環球健康 (UHS) 2010 Q1 法說會逐字稿

Good morning, and welcome to the Universal Health first quarter 2010 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. Steve Filton, please begin.

Good morning. This is Steve Filton. Unfortunately, Alan Miller, our CEO, cannot be with us this morning, but I'd like to welcome you to this review of Universal Health Services' results for the first quarter ended March 31, 2010.

As discussed in our press release last night, the Company recorded net income per diluted share of $0.73 for the quarter. During this conference call, 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, 2009. I would like to highlight just a couple of developments and business trends before opening the call up to questions.

On a same facility basis in our Acute division, revenues increased 3.1% during the first quarter of 2010. Adjusted admissions to our Acute Care hospitals owned for more than a year increased by 1.8% compared to the prior year quarter. On a same facility basis, revenue per adjusted admission rose 1.3% during the first quarter of 2010.

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 decreased to 16.1% during the first quarter of 2010 from 17.6% during the first quarter of 2009.

The margin decline results from the Texas Medicaid reductions implemented last September, increases in uncompensated care expenses, and the difficult cost control comparisons to last year's first quarter. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $176 million and $158 million during the three-month periods ended March 31, 2010 and 2009 respectively.

On a same facility basis, revenues in our Behavioral Health division increased 6.7% during the first quarter of 2010. Adjusted admissions to our Behavioral Health facilities owned for more than a year increased 3.8% during the first quarter and revenue per adjusted admission rose 2.8% over the comparable prior year quarter.

Operating margins for our Behavioral Health hospitals owned for more than a year increased to 26.1% during the quarter ended March 31, 2010, as compared to 24.6% during the comparable prior year period. Our cash flow from operating activities was approximately $136 million during the first quarter of 2010, as compared to $152 million in the first quarter of 2009.

The decrease was primarily attributable to $17 million of construction management receivables collected during the first quarter of 2009. At March 31, 2010, or ratio of debt to total capitalization was 33%, and the ratio of debt to EBITDA was 1.3 times.

We spent $63 million on capital expenditures during the first quarter. Included our capital expenditures were the construction costs related to a new 171-bed hospital in Palmdale, California scheduled to open later this year and the 220-bed Texoma replacement hospital which opened at the very end of last year. We also have multiple projects to add capacity to our busiest behavioral facilities.

We opened a total of 78 new Behavioral Health beds during the first quarter, and anticipate opening a total of approximately 400 new beds in 2010. As reported last week, we were recently notified by CMS that they intend to effectuate the termination of Southwest Healthcare Systems' Medicare and Medicaid provider agreements effective June 1, 2010.

We were also notified by the California Department of Public Health that they plan to initiate a process to revoke Southwest Healthcare's hospital systems hospital license. We have recently commenced discussions that we believe were productive with both CMS and the California Department of Health in an effort expeditiously and collaboratively resolve these matters, although there can be no assurance we will be able to do so.

Rancho Springs Medical Center and Inland Valley Regional Medical Center which comprise Southwest Healthcare System located in Riverside, California remain fully committed to providing high-quality health care to their patients and the communities they serve.

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

(Operator Instructions) Your first question comes from Shelley Gnall with Goldman Sachs.

Hi, thanks for taking my question. So I guess first, Steve, have you attempted to quantify the impact of the severe weather, or the tough comp to [slew] on the first quarter admissions trend?

We didn't, Shelley. The difficulty, obviously, is you are sort of speculating on something that didn't happen. So not really sure. As far as the flu goes, I think everybody acknowledges this was a very, very light flu season.

And I think everybody's acute care volumes were off in January and February as a result of that. But it's difficult to say precisely how much. As far as the weather goes, the facilities that were probably most affected on the acute care side were George Washington University Hospital in Washington, DC, and on the behavioral side a number of hospitals in the sort of southeastern part of the country.

I think it was helpful that the bad weather occurred mostly in February. I think a lot of the sort of missed volumes came back and rebounded in March. I think at the end of the day, our view is that the weather did not have a terribly significant impact in the quarter.

Okay, great. Thanks. And then just commenting on, I guess, Alan's comments at recent investor conferences, is there an increased appetite maybe for adding leverage to the balance sheet, and if so, what degree of leverage would you be comfortable with?

I am at a little bit of a disadvantage since Alan and I don't go to the same conferences, so I don't exactly know what he said, but I think what we've said certainly on our calls and what I've said, Shelley, is that we have this very low levered balance sheet. Not just for the sake of having it, but to be able to respond flexibly to opportunities, and as we have been saying for sometime, we are evaluating the opportunities that are coming our way seriously. But don't feel compelled to act just for the sake of acting.

And I think that's our history. And we will continue to do that. So we think we have a balance sheet that really positions us will for opportunities as we move into the future, and we're going to continue to evaluate those opportunities very seriously.

As far as the let us level of leverage that is sort of tolerable to us or that we view as optimal, I think it depends on the quality of the opportunities that are out there. And, again, we will evaluate that on a case-by-case basis.

Okay. Thanks. And then just one more quick one, on the supplies line, it doesn't look like we're seeing a lot of benefit from your cost-cutting opportunities on supplies yet. Is that more of a back half of the year event or can you give us any update on what's going on with your supply cost initiatives?

Yes, we continue to pursue our supply cost initiatives, and we do feel like there remains opportunity. There's a little bit of shift as we bring certain contract services like dietary and housekeeping in-house. We're doing that more and more, so we're shifting a little bit of expense from other operating expense to salaries and supplies so that distorts some of that sort of same-store improvement.

But no question, during the first quarter we saw some increases in cardiac rhythm management expenses and pharmacy expenses. And we are very focused on controlling those and driving those costs down because I think as we've said in our sort of guidance call, if there is to be margin improvement on the acute care side on the expense side of things, it's more likely to be on supplies and other operating expenses than on the salary line.

Okay, thank you.

Your next question comes from Tom Gallucci with Lazard Capital Markets.

Thanks, good morning, everybody. Steve, I was wondering first if you could maybe talk a little bit about payer mix trends you saw in the quarter?

Sure. You know, Tom, I think that the payer mix trends that we saw this quarter are fairly consistent with the trajectory that we have seen probably since the back half of 2008, and that is with a fairly sort of steady consistency. Our commercial admissions have been rising somewhat slower than our overall admissions and our Medicaid and uninsured admissions are rising somewhat faster than our overall admissions.

And I think that pattern has held for just about every quarter except maybe the first quarter of last year when we had a real strong payer mix. But I think that trend continues and I suspect will continue as long as the unemployment rate remains sort of as stubbornly high as it is.

Great. Can you talk about the geographical variations, I know you have talked a little in the past about Florida, or some other markets maybe having bottomed a little sooner in Vegas maybe a little bit later. So what do you see there in terms of your different key markets?

Our Acute Care EBITDA, as you can see by our margins was down in the first quarter, probably more than half of that decline is attributable to the Vegas market. Another chunk is attributable to the Texas Medicaid cuts that we talked about at some significant length in our guidance call in February.

And the rest in terms of geographies, there is sort of a push, some up, some down, another strong quarter in the Washington, DC market, and obviously, very strong quarter throughout the Behavioral portfolio.

Okay, thanks, Steve.

Your next question comes from Jason Gurda with Leerink Swann.

Hey, good morning, Steve. One of your peers had mentioned that they saw a sharp slowdown in OB volumes during the quarter. Did you guys see anything like that?

Our OB volumes, I did see that comment, so we looked a little bit more carefully at ours, our OB volumes were down slightly in the quarter along with some other service lines like inpatient service, inpatient surgeries which were down slightly. It didn't seem to me to be a terribly new or dramatic shift. I think we have seen OB volume off a little bit for a while now.

And I think that's consistent with the weaker economy as people are making -- childbirth -- are being more cautious about childbirth decisions. But I wouldn't describe it as a dramatic decline in the quarter at all. But it was down a little bit.

Okay. And thinking about seasonality throughout the year, last year your second quarter was a little stronger than historically it's been. Any thoughts on this year?

No, I mean, the main thought that we had, Jason, that we talked quite a bit about, again, in our guidance call in February was that we thought that the skewing or the weighting earnings to the first half of the year in 2010 would be less dramatic than it has been in the last couple of years. We talked about the fact that historically prior to 2008 and 2009, we earned on average something like 52% of our profits in the first half of the year, and 48% in the back, and in 2008 and 2009, it was maybe a 60-40 split.

We thought that 2010 would be more reflective of the historical trends, split a bit more evenly. And we continue to think that's the case.

Okay. Then just finally, is there any expected timeframe where you expect to get -- obviously before June -- but any timeframe before that do you expect to get an update on the Southwest situation?

As I indicated in my remarks, we are working diligently on the issue. Mark Miller, our president, was visiting last week on the West Coast with both the California Department of Health and CMS representatives. We have submitted a proposed corrective plan and agreement to extend that June 1 date and are awaiting a response from the government.

So we are very focused and obviously very aware of the June 1 date, but it's impossible for us to predict at this moment the exact outcome. But all I can say is we are as focused as we can be on this issue.

Okay. Thank you.

Your next question comes from Gary Lieberman with Wells Fargo.

Thanks. Good morning. I was hoping maybe you could talk a little bit about the impact, if you can quantify it, that the strong Medicaid trends, the increase in Medicaid enrollment has had on your Behavioral business?

I think the reality, Gary, is the strength that we saw in our Behavioral portfolio in the first quarter was attributable, I would say, to two broad things. One was just probably the strongest quarter we've had in a while in our Acute Behavioral business. In reality, that is the business that is far less dependent on Medicaid than the residential business. So that didn't seem to be driven by a Medicaid improvement.

And then, secondly, I think we definitely saw improvement in facilities like our facility in Wyoming that has added beds and added capacity. We saw improvement in other facilities that have more recently added capacity, and in some of our newer facilities that are maturing, that are in their sort of second or third year of operation, like we have new facilities in Orlando and another new facility in the Atlanta market where we have several existing facilities.

All those facilities showed strong performance in the quarter. But I don't think, I would say that none of them were really necessarily driven by Medicaid improvement. As a matter of fact, I think we continue to view the whole area of Medicaid pricing and constraints on Medicaid utilization in Behavioral as still probably the single biggest challenge that that business faces.

And then maybe one quick follow-up on other operating expenses, looks like you had some pretty good ability to control that. Was their anything specific or was it just an aggregation of different stuff?

Well, the first, one clarifying point I will make is that in the first quarter of 2009, we did have $19 million or $20 million of other operating expenses associated with our construction management business. We also obviously had a similar amount of revenue, but if you adjust for that, while I think the first quarter 2010 showed good performance on that line, it's probably more in line with the way people have modeled it, certainly with the way we modeled it.

To your point, Gary, I mentioned a little bit of a shift which is just geography on the income statement of contract service expense out of that line into supplies and salaries. We made some progress on things like physician subsidies in some markets, but no one single item that really moved the needle on that line.

Thanks a lot.

Your next question comes from Christine Arnold with Cowen.

Follow-up little bit on the Behavioral. You just said that your Behavioral Health was more strong in acute and it sounds like less Medicaid volume. Was this commercial volume, and do you see kind of that volume being sustained? I'm trying to figure out here if we're seeing a blip or kind of, in your opinion, kind of a turn in that business?

It's a little hard to say, Christine. Obviously, there has been some speculation and I know you have speculated probably prominently that psychiatric business would benefit from mental health parity. That's a little hard for us to sort of precisely identify or quantify.

There has been some sort of slowdown in that process in the sense there are a number of insurers that have sued CMS to halt the implementation of the rule because they argue that it wasn't implemented properly. So while we think a lot of insurers have made the necessary, or the changes required by the mental health parity legislation, we certainly don't know that all insurers have made those changes. And we don't know for a fact that they have all been implemented.

But to your point, I think in the acute business it is far more likely that we are seeing the benefit of more commercial volume and more Medicare volume, and in the not so much the residential business which tends to be Medicaid and Medicaid-like payers.

Okay. And on the acute side, the pricing looked a little bit weaker than we were looking for, and I know you have kind of broken out Texas Medicaid, which started back in September. But we didn't see the traditional boost even though that was in the run rate. How do you think about acute pricing going forward? I think you are looking for something in the neighborhood of 2.5% plus, weaker than that this quarter?

Yes, I mean, again, I think what we talked about at the end of the year was acute care same-store revenue growth that would be in that sort of 3.5% to 4% range. We fell a little bit short of that in Q1, although as you point out, the shortfall was more on the pricing side and actually volumes were a bit better than we expected. It's hard to know whether, how much of a trend that is.

I think a couple of things that drove that in the first quarter, we've talked before, at least in the last couple of quarters about some contraction in our managed care length of stay, particularly in the Vegas market where virtually all of our contracts are per diems. So when managed care length of stay contracts our reimbursement per admission declines and that drives pricing down.

I mentioned before, I think in response mostly to a question about OB that inpatient surgeries were off a little bit in the quarter compared to outpatient surgeries. That drives pricing down a little bit. Again, hard to know whether those trends are, whether a quarter makes a trend.

So we're comfortable still with our sort of 3.5% to 4% same-store acute care revenue growth. We will see about the components of that as the year plays out.

Thanks.

Your next question comes from Ralph Giacobbe with Credit Suisse.

Thanks, good morning. Steve, just in terms of salary expense, hopped up a little bit. Is their something in that line item or just lower top line that pushed that percentage higher?

Well, two things, Ralph. I think that we talked at great length, again, in our guidance call and probably prior to that about the fact that we did a lot of things at the beginning of 2009 in terms of wage rate freezes, merit increase freezes, position freezes, that we indicated that as of 2009 progressed, we sort of took our foot off the brakes a little bit as the economy improved and our business improved.

And, therefore, when we got to the first quarter of 2010, that comparison, particularly on the salary line, would be extremely difficult. And I think you are clearly seeing that reflected in the first quarter. In addition, we've got a couple of large projects that opened in Q1.

The Summerlin tower, the Texoma replacement hospital, obviously these are projects that are opening in a very difficult economic environment, and they are getting off, as we expected they might, to a slower start than we anticipated when the projects were first contemplated. So I think the effect of those projects in Q1 are actually dilutive, and you can see that on the salary line where they are driving salaries up, but we're not getting the maximum sort of revenue contribution that we thought we'd get.

I'd point to those two elements as probably most responsible for the sort of inefficiencies on the salary line that you have noted.

Okay. And then in your comments, you mentioned 400 new beds on the psych side coming in, in 2010. We also mentioned 78 new bids in 1Q. Is that sort of inclusive within the 400 or 400 additional as you think about the rest of the year?

The 78 is meant to be inclusive of, or included in the 400.

Okay. And then the spread of that over the year, is that going to be fairly balanced do you think, or more back end loaded?

I always suggest to people to just think about it as ratable, although in fairness, how those beds come on is subject to regulatory approvals and some of the vagaries of construction management. So they don't usually come on quite ratably, but frankly we don't have a whole lot better guess than that.

Okay. That's fair. And just last one, just to jump into interest expense a little bit. What caused that?

I think the main issue was on the two projects we opened, the Summerlin tower and the Texoma replacement hospital, we had been capitalizing interest prior to their opening, essentially on January 1. So while we've had cash interest expense on those two projects, the actual financial statement interest expense just started in the first quarter of 2010.

Okay, great. Thanks, Steve.

Your next question comes from Frank Morgan with RBC Capital Markets.

Good morning. A couple of questions. I was hoping you could first comment about -- I think I may know the answer here, but I noticed on the behavioral side, pricing much stronger in the quarter relative to last quarter. Was that a result of this mix shift to the acute psych side?

I think that's precisely it, Frank. With the strength in the acute behavioral business versus residential, I think that's absolutely what's driving the pricing strength.

Okay. Two others. Just general comments about managed care contracting, how that's going, and what kind of pricing we're seeing. And then, secondly, can you give us some details on both your surgical volume growth as well as you're ER visits? Thanks.

ER visits were up, as I recall, 4% or 5% in the quarter which I thought was a little surprising, pleasantly surprising given the fact that we didn't have a lot of flu volume. As far as surgical volumes go, I think I commented before that we saw a slight decline in inpatient surgeries and a slight increase in outpatient surgeries.

And as far as managed care contracting, we continue to sort of hold to the kind of 6%, 7% managed care price increases that we have been talking about for a while. We have not really seen those numbers come under any significant pressure so far.

Thank you.

Your next question comes from Kevin Fischbeck with BanK of America-Merrill Lynch.

Okay, thank you. A question on uncompensated care. I guess of the hospital companies, UHS has been one of the more conservative on the outlook for uncompensated care. I was wondering if you could, given that the number came in better than we thought, wanted to hear if it was trending better than you had thought and whether your view on uncompensated care had changed at all for 2010?

I'm sure that -- this is what you're asking, Kevin, or this is what you mean, but when we talk about uncompensated care, we're obviously talking about the total of bad debt and charity and uninsured discount. Those numbers are up about 100 basis points from last year's first quarter. That's, I think largely in line with our expectations. I think we, your right, Kevin, we have been a bit more bearish in our outlook about uncompensated care.

I think that's a function to some degree of our reliance on the Vegas market, which certainly is still suffering from the softness in the economy to a disproportionate level compared to other markets. I mean the unemployment rate in that market remains well over 13% which is, obviously, as you know, quite a bit higher than the national average.

And I think as a consequence, our uncompensated care in that market has been growing faster than it has been in the rest of the portfolio. So, again, in answer to your question, yes, uncompensated care came in, I think, very much sort of in the range of our expectations.

I think largely because of the Vegas market, although we still see pressure in some other markets as well, and I think our view of the year was that uncompensated care would be challenging for at least the first half of the year, and then maybe start to abate or at least level out in the back half of the year. And absent any kind of other developments, that's still our view.

Okay. And I guess, if you could just also, you mentioned Vegas, provide an update there? It looks like year-over-year it was down. Maybe it saw some sequential stabilization. Can you give some color there, and I want to say that similar to the bad debt that you just mentioned, you might see some improvement in the second half of the year for Vegas. Is that still the outlook there?

I think as we mentioned in our February call, we're starting to get some mixed metrics, economic metrics, coming out of the Vegas market which, while not strongly encouraging, are still better than the relentlessly negative metrics that have been coming out for the last year and a half or so. Visitors to the city are increasing and some of the tourist numbers look better.

Some of the underlying real estate numbers look better. But, again, that could sort of stubbornly high unemployment is a big concern. I think the way it's being reflected in our hospitals is we're seeing real sort of pressures on what we describe as our downtown hospitals, the two older hospitals that we own in the market that are closer to the city center.

And then in our suburban hospitals, we're doing a bit better. And, again, I think that's all reflective of the economic pressures.

Okay. And then, I guess, one last question. Circling back to the question earlier on balance sheets. I guess I would have thought -- it seems to me like maybe that UHS is somewhat under levered.

And I understand the historical focus on being disciplined with capital allocations. But I guess at [one-times-ish] debt to EBITDA, you are starting to, I think, almost look under leveraged. Is there a point where you feel like share repurchase becomes the best use of cash if these deals don't seem to be fitting your criteria? Just a little bit more color about when we might expect to see that capital be deployed?

First of all, Kevin, Ii think we would not dispute the observation that at these levels we are under levered. I think we have said that for several quarters. In the fourth quarter we did buy back -- I'm doing this from memory, but I think about $70 million worth of shares in the fourth quarter.

The first quarter is usually not an active share repurchase quarter because of the very, very narrow window we have in terms of a trading period. But we have mentioned a number of times that at these levels, we're aggressively looking for acquisition opportunities and we will make judgments as to the availability of those opportunities versus the opportunity to buy back our shares, which we also find as a compelling by.

But, again, just to reaffirm your initial observation, we would absolutely agree with the idea that at these levels we are under levered and looking for prudent ways to put our capital to more efficient use.

Okay, great. Thanks.

Your next question comes from Darren Lehrich with Deutsche Bank.

Good morning, everyone. This is Brian Zimmerman filling in for Darren. Steve, on the behavioral side you saw some strength and better same-store growth rates compared to previous periods. Do you think that you have comped out of some of those tougher quarters, and what sort of growth should we expect in a second and going forward?

It's a tough question, Brian. The 6.7% same-store revenue growth that we had in the quarter is a good 250 basis points better than our own expectations for the year.

We're very pleased with those, obviously, but the ability to sustain that sort of 4% same-store admission growth in this tough economic environment, and particularly with some of the pressures from state Medicaid and other similar programs, we still remain cautious about our ability to do so. So very pleased with the same-store revenue performance, but still very cautious and very conscious of the threats that we have with state Medicaid programs. There are a number of states we are watching carefully, including Florida, Mississippi, Virginia, all are states that are contemplating further Medicaid cuts.

We have some exposure in those states. I think others have greater exposure, but, again, I think the situation is a bit too fluid for us to sort of declare victory at this point. But obviously we are extremely pleased with the behavioral performance in the quarter.

That's helpful. Can you talk little bit more about freestanding outpatient activity? Have you seen any changes in the competitive environment, and I guess if you have, do you have any programs set up to take advantage of the situation?

I think we made the observation in the last year or two that the rate of growth of what we sort of describe as niche outpatient competitors, whether it's ambulatory surgery centers or imaging centers or urgent care centers, radiation centers, we think seems to be slowing. I don't think we're necessarily seeing a contracting of those businesses, but at least their rate of growth, which was sort of meteoric for a number of years, definitely seems to be leveling off.

I think that's a function of obviously a more difficult credit market. Is not as easy for these start-ups to get financed. But I think it's also a function of payers acknowledging that the strategy of enrolling every single provider in their networks has not been a really prudent strategy in terms of controlling costs.

And so I think we are seeing an effort on the payer side of the equation to move, at least start to move to narrower networks, et cetera. And we view that generally as a positive development for us.

Okay. And then one last question, what sort of managed care pricing disability do you have going into next year? And also can you talk a little bit about some multi-year contracts that maybe you have?

A goodly number of our 2011 contracts are in the books. Probably more than half at this point. In terms of any individual contract, none is probably noteworthy of mention other than our Sierra contract in Las Vegas is up for renewal in late spring or early summer of 2011.

It's probably the only contract, the only sort of single contract we ever talk about in and of itself. So we've already begun very preliminary conversations with the payer there. But other than that, I don't know that there are any other multi-year contracts that are worth noting at this point.

Okay. Thanks a lot, Steve.

Your next question comes from Adam Feinstein with Barclays Capital.

Hey, Steve. Just a few questions here. You were talking a little bit about Vegas, so I want to follow up with something there. Clearly, it sounds like operating profit dollars were down slightly more than the overall acute care business. But when we think about volumes, was the volume growth in Vegas similar to Companywide average?

I think admissions in Vegas were actually flat in the first quarter, Adam, and I don't have the history in front of me, but that's probably the first time in a long time that Vegas volumes have actually lagged the Company. Not by much obviously, but even by a little bit in the first quarter.

Okay. And once again, it's hard to answer this, I know, but can you expand, if you have any color, but do you think the overall market was (inaudible) do you think you guys maintained close to 40% market share in the quarter in Vegas?

We don't have market share data available to us in quite that real a time basis. So we really don't have any market share data for Q1, Adam, but I think our general sense, especially with the opening of the Summerlin tower, was if nothing else, we are at least holding our own, if not perhaps still increasing our market share.

Again, I think that those softening volume numbers are much more a reflection of just overall weakness in the market and the struggles with the local economy is than with any other competitive dynamics in the market.

Okay. And then when we look at McAllen, maybe just get a quick update there, obviously there has been a nice turn there over the last couple of years now. So just a similar question. Did McAllen do better if Vegas did slightly worse?

No, the McAllen market, I think, in Q1, Adam, was down almost exclusively as a result of the Medicaid reductions that we discussed at some length back in our February call that had been implemented back in September of 2009. So those were clearly anticipated.

I think exclusive of those Medicaid reductions, the McAllen, or South Texas market, was largely flat with last year, which, frankly, after two years, meaning 2008 and 2009 of dramatic profitability recovery in that market wasn't -- was not sort of an unexpected performance and one that we're not entirely displeased with.

Okay. And just, you guys showed some upside relative to what everyone was looking for. I'm just curious. Relative to your own model, did you guys do slightly better than what you are thinking for the quarter, and if so, it sounds what it was probably on the psychiatric side, is that correct?

Yes. Adam, I think our own internal budget was probably a couple of pennies better than consensus, but that means we still beat our own internal budget by a couple of pennies. And as you described, and I think most people described in their notes last night, a little bit better than expected performance in Behavioral and a little bit softer than expected in Acute is the way we got there.

Okay. And then just a final question here.

Everyone is asking questions about leverage, and obviously everyone is wondering with some bigger potential deals out there, I guess, just what I wanted to ask you, Steve, the last time you guys did a really big deal in the psych it was the Charter deal, and that was a huge homerun for you guys. But that was more of a distressed asset.

So I guess just a question, as you think about larger deals and synergies and things like that, I guess I'm just trying to compare that transaction to other things you guys have done in the past in terms of just opportunities in terms of improving margins. Is it typically a function of improving costs or a function of enhancing revenue growth with some of the deals you guys have been over the years?

I think it's hard to say, Adam. I mean, we have looked at historically a wide spectrum of opportunities in both the Behavioral and Acute business, both large and small, both public and non-public. I think every opportunity is different.

But we are always looking for what's the upside, what do we bring to the deal? And we play out each individual situation. At what price can we acquire this asset, who else is bidding, and every deal has its own dynamic. But every opportunity that we believe is at all interesting, we take a careful look at.

We've certainly bid on some opportunities that we didn't get. We have passed on some opportunities that others were very interested in. So it's very difficult to kind of make general characterizations that are going to allow people to draw conclusions about which specific deals we are anxious to do and which we're not.

And the other piece of it is, as I am sure you can appreciate, is it would probably be imprudent of us to comment on any specific pending deals that are out there. But other than to say that we are going to seriously take a look at anything that makes sense for us.

All right. Thanks, Steve.

Your next question comes from AJ Rice with Susquehanna.

Thanks. Hi, Steve. I have a couple of quick questions. First of all, I want to make sure I understand, on that construction business impact on other operating expense, last year versus this year, the swing, when you look at the individual business segment margins, Acute and Psych, is it in either one of those?

No, it's in the other segment.

Okay. Then if you look at those Acute and Psych margins relative to the margins you are reporting on a consolidated basis, presumably because they're going in opposite directions, there are some swings there that maybe aren't apparent when you look at the consolidated numbers. Can you just give us a flavor for where the biggest swings on both of the sides of the business are?

I mean, again, I think our Behavioral profitability exceeded our expectations in the quarter, and I think as I kind of tried to emphasize before, that's an absolute function of that 6.7% same-store revenue growth. That level of revenue growth will drive margin expansion, which it did in the quarter.

And I think, frankly, it always should if we get to that level of growth. The question I think for us is whether we can sustain that the level of revenue growth, and I think it's too early to say whether the first quarter creates a trend or not.

If you looked at the individual line items, that would be mainly labor where your getting the benefit from that?

I think on the Behavioral side, again, if we're driving 6.7% revenue growth, I believe that every single one of our expense lines is growing at a rate slower than that. So we're getting essentially margin expansion on all of our lines, although in Behavioral especially salaries really drives the profitability more than anything.

Right.

And on the Acute side, again, we talked about this before, we had a very tough salary comparison. So with our revenue falling just a little bit short, our revenue growth in Acute falling just a little bit short of where we hoped to be, I think what's driving that margin contraction is mostly the salaries, although we had an earlier question, I think supply performance was a little bit under but we expected as well. The other operating expenses we actually got some leverage on that line in the quarter.

Okay. Just to sort of follow up on Adam's question because it's sort of a little bit of the elephant in the room, is the potential of a transaction.

When you think about the deals that you've looked at over the years, and it's obviously been out there that you have looked at some big hospital deals and other things, when you say why you didn't do those deals when you look back, is it largely because the price wasn't right or has it been more a function of the ability to integrate that deal, management, stretching your management infrastructure too much?

Can you give us some flavor for the reasons why, I guess, most of the deals you looked at you really didn't do. But maybe some flavor so we can think about how you look at them more?

AJ, I know you are just trying to do your job, but I think it's going to be difficult for me to describe our historical behavior in a way that is going to sort of paint a very direct picture for people to be able to say, okay, we know now exactly what transaction the Company is or isn't interested in. I mean the answer to your question, and it is probably obvious to some degree, is we missed a lot of deals for all kinds of different reasons.

Some because we are outbid, some because we chose not to bid. Why we would choose not to bid or choose not to bid higher, maybe that we evaluated the upside in deals a little bit differently than our competitors did. I think we feel like historically and in kind of a broad sense, we've done a pretty good job in the acquisitions that we've chosen to do.

We've been more selective, probably, than most of our peers. And that has held us generally in good stead. Although there's certainly a handful of transactions over the years that we wish that we did do and maybe bid a little bit higher on. But I don't think there's anything definitive I can say about exactly that decision making process, especially that's going to allow you to draw a really finite and definitive conclusions about what we may choose to do in this current environment.

I guess, not to beat a dead horse, but I guess the one thing I was wondering about was your sense of the management depth that you have at Universal and the ability to take on whatever size deal you look at versus -- you feel very confident on that part of it -- versus just being more of a question of getting it for the right price and the right return threshold and the right opportunity.

I don't know if there's anything to say on that. I mean, has it ever been that you guys felt that something was, stretched management too thin given the way you guys operate the Company, I guess?

So far, you've given me the elephant in the room and the dead horse analogy. I don't know how many other animal analogies you have in your quiver there, AJ, but it's an issue, obviously, in a very large transaction we have to be confident that our management is up to the task. We have a lot of confidence in both of our, both segments' management teams, however.

So it's just another factor, I think, that has to go into our thinking. And, again, difficult for me to answer your question in a way that is not going to be inappropriate at this point.

Sure. All right. Just last thing. I appreciate the comments initially about the Southwest and are you guys are at with that. And maybe it's just a function of more focus on the Company given the M&A chatter out there, but there's been a couple of different little regulatory things.

Obviously, nothing like Southwest, but would you say that you think the environment has changed in any way in terms of more regulatory focus, either in certain specific markets or just as a general rule? Or are these the sort of run of the mill things that maybe are getting a little more publicity now than they would have otherwise gotten?

Well, first of all, I would say, AJ, that I don't think any of these sort of discrete items are really related. I also want to be clear that -- I don't think we would characterize any of these regulatory items as run of the mill, either.

We take them all very seriously, but certainly some are more routine than others. Southwest, I think, is a different animal, and as I said in my earlier remarks, we couldn't be any more focused on that. I think as to some of these other, smaller mostly behavioral items that have come up, in recent months, again, very specific.

I think we are working with regulators to sort them out very diligently, focused on them, but, no, I don't think they are part of a pattern or that there's any broad conclusions to draw from them.

Okay. Thanks a lot.

Your next question comes from Kemp Dolliver with Avondale Partners.

Thanks. I'll let the menagerie stay in the cage for now.

I appreciate that.

Great. Steve, on the acute care business, a couple of questions as it relates to self pay and bad debt. What was the increase or approximately, what's the self pay mix as a percentage of, say, admissions at this point?

I'm not sure I have it right in front of me, Kemp, but I think what we've been running, pure self pay admissions in the sort of high-single-digits. That sort of 7.5%, 8.5% for a while, and I think the numbers in Q1 are definitely in that range.

And that's a percentage of admissions?

Just total admissions.

Okay, great. So the acute care bad debt for the quarter came in roughly where?

At 11.8% of revenue.

Great. Thank you. And also, just looking at some of the statistics on a sequential basis in the Behavioral business, even though you added beds, it looks like you might have trimmed some beds or trimmed some facilities because it looked like you had 82 facilities instead of 84. Anything going on there in terms of some consolidations or the like?

That's exactly it. In the one case, where we closed two facilities, which is what is reflected in the data that you're suggesting, in one case, we combined one of these wilderness schools with another one that was geographically proximate, just because there is not enough business to support running the two.

And then in another case, we closed a very small facility which lost a single contract that it was highly dependent on, and really sort of rendered it not viable at that point. But, again, we'll just stress that these were two very, very small facilities that we closed.

Okay, good. And then just finally on the Behavioral strength, it was apparent that this was all but practically industrywide in the quarter. So I just wanted to be clear, you saw strength in commercial and probably Medicare in the Acute business? Was their anything else that drove that?

No, other than as I suggested, I think at least in our case, Kemp, we are seeing it in particular in facilities that had added capacity in the last few years, and I think we're seeing the normal sort of ramp up, trajectory ramp up in the filling of that new capacity, and in some facilities that have opened in the last two or three years as they ramp up on their normal trajectory.

Okay. Great. Thank you.

Your next question comes from Justin Lake with UBS.

Thanks, good morning. One question on the -- on the new capacity put on line here, Steve. It looks good for 2010. Can you give us idea of what is in guidance as far as contribution from these facilities?

I think when we gave our guidance a couple of months ago, we said that what the guidance presumed as to our three -- and I think what we are hopefully talking about -- are our acute capacity, Summerlin, Texoma, and Palmdale, which has yet to open, that our guidance presumes they would be essentially neutral to 2010 earnings. I suggested that coming out of the gate in Q1 Summerlin and Texoma were a bit dilutive. But we're going to sort of, I think, at the moment still stick to the idea that by the end of the year they ought to have sort of a neutral contribution.

Okay, and that ramp-up is going -- I know you had expected it to start slow because of the economy. Is it growing as expected or better or worse than that slow start?

I think in terms of our sort of our revised expectations, as I suggested, three or four years ago when the contemplated these projects, first contemplated them, I think we certainly didn't presume that we would be opening them in the teeth of the worst economic environment we have had in 80 years. So I think we projected a much faster start.

But in terms of where we were at the end of last year, the beginning of this year, as we thought about our guidance and our budgets and projections, again, they are off to -- we wish they were starting a little stronger, but I don't think they are well off our expectations.

Okay. And just to think about longer term, you put something like $400 million into these facilities, if I'm rounding the numbers correctly. Is that about right?

That's correct.

And what's the typical cash-on-cash return? If I think like two to three years out, how much growth should these three facilities generate for you?

Look, I think as we have talked about before, we are looking at -- we usually have these conversations in the context of acquisition multiples, but we are looking for returns on EBITDA of six or seven times at least. So I think that over an extended period of time, that would be the sort of EBITDA return on a $400 million investment that we'd be looking for.

Okay. So something in the neighborhood of, say, $60 million or $70 million?

Yes, again, I want to stress that's over a fairly extended period of time, but, yes.

Got it. And then just my typical question and then I'll let you jump, as you think about the CapEx now, once we get the last facility up and running in the summer, CapEx should decline to what? What's the number for this year? What are you thinking about next year? And is their anything new in the pipeline that has come up since the last quarter that we should be thinking about that might (inaudible) there? Or will CapEx continue to decline in the Acute business?

Last year, meaning 2009, we spent about $385 million of CapEx. We guided to a number for 2010 that would be about $50 million lower and we've preliminarily sort of indicated that in 2011 we'd expect that number to again be another $50 million lower. You can see from the $60 some odd million of CapEx that we had in Q1 that we are spending at a slower rate than our guidance.

I think that's a reflection of the fact that not only, Justin, are there not any newly contemplated projects that we are undertaking at the moment, but even some of the ones that were in our guidance we're approaching very cautiously, thinking about carefully.

I suggest or I suspect that we will still do most of those projects, but as I think with most providers in this environment where we are taking a more cautious approach to our capital spending, and so, if anything, and I think our first quarter spend rate reflects that, we're spending at a little bit slower rate than we originally anticipated.

Okay. And given the [deposition], either we're going to see share repurchases likely start to increase so you will do something else with some of these animals that have been discussed?

I mean, as I think Kevin was asking before, certainly our intent is to put more of our capital to productive use rather than just continue to repay debt at this point.

Makes sense. Thanks a lot, Steve.

Your next question comes from John Ransom with Raymond James.

Hi, good morning. I was trying to work in hyenas into this, but I wasn't able to do that. Can you talk about two things? Any updates you have for the fiscal 2011 state budgets in Nevada and Texas and any other states where you have some concerns? Can you give us your best guess as to what Medicaid increases or decreases might look like?

In Nevada, the state legislature, which typically only meets every other year, had met to contemplate some further Medicaid cuts. We've seen some already in Nevada. Chose not to implement at the time.

But, again, think in this environment, just because the state passes on Medicaid cuts, I don't think it's appropriate to assume your sort of in the clear for any period of time. They can resurrect those conversations at any point in time.

In Texas, which frankly is a far more important state to us from a Medicaid perspective, I think the state is still contemplating some Medicaid cuts in their next fiscal year, which begins in September. I think, I'm doing this from memory, John, but I think our own guidance presumes that there is like a 1% cut come September of 2010. But, again, I think Medicaid cuts are on the table in virtually every state in the country, and certainly every state in which we operate.

I think at the moment, particularly with the expectation that there may well be an FMAP extension, that some of the states are waiting to see how that develops. But I think it remains a risk, maybe the single biggest risk that our businesses face in the next year or two.

So do you think -- I know this is speculative -- but how are states going to handle this? Because our understanding is that Congress is going to probably exit for the summer, or almost certainly exit for the summer without having passed the 2011 budget.

So is it your opinion that the states will act when they have a kind of a first half, second half budget or will they presume that FMAP will be there and then cut from there or will they presume that FMAP won't be there? Have you seen any consensus about how the states are going to handle this? Because the FMAP expires December 31 which kind of cuts these states right in two.

Right, right. You know what, John, I have kind of read it both ways. I have read that there are states that sort of assume that FMAP will be extended regardless of how that's timed, et cetera, and others that are taking the opposite approach that they have to presume that it won't be enacted accordingly.

So I don't know that I can make a general statement about how the states are behaving. But, again, I would just say that based on our lobbying efforts throughout the country that we just find that states are extremely anxious about their budget situations. And like I said, I just think this is going to continue to be a risk.

It's not going to recede, and we're going to be talking about this unfortunately next quarter and the quarter after that and for sometime, I think, until the economy really starts to improve measurably, which I suspect will be a while.

Okay, thanks. And then, secondly, just on the general topic of quality, you have had some headlines this quarter that I'm sure you would rather not have had. And I recall some of your scores on the Medicare compared data, particularly in Vegas, weren't maybe as good as the industry average.

Is their something about quality that you're thinking about differently or do you think some of these general scores that we see don't capture the true picture?

I think it's a difficult question, John, to answer in sort of a two-minute sound bite. I think that Medicare with its core measures, with HCAHPS, is starting to scratch the surface of having good quality data that can be measured across a large spectrum of hospitals. And you're right.

Not in every case do we reflect at the highest levels, although for the most part I think in our core measure reporting now, we are at or above the national levels, and we have certainly shown dramatic improvement. This is all on the Acute side. I think there's a real lack of national reporting on the Behavioral side, although they are also moving in the direction.

So the only thing I can say is we're very focused on it. I think that some of the individual and sort of discrete situations that have arisen, I think I said this in response to a question that I believe it was AJ asked before, I don't know that you're easily able to draw broad conclusions from that.

But the only thing I can reassure the folks on the phone here is that quality for both of our business segments remains a very, very high and determined focus of ours, and we think that high quality providers are going to be the only ones that are going to be successful into the future. So we are determined that every one of our facilities fits into that category.

And I guess JCAHO is collecting data for the Behavioral -- they have seven core measures, I believe. How do your Behavioral hospitals look on those JCAHO measures? And do you know if JCAHO is still pointing toward making those public for all facilities second or third quarter this year?

As far as I know, John, that's still the plan. We actually had a number of people that sort of served on the committees and things that helped to develop those measures. But I'm not the biggest expert on that.

So I probably don't have the most up-to-date information. But that's still my understanding is that we will start to see that sort of industrywide reporting that we've now seen on the acute side for a number of years, we're going to start to see that in behavioral very soon.

And how do your Behavioral hospitals look on those core measures? As you have started publishing them internally and measuring them have the scores moved up?

Again, and I think this is also true on the Acute side, right now all we can do is measure against ourselves, and we do do a lot of actual measurement against ourselves and I think are showing steady improvement. But until the data gets published sort of nationally, it's difficult for us to know exactly how we stand from that perspective.

Got you. Okay. Thank you.

Your next question comes from Gary Taylor with Citigroup.

Hey, Steve. Good morning. Sorry to keep you on the horn here. I'll be quick.

A couple of things on the balance sheet, looked like DSO even though it was down one year-over-year, crept up a day sequentially. Is that just timing? Any significance to that?

I don't think so. I think we had -- from our perspective strong cash collections in the quarter. Nothing about our receivables performance that in my mind would create any concern in the quarter.

Could you give us the allowance now or wait for the Q?

Yes, we're going to have to wait for the Q only because I don't have it in front of me, Gary.

Okay. And on the cash flow, looked like a big jump in deferred tax as a source of funds this quarter. Is that just timing as well or anything systemic?

No, I think that's absolutely just timing.

Okay. Everything else was answered. I guess maybe just quickly I'd go back to Southwest Health System, and I think having seen pretty well run companies, such as yourselves, occasionally run into these types of issues, and the issues almost always being resolved short of any sort of termination, I guess. Can you just -- we're all reading things in the paper and so forth.

Can you give me maybe the very succinct version, or the UHS version of how you ended up in this position there?

Sure. And, Gary, by the way, if I had kind of a perfect answer to this question, it's almost a self-defining sort of thing. We wouldn't be having the conversation. If I had known exactly what had gone wrong in this situation, we would have fixed it a long time ago.

The situation began rather routinely a couple of years ago with some deficiencies noted that we had a number of surveys and re-surveys, corrected some deficiencies, other new ones arose. Last summer we entered into a specific sort of compliance improvement agreement with the government. And I would say at least in this last stage that was probably a significant mistake in judgment in the sense that probably the most important aspect of that agreement was that we hired an outside monitor.

We actually hired two different firms to come in, at fairly considerable expense, monitor our compliance activities, et cetera, report to us, report to CMS. We were getting fairly favorable reports from the monitor, and I think probably were sort of misled or didn't appropriately interpret those because when CMS actually came in to do their full survey in January, they found the deficiencies and reported on the deficiencies that sort of leave us in the position we're in now.

So with the benefit of hindsight, which as you know, is always 20/20, we are taking a much different approach in this phase of the process and dedicating a much larger number of our own resources both at the corporate level and at the hospital level. Management is much more focused on the issue and I think we're extremely hopeful that our dedication and focus will properly address the issues in this go around.

Although we earnestly tried to address them before, obviously, we have to conclude that we didn't do it in a way that satisfied either the state or CMS, but are extremely determined that we will do so in this round. And as I indicated in my opening remarks, hopefully working collaboratively with the state and CMS to do so, that's absolutely our goal.

How much impact is this having on the kind of the run rate business there? On the current quarter just occupancy and volume?

The interesting thing is at the revenue line, the facility continues to perform well. It is still in great demand, or the two facilities are in great demand in their community. Our revenue growth is still strong. We certainly do have some extraordinary expenses and will continue to have extraordinary expenses, although I don't really think it's moving the needle from a consolidated perspective, but these are two facilities that, again, I will say run at very high occupancy levels and are in great demand in their communities.

So it makes our commitment to fix the current issues and to sort of get them focused on providing care and servicing their community rather than dealing with these regulatory issues. It just raises the urgency to do that even more.

Okay, thanks a lot.

And there are no further questions at this time.

Okay. As always, we thank everybody for their time and we'll talk to everybody next quarter.

Thank you, ladies and gentlemen, for your participation in the Universal Health first quarter 2010 conference call. You may now disconnect.