環球健康 (UHS) 2008 Q4 法說會逐字稿

Good morning. My name is Brent, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the fourth quarter year end 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.

Good morning. I'm Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome this review of Universal Health Services results for the full year and fourth quarter ended December 31, 2008.

As discussed in our press release last night, the Company reported income from continuing operations per diluted share of $3.80 for the year and $0.81 for the quarter. After adjusting for the reserve established in connection with the ongoing investigation of our South Texas Health System affiliates and the liquidation distributions from a malpractice insurer our adjusted income from continuing operations per diluted share for the quarter ended quarter December 31, 2008 were $0.87.

On this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2008.

We'd like to highlight just a couple developments in business trends before opening the call up to questions. Revenues for the fourth quarter increased 5% over the prior year's quarter. Exclusive of the impact of new facilities, most notably Centennial Hills, and the revenues related to a construction management contract, revenues have increased by 2%.

On a same-facility basis, in our Acute Care division revenues increased 2.2% during the fourth quarter of 2008. The increase resulted primarily from a 3.3% increase in revenue per adjusted admission. Admissions to our hospitals owned for more than a year were down 0.4% 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 extent it cannibalized some of its volume from our existing facilities, the better than expected operating results at Centennial Hills contributed to a greater than 9% increase in total admissions in the Las Vegas market during the fourth quarter of 2008 over the comparable quarter of 2007.

We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. On a same-facility basis, operating margins for our acute care hospitals increased to 13.9% during the hundred quarter of 2008 from 13.6% during the fourth quarter of 2007.

Our acute care hospitals provided charity and uninsured discounts based on charges at established rates amounting to $163 million and $140 million during the three-month periods ended December 31, 2008, and 2007. Even after adjusting for certain reclasses between charity care and other discounts the percentage of net revenue bad debts, charity expense and the uninsured discount in the fourth quarter were at levels higher than those that we experienced for the fourth quarter of 2007.

On a same-facility basis, revenues in our Behavioral Health division increased 4.0% during the fourth 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 for more than a year, increased 0.7% during the fourth quarter.

Revenue per adjusted patient day rose 4.8% during the fourth quarter of 2008 over the comparable prior year quarter. Operating margins for our Behavioral Health hospitals owned for more than a year decreased to 23.2% during the quarter ended December 31, 2008, as compared to 23.5% during the comparable prior year period.

Our cash flow from operating activities was approximately $67 million during the fourth quarter of 2008, as compared to $26 million in the fourth quarter 2007. At December 31, 2008, our ratio of debt to total capitalization was 39%, and the ratio of debt to EBITDA was 1.77. We spent $115 million on capital expenditures during the fourth quarter.

Included in our capital expenditures were the construction costs related to a new 171-bed hospital in Palmdale, California, and the 220-bed Texoma replacement hospital, both of which are scheduled to be completed and opened in 2010. In Las Vegas we are also underway with a major bed tower expansion of our Summerlin Hospital, and in California we're in the process with a major expansion of emergency room, imaging and women's services to our Southwest Healthcare campuses in Riverside County.

During the fourth quarter of 2008, we repurchased approximately 1.2 million shares of our Class B common stock. We currently have 2.4 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) We'll pause for just a moment. And your first question comes from the line of Shelley Gnall.

Hi, thanks very much. Steve, could you remind us why the bad debt trends tend to show sequential improvement into the fourth quarter? And then, specifically, this quarter what have you seen on patient mix and whether that impacted, I guess, why that didn't impact bad debts more in this quarter?

I think, Shelly, we're pretty consistent in, in encouraging people to look at bad debt and charity care and uninsured discounts in their entirety. I have to concede that sometimes I can't explain the shifts between the various categories and I'm not sure frankly they're terribly important.

I think we saw a slight modest uptick in our uninsured volumes in the fourth quarter and that's clearly reflected in an overall increase in, again, the total of bad debt charity care and uninsured discount. So even though bad debts looked like they were fairly low in the quarter, I think if you sort of normalize that, our revenue per admission, our adjusted revenue per admission was only 3.3% because of the high charity care.

So if you want to think about bad debts being higher and revenue per admission being a little bit higher, you can think about it that way as well. But clearly, the overall trend of patient mix was a slight increase, not terribly dramatic, but a slight increase in the number of uninsureds and think that was reflected in higher uncompensated care expense in the quarter.

Okay. And then as you think about the guidance for next year, mostly what we've heard I think from your competitors is an expectation that the rising unemployment is going to impact both admissions and bad debt expense so can you, can you tell us what you've included in your forecast for bad debt for 2009?

Sure. I mean, I think our best guess is that we're likely to see the trends that we've experienced in the back half of 2008 continue into 2009. And, and right now I'm just talking about the Acute Care business, but I think we would expect in 2009 that our same-store admissions would be flat to slightly down, so 0% to 1% down, and that uncompensated care, depending on, again, where you want to put it, but uncompensated care expense probably will rise by something like 50 to 75 basis points.

Okay. And then just quickly on the Behavioral Health business, any benefits or pressures from either the stimulus plan or what you saw in the President's preliminary budget that you think would have a meaningful impact on the business?

Well, again, I think those are two very sort of separate and discrete questions. As far as the stimulus plan goes, there's a significant $87 billion of additional federal matching monies to go to the states to subsidize their Medicaid programs and that, I think, should be beneficial to us on both sides of our business because clearly many, many states have seen a significant pressures on their Medicaid programs and we've seen Medicaid cuts in many of the states in which we operate, both Acute and Behavioral, so I think that should certainly be helpful.

As far as the President's budget package, obviously, we have always argued that any initiative that provides insurance to any or all of the 45 million to 50 million of Americans to don't have health insurance currently would generally be a good thing for hospitals in general and for us in particular. We don't know exactly how that's going to be funded, obviously. Some of it is through tax increases, some of it is through Medicare Advantage reductions.

Some of it is through provider cuts. The devil's in the details and we'll need to see how all that sorts out, but again at the end of the day our general sense and this goes for both Behavioral and Acute is the more people that have health insurance, the better that is for hospital providers.

The SCHIP program, which was passed, increases the number of children by 4 million, which is good for us, and it adds $35 billion over five years, so that's an increase for healthcare providers, which is already on the books.

Okay. Thanks.

Your next question comes from the line of Adam Feinstein.

Yes. Hey, good morning, everyone. Just, maybe start with Vegas, Steve, I just wanted to get some follow-up, it sound like pretty strong growth there as Centennial had a really nice quarter.

You said 9% growth. I was just curious if you could talk about operating profit growth and margins in Vegas also, and just what are your thoughts in terms of what's driving the growth there, and do you think it's sustainable for 2009?

Well, Adam, I think that it's, it's worthwhile saying that the trends that we've seen in Vegas and, I'll say beginning with the back half of 2008 are that volumes have remained fairly strong, and that's, I think, both kind of overall volumes in the market, but certainly our market share trends continue to be favorable as well. But payer mix is where we're seeing the weakness in the Vegas market.

I know you're aware that unemployment rates are fairly high housing fairly high, foreclosure rates are high. It's a market that is under probably a disproportionate amount of pressure compared the national average. And so payer mix has certainly declined, and, again, our uncompensated care expense as logically increased in that market.

And I think that's sort of our expectation that those trends will continue. So in the fourth quarter especially I think the increase in uncompensated care caused a decline in our operating margins in the Vegas market.

I think one of the more encouraging broader stories of the quarter from our perspective is that despite decline in operating margins in the Vegas market, overall Acute margins increased, which obviously means that we've been able to offset that decline in our markets, and I know that was a concern of a lot of people given the overall economic weakness in Vegas, so we were quite pleased with those results.

Okay. Great. And then just, minority interest line item was a little bit lower, was that related to Vegas or I think last quarter you had some items related to surgery centers. I just wanted to get some clarity there?

No, I think the decline is related to Vegas and basically as I just mentioned, mostly related to an increased in uncompensated care in that market.

Okay, great. And then just on this psych business, this, what are your thoughts in terms of what's going on there? Yesterday one of your competitors had a difficult quarter.

You guys had a better quarter, but you did see a slow down in the growth rate, so just curious in terms, do you think there's been any change there? One of the things that came out yesterday was some concern about the economy impacting the psych business, so just curious to get your thoughts in terms of what's going on there?

Well, I think two thing are noteworthy. I mean, one is that we went into the fourth quarter with a very difficult comparison to last year's fourth quarter. Our same-store admissions in last year's fourth quarter rose by over 7%. The competitor that you referred to last year's fourth quarter had an admission growth rate of 1.5%.

We, obviously, had had a much tougher comparison going into the quarter and really before the economy ever weakened, we suggested to people that beginning with the fourth quarter of '08, because of those comparisons, people's expectations, and our own expectations clearly had to be more modest for behavioral admission growth.

But there's no, also no question, and I think we've been saying this for some time, that the Behavioral business is not recession proof by any means, and that it is likely that we would see, and that we have experienced some softening in our business as a result of the economy.

We're certainly seeing some payers, for instance, Medicaid payers in particular, but other payers as well looking to control utilization a little more tightly, looking to direct patients to lower cost settings where that's possible, where I was going to say, where that's appropriate but I would think that we would argue but in many cases it's not appropriate, but moving people from acute to residential settings, from residential to home care settings, et cetera.

And so you I think that is certainly affected some of the slowdown in our Behavioral admissions and also even though it's not a huge part of our business, we do have some of our more, sort of niche and specialty programs where patients are really paying the bills out of their own pocket. And those self-pay programs, are certainly being impacted by the weakening economy as well, so I think it's a combination of a very difficult comparison for us, and some amount of weakening that's caused by the overall economic slowdown.

Okay. Great. And my final question, just the guidance just to follow up on that, so would you think about, you guys have talked in the past about a 6% to 8% type of growth number. So are you thinking about that for 2009 within psych?

I think that it's probably sort of comes down to the lower end of that range, Adam. I mean, I'm guessing that our thinking now, again, sort of continuing the trends that we've experienced is that, more reasonable admission expectations are probably in the 1% to 2% range, and you know to tack on to that the 3% to 4% pricing growth that has been easier to achieve, and I think you get sort of close to the low end of that range. I think it would be very difficult in this environment to get to the high end of that range.

Okay. Thank you very much.

Your next question comes from the line of Ralph Giacobbe.

Great, thank you. Good morning. I guess, first, going back to sort of the budget, just high level, one of the things talked about was bundling hospital payments, seems a little bit far reaching, but I guess just, one, be helpful to get your general thoughts on that, and then, second, sort of as it relates to that, you guys have a more diversified portfolio, any interest in sort of expanding in other service lines, sort of an IBM type model, sort as we look forward?

Okay. As far as the first question, Ralph, about the bundling I know, as you know, the real savings from that bundling item don't take place until 2015 or so so it is several years out.

In addition, I mean, it's not absolutely clear how that's going to work, but I assume what will happen is that Medicare will essentially give some sort of bundled payment to the hospital providers and then the hospital providers will need to negotiate rates with the long-term care providers. It will put us at odds to some degree with the long-term care providers, but I think in that sort of dynamic, the acute care providers have a little bit more leverage and certainly with our market share in most of our markets, et cetera, we would definitely believe we would have a little bit more leverage.

So when the time comes, we'll negotiate what we would hope to be rates that would allow us to continue earn a reasonable profit on those patients who will then transition to long-term care. As far as your diversified portfolio question, I think historically the Company is open to other lines of business. We had, we have a surgery center business, used to be a little bit bigger than it is now.

We've historically had some forays into other business, we're open to that. But we're also, I think, of the find that we know what we do well, and we tend to try and emphasize and continue to reinvest in the things we do well. But we're always open to other opportunities, both in other business lines, geographically, I think our approach has always been to respond prudently to those sorts of opportunities.

Okay. And then any changes, any changes to your uninsured discount policy this quarter? Obviously, pretty decent jump. I know you talked about more uninsured admissions, but is there anything more to that than just the uninsured admits up?

No, there's no change to our policy. As I kind of eluded to with Shelley before, and I think I've said on these calls before, in all honesty I don't spend a lot of time trying to analyze the changes between bad debt and charity care and uninsured discount.

At the end of the day, if we're not getting paid, it's not hugely important to me what bucket we put that non-payment in, so we, just as I said to Shelley, we tend to look at that whole uncompensated care bucket in its entirety, and, no, we certainly have not had any accounting changes that should impacted that in the quarter. It should impact it going forward.

Okay. And then just my last one, going back to Vegas. Could you maybe just remind us, that's Sierra deal you signed or United now, where you remember with that contract and what that comes up, to the extent that you can comment to the concerns that potentially you have of HCA trying to get back in or any rumblings around that would be helpful?

Sure. I mean, well, as far as our contract, our contract, which was signed in the second quarter of 2008, was a three-year contract, so we're not even one year into the contract.

Uh-huh.

HCA, which has been out of the United/Sierra network for two years now, we have always said that at some point we expected that HCA would get back into the network. They've been out for a long time.

We certainly are not privy to the specific conversations that may or may not be taking place between HCA and United/Sierra. But I think at this point, we feel like our market position, particularly with the opening of Centennial this past year, has been pretty well solidified and that even if HCA were to get back in the network at some point, that the impact on us would be a lot less disruptive than it might have been a couple years ago had HCA got back into the network right away.

So it certainly would impact us to some degree, but we're feeling pretty comfortable with where we stand not only with the United and Sierra as a payer, but with all the payers in the market.

Okay. Great. Thank you.

Your next question comes from the line of Darren Lehrich.

Thanks, good morning, everyone. A couple questions, just with regard to your outlook and the guidance. I guess, Steve, I wanted to maybe just get more of a global view from you, it looks like your guiding revenue growth for the Company to be up a little over 6%, and I wanted to know, just sort of how that breaks down, how you're thinking about that?

I think you've given some of the components already, but, and then when you look at the earnings leverage that's kind of ability into the model, can you talk just a little bit about how you're thinking about that, and the outlook? It sound like bad debt will be up a bit. So where's the leverage coming from, and then have you built any buyback into the guidance, just to give us a sense for the share count outlook?

Okay. Well, I think on the Acute side, and I think I've probably sort of ticked these basic assumptions off already. But our presumption is that volume growth next year will be flat to slightly down, sort of 0% to 1% negative. Pricing ought to be in that 3.5% to 4.5% range.

And, and the bad debt, or uncompensated care expense, wherever you want to put it, goes up by 50 to 75 basis points. I think when you put those metrics into a model, you're going to come to an Acute Care EBITDA model that is flattish. Again, depending on how you mix it a little bit and deal with expenses, you get, you may get a little bit of a different answer.

On the Behavioral side, again, I think I ticked these metrics off, but the expectation for next year is 1% to 2% admission growth and 3% to 4% pricing growth, and really in the Behavioral business no real change in uncompensated care.

If you put those metrics into a model, I think you get sort of modest mid-single-digit EBITDA growth on the Behavioral side. So the Behavioral's, modest EBITDA growth, relatively flat on the Acute side. And then on the non-operating items we get some benefit from lower interest expense next year, both from lower rates as well as lower levels of outstanding debt, and then lower share count, and I think, again, if you kind of plug all those dynamics in, you can comfortably get to a number well within our guidance.

You haven't built in, I don't think you typically build in additional buyback is that still the case?

I'm sorry, I meant to answer that. We don't, obviously, our guidance, obviously, includes all the buybacks that we've done in '08, but it does not presume that we do any buybacks in '09.

Sure. And then maybe, Alan, if you can just give us your perspectives. I know you like to spend time out in the markets. Maybe give us a view on how you think some of the economies are fairing.

You did a pretty remarkable job managing the expenses in the fourth quarter given the environment, but maybe just give us your outlook on how you're economies are fairing and where you think the big risks are in the portfolio?

Well, obviously, we've talked about Las Vegas, and last Vegas is interesting because they seem to want to continue to open hotels, and that seems to me that, they're looking, just a little bit over the hill and expecting things to ramp back up. And, obviously, we all know that the housing market's been hit in Las Vegas a lot. There's a lot of speculation in Las Vegas. That's going to be squeezed out.

Florida is, another area that's having some difficulties. But we have had very good experience now in south Texas, which has been an area we've worked on diligently. And the other thing to think about is the Company is spread all around the country. And so while we are hurt in certain markets, our overall results show that we are spread around, we are in two basic lines of business, which is helpful.

And with all this money going in, it should be helpful to us. What happens in the long run with regard to inflation and the like is nothing that I'm prepared to talk about, but the Democratic party and plans are spending money. And extending coverage.

All right. And then just one last thing here, Steve. As relates to the other revenue segment, which has the contract in various other things that still has been a little bit volatile, hard to model, frankly. It look like it was $70 million in the period. What else is in there now?

I mean, basically what's in there from a revenue perspective, Darren, is the construction management contract, or surgery center business. I'll try and take a look at the numbers real quickly. I'll tell you what, we'll take a look at them --

I'll follow-up offline then.

That's fine.

Okay. Very good. Thank you.

Okay.

Your next question comes from the line of Erin Blum.

Hi, I just wanted to get a little more detail on the Behavioral business. So I'm curious about what is the mix between drug or alcohol rehab patients and then, or psychiatric inpatients and I'm wondering if you're seeing admissions trends in those two different groups?

I don't have exact data in front of me at that level of detail, but drug and alcohol treatment over the years has become a smaller piece of our revenue pie in the Behavioral division. We have just a couple of facilities that are dedicated exclusively to that treatment and then in a number of other facilities, we have a service line, but it's a relatively small part of our business.

In large part because, I think, a good deal of the drug and alcohol treatment business in today's clinical environment is done on outpatient basis. There are certainly some inpatient treatments, but it's moved over the year to an outpatient business.

Okay. Thanks very much.

Your next question comes from the line of David Bachman.

Hey, good morning, guys. We've covered a lot of ground here already. I would be wondering if you would be willing to provide some color on the Acute outpatient business. Maybe just sort of what you've been seeing in different, different aspects of that business, whether it's ER or outpatient surgeries, just something without that revenue spin on the adjusted admission piece of it?

Our experience has been, and I think this has been true for some time, that our outpatient business which, the business itself, I think, is dominated by the emergency room component of our business, and it's a spin-off business that goes along with that. But our outpatient business in general has sort of moved fairly consistently with our inpatient business, kind of within 100 basis points.

So if Acute admissions were down 0.4% in the quarter, then outpatient volumes, however you want to measure it, ER visits, outpatient revenue, move within, like I said, 50, 60, 100 basis points of that. We've not had a big divergence, positive or negative, or a big gap between the way our outpatient volumes have run and our inpatient volumes have run for some time.

Okay. I know last year you signed an agreement for some emergency room management services. I mean, have you just been pleased with, as well as some other services, but just how has that played out for you so far? Have you been pleased with that decision?

What we did last year was, was sign a contract with a company that provides, as you suggest, both emergency room and some other physician-related services, and really what we did was sign a contract that from our perspective guaranteed us discounted, certain discounted rates if we continued to expand that business, but didn't obligate us in any way to use that company for emergency room or any other service.

So from our perspective it was just a contract that provides us greater flexibility and guaranteed discounts, and in our minds that was a prudent business decision and I think we still continue to believe that.

Okay. And just one other question on the, on the other operating expense, obviously, we see that move around a little bit, but it was a little, although overall expenses were, obviously, looked good for the fourth quarter that was a little bit higher than we had been expecting, is there anything going on there? Sort of how do we think about that line moving forward for 2009?

Yes, I mean, this goes back a little bit to the question that Darren asked. The, probably the most volatile item in other revenues and other expenses is our construction management accounting where we're recording the cost, the entire cost of building a hospital for a third party, and then being reimbursed by that third party for those costs as well as some sort of service fee.

And those numbers can be as large in the 12 months as $60 million, $70 million, $80 million, so they could could be $20 million, $25 million in a quarter on both the revenue and expense line. So again just really depending on the timing of payments it could be somewhat distortive.

Right now, the other piece of it is, we have a contract underway, that contract will expend out probably about halfway into '09, maybe a little bit later into '09. We continue to try to get other contracts, but it's hard to predict, so I'd like to give you more sort of predictability or a better guide to predictability on that line, but it's a little difficult to do.

Okay. That's it for me. Thank you.

Your next question comes from the line of A.J. Rice.

Hi, hello, everybody. A couple questions I could ask maybe. First of all, following up on the share repurchase, what is the level of cash flow from operations that you guys would perceive for '09? Do you have some guidance on that number?

Yes, A.J. before I answer your question, I just want to tack something onto my last answer. The other item that's in that other operating expense line in the fourth quarter is our reserve for the South Texas investigation, so that, obviously, is not something that anybody would have modeled in.

A.J., as far as the share repurchase and then really you're sort of free cash flow question. I mean, think our sort of general sense is that operating cash flow and, less capital expenditures next year, ought to be in the $125 million, $150 million range.

All right. And any comment about your attitude toward the repurchase? I know you said you didn't have any in of the numbers at this point, but you did quite a bit in the second half of the last year, is that the assumption going forward?

Right. Well just to be, just to be clear we don't have any in our guidance that has always just been our historical practice not to include it in guidance. It's not meant to be a signal of any sort of thinking.

I think we talked in the third quarter and I think this view hasn't changed a great deal. Certainly at the levels that our stock is currently trading, which after yesterday's activity is probably closer to the 4.5 times EBITDA range, it's going to be hard to find other investment opportunities that are equally as compelling.

Obviously, we don't know what's going to happen to our share price. We don't know exactly what other opportunities will be available and at what price. But I think we would certainly echo what we've said, which is that we find our own shares at this price to be a pretty compelling investment.

Uh-huh. Okay.

On the same-store numbers that you laid out, I guess in your assumptions, particularly on the Acute Care side, I guess you've got a couple of dynamics that are affecting those numbers in terms in the obstetrics that you did away with down in McAllen, I guess that starts to impact you even in the fourth quarter, but probably definitely in the first quarter.

And Centennial Hills, you'll anniversary that at some point, are those enough to move the needle on your admissions numbers? Can you comment on the effect that will have as those go through the same-store numbers?

Yes, I mean what you're referring to is in the fourth quarter of 2007, the physician hospital in McAllen opened OB services and clearly impaired our OB volumes in that market for the following four quarters. Now that effect anniversaried itself in the fourth quarter '08, so it's no longer an issue beginning with the fourth quarter of '08. I know this is not the question you asked. But I'll comment on it anyway.

I mean, I think the good news in the McAllen market is that we've replaced that OB business, which has been largely Medicaid business, that wasn't terribly profitable with better paying business in part. And I think, just adding on to what Alan said before, some of the other markets that have performed well, include McAllen in 2008, and part of the McAllen performance is that we've, again, sort of supplemented that lost Medicaid volume with better paying cardiology and other business.

Centennial Hills opened in January '08 and it was not included in our same-store numbers in all of '08. Beginning in the first quarter of '09, Centennial Hills will be included in our same-store numbers. Those two factors, as well as everything else that we've talked about in the call, are all, go into our thinking about what 2009 looks like, and, again, at the end of the day we come up with Acute Care volumes that should be relatively flattish going into 2009 on a same-store basis and that's our best guess.

Okay. And then maybe one last thing on the guidance. Obviously, you don't typically give any more, I guess, quarterly guidance, but my sense would be that the first quarter last year was a very strong quarter.

Needless to say it probably surprised you guys. Is there any comments we could get you make about how you might lay out the quarters, things we should keep in mind, is that the right thing to highlight there or is there any other comments you'd make?

Well, I think you've pretty much done it for me A.J., I appreciate that. So I think it is worthwhile reminding people that the first quarter of 2008 was really, sort of an extraordinary performance.

I think we, doing this from memory, I think we beat consensus estimates by $0.30 or something, so we said at the time and it certainly turned out that way that we thought as the year went on the numbers would sort of come down to kind of more historical means and they certainly did. So I think as people think about allocating our guidance amongst the quarters for '09 they ought to just keep in mind that, that first quarter comparison in particular will be a difficult one.

A.J.?

Okay.

A.J., glad to have you back. You know a lot about the business. Great to hear you.

Okay. Thanks, Alan.

Your next question comes from the line of Frank Morgan.

Good morning. I was hoping you could give me a couple of numbers, Steve. What were surgical volumes, both on an inpatient and outpatient basis, as well as ER visits?

You know, I don't have the exact numbers in front of me, Frank, but sort of, following up on the way I answered a question previously, I think, again, our surgical volumes and our ER visits have, I think, tracked admission rates for a couple of years now within 100 basis points pretty regularly. So my recollection is that's the way the fourth quarter went as well.

You mentioned the growth in the uninsured, can you talk a little bit more about what that was in terms of percentage of total admissions and maybe talk a little bit what would the volume growth have been absent the growth in the uninsured population?

I think that our uninsured volumes were growing at probably 75 or 100-basis-point rate faster than our overall admission rates. Sort of as I said before, I tried to characterized it slightly ahead, but certainly not dramatically ahead.

Okay. Then one last one here in terms of your '09 guidance, what do you, how do you think about the various state programs, the UPL, the [Dish] programs all those in terms of, your outlook there that's embedded in the guidance?

Most of those programs run on a state fiscal year basis, so at this point I think all of our [dispro] programs have been renewed through the state fiscal years which generally go to either June or August of next year. There's some uncertainty about some of the UPL programs in Texas, but I think we've kind of accounted for that uncertainty in our guidance where we're not assuming kind of a best case scenario, we're assuming a most likely scenario, so I think our guidance takes all that into account.

It takes the definitive renewals of the [dispro] program, and kind of tries to take a shot at the UPL stuff sort of straight down the fairway.

Thank you.

Okay.

Your next question comes from the line of Margot Murtaugh.

Yes. Hi, Steve. I wondered if you could break down CapEx between maintenance and expansion projects? And also, on the budget proposals, is there anything else in there regarding hospitals? And specifically on pricing, this year you're getting good pricing from Medicare, what do you see in the coming years from Medicare and commercial pricing?

Okay. As far as CapEx goes, I think that we have generally said that we believe that maintenance CapEx, which is really an Acute Care phenomena, there's pretty minimal CapEx on the Behavioral side. That maintenance CapEx on the Acute Care side is about 2% of revenues. Everything else in capital spending on the Acute Care side tends to be [expansionary.]

I think it's worthwhile, and we've certainly said it before, to note that there are a significant chunk of our capital spending both in 2008 and going into 2009 are tied up in some kind of very large capacity expansion projects and I mentioned them in my prepared remarks.

But the new hospital in Palmdale, California, the replacement hospital in Texoma, or Dennison, Texas, the Summerlin bed tower, the expansion of surgical capacity or the replacement of surgical capacity at our Valley Hospital in Las Vegas. I mean, in total probably those four, and maybe our California Riverside County projects are somewhere around 60% of our capital spend in, in '09 or our projected capital spend. So there's some big pieces of committed projects in our capital spend.

As far as pricing for next year and budget proposals, I mean, there really actually, there's not, that I'm aware of, a specific take on the Medicare market basket increase yet that the Obama Administration has tackled. And as commercial rates go, I think the big outstanding question, obviously, is there's been some amount of Medicare Advantage cuts that the Obama Administration has signaled and presumably that will create some pressure on our Medicare Advantage pricing at some point.

Again, the only thing that sort of we can say about that is the whole, our whole approach to a business, core business strategy is to create significant market share positions in markets, et cetera, specifically, and probably most importantly to create leveraged in manage care negotiations. So it's not to say we won't be affected by those kinds of declines or whatever, but we certainly at least have a fairly strong negotiating position.

So I think that has to be written. I mean, again, the good news from a pricing perspective, which we wouldn't have necessarily predicted three or four months ago, is that I don't think Medicaid will be nearly as big a pressure point going into 2009 because of all that money that the stimulus package makes available.

And just, what percentage of Acute Care reimbursement is Medicaid and also of psychiatric, what percent age is Medicaid?

On the Acute side, it's about 12%, 13%, and on the Behavioral side it's more like 25%.

Okay. Okay. Thanks a lot.

Thank you.

Your next question comes from the line of John Rex.

Thanks. Hey, just a quick question. Couple quick ones here. What explicitly have you built in for the '09 in terms of the Medicaid reimbursement outlook in particular for states that have announced or where you'd expect reductions and how you've kind of offset that against the stimulus provisions?

You know, John, I think we for a while have said that our expectations for Medicaid price increases in '09 was 0% to 2%. And I think the way things were going toward the latter end of '08 we worried about being able to stay in that range even in the lower end of that range.

I think from our perspective what the stimulus package moneys do is allow us a much greater comfort to think that we can get into that 0% to 2% range. So just more specifically I think we sort of feel like the cuts that have already been announced, we're sort of assuming will remain in place, although if some of them are restored that will be a plus. But I think our assumption is that from here on out we really won't see any further cuts, or the states won't have to make further cuts because this money will be available to them.

How did you handle California with their recent action?

Yes, I mean, so California implemented a Medicaid cutback in July of '08, certainly that cut is reflected in our guidance. They have in the recent budget that's passed further Medicaid cuts. Our assumption is that those won't have to be enacted because, again, the moneys that the stimulus package provides.

I also think it's worth noting that our Medicaid, our percentage of Medicaid business in California is less than our Acute Care average. So our exposure in that state from a Medicaid perspective is not as great as it is in some other places.

Okay. And just your kind of updated color commentary on the January, February volume trends? Anything kind of looking much the same essentially as you saw in the 4Q, essentially, just any color commentary around that?

I think, as I know everyone's aware, we have this mechanical issue of one less day in February this year, so that certainly is just a cosmetic thing. But generally I think we're just seeing a continuation of the same trends. Softness in volumes on both sides of the business, but not terribly dramatic.

I know, again, this is not the question you're asking, but I probably should have mentioned it when some other people asked questions about guidance, I mean we are finding a little bit more operating leverage in both businesses. I think you clearly saw that in the fourth quarter.

The operators, as I mentioned, in the third quarter did a good job, again, in the fourth quarter of controlling expenses. And I think that the one sort of positive about this economic environment that's hard to find any positive, but the one positive is that, this sort of deflationary environment has allowed us to control wage rates and other operating costs in a way that in all honesty six or seven months ago we probably wouldn't have imagined we'd be able to do.

So I think volumes are going to continue to be soft, but our leverage point on volumes is probably lower than we would have thought a while ago.

So we expect that line item to maybe show a little better in '09 then when you get down to the salary, wages line?

I think so. In the sense, when you say better, I think in the sense that what we would have projected to be our rate of increase in wages five, six, seven months ago is clearly slower did today. I don't mean to imply that wages are going down.

Right. Okay. Great. Thank you.

Your next question comes from the line of Robert LaGaipa.

Hi, good morning. I had two questions, I guess one relates to the healthcare plan of the President's budget. You talked about several times about volume improvement as a result of extended coverage, and I guess my question is related to the margin end of things. Obviously, part of the plan is flat fee admissions into hospitals, including 30 days of follow-up care. What's your expectation in terms of margins as a result of the plan? If you have any thus far?

I mean, again, I think the devil is in the details, Robert, and I think until we see some more precise details, it would be difficult for us to tell you what we would expect to happen to margins, I mean, as Margot, I think, just asked before, we don't even know what our Medicare market basket increase will be next year, so it's very difficult to say. And, by the way, I'm not sure we did say that we expected volume improvements from --

Okay.

Expended coverage. I mean I think we've just generally said that we think extended coverage is a good thing. In a business where bad debts run 10% to 12% of revenues on the Acute side and charity care is more than that, but certainly having more people with healthcare coverage is a good thing. But I don't think we've tried to take a stab at all at how that would impact volumes in any sort of precise way.

Fair enough, and just one quick follow-up, is just related to the pricing expectations in terms of the guidance for this year, is there any variability we should be aware of moving forward in relation to this forecast, and where would it come from?

Yes, I think sort of almost by definition, of course, there's variability. And I think it comes, if you look at sort of what it's been in the most recent past, I think it's probably a decent guide. I think that pricing has held together pretty well over the past year and our expectation, again, with the Medicaid relief and the SCHIP relief that Alan referred to, I think we feel like our pricing is likely to hold, and I think that the variability is likely to come on the volume side, that's been the case.

We think that volume declines will be relatively modest, or the growth on the Behavioral side will be relatively modest, but that's a variability. And then the uncompensated care component has probably been the single greatest most volatile metric in the entire Acute Care business for a number of years now and I suspect that it will continue to be, particularly in a difficult economy. So I think that's where the variability is likely to occur if it does.

Terrific. Thanks very much. Fair enough.

Your next question comes from the line of Jeff Englander.

Good morning, Steve. Alan. Quick question and I apologize if you covered this in your prepared remarks, I hopped in a little late. First, in terms of mental health parity which kicks in October. Any meaningful impact from that?

Jeff, I'm not sure, again, that's something we can say in any sort of precise way, but it's one of those things that, it can only be a good things for us. But I don't think we have sort of enough data points or enough of a database to be able to say that there's this universe of people who have been unable to seek care in the past because they're behavioral benefits didn't measure up to their acute care benefits.

But presumably there is some universe, and we will have the advantage of having those people covered. It really gets back to this question of more people covered by more health insurance can only be a good thing for the provider community and mental health parity provides that. So we think it's a plus, but it would be impossible for us to tell you what the precise impact is.

The other question is on your competitor's call yesterday, they mentioned that they had had some experience with higher rates per claim on the liability side, and I'm just wondering if you can give us any color about what your experience has been on a per claim basis in terms of that same element?

I'm not sure that I have, I'm actually sure that I don't have the claim level data available to me right now. I will say this, I'll make a couple of comments just about malpractice experience. Obviously, first of all, because we have our two businesses, the bulk of our malpractice expense is associated with our Acute Care business.

And then just in terms of our historical experience, we've always been pretty transparent in what we disclose about our malpractice experience. Our cash flow statement shows both the amount of malpractice expense we provide and the cash claims that we pay out.

And if you look, at least over the last three years, the amount that we provide exceeds the amount that we paid out by at least $10 million a year, and in many cases by substantially more than that. So we're very comfortable with the levels of expense and the levels of reserves in malpractice.

Have you seen, I guess, the question earlier was to get at, any increase in terms of the general levels of pay out amounts on the claims? In a broad sense not in, down to specific claims level?

Yes, again I would think just from a trending perspective, we actually had a favorable malpractice adjustment back in the second quarter of 2007, and I would say that sense then our experience has been largely favorable. So we certainly are not anticipating any catch-up adjustments or anything like that. I think at a minimum our reserves are certainly sufficiently and fairly stated.

I don't think you can approach this on just a broad basis. I think there's a quality aspect of this as well. And all provision of services are not the same having to do with quality.

Okay. Thanks very much.

And, sir, we have no further questions at this time.

Okay. We thank everybody for their time, and we'll talk to you again fairly soon at the end of the first quarter. Thank you.

This does conclude today's conference call. You may now disconnect.