also underway with a major expansion of emergency room, imaging and women's services to our Southwest Healthcare campuses in Riverside County, California.

Our behavioral facilities have operated at a very efficient 77% available occupancy rate for the first quarter. We have multiple projects to add capacity to our busiest behavioral facilities. We opened a total of approximately 140 new behavioral health beds during the first quarter and anticipate opening a total of 350 to 400 new beds in 2008.

During the first quarter of 2008 we repurchased approximately 1.8 million shares of our Class B common stock at an average price of approximately $50 per share. We currently have 3.8 million shares remaining under the previous authorized share repurchase program.

Alan and I will be pleased to answer your questions at this time.

(OPERATOR INSTRUCTIONS) Your first question comes Christine Arnold of Morgan Stanley. Christine, your line is open. Christine, your line is open.

Next.

Your next question comes from Adam Feinstein of Lehman Brothers.

Okay. And I'm actually here. A great quarter. Looks phenomenal. Just a couple of questions here, Alan and Steve.

Just maybe if you could just talk a little bit about the operating leverage I mean, clearly big benefit to margins from better pricing. Steve, you had mentioned better job at measuring registry costs and malpractice but, clearly, the operating leverage is very impressive here. I just wanted to get some more thoughts there and was just curious if you can quantify just the improvement in registry and I have a couple of follow-up questions.

Okay.

Well, I mean, again, I think it does start with the same store revenues. Obviously, we had same store revenue growth of 7% on the acute side and 9% on the behavioral side, Adam, and, frankly, I think with those kinds of same store revenue growths we would anticipate that leverage is available, operating leverage is available to us, and I think our operators deserve a lot of credit in the first quarter for making that happen.

We announced an adjustment to our malpractice reserves back in, I think, the second quarter of 2007 and said we'd have an ongoing benefit from that, and clearly that has been the case. Our malpractice expense in the first quarter was 4 or $5 million lower than it was in last year's first quarter.

Our registry expense was about $3 million lower than it was in last year's first quarter, which is, you know, pretty, I think, impressive given the fact that I think other providers have cited sort of the unexpected severity of the flu season as a reason why their registry costs have risen now.

A good portion of that decline in fairness is due to the Las Vegas market where we were experiencing some significant registry costs last year as a result of kind of a lingering result of the strike we had in December of '06 and we had some registry commitments that extended into the first quarter of '07, so there's a positive comparison there.

But you know, even in hospitals that didn't have great revenue performance like McAllen where we lost, as we discussed on previous calls, a significant amount of OB business, the facility did a good job of adjusting their costs downward, and as a result raising their margins even on lower revenues. And in facilities like Texoma which we acquired in the first quarter of '07, we've made some of the operating improvements that we anticipated making when we did the acquisition, and that's reflected in our expanded margins as well.

So again, I think a lot of credit to the operators for doing a good job in the quarter and taking advantage of strong same store revenue in both of our segments.

Okay. And just a follow-up question here.

Just maybe talk a little bit about the new hospital in Vegas about the ramp-up, was just curious in terms of what the impact was [in the] other quarter and just and maybe if you could just let us, maybe it would be interesting just to compare and contrast the ramp-up of Centennial Hills to Spring Valley.

Sure. I mean if those of you recall at our year-end call at end of February, Alan was actually in Las Vegas and provided some commentary on Centennial Hills which was rather bullish. Centennial got off to a strong start. Our volumes have been better than we expected.

It still was dilutive for the quarter as we would have expected it would be probably contributed about $0.05 or $0.06 worth of dilution to the first quarter although that's probably a couple of pennies better than we expected. I think as I said, it got off to a strong start from a volume perspective, better than we expected. That was kind of our experience with Spring Valley as well.

I would say probably the major difference, and to some degree we anticipated this, was the quality of the payor mix at Centennial looks like it is better than when we got started at Spring Valley. And again, I think Alan talked about just the really good demographics of the neighborhood surrounding Centennial, and so we're just extremely bullish on its outlook. It'll be dilutive probably for another quarter or so but the long-term prospects of Centennial in our mind are as good as any hospital we've opened in quite some time.

Okay. And just one final question and I'll get back in the queue.

Just on the site piece things looked great also at 9.2% so that's two straight quarters of over 9% growth. You haven't seen that in a while. Maybe if you could just provide any commentary there in terms of what's going on.

You had mentioned the benefit from new beds, but certainly pretty impressive growth. Just any thoughts in terms of anything going on there?

You know, you're right. We obviously talked in our year-end call about the fourth quarter growth which was impressive and, obviously, it's continued into the first, and I think just as it was in the fourth quarter, it is relatively widespread throughout the portfolio. We're benefiting from the new beds we've added but we're benefiting, frankly, in markets where we don't necessarily have new capacity in some of our large markets like in Atlanta and in Chicago, we're definitely taking market share from competitors.

In some places I think we mentioned at the end of, you know, our end of the year call we converted one of our facilities from residential to acute and have really increased our profitability at that facility. And again, the strength is really throughout the portfolio, which is a credit to our operators.

As Steve pointed out, the operators have certainly shown their capability certainly all along but in behavioral we have been very disciplined. There have been a number of acquisition opportunities that we have passed because of pricing and because of our evaluation of the market opportunity.

So consequently, our portfolio is tight. The facilities are needed, and I think our operators and our development people in that area have really been exceptional.

Okay. Thank you very much. Great quarter.

Your next question comes from Ken Weakley of Credit Suisse.

Thanks. Good morning, everyone.

Steve, I was curious on the flu, if you had a sense of whether it was dilutive to the margins. Your Q margins are actually pretty good this quarter but I was just curious where they would have been without the flu if that's something you can actually tell us.

Yes, it's a good question, Ken, and to be honest, I think, we have always been a company that has not necessarily stressed the impact of the flu, but this clearly was one of the more severe flu seasons in a number of years, particularly in some of our markets. We calculate based on the incremental increase in our sort of respiratory discharges that there was probably a $0.05 or $0.06 benefit in the quarter from the flu.

But again, I'm going to go back and give the operators credit because the flu by its nature is not sort of a high margin, high revenue business and the way you make it work is you have to control your length of stay, good throughput, control your expenses and I think or operators did all that and that's what sort of turns the incremental volumes into a $0.05 or $0.06 benefit. That's not a given when you have that flu volume that you're going to do well with it but we did in the first quarter.

I guess question number two, more I guess for Alan, you heard General Electric a couple weeks ago talking about the, it sounds like the Cap Ex spending of not for profits is coming under some pressure for a lot of good reasons and I was just curious if you had a sense as to whether that was developing in your markets in particular and what sort of advantages that might be allowing for as you might go forward Into the next year or two?

We haven't really calculated it. I'm not aware of things like that in our markets.

Okay.

But it will work to our advantage.

Okay. All right.

And then lastly on Medicaid as we get into the, you know, going into the second quarter we'll have a lot of [states] coming up, any comments from either of you coming on Medicaid risk in Texas disproportionate to share payments?

We have not seen any proposals to reduce disproportionate share payments. I think Medicaid in many states is kind of on the table as a budget item. We said a couple of months ago and I think it's still true that right now with the proposals that have essentially been implemented or been committed to in Florida and California which will happen later in the year, I think that our Medicaid pricing that's embedded in our guidance, which is only about a 0 to 1% increase blended for the year, is still good.

Obviously, if some of the states that are considering it make more draconian cuts to Medicaid it could be challenging to us but that's something we'll have to continue to watch as it moves along and, obviously, I think it's very dependent on exactly how severe, or precisely how severe the economy or the weakening of the economy gets. You know, if I think it extends only for another quarter or two the states probably, I think, handle it. If not, they're certainly going to look at their own budgets and their own spending.

Okay. All right. Good enough. Thanks so much.

Your next question comes from Tom Gallucci of Merrill Lynch.

Thank you. Good morning.

The leverage obviously was tremendous down to the bottom line so I'm a little bit curious to try and dive a little deeper into the volume side if I could, Steve. You're up 0.8% on same store growth but Centennial had cannibalized some business, I guess, on same store. Does that add another 50 or 100 basis points if you were to sort of try to normalize for that?

Our guesstimate of that is that about a third of Centennial's admissions came from our existing facilities and so if you added that back to our same store volumes, it would add probably about 70 or 80 basis points of admissions back. You'd get to about 1.5 or so, 1.6 from 0.8.

The other thing that we talked about at the end of the year and the dynamic is the same is that we are down quite a bit in the McAllen market in the both the fourth quarter of last quarter and first quarter of this year in OB volumes because the competitor, physician-owned competitor hospital opened an OB service. That is not very profitable business to us so if you add those admissions back, if you add McAllen back and you add a third of Centennial's admissions back you probably get to about a 3% same store acute admission growth for the quarter, and we attribute about half of that increase to the flu. So that's, I think, the biggest moving pieces of admissions for the quarter.

And then of course I think you mentioned earlier you had a tough comp given sort of some of the dynamics a year ago in Las Vegas so very strong volume.

Now, what was their, what about within the payor mix sort of was their Medicaid, I think, might have been down, you said, with the OB, the lost OB volume in McAllen. What about Medicare and managed care? It was skewed toward managed care?

Yes, I think that the other sort of significant trend in the quarter beyond the flu on the acute side was we saw a pretty sizeable increase in managed care volumes. Now, some of that is flu-related, but clearly a portion of it is not. And we can go sort of market by market and identify some new contracts that we have or specific market where we know we're taking managed care market share from a competitor.

But in general, you know, I would say that our managed care volumes were up probably close to 6% for the quarter, and you know, I think maybe 3% of it is clearly attributable to the flu or specific contract, but you know, half of it is just general strength in managed care volumes and, obviously, I think it's the provider side of what many of the managed care companies have been reporting over the last few weeks. We certainly have been experiencing that trend and obviously, that has helped pricing.

So you know, in a quarter in which we have seen compared to last year a fairly significant increase in uninsured charity care, et cetera, although it was comparable to the full-year of last year, it was quite a bit over last year. So to have that number quite a bit over last year and still have a 5.3% pricing increase in acute care, I think reflects the overall strength of that managed care volume.

All right. So you sort of had your best payor mix, your best payor grow the fastest. And what about the sustainability? Was it spread across markets fairly evenly or was it really concentrated, let's say, in Vegas?

No, I think it was spread. I mean we had a good quarter in Vegas, there's no doubt. Obviously, as you point out, there's a tough comparison but if you look at our minority interest line you can tell that the greatest portion of that relates to Vegas and you can see that it's up and we had a strong quarter in Vegas.

But there was strength throughout the portfolio, you know, as well in a number of other markets so that managed care dynamic, especially, we felt in a number of our large markets and, frankly, even in some of our smaller markets.

And if I could ask this last one. Absolute pricing for managed care it's pretty steady or has that gotten better or worse?

No, I think it's been pretty steady from our perspective, I mean, again, to me the story of the quarter is managed care volume. 6% is sort of the best that we've seen in some time. Managed care pricing, I think, is still in that 6 to 7% range which has been pretty consistent for a couple of years now.

Okay. Great. Thank you.

Your next question comes from the line of Erik Chiprich of BMO Capital Markets.

Good morning. Thanks for taking the question and nice job on the quarter.

I wanted to know in regards to McAllen, I know you talked about some of the challenges there. Is the profitability up year-over-year in that facility with the lost volume?

And then I know you guys have been pretty patient in that market. Just curious if you can give us an update on what your strategy is going forward there.

Sure. I mean, the profitability of the McAllen market is definitely better than it was in the first quarter of last year, and I think there's a couple of factors to that. One is our uninsured expense is lower.

We made some changes, frankly, in our uninsured accounting in the McAllen markets specifically last year's first quarter. I don't think it much affected our consolidated results but it was specific to the McAllen market and so the comparison to this year looks like a favorable one.

But you know, as I said earlier in response to a question, even with significantly reduced volumes in that market, the operators in that market have reduced their expenses in such a way that our margins have actually risen and so we are doing better in that market although in fairness, a good portion of that was built into our own expectations and our own guidance so McAllen is well ahead of last year and a little ahead of our own internal result.

Got you. And then can you give us an update for the contract renegotiations with Sierra United in Las Vegas and anything you're hearing on HCA getting back in a contract?

To the best of our knowledge, HCA is not back in the contract or back into the Sierra network and from what we hear from both Sierra and HCA, there's no imminent plans to have them back in the network.

We have signed a three-year renewal with Sierra that will extend -- will take effect, I think, in May and extend out for the next three years, so we feel like we've gone a long way to cement what is a very good market position from our perspective, and a very strong relationship with the biggest payor in the Las Vegas market. And that is basically based on the legacy Sierra business, and I think specifically provides for the fact that it does not apply to the legacy United business.

So at some point when the United contract is up, which is not for some time, that contract will either separately be renegotiated or United will try and fold its subscribers into other products -- its other products in the market.

And what type of increases did you see on the three-year renewal?

I think as has historically been the case they're a little bit lower than the average increases that we mentioned, or I just mentioned in response to Tom's question of 6 or 7%, just a little bit lower than that, but in our mind, you know, well worth it for the significant business that we get from, again, what is the largest payor in that market.

Okay. Thanks very much for the update.

Your next question comes from Matthew Borsch of Goldman Sachs.

Hi. Thanks for taking our questions. This is Shelley Gnall in for Matt Borsch.

I guess our first question is on the bad debts. Looks like it was up sequentially into the quarter. I was wondering if you could comment, are you seeing any, is that, could that be related to jobs loss or, I guess, specifically insured jobs loss in any of your markets?

Shelley, you know what I said before, I said in my prepared remarks as well, was that the total of bad debt and charity care and uninsured discount and I think you need to look at all three together is running at about the same percentage as it ran for full-year 2007. Frankly, that's well within our expectations. We actually expected that number to tick up a little bit in 2008, and so far it hasn't, and we're obviously grateful for that.

You know, in all honesty, while the economic news coming out of many of our markets, including Las Vegas, is not great, you know, we have not felt a pinch in too many of our markets, other than in Florida, which we mentioned in our year-end call, and particularly on the east coast of Florida. It's not something that we're feeling as yet in our markets. We certainly are watching it very carefully and it's possible that I think if the economy continues to weaken, we will, but so far our fingers are crossed, we're not getting pinched a whole lot.

Okay. Great.

And then I guess a related question, the surgical -- the supplies expense looks like it was a little bit better. Clearly, there's a lot of flu in the market but can you talk a little bit about the demand in utilization you were seeing in surgeries?

Our surgeries were relatively flat for the quarter. As you point out, because of the emphasis on flu, that's going to, which is not a supply intensive diagnosis, that'll drive it down a little bit.

I think the other, the only other sort of notable dynamic is that in the Las Vegas market we saw a decline in some of our very highly intensive supply-type surgery, spine surgeries, et cetera, and you know, frankly, at the end of the day I think that probably wasn't bad thing for us because of the costs of those procedures I don't know that we make much of a margin so their absence probably doesn't hurt us and certainly makes the margins probably look a little better.

Okay. Great. Thanks. That's it for our questions.

Your next question comes from Jay [Cengurta] of Bear Stearns.

Good morning.

Steve, I think that you said your case mix was up. Do you have sort of an indication of what type of -- since the surgery volumes were flattish, what sort of procedures are driving the increase in the case mix?

We did have a small, I would say maybe 2.5, 3% increase in our case mix which is pretty strong especially given the fact that we did have so many more flu cases. As we look across the diagnosis groups, there's no other sort of diagnosis group that, you know, tends to dominate that. And again, I would sort of tie it back to the increase in managed care utilization.

You know, those managed care patients tend to be younger patients who are in the hospital for some sort of procedure as opposed to Medicare patients who are more weighted towards medical cases where they're in, you know, for in many cases longer lengths of stay, et cetera, and not necessarily severe illnesses. So I think it's tied to that kind of slant towards managed care business in the quarter.

Okay.

And if I could, Alan, if I could ask a couple of questions just related to your experience in the industry on your thoughts on how a recession would impact volumes or if you have thoughts on how it would impact volumes In the past, and also on nursing costs.

Interestingly, the beginnings of a recession or a slowdown, people tend to use hospitalization more because they have coverage. And you know, coverage extends for 18 months on COBRA, so usually this industry does a little better when the economy slows down.

Obviously, if it continues for a long period of time, you're not going to be able to absorb it, but in the shorter run, you do pretty well. And obviously, you know, we haven't seen anything, there was an earlier question on that.

With regard to nursing, I don't see any differences other than perhaps people move from an industry that is laying off workers and you get some people who go into the nursing field. That's the best I could do on that.

Okay. Thank you guys.

Your next question comes from Darren Lehrich of Deutsche Bank.

Thanks. Good morning, everyone.

I do have a follow-up question regarding the Sierra renewal. Steve, just two things there. First, are you, were you able to secure annual inflators in the contractor or is there just a one-time increase that you've negotiated?

No, Darren, we will get an increase, you know, kind of as I described it to Erik of, you know, just a little bit less than our average in each of the three years of the contract.

Okay. And then were there any bells and whistles in the contract relating to quality or are you doing anything along those lines with regard to pay for performance?

No. In all honesty, I think other than the increased rates I think the contract looks very much like our last contract did and there were no major changes.

Okay. Fair enough.

And then Centennial Hills, you know, you've spoken about the impact and I guess we can go back and figure out where you might be census-wise, but can you just give us a sense for where you thought you'd be by the end of the year in Centennial Hills with census and where that squares with the first quarter, just put your comments about it being a little bit better than expected in the context?

Sure. I mean, I think to be honest I don't remember sort of within our guidance where we pegged Centennial for later in the year, but for the first quarter we sort of thought Centennial would open in its first quarter in kind of a 34, 40 ADC range and they've been more in a 55, 60 ADC range. And I think just as important, as I said before, the quality of the payor mix is probably a little bit better than we anticipated although we anticipated, frankly, it would be a little bit better than Spring Valley's experience but I think it's been even a little bit better than we expected.

I don't want to read too much into a couple of months' worth of results but, again, we just love where Centennial is positioned in the market. We just think that it's, you know, it's cannibalized less business than Spring Valley did when it opened and so the trends are just very encouraging.

You know, we'll feel better after a couple more quarters and we'll feel better if we get to where we thought we'd be at the end of the year which is EBITDA positive. We think we will get there but we'll feel more confidence early at that point.

And your MOB, is that up at least at this point?

It is up, and, you know, a good portion of the space is committed to.

Okay. Just a few other things here.

Cap Ex you didn't comment at all in any change in your guidance, I think you were a little over $400 million projected. Is that still a safe range?

Yes, I mean, obviously, our guidance for the year is 400 to 425 of Cap Ex. We spent a little over 80 in the first quarter so we're at a somewhat slower rate than we projected.

You can peg that to a couple of big projects. We're going a little bit slower in California in Palmdale than was our schedule although the pace is picking up, and Texoma will get started in earnest with real construction spending in the back half of this year. It's clearly back half weighted.

So I think right now we still think we probably get to that number. We certainly are not going to exceed it but we're going to leave that guidance out there the way it stands because we think the pace of our capital spending is going to pick up.

Okay.

And you know, Alan, I know you responded to Ken's question but I guess I'll ask in a different way about Cap Ex. Is it fair to say that you and maybe others in the industry are pushing out a little bit with regard to projects?

You know, it seems like the budgeted spending is there, but the deploying of Cap Ex has gone a little bit slower. Is that a fair observation, Alan?

It's gone slower but it's not anything that we did by design. It's just a question of timing as the projects move along. So Steve pointed out, we're going to probably spend what we had announced earlier. It's just a timing question.

Okay. Fair enough. And then, Steve, you had a couple of closures in behavioral. What was that?

We closed two small facilities in the behavioral division in the first quarter. They had a total of, I think, 28 licensed beds and I think it was just a function of we're sort of niche programs that, you know, when they were not sort of meeting their demand, there was no point in keeping them operating. So it looks to be significant in the number of facilities but in terms of the actual capacity it's pretty immaterial.

Okay. That's fair.

And the last thing here, are there any major systems or IT initiatives we should be aware of for the next two to three years at UHS?

No. I think, you know, information technology, like any of our capital investments is something we're evaluating all the time and trying to make sure that we're competitive, et cetera. So I wouldn't say that it's not possible that we wouldn't have a significant investment in IT clinicals or something down the road, but at the moment there's no such commitment but the process is kind of a continual one that's under way all the time.

Okay. Thanks. Nice job.

Your next question comes from the line of Justin Lake of UBS.

Thanks. Good morning.

Just looking at a bead of this size and just would love to spend a minute going through some of the pieces. I mean, I know you've identified flu as $0.05 of the bead. I'm just curious if you could walk us through.

Versus your plan I think you said the bead was $0.25 better than your plan. Can you tell us how much of that came from the different components whether, I guess, I kind of look at the business and say how much came from Vegas from psych and then just from better operating expenses and then maybe the rest of the acute base.

Sure. I mean, I think Justin, and some of this is not absolute precise science because some of these issues overlap, but you know, we would say, I think I answered Ken Weakly before, that the flu contributed probably $0.05 or $0.06 to the bead.

I think that the performance, the overall performance of the Vegas market contributed probably a similar amount. We probably got $0.04 or $0.05 from the rest of the acute division and $0.04 or $0.05 from the behavioral division. $0.03 or $0.04 just from interest expense being less than we expected and those are probably the major components of it.

Got it.

Any operating, it looked like there was a lot on the margins and I know you talked about lower nursing costs. Any other, you know, maybe malpractice or anything else that you saw in the quarter that might not be sustainable or might have been kind of maybe one-time in nature other than just the flu?

I think that the other piece that, you know, I think we are challenged in explaining and predicting its sustainability is this -- the nature of the increase in managed care utilization. Justin, I know you know as well as anybody that the managed care companies have struggled mightily in the last few weeks to explain that and there doesn't seem to be one single cohesive explanation.

We obviously as a provider are benefiting from that, and so we're not as pressured to explain it as they are, but it's hard to know, you know, how sustainable that is. And as you know, I mean, obviously the managed care companies are certainly going to alter their behavior I assume over the ensuing quarters to try and get their spending under control.

Now, a lot of our contractual pricing is fixed for extended periods of time but certainly from an utilization perspective and those sort of issues, I assume the managed care industry is going to become more aggressive so that's a little bit hard to predict. Obviously I think the behavioral results have been sustained already for a while.

I don't know that we can stay at that 9% revenue growth rate but we ought to be able to keep somewhere in that neighborhood, and interest expense is hard to predict but, obviously, it helps that we're generating more cash and spending less of it for Cap Ex so we'll certainly have that benefit going forward.

Got it. To the extent you have visibility can you give us an update on how April's running versus the first three months of the year?

Yes, I mean, the only problem with sort of giving that intra-month call is that it's almost purely based on volumes and volumes in April look strong on both sides of the business in both segments. Obviously, it's hard to get a meaningful read on payor mix or some of the other issues or quality of the payors, but volumes themselves look pretty good in April.

Okay.

And just one quick follow-up on Cap Ex and not in the short-term but just thinking longer term. I look at your Cap Ex for '08 and '09 and there's a fair amount of new construction going on there in the acute base. Correct me if I'm wrong but I kind if targeted it around maybe $200 million a year of just purely new construction. Am I right?

I would say between 150 and 200 has been the number in '06, '07, '08.

Okay.

And you've got that spending through '09. Is there any spending that you've got that's kind of, is there any plans for 2010 or I think we've spoken off line about the fact that you might be re-evaluating the level Cap Ex you put into the acute business, especially outside Vegas given the performance. Anything there or do you still expect to become materially more cash flow positive from a free cash flow standpoint in 2010?

No, I think your first point is the relevant one and we've talked quite a bit publicly about the fact that these three new hospital projects being Centennial, Palmdale and Texoma are probably a total of a little over $500 million of capital spending over essentially a three-year period. You know, that certainly affects the look of the capital numbers.

Once Texoma is finished in early 2010, we at the moment don't have any other commitment of that magnitude, you know, on the table. And our expectation is short of that, our capital spending will progressively decline as we get there.

That's great. Thank you very much.

Your next question comes from Frank Morgan of Jefferies & Company.

Good morning. Two questions.

Steve, you mentioned about taking market share. It's a great thing but do you have any good theories on why you're able to take market share? I think you mentioned it particularly on the behavioral side, mentioning Atlanta, Chicago. Any more color that you can give us on that?

And then secondly on the med mal side, were there any releases of med mal from prior periods and kind of what's their current rate on that? Thanks.

No, I mean there were no prior period impacts. Again, I think we took back some reserves back in the second quarter of '07 which were well highlighted in that press release, and we didn't count it in our sort of income from continuing operations that we disclosed, but in the quarter absolutely not.

As far as the market share goes I think it's a function of having a preeminent market position in the markets that I cited, Atlanta, et cetera, and I think that that's, it's just easier to operate from a position of strength. And I think in some of our markets some of our competitors have had some quality issues and that, obviously, provides an opportunity for us, unfortunately, for them to step up and where we have a strong reputation to go to referral sources and take market share.

And again, I think that's happened in a few markets so much credit again goes to the operators. There's just not enough credit, I think, that can go to the operators this quarter. This is a quarter in which they really shone.

Thank you.

Your next question comes from Jeff Englander of Standard & Poor's

Good morning, guys.

Steve, circle back with me if you can on the other operating expenses. I believe last quarter we had the same discussion in terms of them coming in a little better than expected and I know you in an earlier question said you didn't see anything specific there but given this is two quarters in a row and I believe another competitor had a similar experience. Is there anything you can put your finger on trend-wise that may be happening there?

Well, let me say a couple of things, Jeff. One is just kind of a mechanical thing that I know at least some analysts have in their model.

We've had, over the last probably four or five quarters, about $20 million a quarter in other operating expense on average related to this construction management contract. And if that's what people had modeled in in the first quarter, we only wound up with about $5 million, which is really just a timing issue, but probably there's about $15 million of, I would say, 10 to $15 million in our own internal modeling and I think in what a lot of other people had related to this construction management contract that distorts that a little bit. By the way, they probably, if you had that you probably had that in other revenue as well.

Other than that, again, we touched on these things, malpractice expense is down, registry is down, we're getting some benefits from the integration of Texoma which has now been in the portfolio for five quarters. We're getting some benefit in the Laredo market from a transaction in which we combined a surgery center that we were joint ventured in in the market with our hospital and consolidated the two physical entitles and that produces some economies.

And then as I just said, I mean I think when you have 7% same store revenue growth in acute and 9% in behavioral in two businesses that are largely fixed cost businesses, there is operating leverage available and it's incumbent upon the operators to execute their plan and in the first quarter and frankly in the fourth quarter last year they did so.

The other question would be can you talk a little bit about maybe the dichotomy between what's happening in the economies, particularly Las Vegas, and what you're seeing in your operations and any thoughts on why you might be seeing that?

Well, the one thing that I would say is that most of the economic news, let's start by saying that historically, I think the economic metric that has most affected hospitals is unemployment rates. And as people lose their jobs, as Alan indicated with a lag, that creates a problem for us because they lose their health insurance, you know, eventually they lose their health insurance associated with their job.

But actually, as you know, unemployment rates have not gone up terribly dramatically. There's been lots of talk about foreclosure rates and housing starts and all the signals that the economy is weakening but in most of our markets, that hasn't translated yet to a measurable increase in unemployment rates, and I think that may well be why we're not feeling a pinch yet.

I don't know whether it will ultimately translate and if it does, as Alan said, we may not feel that for at least a couple of quarters but I think that's probably why, you know, when you pick up the newspaper and read some pretty grim stories, that's why it's not translating directly to our business just yet in most of our markets.

Great. Thanks very much.

Your next question comes from Bill Bonello of Wachovia. Bill, your line is open.

Can you guys hear me?

I can hear you, Bill.

Okay.

Steve, you talked about the April trends and that the volume is pretty strong, but be careful to read too much into that and it's hard to tell on the payor mix. So just to be perfectly clear, can you not tell yet whether that, you know, exceptionally strong managed care volume growth has continued in April? You just, you don't know where the volume's coming from?

It's a little bit hard to get, you know, those -- that sort of clarity of the data kind of on an intra-month basis. Again, Bill, it seems that, you know, a lot of those trends are continuing to April but it's very difficult to say that with any definitiveness.

Okay.

And then a totally separate subject and maybe a question more for Alan, but it seems like, you know, at least what we were hearing out there was maybe at one point in time earlier in the year you guys were, you know, pretty actively at least considering some of the acquisition opportunities that were out there.

And I'm just curious what your thoughts are on acquisitions these days, what the marketplace is like? Is that something you would bite off if the right opportunity came along, et cetera?

Yes, we would. We have consistently said that our acquisition activity relates to the opportunities. And we're in a good position. We have available capital and if we see a good opportunity we are very actively looking, but as I said earlier, we also have a disciplined approach to it.

There have been a number of opportunities coming by in the behavioral end and we have passed on them because of price or because of what we felt the future growth of those facilities might be. But we are very actively out there, and we would be happy to make acquisitions and are capable of doing so.

And just in terms of the competitive environment or the type of opportunities you're seeing in both behavioral and acute, is anything changing there? Is there maybe less competition that multiples might start to come down or any, you know, starting to see any sort of better looking properties coming up for sale?

Frankly, in the acute end of it, we are, I think it's fair to say surprised that there haven't been more acquisition opportunities and there just haven't been. We expected competitors to be selling more facilities and the good ones, and we haven't seen that. But we're there continually looking and we are in the market.

In the behavioral end I think it's about the same, maybe pricing has moderated a little bit as our competitors are realizing that if you pay up you don't get as good a return or you don't get the return you should be getting, but we're patient and we're particular.

Okay. Thanks a million.

Your next question comes from John Ransom of Raymond James & Associates.

Good morning.

Just looking at some individual states are you hearing anything about [dish] programs? I know Texas is off cycle. Is there anything going on with the discussion of the disproportionate share programs in the state fiscal year back half of calendar '08?

John, obviously as you point out, Texas is the state where we get the lion's share of our disproportion, Medicaid proportion payments and we've really have not heard anything about their state fiscal year or our disproportionate share payment is locked in now through August of next year and then their fiscal year begins in September of '08, and I think that they haven't even, to the best of our knowledge, sort of put that on the agenda yet.

You know, the one thing that I always sort of point out to people is that because the lion's share of disproportionate share monies go to public hospitals and hospitals that treat a large share of indigent patients, et cetera, it's a politically sensitive area and so there's a fair amount of political cover that goes along with it. And you know, I don't know that the state is out to protect UHS but I think they are generally -- there are a lot of underlying constituencies out to protect the hospitals that receive disproportionate share of funds.

So we've been getting Texas disproportionate share for many, many years and it changes year-to-year and there's some tweaks to the system but it's never been dramatically cut back and we don't have the expectation that it will be dramatically cut back this year.

Okay. Great.

And my other question, just to make sure this is clear in all the noise, the biggest change with respect to your expectation this quarter was the commercial volumes, is that correct? Plus the cost controls.

I would say the impact of the flu season and the commercial volumes, the two of those issues.

Okay.

Well, now that the flu season has receded, are you still seeing similar commercial volume trends so far this quarter? Because you only took your guidance up $0.05 or so ex this quarter. Is there anything that you've seen so far this quarter that would suggest that was just a blip?

And that's, I know Bill Bonello asked the question I think in a slightly different way. I think it's hard to say, John. We can say that our volumes overall look relatively strong in the first, you know, in April but we don't have enough sort of deep dive information to sort of know the real payor mix, the way that slices from a payor mix perspective just yet.

Okay. Thank you.

Your next question comes from David Bachman of Longbow Research.

Hey, good morning. Nice quarter, guys.

Most of my questions have been answered here but just back to interest expense that was a little bit better. What should we be looking at through the rest of the year just generally on that?

I mean, obviously, I think that the run rate for interest expense, I'm not about to predict what direction rates go and I'll leave that to people who are smarter than me, but from our own internal perspective our borrowings will increase to the extent that our capital spending rates pick up, if in fact they do.

Obviously, the flip side of that is we generated a lot more cash in the quarter than we expected so I think that we probably will have a little bit of a favorable variance going forward on interest rates is what we would expect and, frankly, bake that into our revised guidance for the year.

Okay. So your guidance reflects at least directionally something positive there.

I think that's right.

Okay.

And then, you know, you've got to nitpick here to look for anything negative. On the behavioral side, obviously strong volumes, pretty happy with where the pricing came in or is there, it looked like it might have been slightly less than we thought it might be.

I think we've said for the last few quarters that behavioral pricing is on the low end of the range of our expectations but you're right, I mean, it's a little bit of nit. And also I would say this, I think that the two dynamics go together.

When you've got 8% same store admission growth it gives you a little bit less leeway about picking patients, et cetera, and you're trying to get patients in and out and just meet your demand and I don't know that you can be quite as selective as you would otherwise be, so I think the two go together. It's tough to have great pricing when you've got such admission growth.

Sure. Okay. That makes sense.

And then you've given a lot of credit to your operators for last quarter and this quarter and performing to plan. On the cost side is, you know, what's the key metric that they have to meet? Is it really staffing? Is that the biggest thing under their control?

Well, staffing is our probably biggest variable cost but I think, again, the issue is what I tried to stress is that when you have 7% same store growth acute, 9% same store revenue growth in behavioral, it provides an opportunity for leverage but what the operators have to do is control their staffing and make sure that they're semi fixed and fixed costs remain fixed and that their costs don't slide and that's a battle every single day. They've got a very complicated job and, again, I think in the last couple of quarters they performed exceptionally well.

Okay. And then just one last follow-up on that.

Is it, it seems to me that in a weakening economy it may be a little easier to squeeze coverage, nurse coverage out of your existing staff than you would have otherwise, people's willingness to pick up extra hours or extra shifts. Is that a safe assumption?

No, I think it's fair and I think it was Jay Cengurta who asked kind of a similar question before. If you look back on it the last time that registry expense peaked was sort of in the summer of 2001 and it started to go down after that. And not coincidentally that was in the middle of the last recession that we went through.

So I think it's true, and Alan kind of alluded to it before, when we're in a recession, nurses or some of them return to work or take more hours if their spouses are laid off or whatever the issue is, but it's easier to deal with it. So I think actually that aspect of our business may get a little easier in an economically depressed time period where there may be other aspects of the business that are more of a challenge but I think the labor side may provide a few opportunities for us.

And obviously, there wasn't flu running rampant among your staff which caused a lot of missed shifts as well.

But again, here's another place where you give the operators credit. We had a severe flu season that surprised most people and it's easy to have your registry expense go up in an environment like that, and as I said, our registry expense was actually down considerably for the quarter so, you know, just a good job by those who staff the hospitals.

I'm going to try to squeeze in one other quick question here.

On the CMS recovery audits, do you guys have any comments on that or any thoughts on how to handle that when that gets rolled out in, I guess, January '09 now?

No, I mean, look, this is just a revenue enhancement, a revenue raiser for the government. They're going to try and raise as much money as they can and if they can't do it by lowering Medicare rates they'll do it by trying to recover previously-made payments, and we just have to make sure that all our i's are dotted and t's are crossed and that the government isn't doing anything, or trying to recover money in violation of their own rules so it's kind of a hassle for us but we just pay closer attention to what we're doing in those areas that they're auditing.

Okay. Great. Nice quarter again. Thanks.

Your next question comes from Whit Mayo of Stephens.

Thanks, guys, for squeezing me in at the last minute. I'll make it quick.

Steve, of the 350 to 400 beds that you're adding this year in your behavioral division, does that include the 140 that you added this quarter?

Yes.

Okay.

And of all those beds that you're adding this year, are all of those additional beds you're adding to current facilities or are any of those de novo projects?

No. I don't think we have any de novo projects on the current slate.

Okay.

And can you comment just quickly about how maybe the Easter shift impacted your business at all? I know over 9% same store's really strong but just any adverse impact there?

No, we saw maybe a little softness right in the couple of days before Easter and right after Easter, but I would say it didn't have a meaningful impact on the quarter.

Okay. And one other quick question.

You talked earlier about the construction project. Just can you give us an update on when that trails off? How much that contributed in the quarter and do you guys expect any other contracts at some point?

We probably had about $1 million of EBITDA related to that project in the first quarter. This probably as we, that facility is just open and so we're just sort of closing out the accounting and final billing for it and there's probably maybe another $1 million of trailing EBITDA next quarter perhaps.

As we talked about in our year-end call we have a second contract, and I mentioned in my opening remarks, that we feel likely to finalize. There's probably, given the timing of it, 3 or $4 million of potential EBITDA to be had in the back half of '08 related to that contract, but in fairness, we had already included that in our -- even our original guidance and obviously in our revised guidance as well.

Okay. That's it. Thanks, guys. Good job.

Your next question comes from [Andres Bergnoff] of JPMorgan.

Good morning, guys. At this point most of my questions have been answered so just a couple of subtleties maybe.

Alan, when you were talking about the acquisition environment on both sides of the business, I guess I would characterize it as sort of maybe a little bit of head scratching that there isn't enough or there aren't a lot of assets for sale on the acute side and on the behavioral side it's more pricing oriented.

On that point are you finding that you're sitting at the table with people who are out bidding you or are you finding that sort of seller expectations have gone up?

Andres, let me take a shot at that.

Interestingly, I think as Alan said on the acute side we're just not seeing very many opportunities. I mean, the reality is I think most of the deals that have been done recently have been other for-profit sellers selling to for-profit sellers and generally, I won't make a blanket statement but generally those are properties that are not necessarily of great interest to us.

On the behavioral side, you know, I think that there has been over a number of years a lack of sort of interest in that business and then over the last three or four there's been kind of renewed interest, and so I think there's sort of a backlog of demand for those properties and, therefore, we haven't seen and obviously that's a business that hasn't faced some of the headwinds that the acute business has faced, so I think we still see the multiples in that business can be pretty high.

And, again, as Alan indicated, we take a look at most -- just about every opportunity that's out there, and if the bidding gets to a point where we think it just doesn't make sense anymore we're okay with dropping out. But again I think on the behavioral side it's more of a pricing issue, on the acute side I think it's just the availability of properties themselves.

Okay.

And then maybe trying to yet again sort of slice and dice this managed care increase that you've seen in terms of volumes, I mean, I guess, the concern that's running through a lot of the questions, let me just state it outright, is this sustainable or not or are we seeing an acceleration of elective procedures sort of prior to sort of a recessionary or an economic downturn?

And maybe the question I have is how do you think your operators are preparing for that because, clearly, you staff differently depending on what you think it is?

Well, yes, and by the way, Andres, I appreciate your being up front about it but we're certainly not trying to hide the notion that some of this increase may not be sustainable.

Absolutely.

I think our guidance is realistic in terms of our not taking a stand that it absolutely is sustainable. I don't know. I mean like I said before, the managed care companies who, frankly, I think probably should have a better handle on this than the providers themselves, I think have been struggling with, you know, why some of these utilization data points have increased pretty dramatically, pretty quickly and I'm not sure that I have any great explanation beyond what has sort of been offered out there already.

So all I can say about how we're handling this is our operators are certainly not behaving as if this is volume and this is payor mix that's going to continue indefinitely. And we're not staffing up or ramping up for a wholly different business model or anything like that and, again, I think we're in a position to react relatively flexibly to whichever way this goes. If the business is sustainable I think we're prepared to deal with that and if it's not, I think we're prepared for that as well.

Okay. Great.

And you have been very up front about the uncertainty surrounding this, but sort of just one more quick one maybe just to confirm. I mean you're really seeing no specific trend on that sort of extra managed care volume in terms of, I mean, is there any ability to sort of characterize it as more elective in nature versus acute or there's a lot of orthopedic in there which has a lot of elective procedures in it. Anything along those lines?

No, again, I think some of it's flu related. That sort of fits into what obviously others have reported but, you know, we saw an uptick in outpatient surgeries in our managed care business and in some other diagnosis, so, you know, I don't know that there's kind of a single comprehensive explanation to point to.

Okay, great, Steve. Thank you.

Your final question comes from Christine Arnold of Morgan Stanley.

Thanks for fitting me in, sorry. I was delayed getting back from a presentation.

It seems like the real issue here just to probe on the commercial volumes is whether or not sustainable, which is what everyone's been asking about. So what's really astounding is that the volume was so good in the first quarter which was when deductibles generally reset and mute volume kind of seasonally for the managed care companies and the managed care companies aren't admitting to an increase in volume. They're saying that the pricing at the hospitals are getting better.

So a couple of questions here. Do you have a sense for how many, as you look at your employer base in your markets is it mostly large employers who had reset copays and deductibles in January are mostly small employers where it kind of renews throughout the year?

You know, my general sense of that, Christine, is that both small and large employers have gone down the benefit plan design route in '05 and '06 and increased copays and deductibles dramatically in those years and we clearly saw less of it in '07, and I haven't seen real hard data in '08 but my guess is we probably saw less of it in '08 because we know this is an employer of 40,000 people. There's only so much you can push those copays and deductibles before you create real dissatisfaction among your employee base.

So like everybody else I think we raised ours in '05 and '06 and then kind of muted it in '07 and '08 and it just strikes me that that's the pattern that we've seen with most employers.

Okay. So part of this could be a wear-off of a deductible effect.

I think that's an element of it for sure.

Okay.

And then have you highlighted, I apologize I missed a bunch of this. Have you highlighted the profile of the ex flu admissions because you said 5 to 6 volume for managed care, half of that was flu but that still leaves you with strong 2 to 3% volume ex the flu which is above baseline.

So is it dialysis? Because (inaudible) insurance companies are saying it's dialysis and preemies that they're seeing driving volumes or is it something else in terms of the procedures?

You know, I think it's, I mentioned this to Andres, I think it's across the board. I don't think it's specific to a single diagnoses. It's into outpatient surgeries and it's in other in and outpatient diagnosis.

So in some ways I think that, you know, kind of is encouraging that it may be sustainable, but -- because it's not in one particular place but it's not easy to pinpoint from our perspectives.

I appreciate that.

And then last question. You had great cash flow, you showed Cap Ex restraint. This quarter you purchased shares.

Do you target being cash fully positive like property and cash flow minus Cap Ex or is that something that doesn't even enter kind of your process as you look out and look forward? Because you aren't that levered so it's not like it's a challenge to get more leverage. How do you think about that?

Right. I think our original projections for the year assume that we would be a net borrower given the fact we had already bought back $90 million worth of shares in the first quarter and we had a 400 to $425 million capital budget. Obviously, if we're able to sustain the operating performance that we have, that should improve some, but no.

And then I think getting back to, I think, Justin Lake's question before, I think after 2008 we assume that we would become a net repayer of debt as our Cap Ex started to skinny back a little bit.

All right. Thanks for taking my questions.

Thank you.

There are no further questions in queue, sir.

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

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