環球健康 (UHS) 2008 Q2 法說會逐字稿

Good morning. My name is Hamilton and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarterly Universal Health 2008 earning release. (OPERATOR INSTRUCTIONS) I will now turn the call offer to Mr. Steve Filton. Sir, you may begin.

Thank you, Hamilton. 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 second period ended June 30, 2008. Hamilton, I think that static is from Mr. Miller's line. Perhaps you can mute it until he is ready to answer a question.

Yes, sir.

Thank you. As discussed in our press release last night the company recorded net income per diluted share of $1.07 for the quarter, representing a 35% increase over the adjusted net income per diluted share earned during the second quarter of 2007, as calculated on the supplemental schedules included with last night's press release.

Combined with our better than expected first quarter earnings, we earned $2.27 per diluted share during the six months ended June 30, 2008, representing a 34% increase over the adjusted net income per diluted share earned during the first six months of 2007. During this conference call we 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 and business trends before opening the call up to questions.

Revenues for the second quarter increased 8% over the prior year's quarter. 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%. A second smaller construction management contract has recently commenced. On a same facility basis in our acute care division revenues increased 7.6% during the second quarter of 2008.

The increased resulted primarily from a 7% increase in revenue per adjusted admission. Admissions to our hospitals owned for more than a year were up 0.8% for the quarter. In the Las Vegas, Nevada, market although the opening of the Centennial Hills Hospital has negatively impacted our same store admissions comparisons, to the extend that it cannibalize some of it's volume from our existing facilities, the better than expected operating results at Centennial Hills contributed to a greater than 10% increase in total admissions in the market during the second quarter in 2008 over the comparable quarter of 2007.

Also as we previously disclosed newly constructed capacity the physician owned hospital in McAllen,Texas opened during the fourth quarter of 2007, unfavorably impacted our admissions in that market. We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues.

On a same facility basis operating margins for our acute care hospitals increased to 14.6% during the second quarter of 2008 from 12.7% during the second quarter of 2007. The margin improvement resulted from continued increases in commercial payer volumes volumes and pricing, the favorable impact of our change in group purchasing organizations and an increase in overall operating efficiencies.

These favorable operating trends were manifested by increased margins in a variety of our markets including our south Texas markets, Florida, Washington, DC, and Las Vegas, Nevada. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates, amounting to $143 million during each of the three-month periods ended June 30, 2008 and 2007.

As a percentage of net revenue, bad debts, charity expense and the uninsured discount in the second quarter, were consistent with those levels we experienced for full year 2007. On a same facility basis revenues in our behavioral health division increased 7.8% during the second quarter of 2008. This increase resulted from increased patient volumes and an increase in revenue per adjusted patient day.

Admissions to our behavioral health facilities owned more than a year increased 8.5% during the second quarter and patient days increased 3.1%. Revenue per adjusted day rose 5.1% during the second quarter of 2008 over the comparable prior year quarter. Operating margins for our behavioral health hospitals owned for more than a year increased to 24.8% during the quarter ended June 30, 2008, as compared to 24.6% during the comparable prior year period.

Our cash flow from operating activities was approximately $67 million during the second quarter of 2008, as compared to $60 million in the second quarter of 2007. At June 30, 2008, our ratio of debt to total capitalization was 40.6% and the ratio of debt to EBITDA was 1.95. We spent $75 million on capital expenditures during the second 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 schedule to be completed and opened in 2009.

In California, we are also underway with a major expansion of emergency room imaging and women's services to our Southwest Health Care campuses in Riverside County, California. Our behavioral health facilities have operated at a very efficient 77% available occupancy rate for the first half of the year. We have multiple projects to add capacity to our busiest behavioral facility.

We opened a total of approximately 70 new behavioral health beds during the second quarter and anticipate opening a total of 350 to 450 new beds in 2008. In connection with the government's ongoing investigation of our south Texas health system, we have received notification that at this time the government will not be pursuing criminal prosecutive action against the company or our south Texas health system.

The Department of Justice is still investigating whether any individuals independently obstructed justice. The government is continuing its civil investigation of our south Texas health system. We expect to continue our discussions with the government in an attempt to resolve this matter. We'd be pleased to answer your questions, at this time.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Tom Gallucci of Merrill Lynch.

Good morning. Thank you, Steve. You mentioned strength in Vegas on the volume side. And McAllen I suspect was down was with the new competition early or late last year. Can you talk about how the rest of the volume was spread throughout the rest of the portfolio? Was it fairly even or were there other extremes either up or down?

Sure. Obviously, Tom, you always have some ups and downs but we saw strength -- I kind of alluded to profitability in my opening remarks but we saw strengths in admissions in the Washington, DC market at GW, we saw it in Florida, in B0raiderton market whereas we disclosed for the past three or four fourth quarters I think we benefited from major construction renovation project that we completed at the end of the second quarter last year. So I think we saw that strength, again, throughout the portfolio.

Okay. Then on the out patient side can you discuss the trend you're seeing there?

Sure. In the first quarter we talked about the fact that surgery volumes were actually a little bit negative in the first quarter. In the second quarter they turned sort of slightly positive.

Not a huge change but we did see a little bit of a rebound in our surgical procedures particularly out patient surgery and we have seen relatively busy ER visits throughout the year. Busier in the first quarter just because of the flu impact, but still busy ER in the second quarter as well.

Okay. Final question. Just wondering how you're sort of viewing the Medicaid landscape at this point given the state of the economy and state budgets? Thank you.

Sure. Well, we have seen and I think we have talked in previous calls about Medicaid announced Medicaid reductions in Florida which took effect on July 1. California's was supposed to take effect on July 1 and there is some legal wrangling that has sort of enjoined that for the moment, but may well be retro active to July 1.

Both those changes are worth probably a couple of million dollars of negative impact each to a us in those states. Since the second quarter call the state of Nevada has passed Medicaid reductions which will take effect on September 1. We don't have a huge exposure to Medicaid in Las Vegas or Reno. And again, probably worth a couple of million dollars negative impact to us.

The best news I guess from the Medicaid perspective is that the state where we have the biggest Medicaid exposure is Texas and at the moment, Texas in not talking about any Medicaid reductions they are talking about some tinkering with disporportioned share programs and moving the money into the regular Medicaid program, but as we I think have articulated in the past our expectation is that the impact of that will largely be budget neutral or revenue neutral to us.

Thank you.

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

Okay. Thank you. Good morning, Steve, good morning, Allen. Maybe just starting with Vegas. Maybe just talk about you highlighted a 10% growth number. Just curious, if you could just comment about overall profitability in Vegas, in terms of margin trends there.

And then just curious Steve, in terms of the Centennial Hospital just sounds like ramping up much better than anticipated. You had initially talked about $0.07 to $0.08 of dilution for the full year. Just curious in terms of how you are thinking about that and I have a couple of follow-up questions.

Sure. The Vegas profitability was good for the quarter. On a same store basis our profitability was up. And as we discussed before, I mean for the first half of the year Centennial has outperformed our own expectations. It was actually close to being EBITDA break even in the second quarter which is probably about three months ahead of when we thought they would get to that level of profitability.

So we are just pleased with general developments in the Las Vegas market. But our profitability, again, as I sort of commented to Tom from an admissions perspective, but it is also true about profitability, was relatively strong throughout the portfolio. To have a beat as large as we did you need to have sort of both portfolio wide strength as well as obviously strength across the two businesses and I think we had that in the second quarter.

Okay. And then are you still -- I guess in terms of the dilution for the year from Centennial, how do you think about that $0.07 to $0.08 that you talked about earlier?

I think we will probably in the end do better than that, Adam. I mean as long as trends continue the balance of the year ought to be a little accretive at Centennial. Like I said, we are probably at the end of the day about three months ahead of sort of our ramp-up schedule there which already thought was a pretty accelerated schedule. I don't know exactly how much less than the $0.07 or $0.08 will be, but we should be at least a few pennies less than that.

Okay. Then just a follow-up question to here. I guess just as we think about the operating leverage in the business model. I mean, clearly you guys have been showing upside on the margins. So just curious last quarter, Steve, you talked about some improvement in salaries and benefits and this quarter it looks like you saw a similar improvement as well as on the supply line item. Just curious if you can comment on that. Any items that really stand out in terms of the cost management?

Sure, Adam. I mean, what we said in the first quarter and I think it is equally true in the second is that when you have the strong revenue performance and we had same-store revenue growth in our two business segments in the 7.5 to 8% range.

That's obviously pretty strong same store revenue growth and I think it provides an opportunity for a lot of operating leverage and I think you saw again in the first half of the year that our operators have taken advantage of that. I think it is also true that in a little bit of a weaker economy we've seen some of the pressure come off our wage rates.

Our usage of temporary nurses is clearly down over last year for the first six months. Which I think is a good indicator of sort of how much pressure there is on wage rates. We mentioned in my prepared remarks that we are getting some benefit from our change in group purchasing organizations which was effective April 1. So I think we had a few million dollars of benefit from that in the second quarter.

The only other comment I will make is we did see a little bit of a bias, or have seen a little bit of a bias this year towards more medical procedures and less surgical procedures and a little bit more acutely on the medical side. And just generally medical procedures are less supply intensive than surgical procedures and so I think that's driving down our supply expense a little bit as well.

Okay. And then just a final question here. Just on the pricing side, has anything changed, Steve, there? Seems like you guys are seeing some acceleration. Just curious. I know you finalized the new CR contract. You highlighted on the last call. So just curious in terms of how you think the pricing environment, have there been a few contracts that have changed? Have things -- I guess just how are you thinking about that?

I think that the dynamics, there are a few dynamics, Adam, that are contributing to what has been a relatively strong pricing environment in the first half of the year. As we anticipated would be the case I think we have benefited modestly from Medicare switched to the MSDRGs. So that has been a modest help to us.

I think that in general our managed care pricing which we have said over the last few years has been going up at a rate of somewhere between 6% and 8% that for the first time this year we are kind of on the high end of that range, rather. And then finally as we talked about in the first quarter and I think it is good again in the second quarter our just general mix of payers has been good and has been weighted more towards managed care and less to indigent non pay patients and Medicaid patients. I think all those things have contributed to the stronger pricing.

Last quarter you gave a commercial volume number, just since you're talking about mix there. Do you have that number again?

Yes, we talked last quarter about commercial volumes being up 6% year-over-year in the first quarter and is in the second quarter the numbers were pretty similar.

Okay, great. Thank you very much. Great quarter.

Next we have Jason [Gordeau] of Leerink.

Good morning, Steve.

Good morning, Jason.

Do you have sense for what the uninsured admission trend were during the quarter?

I think our uninsured admissions were growing at about the same rate as our overall admissions which I think was the case in the first quarter as well. So overall, insured admissions were growing at about the same time. Managed care admissions were growing a little faster. Medicaid admissions, largely as a result of the loss of OB business in McAllen were down. That's kind of how the mix looks.

Okay. You had mentioned in your comments earlier that you had started a second construction project. Could you maybe add a little color on that?

Sure. Our first construction management project was initiated in '06, and between '06 and '07 we recorded probably $10 million of EBITDA related to that project which is now largely completed.

I mean, the project itself is completed and we are just finishing sort of the construction, accounting and little bit of cleanup in that regard. We have commenced a second contract with actually the same not-for-profit system on a smaller scale that will result in EBITDA to us of probably a couple of million dollars in the back end of 2008 and another couple of million dollars in 2009.

And we continue at the same time to look for other opportunities for more of these construction projects. We think we have a particular skill set in this area and we think that it adds value to others. So we continue to try to market those services.

Interesting. One other thing I wanted to touch on was you were going through a little bit of the state Medicaid exposure in some of your expectations. Do you have a sense overall what you are expecting from Medicaid into the back of the year and into 2009?

Going into 2008 we said that our pricing guidance presumed that Medicaid pricing would go up like 0% to 1% and the changes that have been announced so far don't really change that very much. So I think we are sort of still in that range for' 08 and although we have not been very precise about it, and my guess is that is sort of the outlook for ' 09 as well.

Okay. Well thank you very much. Congrats on the quarter.

Thank you.

And next we have of Ralph Giacobbe of Credit Suisse.

Great thanks. Good morning. Just in terms of the guidance sort of raised it about $0.10 on a $0.16 beat. Just wondering if there is anything in the second half we should be aware of. Obviously, you talked about some of the Medicaid cuts and I guess just whether guidance assumed sort of the first half trends continue into the second half?

Sure, Ralph. I mean two things. We mentioned this in the first quarter as well. It is a little bit difficult because we don't give quarterly guidance, but I think it is fair to say that while our full year guidance at the outset of the year was pretty consistent with the street, our guidance was a little bit more front end end loaded than by the streets and obviously the streets was a little more back end loaded..

So I would say in the first and second quarters or first half of the year our internal beat, if you will, was somewhat lower than the street had it and therefore when we raised our guidance I think in both the first and second quarter I think we were raising our guidance to some degree more than the beat in each quarter or to accommodate the beat in each quarter. But that's largely sort of an allocation issue across the year.

I think the other aspect to be noted is as everybody knows obviously we are watching the news about the weakening national economy and some of our local economies carefully and increased unemployment rates in some of our markets, et cetera. And I think the second quarter results demonstrate this that we have felt little impact from that economic weakness thus far, we certainly can't guarantee that there won't be some impact later in the year. So we have tried to be relatively cautious about how we might feel that in the back half of 2008.

Okay. Then I think you mentioned case mix. Did you give a percentage for the case mix in the quarter?

I'm not sure I mentioned case mix, but I appreciate you say that. Because our case mix is up a little bit. Not a whole lot. I would say 3% or 4% our case mix is up.

Okay. And I guess in the first quarter I think you mentioned sort of 2.5% - 3.0%, so tracking still. Do you think that is sort of a sustainable number? Or what are you seeing, what's driving that?

I wish I could say that with some precision, Ralph. As I mentioned before we have taken sort of a hard look at our mix of procedures and we've noted that, again, there has been a little bit of a bias towards more medical and less surgical procedures and, frankly that's not necessarily the environment where we think that our case mix would be going up.

So other than to say I think just in general I would say that the acute care hospital environment is such that patients who get admitted over the last few years are just sicker and more acutely ill and that trend continues. I don't know that I that I could point to any other rational for why we are seeing a little bit of creep up our acutety.

Okay and then just the last one. Could you remind us again the difference between the behavioral side seeing kind of a flattish revenue per adjusted admit stat versus kind of that 5.1% increase in the revenue per just patient day?

Sure. That is almost entirely a function of a 5% length of stay reduction in behavioral in the quarter. Unlike acute in behavioral, virtually all our reimbursement from all payers is on a per diem or per day basis. So when length of stay contracts as it did in the second quarter, revenue per admission goes down, so just very simply if this year we are seeing -- or let's say last year we were seeing a Medicare patient on average ten days at $500 a day and this year our average Medicare patient is staying nine days for an average of $500 a day we are obviously going to have a decline in revenue per admission but revenue per day will be going up by the normal pricing. So --

Is there something driving that sort of lower length of stay?

I don't think so. I mean, obviously there are some states where you may see a little bit of pressure from managed Medicaid. But I think in general if probably more than anything else, Ralph, is the idea that this is the third quarter in a row where we've had same store admissions increases in behavioral in kind of the 7%, 8%, 9% numbers and those numbers I think are so significant that our operators have changed their practice a little bit.

And in order to accommodate the tremendous demand for our services and our capacity, we are doing the best that we can to turn patients over and even if utilization review and clinical practice would allow us to keep a patient an extra day et cetera, I think sometimes if it is clinically appropriate we are discharging that patient just so we can satisfy our waiting list and our demand for referral sources to get patients into our facilities. So I think you're seeing a little bit of that after now three quarters of very, very strong admission growth.

Okay. Great. Thank you.

And next we have a question from the line of Matthew [Bush] of Goldman Sachs.

Hi, thanks. This is Shelley Gnall in for Matt Bush this morning. If we we could go back to the Las Vegas market. I was wondering. Steve, I think you've mentioned in the past the economic metric that has most impacted hospitals is unemployment.

Can you talk a little bit about your sense, even just anecdotally, what's going on in the Las Vegas market and are the 10% admissions growth you guys have seen is that market share that you're taking from other hospitals? I guess what is the market dynamic in Las Vegas?

Well, let's talk about market share first. Clearly we talked throughout 2007 about a significant shift in market share largely as a result, obviously, of Sierra's cancellation of their contract with the HCA facility. So there was a significant shift in market share in 2007. We also talked in 2007, however, that as a result of that shift, losing some other business like Medicare and other commercial payers, et cetera.

One of the positives for us in the first half of 2008 and particularly in the second quarter is we saw a nice recapture, for instance, of some of that Medicare volume we had lost. I think if anything literally every quarter as market share data comes out and the nice thing about the Vegas market is that data is available on a pretty realtime basis, we are just seeing our market share continue to strengthen and the gap between us and our nearest competitor continues to widen.

So we are very pleased with market share in the Vegas market. As far as the overall economy, obviously there be is much that has been written, as you well know, about weakness in the Vegas economy, but I think we have been pretty open about saying that we are not feeling a great deal of that thus far. Unemployment rates did go up in Vegas earlier in the year. I think in March or April. But I think in May they actually came down by a tenth of a point.

So I'm not sure that there is a clear continuing progression of upward pressure on unemployment in the market. It is kind of a mixed bag. Some of the gaming properties have announced layoffs, et cetera, but others have announced major hiring. The Wynn properties announced they are hiring 4000 or 5000 people and there is the city center project that is underway that will employ several number of people as well.

And there are still a significant number of people moving into the city. Even the most recent data from May or June indicates that there are about still -- people are moving into Las Vegas at the rate of about 50,000 a year. So we are carefully watching the metrics in Las Vegas, but as I indicated in response to other questions earlier, our business there remains strong and we are hopeful that we can weather whatever weakness may exist there.

Okay. I really appreciate the color. Thanks. And then if I could just do one quick follow-up on maybe Ralph's questions on the behavioral health. Can you talk a little bit about what services are seeing the strongest growth in behavioral and maybe update us on your mix of inpatient and out patient?

Well, first of all, from an inpatient/outpatient mix, our business has always on the behavioral side has always been heavily weighted towards inpatient and even in most markets where we have out patient with a few exceptions, the out patient business that we have is largely designed to compliment and ultimately feed our in patient business. So it is very much and in patient oriented business that we have.

In terms of the mix between residential and acute. Those numbers remain about the same. We are still I think more heavily weighted towards the acute side than the residential side. And as far as individual service lines, chemical dependency et cetera.

I don't know that we are seeing that strength and admissions focused in a particular service line, et cetera. We are seeing that strength pretty much spread throughout the portfolio. Service wise, geographic perspective. Adults and adolescents.

So obviously I think when you are growing at 7%, 8%, 9% pretty consistently for the last few quarters you've got to have some pretty widespread strength and I think that's what we are seeing.

Okay, great. Thanks. Appreciate it.

Next we have Darren Lehrich of Deutsche Bank.

Good morning Alen and Steve.

Good morning.

Wanted to go to the question with regard to the outlook for the second half of the year. We clearly hear what you are saying, Steve, about what your internal budgets were and how they were weighted.

I guess I just wanted to get your comments on a couple of things if you had to break down what really changes in the second half relative to your earnings levels and perhaps your revenue. How would you frame that for us? Do you have -- is it weighted towards your bad debt rising?

Do you have volume softening? Can you just maybe hit on some of the high points that would help us frame what looks to be an unusually lower weighted second half relative to what you've done in the last at least two years?

Sure. Well, first I will preface it. Alen and I spoke before the call this morning and he reminded me of something Yogi Berra once said that predictions are very hard to make, especially about the future. I think that is certainly true here, particularly in sort of in the volatile environment we have been operating in the last few years and now layer onto that the economic uncertainty.

I think in general, Darren, just mechanically what we have done is we have said, okay, we had guidance out there for the year. We've beaten that guidance and we discussed that we have beaten it a little less internally than we have beaten perhaps the streets guidance in the beginning half of the year. But just generally we have taken the approach that for the balance of the year we will meet our original guidance, save for things like interest expense, et cetera, that we adjusted on early in the year.

And have not really necessarily said that we are anticipating a reduction in volumes or an increase in bad debt. And as we have indicated up to now we really have not experienced that but we've taken, as I said, characterized earlier a fairly cautious approach to it and we hope to deliver on what we've promised and that's just the position that we've taken.

Okay. That's fair. You did at one point have a revenue target out there at 5.13 billion. Is that roughly the level you're still looking at? Or does the Centennial ramp change that outlook in any way?

I don't know that the Centennial ramp has enough of an impact on our consolidated results to really make us rethink that.

Okay. Fair enough. A couple other things. Just going back to the labor costs management. It has looked quite good. I know you're discussing the easing of labor relative to the economy.

Can you just give us maybe a spot number at this point where you are in temporary labor costs per patient day or however you might measure it, where that is in the second quarter and where that's come from relative to last year?

That number I don't have in front of me, Darren. I will be happy to provide it offline. But I do know our temporary use of labor in total is clearly lower in the first half of '08 than it was in '07 despite the fact we have pretty strong revenue on both sides of the business, et cetera. Again, I will be happy to provide more granular detail offline but the big indicator I think is that our overall expense is lower than it was last year.

Okay. I'll follow-up offline there. And then just back to pricing. Maybe to peel back a little bit further there. Just make make sure I'm hearing you correctly.

Have you seen any shift at all that would show up in your pricing trends relative to a shift from in patient to out patient catheterizations and maybe some growth in observation days which get reclassified and maybe paid at lower than in patient? Is there anything palpable there that you want to highlight to us relative to that pricing number?

I think that both of the trends that you mentioned, which is a shift from in to out patient particularly in the cardiac area and more observation days, are trends that we certainly have seen over the last few years, I can't tell you with any precision what our experience has been in the first half of the year.

I can't tell you right this minute. We certainly know that. But obviously with our pricing strength I think it is fair to say that we are not experiencing a tremendous amount of pressure from either of those issues or otherwise we wouldn't be able to see the pricing strength that we have seen in the first half of the year.

Okay. And remind me, the Sierra contract renewal took effect. Was it May or June? So we saw some of that increase in the quarter?

Yes. It was either late May or early June.

Okay. Then Alan I just have a question for you about Texoma. Can you give us some comments about that acquisition, how it is performed?

And then one specific question about Texoma is just the physician model which you inherited with that acquisition. Can you talk about how that model may translate to other markets, where you've found any success in that physician group there?

Well, they happen to be good at managing physician group. So we have been studying what they have done. They have been very successful with it. There is a shift now happening with more people now seem to want -- more physicians seem to want to be employed.

So we are looking at how they have done it and seeing what we can learn from them. We are bullish on the market. I would say it has been uneven. But we are going to be building in a very good location and it is a growth community. So we are happy with the acquisition.

I think that if you look, for example, at what the returns have been, not only Centennial but in Bradenton, we did a big construction project there and it has really turned the hospital into a very wonderful projection, positive earnings, really growing. So we are excited about it.

One of the things that you're competitors all seem to struggle with is just the physician employee model and how to really implement that through a portfolio. I mean, is something like Texoma can you translate to other markets, do you think, if you have to do more employment?

I would say we are studying it. We have not been -- never got into the buying practices and employing physicians other than the house-based physicians. We never thought it was -- and this is over a period of time. We never thought it was very productive. A lot of people retired on our dollar.

But the trend now seems to be that with all of the paperwork and the government involvement, a lot of physicians, particularly the younger ones, they would like to be employed and not be bothered with anything else. And go home and not be concerned about running a business. We are looking at that. We are employing physicians on a very selective bases. But it is a trend that seems to be happening and we are going to all have to deal with it.

Darren, I think the Texoma business is it is actually instructive. Texoma had a physician employment model for a long time before we bought them and we know from them sharing their history with us they struggled with it for many years in the beginning. They lost a lot of money in the beginning on their physician ownership, et cetera.

Once the model was developed and the physician ownership and practice built, et cetera, we think it is a very effective tool, but as you alluded to, our competitors and I think all hospitals rarely implement a physician ownership model without a lot of bumps in the road to get there.

So the challenge that we all have is to get to perhaps an effective end game. Can you do so without losing too much money and being too disruptive, et cetera? As Alan said we are trying to learn from the Texoma experience both before and after our ownership as we think about how we're going to handle this issue in all of our other markets.

Great. Thanks a lot. I will jump out of the queue here.

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

Thanks, good morning. I'm not sure if you gave it. Do you have a number for what the bad debts were at the acute care hospitals.

I think our same store bad debt in acute was 12% in the same quarter roughly.

Do you have a dollar number?

I do. I'll find it or -- I have it. It's right here. It was 114 million in the second quarter.

Okay. Then I guess maybe to beat the horse completely dead here on Las Vegas. Could you talk a little bit I guess about whether or not visitors to Las Vegas account for any significant portion of the hospital volumes or any significant portion of the revenue at your hospitals?

Sure. Let me make two comments about that. One is that only a relatively small percentage of our market revenues come from the tourist business. When we have attempted to clarify this in the past it is somewhere in the 3% to 4% of our revenue comes from the tourist business which is not, frankly, unexpected.

Obviously most people when they are taking a vacation are doing so in what they think is good health and it is usually only an emergency that would cause them to seek medical treatment when they are away. The other comment I would make is, for those that follow the Vegas economy and the gaming industry, is that tourist volumes are not really down very much.

What's down is the amount of money spent by the average tourist on the average night, et cetera, which is, frankly, as you can imagine, a bigger challenge for the gaming industry than the hospital industry. So, two things.

We are not overly reliant on the tourist business to begin with other than indirectly as the strength of the gaming industry and secondly the amount of tourists visiting the city which I think are projected to be 37 million this year, is not really down.

Okay. And then you'd benefited I think earlier in the year from some favorable trends on malpractice insurance. Can you just update us in terms of, has that changed at all in terms of what you're reserving or what your outlook is there?

Right. So I think actually that adjustment to our malpractice reserves goes back to the second quarter of 2007. So this quarter actually the comparison is probably not as favorable as it has been. But in general, I think that the favorable trends that caused us to reduce our malpractice accruals a year ago have generally continued.

We think we are benefiting in some of the most important states in which we operate by malpractice, to whatever form that has been passed in states like Nevada, Texas, and Florida. As well as improvements that we have made to reduce risk particularly in certain service lines like OB.

Okay. Then maybe just a follow-up question for Alan in terms of what your thoughts are on the acquisition environment both maybe in the acute care business and also in the psych business?

I'll start with the acute business. We are active. We are always looking and evaluating. There are a number of players. We thought it might decline in a few players, but there are people out there. When something good comes on the market or people know about it, there have been a number of players.

One came up recently and my understanding was they had ten or 12 people that were active and had some capabilities. The psych business, you've got to be selective. There are a number of startup companies and I'm interested in seeing whether their funders will be as willing to fund new companies as they had been. There are a number of them out there. We are being selective.

We have made, as you know, acquisitions almost every year. Actually, every year. And there is not a lot of them but we are interested in the ones that are -- have a future, can be productive, we can buy them at. The rates are higher than they have been but they are there. But it's not a great number of availabilities as they had been in the past.

Great. Thanks a lot.

Next we have Justin Lake of UBS.

Thanks. Just a couple quick questions. One on share repurchase. For the last call you mentioned you were going to take a break to look at the M&A opportunities out there. When do you expect to kind of have that evaluation done and kind of make the decision whether to go into active in M&A or get back to buying back stock?

Justin, I don't know that we set any sort of time frames or deadlines for ourselves. As Alan just indicated in his response, the acquisition evaluation process is sort of ongoing and constant and frankly, the evaluation of the opportunities to repurchase our own stock are also ongoing and to some extent dependent on how our stock price moves, et cetera.

Obviously at the recent levels we think our own stock is a fairly attractive buy. But we are always going to look at the opportunities to repurchase our own stock in connection with any opportunities that exist to buy other earning streams and decide the best way to employ our capital.

Okay. Great. Thank you very much much.

Next we have Frank Morgan of Jefferies and Company.

Good morning. A couple of question here. Steve, you mentioned dish payments in Texas. Any update on other states like South Carolina and then back to Texas what about other kind of state or county programs that have been a source of funding for you in the past?

Sure. We talked in previous quarters about the UPL programs in Texas and I think in essence we have gotten within the last few quarters sort of the all clear, if you will, on our current UPL programs in Texas. They all seem to have met CMS Muster. So I think we are square on that.

As I said, you know, Texas is the state where we receive by far the most significant amount of Medicaid disproportionate share and Texas continues to sort of look at a remodeling of their regulations in their system but continue to say that, informally at least, that this is intended to be budget neutral.

And in the informal conversations we have had with the state of Texas we don't believe that we are likely to be impacted in any material way either positively or negatively although we should get those rates and know with some certainty later this month -- this month, excuse me, meaning August. I apologize.

South Carolina is a much smaller number in terms of our exposure to disproportionate share. I don't believe we have gotten our fiscal '09 numbers yet, but again our expectation there is it should not be material. Our exposure to South Carolina is much less than it is to Texas.

Okay. Two more and then I will hop. First, were there actually any medical malreleases of property or reserves in the quarter?

No.

Okay. Then finally, any explanation for just the weakness in surgical volumes overall?

In all honesty, Frank, we haven't been able to do the real deep dive that we did in the first quarter. When we did it in the first quarter most of the reduction was in cardiology and within cardiology it was in [stenting] procedures. It looked, at least on a preliminary basis, that those volumes came back some in the second quarter.

So, again, I think in the second quarter I think our surgical volume sort of moved in line with our overall admissions and I would say that is what we expected. The first quarter they were a little weaker and like I said that was mostly looking like a cardiac [stenting] issue.

Okay, thanks.

We have Kemp Dolliver of Cowen and Company

Hi. Thanks. One question that relates to the earlier acutety discussion, Steve, and that is what spillover effect if any do you think MSDRGs have had on your commercial business?

At least one of the plans has noted that what they are seeing is essentially the coders that learn MSDRGs they code it for Medicare and then they basically code everything else the same way just out of human nature and the absence of any double check on it by the payer or even the hospital.

Kemp, I think that for us the vast majority of our managed care reimbursement remains per diem based and so it is not dependent on coding. The only large pair, quite frankly, that we have, that has tried to mirror the medicare MSDRGs have been Texas Medicaid and frankly they struggled with it.

We benefited. Not to any great disagree. They made some retroactive payments, maybe a couple million bucks of not getting it right when they first implemented it. But other than that I would say the vast majority of our managed care contracts are not subject to reimbursement that would be coding sensitive.

Okay. Good. And the acutety increase you mentioned, this 3% to 4%, my impression is that's probably relatively strong compared to your history. Is that right?

Yes. I mean, actually, for a long time we didn't see much movement in our case mix index for the last couple of years. So this modest improvement in the last quarter or two is something that's relatively recent for us at least.

That's great. Thank you.

Steve, I'm going offline now. Bye, everyone.

Our next question comes from the line of Jeff Englander of Standard & Poor's.

Good morning, Steve. Quick question. I believe it was last quarter and correct me if I am wrong, that you gave some commentary that business was more impacted not so much by weakness in housing but by weakness in employment and you made some comments this morning about the Vegas market.

Can you just color on any of the other markets and what you're seeing either anecdotally or otherwise in terms of employment and what impact that might be having on your results?

Sure. I mean, I think that the conversation that you are alluding to, Jeff, is that in the first quarter people were asking me about whether we were feeling any pinch from a weakening economy in Las Vegas and I think we talked about the fact that most of the metrics three or four months ago that were negative in Vegas were housing related.

Foreclosure rates were up, housing starts were down, et cetera. And we speculated that we didn't necessarily think that those metrics would have a direct and immediate impact on us. And that the more likely impact that we would have in any market is frankly if the number of people who were unemployed went up mostly because the concern would be that people who lose their jobs would lose their health insurance that came along with their jobs.

So at the very end of the first quarter I think we were seeing an uptick in employment in Las Vegas and noted that and said we would watch that carefully. Obviously national unemployment rates have gone up. We have seen them go up in some of our local markets.

As we have indicated a few times now I don't know that we are really feeling that pinch anywhere and as a matter of fact, frankly, if there was a market that we have acknowledged we probably felt some of the local economic weakness it has been Florida and frankly we did well in the second quarter in a couple of our Florida markets.

We continue to say that we are not seeing much of an impact. As you know, unemployment has arisen on a relative basis fairly dramatically, but it is not at terribly high levels compared to what we have experienced historically.

Okay. Can you make any comments about what you have seen in Texas at all?

The Texas market in general have done better than the national average. I think Texas generally has weathered the storm a little bit better probably most because of the oil industry. In the second quarter I mentioned in our -- in my prepared remarks that our south Texas markets, which are primarily McAllen, but also Laredo and Eagle Pass did well in the second quarter.

Alan indicated in one of his responses that Texoma, which is a north Dallas market, has been a little more uneven. Amarillo has been a little more uneven. We are not seeing any particular weakness in Texas and again in the south Texas area we have probably seen some strength, actually.

Great. Thank you very much.

Next we have David Veal of Morgan Stanley.

Hi, thanks. We heard anecdotally June was a tough collection month for providers. I wonder if you can just call out any trends that may have been notable in terms of month-to-month variations in the key metrics?

I don't have the month-to-month in front of me David, but my general sense -- there is always some ups and downs in the quarter but volume wise, collection wise, it strikes me that our performance was relatively stable throughout the quarter.

It is not like we saw things get steadily better over the quarter or steadily worse either way , and frankly I think for the most part we have seen that stability for the entire first half of the

Sure. Just one follow-up. Any impact at all from hurricane Dolly in the south Texas markets?

We were hardest hit by hurricane Dolly in the McAllen market but I think even that is sort of a three- or four-day event. Mostly rain. Lots of leaks and whatever in the facility and a couple of days of diminished ER and elective volume. But as I recall hurricane Dolly hit on a Wednesday and by the following Monday I think we were very much back to normal.

Great. Thank you very much.

Next we have a question from David Bachman from Longbow Research.

Good morning Steve. couple questions on managed pricing, to get back to that. It's obviously been strong. You said 6% to 8% is sort of what you have been looking for this year. Can you talk about how that varies across the portfolio? I mean are you seeing -- are there certain markets that are significantly above or below that just in general terms?

I don't have enough sort of granular detail in front of me to answer that question sort of accurately, David. The answer I think is I'm sure that's the case.

And I have mentioned before that probably what determines our success in managed care negotiations is probably our relative market strength and market share and the availability of excess capacity in the market and the payers' relative strength and market share probably more than any other issue.

But it's not like I would say that we are getting 10%, 12% increases in some markets and 2%, 3% increases in others. I would say that the variability is more narrow than that?

It would be more narrow than that?

Right.

We could assume given what you have just said that the Las Vegas market, you would be in a stronger position with capacity coming online and a larger market share there to getting to the high end or slightly above the high end of that range then?

Well, I wouldn't necessarily jump to that conclusion only because the counter veiling argument to that is we probably have the strongest managed care player that we negotiate in that market and I think we have indicated previously that our negotiated contract with Sierra was at rates lower than our average rates.

So I think it is -- you can't underestimate the strength that the payer has in that market. That particular payer has in that market.

Okay, okay. That's helpful. Then just back on operating leverage front. Hopefully you can give us just a little bit more color. I see in the same facility metrics here average daily census is up 130 bases points year-over-year. Can you talk about how that much of that kind of move just really helps profitability?

Well, I think -- again, and I think our results in the first half of the year are reflective of the fact that is very helpful. This remains both in the behavioral and the acute business largely a fixed cost business. A lot of our expense is wage related and a lot of that wage expense is fixed and semi fixed other than sort of the nursing caring on the unit, I would say most of our labor costs is fixed or semi fixed.

The only other variable cost associated with each incremental patient is the supply that the patient generates Again, so it is fixed and semi fixed. So when we have an increase in ADC as you framed it or as I framed it before, 7.5, 8% increase in same store revenue, I think there is an extremely significant opportunity for operating leverage.

Again, I think the operators have to do their job in order to enjoy it and in the first half of this year I have said over and over again our operators I think have done a really remarkable job.

Okay. Great. And just one last question. You haven't talked as much about recruitment of referring physicians as some of the other operators do. Can you give us any metrics on that in the quarter and strength on that front?

Historically, you're right, we haven't talked about physician recruitment, the way that others have. I think largely because the companies that really talk about physician recruitment tend to be those that have more rural facilities where literally the recruitment of a single specialist or an orthopedic surgeon or cardiac surgeon, neurosurgeon may be the only one in the market really affects their ability to deliver a service in that market.

We tend to operate in markets where we have kind of a broader ability to deliver the service. It's rarely dependent on a single physician. And therefore, it is just not -- obviously physician recruitment is an important function to us. Occasionally we will run into problems with recruiting a particular specialty in a particular market.

But generally the markets that we operate in particularly those most important to us, Las Vegas, south Texas, et cetera, these are markets that have been growing, they are growing faster than the national average and frankly physicians want to practice there. And they have not been terribly challenging to recruit to.

Okay. Just one last question on the behavioral side. 350 to 450 beds in '08. How many are those are on line to the second quarter?

I think. I'm not remembering the first quarter number exactly. But I think we are sitting at about 200 for the first half of the year.

So about halfway through. Okay. Great. Thanks.

Sure.

We have a question from the line of Gary Taylor of Citigroup.

Hi good morning, Steve. Thanks for taking all of the questions. A few quick ones. On the construction contract, the one, how much revenue do you think that adds on the back half?

I'm going to guess at this Gary because I haven't seen a real sort of construction time line but I'm thinking maybe 25 to 35 million of revenue and obviously a like amount of other operating expense.

In just the back half, right?

Just the back half of ' 08.

Okay. Centennial Hills. Can you talk about occupancy rate there? Even ballpark?

Yes. I think Centennial has been operating for the quarter at something like -- and actually probably for the full six months, 40% occupancy, something like that. It is 175 beds roughly.

Still got a lot of room there.

Yes.

And on the Medicaid reductions you had commented on, Florida, Nevada, California. Were those 2008 amounts or were those annualized amounts?

When I talked about a couple of million dollar effect in each state, those were annual amounts. So obviously we will only be getting a portion of that in 2008.

Then my last question -- I mean, the one place where if you look at your metrics versus your peers, you've just blown them away year to date is on the commercial admissions growth on the first quarter I think every other public company and then including HCA had negative commercial admission year over year, you were up six or up six again. I think we have asked this question before.

Maybe other people have asked it a different way on the call. But when you look at that 6% growth, do you see a single geography, do you see a particular service line? Is Vegas is disproportionate driver of that? And could you see a strategy such that you foresaw that you were going to see such a nice pick up in commercial?

I guess a couple of things. No, I don't think I don't think that there is a particular market that's really driving that. And to be honest, I don't think it is Vegas. I think if anything Vegas may be a little bit lower than that. Largely because we saw such a large commercial shift in '07 in that market.

But in the McAllen market, really just as an example. I think we are recapturing some of that commercial business that we have lost over the last few years. And then in other markets we are gaining as well. I think -- when you talk about individual strategies, Gary, I think it is a lot of blocking and tackling. I don't think it is the kind of thing you sort of have an initiative and in one quarter you are able to increase that number. I think this is a result of a lot of-- we talked about this a lot in the first quarter.

A lot of things we have been doing over the last two, three, four years are starting to bear fruition and I think we are benefiting from that. We are benefiting from being in some strong local markets as well. We have always talked about that. And we are also benefiting from being -- and I think this is always a little different than the rural companies.

We are in markets where there is a lot of commercial payers and we are not reliant purely on Medicare and Medicaid, but in south Florida and southern California, these are markets that have a very strong commercial bias and we have done well in those markets.

You must really be -- I mean certainly nationally commercial admissions are not up anywhere close to six so you must be taking share even in that commercial mix. Just my last question. When you look at on the acute care side I think the net revenue per adjusted admission was up approximately 7% or somewhere around there.

Presuming that commercial payers by and large pay you better rates than Medicare or Medicaid, have you attempted to kind of ballpark of the 7%. 2% of it is coming back commercial is growing six and Medicare is growing one? Do you have a thought of just how much that might be quantifying in that revenue per adjusted admissions growth?

I don't have it at that level of precision, Gary. I think in answering somebody's similar question before I would say that we have identified probably three or four dynamics which we think are really bolstering that overall pricing.

I think it is the impact of MSDRGs. I think it is just strong managed care. Contractual pricing. I think it is the payer mix as you just alluded to. So I think it is all those things combined, but no we have not necessarily attempted to sort of segregate out each item and identify what its impact is.

Great. Thank you.

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

Steve, you've got to be worn out by now. Just a couple of quick questions. A small company, PRSE, is having a tough day and they are talking about states, some of the things states are doing to cut costs. Are you seeing things -- other than just pure rate, are you seeing anything on the behavioral health side vis-a-vis narrowing networks, reducing eligibility, reducing length of stay that is unusual at the state budget cycle?

I wouldn't describe it as anything as unusual. We may have mentioned in the first quarter some pressures here in Pennsylvania, where the Medicaid program is sort of tightening their eligibility and their utilization to reduce length of stay and issues like that.

And we are responding to that. I think I may have mentioned that in some cases we have just stopped taking some of these patients because the state is making taking some of the patients because the state is making it so difficult.

Okay.

But overall I wouldn't say that other than the gross rate reductions that I mentioned before that we are seeing, a pervasive initiatives on the part of the states to reduce spending.

Okay. My other question is on your -- if you look at uninsured and co-pay collection rates, have they stabilized, have they deteriorated with the economy?

I think we are finding that collection rates have remained pretty stable. At least for the last few quarters. Obviously I think we have seen collection rates particularly on the sort of portion after insurance. The co-pays and deductibles over the last three or four years they have declined some but I don't think in the last two quarters we have seen any material change.

Okay. And then I guess one other thing. If you look at Vegas, forgetting kind of the unemployment rate. Have you seen any projections about just the sheer number of employed people? Is that going to continue? Even if unemployment rate goes down, are the number of people with jobs going to continue to go up in Vegas? Have you seen any projections?

I'm not sure I've seen that specific data point, John, but again, I have seen, to your point, unemployment is going up a little bit, but so is the number of people moving into the market.

Right.

So I'm not sure that the amount of employed people is actually declined, but I have not actually seen that?

Isn't that the number we should look at, is just the number of people that have jobs that have health insurance?

I think that's an important number. Certainly, if there are more people without health insurance that's a challenge for us that they present themselves in our emergency room or whatever.

Sure.

But your point is well taken. I mean, I think if the number of people with jobs and with health insurance remains relatively steady that's an important metric as well.

As far as you know is HCA still not back in the Sierra network? You mentioned that last quarter. Is that still status quo?

They are certainly not back in the Sierra network right now. I can't necessarily comment on whether there are any conversations about getting them back in, but they are definitely not in now.

Okay.

Thank you.

Next we have Whit Mayo of Robert Baird. Mr. Mayo, you have an open line, sir. He may have withdrawn his question. And I am showing that we have no further questions at this time.

Okay. We would like to thank everybody for their time and we look forward to speaking with everyone next quarter. Thank you.

Thank you for attending today's conference. You may now disconnect.