環球健康 (UHS) 2009 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone for the Universal Health fourth quarter 2009 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) I would now like to turn the call over to Mr. Steve Filton. Mr, Filton, you may begin.

Good morning, this is Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the full year and fourth quarter ended December 31, 2009. As discussed in our press release last night, the Company recorded net income attributable to UHS per diluted share of $2.64 for the year and $0.62 for the quarter. After adjusting for a reduction in our Workers' Compensation self insurance reserves relating primarily to prior years, our adjusted net income attributable to UHS per diluted share for the quarter ended December 31, 2009 was $0.57. During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, projections, and forward-looking statements.

For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our form 10k for the year ended December 31, 2009. We would like to highlight just a couple of developments and business trends before opening the call up to questions. Revenues for the fourth quarter increased 4% over the prior year's quarter. On a same facility basis in our acute care division revenues increased 5.6% during the fourth quarter of 2009. The increase resulted primarily from a 2.5% increase in revenues per adjusted admission. Adjusted admissions to our hospitals owned for more than a year were up 3.1% for the quarter. We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense, and doubtful accounts divided by net revenues.

On a same facility basis operating margins for our acute care hospitals decreased to 13.4% during the fourth quarter of 2009, from 14.0% during the fourth quarter of 2008. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $162 million and $159 million during the three month period ended December 31, 2009 and 2008. As a percentage of net revenue bad debts, charity care expense and the uninsured discount in this year's fourth quarter were at levels higher than those experienced during the fourth quarter of 2008. On a same facility basis revenues in our behavioral division increased 5.1% during the fourth quarter of 2009. This increase resulted from increased patient volumes and an increase in revenue per adjusted patient day.

Adjusted patient days to our behavioral health facilities owned for more than a year increased 3.9% during the fourth quarter. Revenue per adjusted patient day rose 1.2% during the fouth quarter of 2009 over the comparable prior year quarter. Operating margins for our behavioral health hospitals owned for more than a year increased to 25.1% during the quarter ended December 31, 2009 as compared to 22.7% during the comparable prior year period. Our cash flow from operating activities was approximately $49 million during the fourth quarter of 2009, as compared to $79 million in the fourth quarter of 2008. At December 31, 2009 our ratio of debt to total capitalization was 35% and the ratio of debt to EBITDA was 1.41.

We spent $101 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 scheduled to be completed and opened in 2010 and the 220 bed Texoma replacement hospital, which has opened. In Las Vegas we also opened a major bed tower expansion of our Summerlin Hospital and in California we are in the process of a major expansion of emergency room imaging and women's services to our Southwest Health Care campuses in Riverside County, California. During the fourth quarter of 2009 we repurchased approximately 1.7 million shares of our class B common stock. We currently have 2.2 million shares remaining under the previous authorized share repurchase program. We will be pleased to answer your questions at this time.

(Operator Instructions). Your first question comes from the line of Justin Lake of UBS.

Thanks, good morning. A couple questions here. First, Steve, on Texas Medicaid you laid out some of the headwinds there for 2010, can you give us little bit more detail in regards to how much of that is known versus potential and then when do those start flowing through.

Sure, Justin. I think, frankly, it's all known and actually I believe that for the most part it all started flowing through in Q4 of '09, which is consistent with the state fiscal year which begins in September. The Texas state fiscal year. The basically two major pieces of that Texas reimbursement that are worth noting, both of which I think we've touched on at previous times. The first is some years ago, probably four years ago at this point, we combined the licenses of McAllen and Edinburg to take advantage of some higher reimbursement rates, with the knowledge that at some point the State of Texas would rebase those rates and we would have to have those rates lowered.

They've done that in September of '09 and so since that date we are working with lower base rates for Medicaid in our south Texas or McAllen market. And the other piece, also in McAllen, is, and I think we've mentioned this a few times, back in late 2007 the competitor physician owned hospital opened an OB service and took away a significant number of our Medicaid deliveries or OB cases. And while that had little impact, as people have noted, on our profitability in that market, at least our direct profitability, it clearly has reduced the amount of our Medicaid utilization and when the -- our Texas disproportionate share was rebased in September of '09 that impact was felt as well. So those two items make up the bulk of the reduction and as I said at the outset they are known and frankly are already in place.

Great. And then in a second question just on cash flow and CapEx expectations for 2010 and then what you are thinking for uses of free cash flow.

As we've noted, we spend approximately $380 million on CapEx in 2009. And as we've also sort of been projecting for several quarters now, our base capital spending should be reduced by about $50 million in 2010 and then, all other things being equal, by another $50 million in 2011. Mostly because those three major projects that I've noted in my opening remarks, Texoma, Palmdale and the Summerlin tower, will all be finished and completely paid out by, certainly, I would think by the third quarter of 2010. As far as uses of cash flow, I'm going to repeat I think in large part some of the comments that we made on the Q3 call and I've subsequently made, we continue to look for acquisition opportunities in both of our business segments. We continue to believe that the current environment should be conducive to such opportunities.

But we also feel, certainly at these prices, that our own shares are a compelling value and, again, as I noted in my opening comments, we bought back 1.7 million shares in Q4 and we are going to look to do what is ever most prudent for the Company. We certainly have the cash flow and the balance sheet to give us a lot of flexibility. So we intend to evaluate those opportunities and take advantage of them as they arise.

Steve, do you have a free cash flow number for next year, or for this year, I should say.

I think our free cash flow number off the cash flow statement, which I don't have in front of me, I think the way to think about it is that rises by the EBITDA increase next year, which is sort of modestly in the mid-single digits, plus the $50 million of additional CapEx that I referenced before.

Got it. Just one quick numbers question and I will jump off. The, from an earnings standpoint I know you've materially outperformed expectations in the first quarter the last couple of years. Up against a tough comp, can you tell us what you think the trajectory of earnings will be through the year. Maybe give us some idea of what you -- the earnings in the first half versus the second half, maybe.

Sure. As you know we don't historically give quarterly earnings and we don't intend to do that, to start doing that now. I will remind people, and I think it's worth noting, that we had really an extraordinary performance in the first quarter of 2009, maybe the single best quarter we've ever had. And I think we have been clear all along that it is extremely unlikely we could replicate that performance. I think if you go back before '07 and '08 -- excuse me, before '08 and '09, historically we've earned slightly more of our EBITDA in the first half of the year, maybe 52% of our EBITDA in the first half of the year versus 48% in the second half. On average. In '08 and '09 that ratio has been more like 60%/40%, even, I think, 62%/38% in one of the years. My guess is that 2010 will go back to looking more like the traditional model, where the earnings are much more ratable during the year. So as you all think about your allocations of our annual guidance, I would encourage you to think about it being far more ratable than it was in 2009.

Thanks, Steve.

Your next question comes from the line of Adam Feinstein of Barclays Capital.

All right, thank you. Good morning, everyone. Just a few questions here. Maybe just to start, with respect to Vegas, can you comment a little bit about what you saw there. From looking at the 10k filing it looked like for the year, Vegas operating profits were down slightly, so just wanted to see if that was a operating number and just try to better understand the trends in Vegas for the fourth quarter.

I think that's a fair read of it, Adam. We were actually probably ahead in Vegas in the first half of the year, we were ahead in Vegas and then gave most of that back in Q3 and Q4 and finished the year somewhat down. I think that the disclosure that you are referencing is a significant one in the sense that it shows that Vegas' contribution to our earnings have declined pretty considerably in the last two years, in '08 and '09, mostly because of the very tough local economy there. But as you know, we've produced really significant EBITDA growth in both those years. So we have been able to do that despite the weakness in Vegas, which I think there were certainly a universe of people were concerned about our ability to do that. Look, I think we think that the economic environment in Vegas remains a tough one.

The good news, I think, is there is some macrodata points and metrics that suggest that we are nearing the bottom of the Vegas economy. I saw some data yesterday that showed that tourist volumes rose for the fourth straight month in December, that housing prices are starting to rebound, et cetera. So I think there are kind of the beginning signs that maybe by the middle of 2010 we will hit the trough in Vegas and start to rebound, because at the end of the day the underlying fundamentals of that market and our position in that market remain from, our perspective, very compelling. But I think -- particularly the early part, the first half of 2010 will continue to be a bit of a tough sweat in Vegas.

Okay, great. And then at the same time just from looking at the K and looking at some of the trends there, in Texas your earnings, the contribution of earnings was up pretty significantly, so just wanted to make sure that we understood what was driving that. Obviously, McAllen has been doing much better, but it looks like operating profits almost, more than doubled in 2009. So just wanted to make sure that that was a operating number.

It is. And as we've discussed on a number of these calls, we happened to have a good year in Amarillo in 2009. But I think it's mostly been the south Texas or McAllen numbers that have driven that increase. You know the history here, Adam. McAllen for many, many years was our second most profitable market behind Las Vegas. And then in sort of the '04/'05 timeframe we had a dramatic diminution in our profits in that market as a physician owned hospital opened. In '06 and '07 things sort of leveled in out. But in '08 and '09 we've seen a significant rebound in those profits. One of the reasons why our guidance and projections for growth in 2010 are a bit more modest, however, is because of the reimbursement items that I noted in my answer to Justin's question and just because their coming off two very, very robust years, our view is that McAllen will have, while a strong year in 2010, it's not going to reflect as much growth as it has the past few years.

Okay. And then here's the final question, maybe one for Alan, the health care reform author. I just wanted to get your update thoughts in terms of what is going on in Washington. I believe the federation has its meeting coming up next week, so just curious as your update thoughts on Washington.

Very unclear. And that's one of the reasons that, as we look into the year we are being conservative. The democrats, I think, have to get something done. And the question is can they have a small plan done. There is a plan B, I don't know if people seen it, that came out yesterday. Democrat plan B, $250 billion. Many of their own people will not want that, because they have an opportunity, they feel, to push through the public option and push through all the major plan because they have both houses and the White House. So -- I mean both houses in the legislature. So it's unclear, Adam, and I don't -- it's very hard to tell.

I listen to, Senator Santurom was on a radio program this morning and he talked about how difficult it is to do reconciliation. I think the democrats were saying that if bipartisanship doesn't work and they had the show yesterday that they would be forced and they would do reconciliation and Senator Santurom went through the difficulties of doing it. I was a little surprised because it appeared to be easier to get done if the democrats had the will. But as he outlined it, it's very difficult and they may not want to take it on all together. So having said all of that, it just looks very unclear at the moment.

Absolutely. All right, thank you very much. I appreciate the comments.

Your next question comes from the line of Ralph Giacobbe of Credit Suisse.

Thanks, good morning. Can you -- Steve, can you maybe give us the payer mix for the quarter and maybe how that mix looked in Vegas, specifically. Looks like volume actually held up better just overall, so maybe it was mix that was a little bit weaker.

I think actually everything you said, Ralph, is fair and accurate. In general, I think our revenue growth and our revenues in Vegas have been weaker than they've been in the rest of the portfolio and I think it's a function of the fact that throughout the portfolio in Q4, meaning the acute portfolio, we saw our commercial admissions rise just a tich lower than our overall admissions and we saw our uninsured admissions rise just a tich more than our overall admissions. That was the same trend we saw in Q3, but not nearly as pronounced as in Q3. And I think those trends in Vegas are also more pronounced. We see more of a decline in our commercial volumes in Vegas and more of a growth in uninsured volumes. That's consistent with the fact that in Vegas we are experiencing or the market is experiencing a higher unemployment rate than we're experiencing, certainly, compared to the national average and for us compared to really any other market that we are in. So the performance there --but to your point, our volumes were strong in the quarter, both in the portfolio at large and in Vegas, relatively strong, so the weakness, the economic weakness is being felt in our payer mix.

Okay, great. And then can you talk about the new towers you opened and sort of when you will see or think you will see the contribution from them as we move into 2010.

Well, we opened the Summerlin tower affectively on January 1 and as we've discussed on a number of occasions Summerlin has become our largest and most profitable hospital in the portfolio and this tower is the third major expansion that we've completed in the ten year history of the hospital. Obviously, we -- when we began the project and certainly now we would love to be opening it in a more robust economic environment, but at the end of the day Summerlin was facing some capacity issues and occupancy constraints and we believe -- part of our comments about the fact that or my comments to Adam about a tough year ahead in 2010 is that I think all the overall metrics are going to be tough in Vegas, but I do think we will benefit from having this new capacity. So I think it will offset a little bit, but again I mean it's going to be tough to see any overall positive growth in Vegas in 2010.

Okay. And then just my last one. Can you maybe talk a little bit about what you expect on the psych side, particularly with the mental health parity legislation, any greater expectations there.

We've said for sometime that is very difficult for us to, with any precision, predict what the impact of mental health parity will be on our behavioral business. The presumption, obviously, has always been it could only be positive. But it's just really impossible to tell, so I think our view was that we would at least go through a couple of quarters in 2010, see what our volumes look like, particularly our commercial volumes, and see if we could detect any trends there. But I don't think we, I know we haven't really baked anything specifically into our guidance or our thinking that really counts on the benefits of mental health parity, although it's a potential upside or tailwind for us as we go into 2010. Okay, great. That's helpful. Thank you.

Your next question comes from the line of Tom Gallucci of Lazard Capital.

Hi, good morning. This is actually Colleen Lang on for Tom. Steve, I was just wondering if you could maybe talk a little about what drove the outperformance in Q4 relative to your guidance and, I guess, the street.

Yes, I think if you go back, Colleen, to our Q3 call, we had some questions about why we didn't have, why we didn't raise our guidance for Q4 beyond what we did. And I think at that time we expressed two major cautionary themes. One was that the uncompensated care in Q3 was pretty high and we were concerned that would, that trend would continue into Q4. And two was we began to see some real weakening in the Vegas market and expressed some concerns that that would continue into Q4. I think the Vegas weakening did continue and we've already talked about that. I think the piece that didn't occur, thankfully, was that there was some moderation and stabilization in our uncompensated care trends.

I would make two comments about that. One is we saw that same sort of seasonal pattern in the last couple of years where Q3 was sort of the worst quarter from an uncompensated care perspective and it improved a little bit in Q4. And obviously, as you well know, all of our peers seem to report similar trends. And obviously, we sort of approached that with a cautionary note. We are happy to see those stabilization trends in Q4, but I think as Alan's comments indicated, it is still a pretty tough economic environment, particularly for us in the Vegas markets. So our outlook for 2010 from an uncompensated care, from a kind of just an overarching economic perspective remains reasonably cautious, particularly for the first half of 2010.

Okay, great. Thanks for all the color. And then just looking at pricing next year on both acute and behavioral sides, what are your expectations for pricing, especially in light of the current Medicaid situation.

Our same store revenue growth in both business segments this year was sort of in the 3.5%, 4% range. And I think from our perspective that's kind of a good starting point to think about 2010 and to me that sort of 3.5%, 4% breaks out, and again in both segments, to sort of basically 1% volume growth and 2.5% to 3% pricing growth. I think that the down side to that projection is on the pricing side of the equation. On the acute side it's on the uncompensated care part of it that we are still, again, in a tough economy and we could not unreasonably expect a spike in bad debt or charity care in the first half of of 2010, particularly in the very difficult comparison to the first quarter of 2009. On the behavioral side, I think as you alluded to, I think we face some risk on the Medicaid front, Medicaid pricing. Our guidance presumes a relatively flat Medicaid pricing environment in 2010, but if we were down a couple of percentage points, as I think our peer in this, in that industry expressed in their call, that certainly wouldn't be a surprise at this point.

On the other hand, I think that we have some upside potential on volumes in both segments. On the acute side I've mentioned that we've opened and will open some new capacity and we hope that even in this tough environment we will get some benefit from that. We may not get it as quickly as we would in a stronger economic environment, but we certainly anticipate some upside from that. And on the behavioral side we have continuing capacity expansions that we would hope to get some benefit from. As well as the, and as the previous question indicated, potentially some uplift from mental health parity as well.

Okay, great. Thanks so much.

Your next question comes from the line of Gary Lieberman of Wells Fargo.

Thanks, good morning. I guess maybe just following-up on some of the admission trends. What do you see on your Medicaid admission trends, specifically. I guess there is some data out indicating that Medicaid rolls were up significantly in some states and was wondering if you guys saw any acceleration in Medicaid admissions because of that.

On the acute side, Gary, I think the only real trend -- probably we saw an uptick in what I will describe as sort of overall Medicaid, although it seemed to be more on the managed medicaid side and I think there's just some shift from traditional medicaid into managed medicaid. It ticked up a little bit. I wouldn't describe it as terribly meaningful. I think on the behavioral side, as we have mentioned in the previous few quarters, I think we actually see the opposite phenomena that we are seeing, particularly in our residential business, some amount of pressure from medicaid and other state-like programs or medicaid-like programs, pressure on both admission rates and on length of stay that's actually trying to find lower cost settings of care for mostly this adolescent population that makes up the residential business.

Okay. And then one follow-up, I guess, on bad debts. Bad debts came down pretty nicely sequentially, your allowance came down as well. In terms of, I guess, how you're viewing bad debts and how you are accounting for it, has anything changed and what are your thoughts there.

The short answer to the question about whether anything has changed is no. I know in your note, Gary, you had made an observation about a decline in our allowance from Q3 to Q4. I think that you will see that seasonal decline pretty much every year that you look at those numbers. We do some write-offs in the fourth quarter that are mostly sort of driven by tax considerations that I think tend to make the Q4 allowance lower than Q3. But -- and I looked at this this morning after looking at your note and you don't have these numbers, but as a percentage of our gross receivables our allowance has actually grown from the year-end '08 to year-end '09. We are very comfortable. We know our auditors are very comfortable with our allowance. Again, no changes and from our perspective no real even change in our approach or tone to the bad debt reserves.

Okay, thanks a lot.

Your next question comes from the line of Frank Morgan of RBC Capital Markets.

Good morning, two questions. I know you touched on pricing a little bit, but I was hoping you could be a little bit more specific as it relates to the managed care pricing piece, particularly on the acute care side. And then my second question relates to the behavioral side of the business. Obviously a tougher rate environment there, but are you seeing any change in behavior with regard to utilization review or is there any kind of change that you're, or pressure that payers are putting on you from -- that would have impacted the length of stays, thanks.

So, Frank, I think on the acute side, we have been saying pretty consistently for a while now that our managed care pricing and, certainly at this point, vast majority of our 2010 rates are now locked in and committed. But our managed care pricing increases are in that 6%, 7% range and that really has not changed very much any time recently.

On the behavioral side I think I would just sort of reiterate the comments that I just made. I think the only real sort of utilization review type changes that we are seeing in a meaningful way and across the board are from the state medicaid and state medicaid-like programs and very much focused on the residential business where they are trying to move these adolescents -- either trying to keep them out of the facilities all together, move them into lower cost settings like group homes or outpatient settings. Or alternatively, they are trying to reduce the length of time that they are in the facilities, which as you know is often measured in those residential facilities by months rather than days. We've definitely seen both a decline in our admission rates to those facilities and in our length of stay, but it is very much focused on that medicaid and state population.

Thank you.

Your next question comes from the line of Kevin Fishbeck of Bank of America/Merrill Lynch.

Hello. Question. You mentioned in a response to the cash flow question that you were looking for EBITDA growth in the kind of mid-single digits, but your EPS range is from negative 1% to plus 8% and so what's the delta there between those two growth rates. Should we be expecting against much higher DNA contribution with some of these facilities opening up or is there anything else going on below the line.

That's fair question, Kevin. I probably misspoke in the sense that I was sort of talking about same store EBITDA rates in the mid-single digits, but obviously that's offset, as we outlined in the press release, by this $0.18 reduction kind of out of the gate in the Texas reimbursement and the lack of construction management income.

Okay. So that's the delta. Okay. And then how should we think about the construction business. Was the last couple of years just kind of being in the right place at the right time and new deals are unlikely or is this a business that you'd want to be a real ongoing business that maybe we are just seeing a slow down because of the economy?

I think it is the latter, Kevin. I mean, I think we think, again, I don't know that this business is ever going to be a -- contribute 25% of our earnings, but it's been a nice business, we think it's a nice niche. We think it plays off nicely to a real skill set that we've had and developed for many years and I think I would turn it around. Not that we were in the right place at the right time before, I think unfortunately right now is the wrong place or it's a difficult time for a business that's dependant on hospital construction. Clearly the rate and then the amount of dollars devoted to hospital construction have declined markedly in the last couple of years, but I think we are starting to see, as we are in the overall economy, signs that those are starting to improve and we continue to have a very significant effort to get new contracts and think we will be successful in doing so. The issue I think at this point is because we have no contracts that are immediately in the pipeline, even if we get some new contracts, which we are pretty hopeful about, they probably won't kick in any measurable earnings at a minimum until later this year.

Okay, that makes sense. And I guess maybe just going back to the EPS range being negative at the low end, what do you see there as kind of the things that would push you to a flatter or, I guess that maybe flattish or slightly down type EPS in 2010.

I think it's really sort of issues that we've discussed before. On the broadest sense I think it's pricing issues, I think it's in a economy that seems like it's going to have a pretty stubbornly high unemployment rate I think we remain cautious about how our uncompensated care trends are going to look, again, particularly in the first half of 2010, concerns on medicaid pricing, in both segments of the business, but particularly in behavioral and again concerns about the Vegas market, which I know you frankly have highlighted for sometime, that at least, again, for the first half of 2010 that that's going to be a tough sled in that market.

Are you seeing any charity care issues on the seg business.

Some isolated issues, but I would say, Kevin, not in a terribly meaningful or measurable way. I think we think that in general we remain in a pretty decent position to control that business.

Then the last question, I appreciate the comments before about health parity and how difficult it is to quantify. I guess there was another bill in the Senate to try and extend mental health parity to Medicare. Do you have any sense for how many patients actually run up against that limit to the Medicare days, is it meaningful.

I honestly don't know the answer to that, Kevin. Although we will go back and talk to our behavioral folks to see if they've seen any reasonable data on that.

Okay. All right, great, thanks.

Your next question comes from the line of Darren Lehrich of Deutsche Bank.

Thanks, good morning, everybody. A few things here. I guess I just want to start out with a question for Alan. Just related to the acquisition environment, a lot of your peers obviously getting more active, seeing more deal flow and stating that valuations are pretty reasonable and I know you guys are always pretty prudent about your deals, but can you just give us some comments on what you are seeing and how you would characterize the opportunities out there at this point.

We are not seeing as much as we had anticipated. Some deals have been done. I think a number of them were in market where others had facilities. We pursued a couple of good ones. The nonprofits picked those up. And we are just being patient to see if there are meaningful ones that are well priced. I don't see that the pricing really has come down. I don't know what others are saying. If we see a good facility, there is certainly a pressure on the higher end of the pricing. We made acquisitions in the behavioral end and we are expanding behavioral. Steve mentioned that we like our own shares. And we are out there. So when we see something that is appropriate, appropriately priced, good positioning, we will do it. As you know we do it from time to time. That's where we are at the moment. We do expect it to pick up, particularly pressure on the nonprofits. So we are out there.

Are you surprised that some of these things are being picked up by not for profits. I guess it's first we've heard that not for profits may be a little bit more of a competition in some situations, maybe just anymore thought there.

I think that it relates the end market where they have facilities that are in the market or in the same, absolute same area, they can get aggressive. And -- but again, there is 4000 of them and less than a thousand of us, so we think there be opportunities.

Sure. Okay, that's great. And then, Steve, a few things for you. I guess just first on the CapEx, I can see what is in the K in terms of the range you are guiding to and $115 million of that being growth. I guess how much of your CapEx is going to be dedicated to I.T. investment. Can you just spend a moment talking about how that might also impact the P&L.

Yes, I mean obviously, I believe what you are referring to is that it's been announced within the last couple of months that we have signed a contract with Cerner to implement a new clinical system will replace the current clinical information system that we have. We have not really included any of those dollars. other than sort of normal equipment replacement. in our CapEx number for 2010. I think from a P&L perspective there will be little impact from that in 2010 as most of the cost that we will spend will be capitalized until we actually get the system up and running, which certainly won't be until the latter half of 2011. So again, I think from both the CapEx perspective and an overall P&L perspective, there will be little impact.

I mean, at the end of the day over the course of the next four or five years, or probably five or six years is a better timeframe, we think we will spend somewhere in the neighborhood of $5 million or $6 million at each of our acute care hospitals to implement this clinical information system or replace our clinical information system. Obviously, as you know, we hope to recoup a very significant portion of that from the stimulus dollars that have been made available by the federal government, but I think it's a little too early to say with any precision how successful we will be in meeting those meaningful use requirements, et cetera. But we are certainly going to work diligently to do what we have to do to recoup and to minimize as much of this investment as possible.

Okay. So it didn't seem like there is a real notable uptick in CapEx and it's already captured in the guidance there.

Yes. If there is a uptick in 2010 it's in the $10 million range.

Got it. Perfect, that's perfect.

I think we ought to add one point on that. That we think that a system of this sort integrated with the physicians should bring us additional volume, make it easier for people to use our hospitals. So it's not just an outflow and a replacement, but we think it's a competitive advantage going forward.

And then, Steve, on the supply cost line you've had a lot benefit over the last year and a half or so from the GPO switch. We saw a little bit less traction on that line item on the P&L this quarter. Can you just comment there and is there anything for us to think about going into 2010 on that line.

I think, Darren, that over the past couple of years we changed GPO's in '08 and in '09 with the onset of the downturn in the economy. We renegotiated and focused a lot on our pricing of a lot of our supply and vendor contracts. So we've had kind of an enormous focus on price for the last couple of years. I think beginning in 2010, that focus is going to shift to things that are a little bit more nuance, like utilization and selection of products and selection of vendors and shifting products to equally efficient but less costly products and different vendors and moving products to low price vendors. The issue there is that, frankly, is tougher work than just the pure pricing negotiations.

But I still think that there is some amount of improvement there. Look, we have said, and we said this now for a few quarters, that we've made -- we made a tremendous amount of progress in 2009 in our operating costs and that it would be difficult to replicate that amount of improvement in 2010, but we still feel like in the supply area there is some improvement to be had and if there is margin improvement to be had, I think, in the acute division in 2010 the supplies is an area where we would hope to get them.

And I guess just a question. I know you can't control the weather, but you've got a fairly significant operation in Washington and there has been some harsh weather, I guess I would just be curious to get your thoughts and what the operators are saying to you about certain elective type things getting rescheduled and whether we should expect there to be unusual disruption or not at this point in Q1.

Yes, there is no question, Darren, that we have seen softness in our volumes in markets like Washington, DC, that have had bad weather and on the psych side, quite frankly, in sort of warmer weather markets that are not accustomed to this bad weather, I think for the most part we feel like that the vast majority of that business and that loss is timing and that particularly the nonelective inpatient stuff is recoverable. I think where you really see potential loss of sort of permanent loss of business is on the elective side in acute, on the outpatient side in behavioral. But the reality is those business lines are relatively immaterial to us. So, again, could we see a little bit of disruption in Q1? Sure. Do I think it's at the end of 2010 going to be something that we really point to as a significant impacting event? Probably not.

That's fair. I guess my just last question here. As it relates to your guidance, I should say, are you assuming any improvement at all in Vegas in 2010 and should we just assume that Vegas is slightly down and have you embedded any buyback at all. I don't think you typically do, but is there any buyback in the guidance.

So to the Vegas question, Darren. I think our view is that 2010 is likely to be a year in which Vegas is down modestly. I think the way that is likely to play out is the first half of the year may be more difficult and then, frankly, as the economy, local economy improves and as our comparisons get easier the back half of the year should get easier for us. But again, I would expect that overall 2010 will be a slightly down year for us in Vegas. As far as share repurchase goes, you've pegged it correctly. We only put in our guidance share repurchases that have already been completed and we don't contemplate share repurchase, we don't contemplate acquisitions, we never have and so we haven't done so for 2010.

Thanks a lot.

Your next question comes from the line of Shelley Gnall of Goldman Sachs.

Hi, thank you. My first question on the volumes is a fairly broad question. I think in the acute business, not just at UHS but across the hospital sector, volumes admissions trends were stronger than expected throughout 2009. Curious your views on whether this is an industry phenomenon or at least from UHS' perspective, is it the result of more aggressive market share initiative?

Well, certainly, Shelly, in all of our markets we have got ongoing programs to enhance and increase our market share and we are more successful in some markets than in others, but that's a constant focus of ours. I would say in general, I think one of the phenomena of 2009 was, as you point out, that for the industry volumes did not decline as much as some expected in the beginning of the year given the weak economy and I think part of that is because we've seen some of that decline already over the course of the last four or five years. We've seen a lot of -- Darren asked about elective business. Over the last six or seven years a lot of our elective business has moved away from our hospitals and into other settings, like ambulatory surgery centers and imaging centers. We've seen increased copays and deductibles, et cetera, that I think have caused people to move that business elsewhere.

The government also stepped in at the beginning of '09 with the COBRA extension, which I think has perhaps mitigated some of what otherwise would have been a decline as well. Again, you are absolutely right, it's been a pleasant surprise for us from a volume perspective in '09, but I think, obviously, we've already felt probably the worst of the economy in most of our markets, so we are pretty hopeful about our volumes going forward.

Okay, great thanks. And then I guess on COBRA, are you making any assumptions in our guidance for timing or the impact of COBRA roll-off for the unemployed?

We are not. I mean in fairness, Shelly, it is really impossible. While we certainly feel like in a general way we have benefited from that COBRA extension and it makes intuitive sense that you would. Certainly, absolutely no way we can quantify what the impact has been and therefore the flip side is when it expires there is no way to calculate what that impact will be. I think as we said earlier, we are expecting or our guidance implies or expects about 1% volume growth in both of our businesses. We think that's a pretty reasonable number and shouldn't be terribly affected by any change in COBRA, so we are comfortable with that.

Okay, great. Thanks. And then just a final question on the behavioral health business. What are the key risks, if there are any, other than rate risks to the behavioral health business. I guess what I am asking about is, is there risk to benefit design, behavioral health benefits in some states.

I actually think mental health parity sort of kind of reverses that trend. If anything I think our expectation is that commercial benefits will actually get better in many commercial plans. Now obviously again, I think for most plans we are talking about at the beginning of January of 2010 when those changes would take place, so it is a little too early for us to be able to say that definitively. But no, I don't think -- I think, frankly, the trend over the last decade has been that there has been a greater recognition of behavioral illness and behavioral -- the viability of behavioral treatment and I think benefit design has actually skewed towards better behavioral benefits. And so in some ways I think that mental health parity is a little bit late in the sense that the market has already addressed the issues that the mental health parity legislation was intended to address, although there certainly still were some discrepancies. But, no again, as I've said in answer to a couple of questions, I think most of the sort of utilization and benefit design pressures in behavioral are all coming from the Medicaid and state like, state programs.

Okay. Thanks.

Your next question comes from the line of Erin Blum of Goldman Sachs.

Thanks. I just have one quick like question, which is on your other operating expense line there seems to have been a big decrease this quarter and what accounted for that.

I think the main thing that most people miss in their models is that for the last several quarters we've run $10 million, $12 million of operating expenses associated with our construction management business, because that -- our contracts are largely done there. That amount of spending is absent in Q4. As I have talked through with people there models, that's probably the missing piece. Now again, there is a comparable amount of other revenue that's missing, if you will, but it's not nearly as noticeable in the revenue line as it is in the other operating expense line.

Okay, thank you.

Your next question comes from the line of Kemp Dolliver of Avondale partners.

Thank you. Steve or and/or Alan, what have you all seen this year in your emergency rooms as it impacted self pay, self pay in general for the industry not as bad as you're given the environment and I'm wondering what kinds of puts and takes relative to your operators' expectations you saw during the year, thank you.

Kemp, I think that generally we find that our ER business is just sort of reflective from a payer mix perspective of our overall trends. Again, what I had said before was in general over the past year we seen a decline in commercial volumes compared to our overall volumes and an increase in uninsured volumes and I think that's what we've seen in our emergency rooms as well. The one exception, I think, is in Q3, and I think we talked about this a bit in the last call, with the surge in sort of swine flu or H1N1 business in our ER's, in Q3 we saw kind of an uptick in uncompensated business in Q3 in our ER's. At the end of the day it wasn't very intensive business, it wasn't high dollar business, I don't know that it drove the needle in a huge way, but that was the only real change that we've seen. I think in Q4 we return back to sort of more normative kind of patterns.

Okay. And just in terms of how the operating rooms were managed this year. If you look back a year ago at your planning process, was there -- were there any new programs or new emphasis on just how you all were treating nonemergent versus emergent patients as they were coming through the door.

You said operating rooms and I am guessing -- .

Emergency rooms, Sorry.

Yes, I think for many years, Kemp, we've focused on trying to separate out the emergent and nonemergent patients in our emergency rooms to better increase the flow and the turn around and the scene in triage times. Again it varies by hospital. Some hospitals have very specific fast track programs, et cetera, but it's definitely been a focus of ours for quite sometime.

Great, thank you.

Your next question comes from the line of Gary Taylor of Citigroup.

Hi, good morning. A couple questions. Can we just follow up on the question about the other operating expense. Obviously you've talked about the construction spending piece for sometime. What about the liquidation proceeds, is that a -- was that a net against the other operating expense this quarter.

In the fourth quarter of last year.

I'm sorry. Yes, I read it wrong, I'm sorry. So anything else in this quarter besides the construction spending piece unusual in that line item.

The only other noteworthy thing, Gary, is we did have a reclass of $6 million or $7 million from other operating expenses to salary expense in the quarter related to our shared services operations where we realized we were recording what essentially was salary expense that we were sort of servicing our hospitals with on the other operating expense line. So the two lines are correct for the year, but in Q4 there is a shift, as I said, of about $6 million or $7 million from operating expense to salary expense.

Great, that makes sense. And I did miss the first five minutes, which I think were mostly your prepared comments, but on the $28 million headwind for next year, did you breakout the construction piece versus the DSH versus Medicaid versus supplemental in any detail.

I don't think we did. I will say that about two-thirds of that amount is related to the Texas reimbursement and about a third of it is the construction management piece.

And I know -- I did read the disclosure in the 10k and I have to confess I was just a little confused by it, because I know you've talked about for a number of months that there was what I kind of call formulaic dispute, perhaps is the right way to say it, around some of the DSH monies into the south Texas system. So when you kind of look at the Medicaid headwind, how much of that is just kind of overall Texas Medicaid rate reductions versus something that's a little disproportionate to south Texas because of the amount of indigents in DSH down there.

And, Gary, you may have missed because I think maybe it was the first question that I answered that talked about this. I think that $28 million or $0.18 that we disclosed is all -- the piece that is Texas reimbursement is all formulaic. It has nothing to do with state reductions based on budgetary concerns or anything else. It all has to do with -- as you described, we have been in sort of a formulaic dispute with the state and it has to do with our Medicaid utilization in some cases, but it's all formulaic and none of it has to do with kind of overarching sort of budgetary actions taken by the state.

Thanks, did I miss somebody asking about South Carolina also?

No. Nobody has. I don't have the numbers in from of me, but I don't believe that our South Carolina disproportionate share is terribly different in this coming fiscal year. Obviously, it's fixed. The Carolina fiscal year runs from July to June, so we've already been six months into it. We certainly don't know what is going to happen in the back half of 2010.

Last question, I just want to go back to Vegas a little bit. You guys are a little unique because we get a little bit of a peek into your numbers from UHT bonus rental, which is a small piece and then obviously people look to the community minority ownership in Vegas and I know all the reasons why there is true-ups and there is accruals, et cetera, but I guess that figure would suggest the 4Q in Vegas was substantially weaker than the 3Q and I'm just wondering if that's true if you can comment on it. I know you did say both the back half was down versus the first half being up. But was 4Q sequentially weaker than the 3Q.

Yes. 4Q was sequentially weaker than 3Q, although again I wouldn't necessarily describe that as tremendously material, but yes, I don't think -- I think we've seen that trend accelerate a little bit into Q4.

Okay. That's all I had, thank you.

Your next question come from the line of AJ Rice of Susquehanna.

Thanks, hi, everybody. Maybe just a few questions as well. I didn't hear you give this, Steve, it's probably in the 10k, but can you give me the bad debt by business line percentage and then do you have any comment on the self pay admissions trend, a year to year growth or as a percent of total admissions, particularly on the acute side.

I mean, what I have said, AJ, and if you are looking for something else I'm happy to try, is that, again, I think for the year self pay admissions have clearly risen at a rate slightly higher than our over all admissions. That trend was probably most exacerbated in Q3 and it moderated some in Q4, but that's the trend that we've seen.

Okay. So you don't actually have a Q4 number versus Q3 that you are giving out really.

No. We never really try to do that precisely.

And the percentage on the two business lines.

I'm sorry. So our bad debt in acute in Q4 was 12.7%.

Right. And what was it in the other, in the psych.

We will get that in a second.

Okay. Any comment on generally, I know we've talked a lot about specific markets, but labor trends overall, wage increases, how they flow through for you in 2010, what you are assuming in the guidance and other things like turnover rates, contract labor usage, maybe just some general comments there. And if it's different in the two businesses it would be interesting to hear.

I think that what we've said for, again, a good portion of the year is we made a lot of progress or had a significant impact in the first half of the year on salary expense as virtually all of our hospitals deferred merit increases, froze wages for period of time, in some cases a quarter or two quarters, in some cases longer than that, but I think by the end of the year virtually all of our hospitals had resumed giving merit increases, although I think clearly we are giving merit increases at a much lower wage inflation rate than we were even a year or two ago. So I think for the last four or five years the overall wage inflation rate was probably 4.5%, 5% and I think currently it's much closer to 2.5% to 3%.

But I do think, again, part of the reason that the first half comparison in 2010 is going to be difficult to the first half of '09 is that in '09 a lot of those wages were frozen and in 2010 we are going to have lower, but at least kind of merit increases across the board. I think in terms of the other questions you've asked, our trends in premium pay, which means registry or temporary nurse usage and overtime, et cetera, are clearly down. Externally I'm not sure there is a whole lot more to us for us to do there. Internally, I think the overtime and premium pay still may have some room to be reduced as we continue to focus on that.

Okay. I know you mentioned there was some movement and things back and forth between other operating expense and the labor, salary and benefits, if we looked at it apples-to-apples, are you showing margin improvement on the labor line. Are you expecting further margin improvement in 2010.

I think that if there is to be margin improvement in 2010, and I'm just going to talk about acute care at the moment, I think it is far more likely to be on the supplies and other operating expense line. Again, back to this tissue of the wage freezes in 2009 in the first half, I think it is very difficult to really get margin expansion from that line in 2010.

Okay.

Just to your previous question, so the bad debt percentage in behavioral was 2.2% in the quarter.

Is that -- was that sort of flat year to year or is that similar up, down -- . I should have asked you

About 20 basis points.

Okay. All right, thanks a lot.

Okay.

Your next question comes from Whit Mayo from Robert W Baird.

Thanks. Maybe just back to the Texas addish for a second. Historically a lot of your peers, and I think this applies to you as well, have been able to get some more dollars from those programs over the course of the year or so. Was just sort of wondering from a process stand point, Steve, whether you think it is possible at all that maybe you can qualify or whether or not you are trying to qualify for more funding.

On these particular issues, Whit, I think we've exhausted our options and again, as I've tried to express to Gary, these are formulaic changes. They are done. They are already in place. Obviously, we are always trying to look for ways to increase reimbursement, to explore new programs, to maximize reimbursement. That's kind of an ongoing process. But on the particular programs that we disclosed in our press release, those are fixed numbers.

Okay. That seems fine. How would you characterize, I don't think I heard you talk about surgeries and case mix, but how did those trend just in terms of intensity for the quarter and how should we think about that over 2010, just given some of the large capital projects that you have coming on line.

Our case mix has increased very sort of modestly over the last few years by 1/100th, 2/100ths of a point every year and I don't think we really see that number changing dramatically. We continue to focus on those high intensity areas, like cardiology and orthopedics and oncology and neuro surgery, but I think to change those numbers in a dramatic way is not terribly likely. Surgeries, I think as many of our peers have reported, inpatient surgeries are flat to down very, very slightly and outpatient surgeries are kind of flat to up very slightly.

Okay. And maybe just one last question. Several of your competitors seem to be putting a little bit more of a focus on buying doctor groups, albeit; it sounds fairly opportunistic. But how do we think about your desire there and would you -- and just how would you need to frame up the competitive environment there. Just any thoughts with regards to that.

This is an interesting area, Whit, because, again, I know you followed the industry for a while, but the thoughts and the approach in this area tends to be cyclical. At one time buying physicians practices was all the rage. And then a couple of hospital systems were almost bankrupted by the process and so hospitals moved away from it. We certainly are in an environment now where I believe mostly in an effort to align incentives with our physicians, more and more hospitals are getting back into the physician ownership process. For us it's absolutely a market by market case by case sort of decision. We've got probably 100 or so employed physicians at the end of '09, which is not a big number, but in certain hospitals it's actually --it is really focused in a few hospitals. And again, I think we're -- in the markets where it makes sense where from either a competitive or from a strategic perspective it makes sense, we are willing to do it. But we are not all that anxious to jump into it in a kind of full scale way, because I think most of the companies that have over the years have generally stumbled.

It sounds like you don't feel too pressured to step up to the plate there or probably have any dialogue going on right now.

Again, in very specific cases with very specific groups it is an absolute option, but it is definitely not a broad-based initiative on our part.

Okay. And I guess one last question, sorry, just the share count in the quarter, you bought back 1.7 million shares, doesn't look like your share count was down too much so when did you buy those shares back, it looks probably like it was maybe in December.

I think actually the bulk of the buying activity was in November. We also had a stock option grant in November, which skews that a little bit, but, yes, I mean I think that's -- those two reasons are why you don't see the full impact in the Q4.

Okay. Thanks a lot.

There are no further questions at this time. Mr. Filton, do you have any closing remarks.

No. We thank everybody for their time and we'll talk to everybody in a couple of months at the end of the first quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.