環球健康 (UHS) 2010 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the UHS second quarter 2010 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Mr. Steve Filton. You may begin.

Thank you. Good morning. I'm Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the second quarter ended June 30, 2010. As discussed in our press release last night, the Company recorded adjusted net income per diluted share of $0.68 for the quarter, compared to $0.72 during the second quarter of 2009, as calculated on the supplemental schedules included with last night's press release. We are maintaining our previously announced guidance for the full year with earnings per diluted share expected to be $2.45 to $2.65.

During this conference call we'll be using words such as believes, expects, anticipates, estimates and similar words that represent forecast projects 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.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. On a same-facility bases in our Acute Division, revenue increased 2.2% during the second quarter of 2010. Adjusted admissions to our hospitals owned for more than a year were up 1.9% for the quarter. On a same-facility basis revenue per adjusted admission increased slightly over last year's quarter.

We define operating margin 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. The impact of the items included in the supplemental schedules are not included in our divisional operating margins. On a same-facility basis operating margins for our acute care hospitals decreased to 14.2% during the second quarter of 2010 from 16.9% during the second quarter of 2009. The margin deterioration resulted maintaining from net revenue pressure experienced at our hospitals, most notably in Las Vegas but throughout the acute care portfolio as well.

The revenue pressures were caused primarily by declining commercial payer utilization and an increase in uncompensated admissions. Our acute care hospitals provided charity care and uninsured discounts based on charges and established rates amounting to $190 million and $181 million during the three-month period ended June 30, 2010 and 2009 respectively. On a same-facility basis, revenues in our behavioral health division increased 5.5% during the second quarter of 2010. Adjusted admissions to our behavioral health facilities owned for more than a year increased 4.7% during the second quarter and revenue per adjusted admission was flat compared to the comparable prior-year quarter. Operating margins for our behavioral health hospitals owned for more than a year increased to 27.9% during the quarter ended June 30, 2010, as compared to 25.9% during the comparable prior-year period, primarily due to the powerful operating leverage created by the robust admission growth. The continued strength of our behavioral business reinforces our enthusiasm for the previously announced acquisition of Psychiatric Solutions Inc. That transaction continues to progress and we still expect to close it in the fourth quarter. Our cash flow from operating activities was $83 million during the second quarter of 2010 as compared to $149 million in the second quarter of 2009. We attribute most of the decline to the timing of working capital items. Our accounts receivable days outstanding remained unchanged at 42 days during the second quarters of 2010 and 2009. At June 30, 2010 our ratio of debt to total capitalization was 32% and the ratio of debt to EBITDA was 1.3 times. We spent $59 million dollars on capital expenditures during the second quarter. Included in that number were the construction costs related to a new 171-bed hospitals in Palmdale, California, which is scheduled to be open in late 2010. We will be pleased to answer any questions you have at this time.

Your first question comes from the line of Tom Gallucci.

Good morning. Thanks, Steve. Just wondering a couple of quick things. First, on the payer mix trends that you saw, I guess based on the results so far, how are you thinking about your expectations for the second half and how does that correlate how you are looking at your operating infrastructure and cost side of the equation going forward?

Tom, obviously we certainly are no more adept at forecasting in this difficult environment than most, but certainly from a payer mix perspective we saw decline in the back half of last year and as a result the comparisons become easier in the back half of the year. So from that perspective, we are hopeful that that provides some relief to us.

On the other hand, we remain in some difficult markets again, most notably Las Vegas. We were disappointed in Las Vegas that last month, unemployment rates were announced in Las Vegas and they are now over 14%. So that is a very challenging environment for us, and one in which, at least as measured by the unemployment rate, we haven't quite hit bottom yet. From an operating cost perspective, as you know, we did -- our operators did an exceptional job in the first half of last year, anticipating a very difficult operating environment, cutting cost and constraining cost. I think this year, their expectation was that the environment was going to improve, measurably, and I think since it did not, we are taking another second hard look at our whole cost structure, and I think our expectations are that in the back half of this year there are some operating costs, salary- and supply-type initiatives that we can employ to ratchet our expenses down a little bit, given this very soft revenue environment that we are in.

Right. And obviously in terms of costs, bad debt been a big wild card, had its ups and downs. Do you have any insight on how you are thinking about that in the second half?

I mean, again, I think what drove the uncompensated care in total, meaning bad debt and charity care and uninsured discount, was an increase in uninsureds. It's a double whammy. We have an increase in uninsured at the same time as we have a decrease in commercial admissions, and it's a little bit of a self-fulfilling dynamic in the sense that bad debts and charity care rise, and as a percentage of revenue, those numbers look even more material because net revenue is softer due to the lack of commercial admissions.

It's a bit of a conundrum that I think, again, is not going to ease much until we start to see unemployment rates in some of our markets level out, and while we have seen that in a few markets, there still are some where that has not been the case.

Okay, and then last one. Are you in a position at all to discuss any of the nuances that the FTC has been interested in on the Psych deal?

We're not going to discuss specific markets. We do expect to receive our second request from the FTC late tomorrow, and that's expected. I think we feel over the course of our initial filing, which at this point was almost two months ago, or just about two months ago, we've made a substantial amount of progress with the FTC. It's been an open-ended, collaborative process. We've been answering their questions and providing a lot of information, and we hope and feel like we've been narrowing the scope. So we are looking forward to seeing that second request, having a better sense of what lies before us, and we'll move from there. But we are very focused on this and we are focused, as I indicated in my opening remarks, on closing this deal in the second quarter. I think our best guess at the moment is late October-early November but obviously that is not wholly within our control, but we are very focused on it and as soon as we get the second request we going to start moving forward with responding to that.

Thank you.

Your next question comes from the line of Adam Feinstein.

Hi. Good morning. I guess, Steve, maybe just as a starting point you, you were talking about the payer mix. Could you just quantify that for the quarter, however you guys track it? I don't know if you want to look at uninsured admid as a percentage of total, but just some way for us to better understand the payer mix in the quarter.

Sure. I think in the quarter, Adam, our uninsured admissions were rising at a rate of probably 2.5% to 3% and our commercial admissions were declining about the same rate of about 2.5% to 3%, and that gap was probably as large as we have seen it in some time, which, again, I think is what contributes to both the high level of bad debt expense as well as the relatively soft net revenue per adjusted admission growth that we saw.

Okay. And just back to the net revenue per adjusted admid, how are you guys thinking about the pure pricing aspect of that? I guess with the uninsured discount skewing the numbers, as you just mentioned, on the payer mix. So how are you guys thinking about pure pricing?

Hopefully I'm answering the question you are asking, Adam. I think our commercial pricing remains sort of in the neighborhood that we expect, kind of that 6-percent-ish neighborhood, and so I think that the decline in our pricing-per-unit or net-revenue-per-unit is much more a function, of not pure pricing, in using the term I believe the way you intended it, but a shift in -- as commercial admissions decline, our Medicare admissions remain fairly constant but where we see the increases in both uninsured and Medicaid admissions and obviously the commercial Medicaid and uninsured trends all continue to drive that net revenue number a little bit lower.

Okay. Just on the cost management side you guys have done a great job there. You mentioned in response to the first question, you are looking over a few things for the back half of the year. Just want to see if you can provide any more details, not necessarily looking for cost-savings in terms of a number but just want to better to understand the initiatives there. I know you guys just implemented a new ortho program, so just curious if that was one of the things you were talking about and just what are some of the other opportunities?

So on the salary line, across the portfolio, we implemented a headcount reduction in either late second quarter early third quarter. Obviously none of that is reflected in Q, but hopefully the impact of that will start to be felt in Q3. And on the supply side, as you suggest, we have a number of initiatives in the high-cost position preference areas like orthopedics and cardiology. I think we've been a little disappointed at the pace in which we were able to move in those areas and I think we are exploring alternatives to see what we can do to -- I think we absolutely believe in the fact that there are savings opportunities there, and it's a question of how we can implement them and accelerate that implementation as quickly as possible and we are focused on that as we move into the back half of 2010.

Beyond that, Adam, I would tell you that every single one of our hospitals has a profit, sort of recovery plan, each one is different, getting down to literally individual expense items and our operators sort of track that literally every month and track the progress. We are very focused on the fact that this is a very difficult net revenue environment and as long as it is, we have to remain extremely diligent from an expense perspective.

Okay, and just my final question. Maybe this one is for Alan. But just -- I wanted to just ask about -- sow with the PSYS deal coming up, just in terms of managing the integration and just overseeing the process, just curious to hear your thoughts there and just in terms of any incremental feedback, I guess in terms as you see the opportunities, you guys had a conference call back in May talking about it. Just curious if you have any updated thoughts in terms of the longer-term opportunity here?

We have a transitional team that meets frequently. We think it's going very well. We have been very pleased with the facilities that we visited. They have a good company, and I think that it's fair to say the people in the field are very positive and looking forward to working with us, and many of them, the ones we met have been very capable. So we are very positive about the whole situation, and we are very anxious to close the transaction.

Thank you very much, Alan.

Your next question comes from the line of Darren Lehrich.

Thanks. Just to follow onto that last point Alan made. Just in terms of the overall access, has it been adequate in terms of what you'd need to do the proper type of integration planning?

Darren, I think as we mentioned, in -- when we announced the transaction and said that our due diligence was somewhat limited because of the competitive and FTC concerns, that dynamic remains in place. In the post-announcement period, we are not getting access to detailed level or facility-detailed level financial statements and that sort of thing, although certainly the broad indications we have is that the business, the underlying business remains strong. We are doing the -- as Alan kind of alluded to, we are doing visits and meeting with people and certainly we've had access to their corporate offices and have visited there on a number of occasions and a number of people have done that.

So we are making progress, but I think by definition, and we've said this before, it's going to be difficult for us to either comment or conclude on a detailed level differences in our margins or that sort of thing, frankly, until either we clear the FTC hurdle or we close the transaction, both of which should occur in relatively close proximity to each other.

Okay. That is helpful. Another behavioral question if I could. The margin here in this period I think is historical high as far as I can tell on a same-store basis. Could you just maybe put a little bit more context around that? That sticks out as being an unusually strong result. Was there any unusual type of item in the period, or would you say that this is now sort of the new bar here?

I mean I think that, as I indicated in my opening remarks, the business model for this business does reflect powerful operating leverage when you have the 5.5% same-store admission growth that we demonstrated this quarter. I'm not positive or certain by any means that that number can be sustained. I think it's a mix of a few things, Darren. I mean there is some speculation is that we are getting benefit from the mental health charity legislation That's not something that we can say with any great level of confidence or precision, but certainly I've always said that we thought it would be beneficial to us.

We also clearly see the benefit in those volumes of newly opened capacity that we have opened in the last couple of years. We see the maturing and the evolution of some facilities. So in the second quarter we have particularly strong performance in our newly opened Orlando facility that's been open for maybe a year now, and our Denver facility that's probably been open for going on two years, and we continue to see those kind of facilities mature and evolve.

So I think that, fundamentally, very sound business. When you are getting again the leverage of 5.5% admission growth, I think that margin expansion is available, particularly in an environment where cost inflation is pretty low. But I mean it's still is an environment where we have lots of competition and I can't guarantee that we can put up those kinds of numbers every quarter.

That's helpful. One question I have just as it relates to parity would be with the non-quantitative treatment limits, looks like the rules were a little bit better for providers and maybe would require less utilization review, administration, perhaps infrastructure, perhaps in places. Is that something that you guys are focused on or think could be helpful? Just wanted to put that into perspective.

I think your characterization is a fair one. I think that the clarification, interpretation of the rules, we felt largely came out in our favor as providers and will be beneficial to us. Again, difficult to quantify the precise impact of those favorable interpretations, but the rule or the law itself I think was favorable to the provider industry, and I think the interpretation and how the law is to be implemented has been favorable as well. So I think it's been a real positive for the industry.

Great. My last question here just as it relates to the acute care business, specifically. What was the uncompensated care ratio in acute? I'm sorry if I missed that but can you just talk about what it was in the period versus last year?

So in the press release -- I'm not sure if I'm answering the question you are asking, but we do disclose that the total amount of charity care and uninsured discounts was $190 million in the quarter compared to $181 million in last year's second quarter.

Okay. That's great. Thank you.

Your next question comes from the line of Gary Lieberman.

Thanks. Good morning. I was hoping maybe you can share with us any sense that you have of what the FTC is focused on or even just the framework of how they are going about to determine which facilities this is must force a diversiture on.

I think, Gary, you got to the crux of the point. From the outset, I don't think that they were ever really challenging the transaction on a macro basis in terms of too much concentration on an overall company basis. It's always been about individual markets. I think the process starts with just physical or geographic overlaps. We provided a lot of market share data in those markets where there are geographic overlaps, trying to demonstrate that where we may be drawing from different populations than our PSI counterparts, markets counterparts. Also trying to demonstrate what other competition exist in those markets. And we have again, I think, starting with a very broad universe of potential overlaps, I think we believe we've narrowed the focus considerably by providing that level of information. We'll know for sure, to some degree at least, when we get our second request.

Okay. Any sense of in terms of are they are focusing more on concentration or barriers to entry? Or -- just how they are looking at that?

I think they are looking at all those factors, Gary. It seems to me that probably their most significant concern, there's nothing new or unique about this, is the ability of a provider to exercise significant pricing leverage. And, again, I think in certain markets we've been able to demonstrate that we don't necessarily have payers with whom we are negotiating, if it's the government or similar payer, et cetera. But I think that everything they look at, whether it's market share or in-proximity of competitors and all those factors I think mostly get back to the issue of whether a combined company or combined company in a market can exercise undue pricing leverage.

Okay. I don't know if you put a number out there, but in terms of a best guess, are you wanting to give, in terms of number of facilities you think they might ask you guys to divest?

I think hat we've said in making the original announcement is that we did a number of sensitivity analysis based on best guesses of facilities that might have to be divested and varies multiples and whether that sort of a requirement would have a significant effect on our accretion estimates, and I think we concluded and said back at that time that we didn't think so, and I don't think our view of that has exchanged at all.

Okay. Great. Thanks a lot.

Your next question comes from the line of AJ Rice.

Yes. Thanks. Hello, everybody. Just a couple of things. I appreciate the comment about managed care pricing trends. Just wondered though, Steve, is there any early rate on 2011? Anything changing in your earlier discussions, and do you have a figure for roughly how much of your business might be recontracted at this point for next year in the acute business specifically?

I would say, AJ, that probably somewhere between one-third and on-half of our 2011 contracts are done at this point.

Okay. And anything different in the discussions?

No. Interestingly not, I don't think we are seeing dramatic -- and I think I was talking in response to Adam before in terms of this pure pricing issue, I don't think we are seeing a tremendous pressure on our contractual pricing. We've mentioned before in calls that in some markets, most notably Las Vegas, from a day-to-day perspective, we are seeing some pressure on length of stay, but I can't say that that's pervasive or that I think is terribly material throughout the portfolio, but I think we are seeing managed care companies tightening a little bit in their day-to-day utilization review and patient management. But I don't think it's having nearly the effect we're seeing in just the shift in payer mix that we talked about earlier in the call.

AJ, one factor that you want to look at or think about is that it's a co-pay situation. It's not that much the contracts and the percentage, but where people have co-pays and they are not working or they are concerned about continuing to work, they seem to defer going to the hospital and activity. And that's tied, I would say, directly to the economic situation where they do have coverage, they choose where they can not to use it.

Interesting. I know last year when you were feeling some pressure from the Las Vegas market, you had McAllen offsetting it, that seemed like it was doing well. I know you also mentioned GW. Is there any other away-from-Vegas markets that either performed exceptionally well and are worth highlighting or alternatively maybe are pressure points? Maybe give us any flavor there?

Yes, AJ, look, I think as we mentioned in our remarks, the payer mix trends, I think were most acutely felt in Las Vegas but I think largely were reflected elsewhere in the portfolio. So I don't know that any of our markets are immune from that, if you will. You are absolutely right in your characterization that I think, in many respects, the South Texas, or McAllen market, really helped to provide a pretty hefty offset to Las Vegas in 2009. I think our guidance for 2010 assumed that it couldn't continue to improve at that rate. And in fact, and I think we mentioned this in Q1, we are starting to see our markets in Texas, particularly those South Texas markets, the recession catching up with them in 2010. They -- I think Texas largely dodged the economic downturn in 2010 and we are starting to see those impacts there. So some of those payer mix dynamics are present in that market as well, and certainly we are not seeing the-- a stronger performance in McAllen 2010 as we did in 2009. But I think generally, most of the markets are feeling the same dynamics. Some obviously are performing better than other, as always, but nothing that I think is worth noting beyond what we've talked about.

Okay. Last question. When you think about health reform, obviously for the hospitals, a lot of that is way out there 2014 and so forth and some of the benefits, but I guess there's a couple of things that are coming in the next six to nine months. We'll see plans reset for next year and so forth, like the lifting of the lifetime caps, the ability of 26-year-olds to get coverage on their parents plan, the elimination of high-risk pulls. What are your thoughts about those and the impact they might have and how you think about those as you look in the next two to four quarters?

Look, AJ, I think we will obviously welcome help anywhere we can get it, it and I think maybe your own research has indicated that maybe those -- the accumulation of those individual mandates result in another $1 million dollars of -- one million covered lives, rather. That is all a good thing. Obviously I think to some degree the challenge is that, it probably doesn't move the needle until the economy starts to improve at the end of the day because, as Alan mentioned, it's a double whammy. Not only are we facing a greater number of people without insurance who are either relying on Medicaid or going without all together, but even those with insurance we believe are -- at least around the edges and as to the most discretionary procedures, sometimes opting to defer or to postpone procedures, hard to imagine that dynamic changes dramatically until we see more improvement in the economy, both nationally and these difficult markets.

Okay. Thanks a lot.

Next question comes from the line of Christine Arnold.

Hi there. A couple of questions. First, could you comment on the Medicaid outlook and particularly as you think about the behavioral health business. Because I think pro forma you are probably going to have about 18% of revenue in that segment.

Christine, I think we've said for awhile now that in our behavioral business, and obviously in the combined business going forward, that in the short-term for the next year or two, that Medicaid pricing remains our biggest challenge, and I think that is still the case. I think we feel like a number of states are taking a wait-and-see attitude as far as the FMAP extension goes before deciding what they are going to do about further Medicaid cuts.

We're absolutely -- I was commenting to AJ about the day-to-day changes we are seeing in utilization review from commercial payers, but we are certainly seeing that from Medicaid payers, as well, squeezing us on length of stay where it's -- we have prospective reimbursement, limiting admissions on the behavioral side, particularly in the residential business. So we are seeing those dynamics and I expect they'll continue again. I can't see a lot of relief on that issue until we start to see some measurable improvement in the economy.

Do you think that the flat pricing in behavioral remains the same or gets worse in 2011?

So I think we went into 2010 with the notion that Medicaid pricing would be flat to maybe down 1%. I think that if FMAP expansion or extension doesn't pass in 2011, we run the risk of seeing that number come down another percentage point or two. So now we are down 2%, down 3% in terms of Medicaid pricing.

My gut reaction is it will be difficult or unlikely, I should say, for it to go beyond that because I think once Medicaid pricing drops below that, it starts to create real access problems and I would think in some markets, access crisis, et cetera, I don't think the state government, despite their difficult financial situations, are willing to encourage.

How hard is it to shift your mix within behavioral, take fewer Medicaid and because of parity, fill those beds with commercial.

It's really a market-by-market issue, Christine. We certainly are -- look at of our markets and all of our facilities and are making those decisions, and, in fact, I think we have three sizable RTC programs currently that we are in the process of converting to acute care. But it depends on a) what the regulatory environment is, and in some state that requires a CON that we may or may not be able to get. And in all locations it certainly is a demand issue. I mean we can't just snap our fingers and replace RTC patients with acute patients if there's not a demand for acute patients.

So we review the regulatory environment in every state, we review, obviously, how we are doing currently, because in some locations our residential facilities are doing just fine and then we also review what we believe to be the potential demand for new acute care beds in making those decisions.

And my final question is, I am struggling a little bit with the bad debt projections and looking historically and trying to move forward. Your charity and discounts only increased $9 million year-over-year and yet your bad debt was up over $20 million, whereas that dynamic in the first quarter really didn't hold, had less of an increase in bad debt than an increase in charity and discounts. Can you help me think through the other factors that might be leading indicators for this? Is it inability to collect deductibles and co-pay? Is it timing difference?

Christine, I think we have always taken the position, and certainly internally, we've always looked at uncompensated care in totality as bad debt and charity and uninsured discount together. I would like to tell you that the classification of each of those buckets at the facility-level is absolutely precise and pure and perfect but it's not. And, as you know and as you indicated, you struggled with it, and we've have flip-flops between the categories over the years that, in all honesty, we cannot fully explain, even with the benefit of hindsight.

As I said, as always, we look at it in total and in total, I think we tend to believe and seen that that is reinforced, that it is tied to the general condition of the economy. We were not surprised unfortunately that as our uncompensated care rose in Las Vegas that it was coincidence or commensurate with the rise of unemployment rate. That all seemed unfortunately consistent with what our expectations would be. So I'm not sure that I can give you fabulous guidance as to how to think about bad debt versus charity care. Our hopes are that in total uncompensated care will start to level out as the national unemployment rate levels out and it levels out in these particular markets where we've been hardest hit.

Thank you.

Your next question comes from the line of Kevin Fischbeck.

Okay, thank you. I just wanted to clarify something. At the beginning you indicated that the psych business trends had given you more confidence in the deal to acquire Psych Solutions. I just wanted to confirm that you -- when you say that, you are basically saying that you don't have up-to-date numbers on Psych Solutions but your own trends keep you comfortable or are you also seeing trends on a more real-time basis from Psych Solutions on a near-term basis that also confirm that?

It's the former, Kevin. I think what I said in my remarks is after essentially disclosing what are record operating margins in our behavioral business, it certainly makes us feel very good about the fundamental strength of the behavioral business. But no, we don't have any sort of detail, financial statement or even overall financial statements for PSYS.

Okay, that makes sense. Usually the two numbers are pretty close then, that makes sense. I guess, going to the acute care business, last quarter you highlighted, I think I dragged from the ramp-up of some recently opened beds on that side, but you didn't mention that on the discussion this time. Can you give an update there?

I don't know that it's a drag from the perspective of really impairing profitability. The two big projects that opened so far this year was right around January 1, The Texoma replacement facility opened, as well as the new patient tower at Summerlin in Las Vegas. Actually at Texoma we are seeing modest but continued gradual improvement in our earnings in that market. At Summerlin, it's part of the overall difficult Las Vegas umbrella. We have been very, very slow to fill that new capacity.

So I think what I was commenting on in terms of a drag is you'll see our occupancy rates decline a little bit as that new capacity, particularly at Summerlin, has come on board and we've been unable to fill it. And from a net income, there are some capital costs, obviously, that have been added in 2010 that we've been unable to entirely offset by increased operating income, but it hasn't been a drag on our operating income.

Okay, that's helpful. And you have provided some disclosure on Vegas but I guess historically, you've also talked about volume trends. I didn't hear how Vegas was trending from a volume perspective and how you feel you are doing as far as like a market share in that market.

I mean our volume trends in Vegas remain pretty consistent with our portfolio trends. They've been, certainly for the last few quarters, moving in sync with our overall portfolio trends, which means that our admissions are flat -- relatively flat, our adjusted admissions are up slightly. I think those numbers give us reason to believe that we are definitely not losing market share, and we actually have pretty current market share numbers -- that is a market where we get pretty current market share numbers. So even though I don't have this quarter's market share numbers and the most recent data that we have it absolutely confirms the fact that we are holding on to our market share and maybe even increasing it slightly. So I think it's much more of a function of just the softness in the market itself, and again, this is a market where I think the issue is really payer mix as opposed to overall demand.

Okay. Last question. If you could just give an update on the bed expansions that is you are doing in the psych business? I think you were looking for 400 beds this year, given the volume numbers, has that changed at all? Are you looking to accelerate that?

No. I think that, again, internally, or from the UHS side of it, we still continue at that pace, although we continue to evaluate new opportunities. And I think frankly one of the first initiatives we'll undertake when we close the PSI transaction is to take -- do that same top-to-bottom review of their facilities that we've done of our own to see if there are opportunities there as well. I mean, Psych Solutions has had its own relatively aggressive capacity expansion program in the last few years, but I think once this transaction has been announced, they are largely focused on finishing the project underway and have not undertaken a lot of new projects. So we are going to take a quick look and see whether there are some new opportunities in their portfolio, as well.

That's helpful. Thank you.

Your next question comes from the line of Whit Mayo.

Hey, thanks. Steve, looking at the acute care segment, the EBITDA looks to be down maybe 10 -- 9% to 10% year-to-date. Just wanted to get your updated thought about maybe what your internal budgets may look like now for that particular segment. I think initially you may have contemplated flattish EBITDA and that may appear to be a little tougher now, so just maybe an idea of what you expect to see.

A couple of things, Whit. We've conceded in both first and second quarters that the acute performance was not meeting our own expectations. I don't think that is a big surprise. I think your recollection is right. I think we knew this would be a difficult year. We sort of assumed that acute EBITDA would be relatively flat. Again, probably the most challenging dynamic has been the payer mix and the slow ramp-up of the new capacity that we've already talked about. I will say this, I did say this earlier. What we also knew is that the comparisons become a lot easier in the back half of the year. So in that sense that should be helpful.

Okay. So the rate of decline is moderating a little bit?

We hope.

One question with Palmdale with the hospital set to open up in the next few quarters. Do you have any idea as to what -- just ballpark, as to what the drag may be for 2011 or do you contemplate that being break-even for the year?

That's a hospital where -- it's a replacement facility. So there's not really a lot of opening cost, if you will, et cetera, and there's not really a significant ramp-up in the sense that, at a minimum, we would hope to transfer all of our existing business over to Palmdale, and the reality of it is that we believe it's an accretive -- certainly at the EBITDA level, it's an accretive transaction for us. I mean we had forecast that in 2010, at a net income level, it would be a push. With 2011 coming on, if we open late in 2009, I would think that even at the net income level our hopes would be that it would be an accretive transaction for us in 2011.

That's helpful. Maybe one last question just with regards to the PSI transaction. Any updated thoughts, Steve, around the financing and the credit markets now and how that stands with your initial expectations?

I think that, in general, our message about the PSI transaction today has been what I would describe as confirmatory in nature. The basic points that we made two months ago when we announced the transaction was that we expected to close it in the fourth quarter, which we still do; that we expected a level of synergies that we still think are absolutely achievable; that there's a level of accretion that we still think is achievable; and from a financing perspective, that we felt like we could finance the whole $4-plus billion package or financing need at an approximate interest rate of about 7%, and we have done a lot of work in the interim to secure commitments on the components of that capital structure, are fully committed and a little over-subscribed so we are actually in the process of allocating amongst our potential lenders. And at the end of the day, I think we feel comfortable that we are still well within that 7% estimate.

So, again, I think on all the significant counts of the underlying assumptions of the PSI deal, we -- today I think our message is, like I said, largely confirmatory in nature. I feel like we are still very much on track.

Thanks a lot.

Your next question comes from the line of Justin Lake.

Thanks. Good morning. Steve, most of my questions have been answered here, but I was wondering if you can walk us through -- you talked about the tougher payer mix in the quarter on the commercial side. Any viewpoint there on scheduled admissions versus unscheduled in terms of growth?

I'm not exactly sure how to think about scheduled and unscheduled. I am not sure we really track that in a meaningful way. I will say, we saw for instance from a surgical perspective, that our outpatient surgeries were actually up a little bit, maybe 3% this quarter, and our inpatient surgeries were down maybe 3%. That dynamic, frankly, I found a little surprising. I thought there would be more discretion on the outpatient side of things than there would be on the inpatient, but that may be reflective of the fact that payers continue to drive more business to the lower-cost outpatient setting, et cetera.

So I don't know that that is a schedule, non-scheduled issue, but I think it reflects two things. I think it still reflects the initiative of payers to move patients to as low of cost treatment setting as possible and I think it reflects what Alan mentioned before, was this notion that even inpatient surgeries, I think you are seeing a dynamic, again, at least around the edges of individuals, even those with insurance, making decisions to defer or postpone treatment. No, that makes sense. You mentioned the outpatient side. That clearly continues to be a growth driver ahead of the overall business there, not just for yourselves but for the industry. Anything you can point to there as far as the disparity between volume growth and unit price there vis-a-vis the inpatient side? You mentioned the surgeries, is there anything else as far as admission growth? How you're getting out -- are you shifting more pricing to outpatient versus inpatient? On a percentage basis?

Sure, I mean I think from a data perspective, and just from an underlying business perspective, the two data points that drive outpatient from our perspective is, again, outpatient surgeries are up a little bit, and our outpatient or ER visits are up in the quarter 2% or so, both reflecting, I think, again, that stronger outpatient component. I think there's an element that -- greater skew to the outpatient is part of the element that drives our pricing-per-adjusted-admission down a little bit because by definition, I think our outpatient pricing-per-unit is a little lower than it is on the inpatient side.

Last question, and I apologize if you got this to earlier and I missed it, but I think you were fairly public in saying that as far as the second quarter is concerned, June volumes were probably the weakest of the quarter and sets up an interesting jumping off point of 3Q. So I'm just curious as you look back now at June, was there anything specific that you can point to there that caused that decline in volumes and can you give us any view on how July has gotten off to start the third quarter?

Yes. I mean it just -- you described our characterization of the quarter fairly, Justin, but just to be crystal clear, June was the softest month of the quarter volume-wise, but it's not like June volumes fell off the table. They were up slightly in April and May and down slightly in June. We have a full week to go in July and my only reaction is it unlikely that July will be better than June.

So I think we'll see how the last week comes in, but kind of started off slowly with the holiday and it hasn't closed necessarily with great strength. So I think we are seeing the trends continue into July.

Okay. That is on a year-over-year basis, right? You would assume with July 4 and the holidays there that it would be weaker sequentially anyway?

My comments were all compared to July of last year, and June to June and July to July.

Perfect. Thanks for the help.

Your next question comes from the line of Kemp Dolliver.

Hi, thanks. First question relates to length of stay in both acute and behavioral. It's down in both segments and, Steve, just curious,s starting with acute, how much of is that is utilization management, how much do you think relates to the payer mix shift?

I think, Kemp, on the acute side it's a bit of a mixed bag. Certainly there's a conscience effort on our part to manage Medicaid and Medicare utilization and reduce length of stay. Obviously Medicare, we are paid on a discharge basis everywhere in most states, on the Medicaid side, as well. So generally by reducing length of stay we are actually improving our per-day reimbursement. And we made some progress in some markets, so I think in some ways that is a good thing on the acute side.

The other aspect though is, as I've alluded to, and we've mentioned in Las Vegas before, but we've seen it in a few other markets, some slight pressure on length of stay from our commercial payers, which is not a good thing because most of our commercial payer, particularly where we're seeing the reductions, are paying us on a per diem basis. So that results in a decline in our reimbursement.

On the behavioral side, most of the reduction in length of stay that we've seen in the last year or so has been on the residential side of the business from Medicaid Medicaid-like payers. I don't see that dynamic reversing anytime soon but it seems to be leveling out.

Sequentially, the length of stay on the behavioral side was the same in Q2 as it was in Q1. So while the pressures exist, it doesn't seem like there's a lot more room to drop there. Right. That's very helpful. And then looks like the situation with Southwest Healthcare has quieted down a bit. Just a quick update with regard with what you have done operationally there and how the process is moving along.

Sure. We announced in mid-May, right around the same time that we announced the PSI deal, that we reached an agreement with CMS to abate our termination notice in the Southwest California, Riverside, California market and to work with them over the course of the next year to correct the deficiencies that have been identified building up to a new full-book survey sometime in 2011. And I think we've been making good progress in that regard. There's probably some level of extraordinary expenses embedded in the financial statements, maybe to the tune of a couple of million bucks in the quarter, as we prepare for that and do everything we need to do. We are absolutely making sure we dot our i's and cross our t's in that market and we continue to work to reach a similar agreement with the California Department of Health. So I think we are making progress there and we are very focused on it.

Okay. Last question as it relates to Las Vegas and bad debt. For years you ran pretty full most years in Las Vegas, and I suspect between the softness -- overall softness in the market and your capacity additions that your occupancy is likely declined. Does the decline in occupancy have any impact on your ability to manage uncompensated care flow?

I don't think so. Kemp, it's interesting. A number of years ago, there were real capacity issues in the market, lots of hospitals would be on divert and even emergency or ambulance patients would have to bypass one or two or three hospitals to get a to a hospital that had existing or free capacity. The hospitals themselves have changed their procedures over the years -- over the last few years to really limit the amount of time on divert and it is, I know -- I don't have any data in front of me, but I know it is much more less today than it was a few years ago, and obviously the decline in demand certainly has alleviated those pressures, as well. But I don't think at the end of the day, those things have damaged our ability to manage our payer mix.

I think if there's one thing that goes just beyond the overall economic pressures in the market, and by far, Kemp, I think that is what is driving the main pressures in the market. But the county hospital in Las Vegas has really suffered financially in the last few years and eliminated some services and some service lines, and I think particularly our Valley hospital which shares a campus essentially with the county hospital, probably has been impacted by that to some degree. That is the one payer mix dynamic that I would say is -- it is indirectly related to the overall economy, but it's kind of specific to the competitive dynamics in the market.

Okay. That makes sense. Thank you very much.

(Operator Instructions). The next question comes from the line of Doug (inaudible).

Good morning. Most of my questions have been answered already, but maybe -- I didn't hear you specifically address Cobra. I'm curious, given the commentary around June and July, is it -- and looking at the payer mix shift, do you have any read that you're may be seeing some of the Cobra roll off from the people that elected to choose Cobra back in the early part of last year?

Doug, I think as you know, as a provide,r it is really difficult for us to really gauge Cobra impact from either the perspective of getting a patient who has rolled off from Cobra and has no insurance or the benefit that we got from having patients who use the Cobra stimulus monies or the stimulus monies to keep their Cobra coverage. Look, it's not entirely illogical that some of the payer softness that we experienced in Q2 was the beginning of people rolling off Cobra, but I can also tell you we don't have any direct evidence of that.

Okay. And maybe just a broader question, just trying to loop back to the payer mix issue. When you step back and you are posting commercial price increases that are fairly robust, I think you said around 6%, and you do have a deteriorating payer mix partially because of utilization on the consumer side and the co-pay's deductibles. How do you think about, just in general, negotiations -- contract negotiations and trying to reach the right balance of what is the right price to charge to balance against payer mix deterioration from people opting not to go to the doctor, or the hospital rather, if they are footing more of the bill, they're going to be more price sensitive.

How do you work through that and maybe just looking out a year or two, if we continue to see these 6% increases, would it be reasonable to also expect an improvement in commercial volume or would they just directionally track similarly given the pricing remains on a similar path?

I don't know that there's a perfect model by any means Doug to answer the question. I don't know that there's a perfect model by any means, Doug, to answer the question. I don't know that -- my own gut reaction is that perspective patients are not price sensitive on the margin. That is, somebody is not saying, I will have a hip implant if it cost me $5,000 but I'm not going to do it if it costs me $4900. I don't think that sense at all. I think it is much more the sense of not wanting to be out of work or not wanting to pay that, whether it's $4900 or $5,000, or being unable to pay that in certain circumstances, et cetera.

So that, again, those sorts of pricing decisions at the individual consumer level, my gut is it's not the same as it is in the retail business, et cetera. I think it's a much different dynamic.

Okay. Last question. Your negotiations with payers, it doesn't sound like you are seeing much change in a movement towards narrower networks. It doesn't seem like you are picking up much of that in the market. Is that a fair characterization at this point?

I think that, to date, that's a fair characterization.

Are you expecting that to change or do you think it will track similarly?

Well, my gut, and I think the reason I assume you are asking the question, Doug, is that the managed care companies are publicly saying that that's the direction they are moving in. So my sense is that it makes sense that they would move in that direction. Quite frankly, I'm not sure that as a dominant inpatient provider in most of our markets, that we really object to a dynamic of narrower networks. I think in some cases that would be helpful to us. While we haven't seen it yet, it's not necessarily a development that we would not welcome.

All right, great. Thank you very much.

(Operator Instructions). Your next question comes from the line of Gary Taylor.

Hi. Good morning -- sorry, is that better?

Yes.

Did you give the acute (inaudible) bad debt number, Steve?

I don't know if we did but it's 13.9%.

13.9%. And, I got on just a little bit late. I know there's been a lot of discussion of the payer mix impact on the net revenue per adjusted admission number, discussion of Medicaid t commercial rate, et cetera. What about pure acuity? Did I miss the discussion on that? Is there comment around what the case mix index looks like year-over-year?

There wasn't. I did say to, I think Kevin, I forget, but we talked a little bit about the decline in inpatient surgeries and a rise in outpatient surgeries. That is contributing to a slight decline in acuity. Again, I don't think it's the driving force of the pressure on net revenues, but it is a dynamic that we saw a little bit in the quarter.

And any specific comments around what you are seeing in terms of orthopedic, does that just tie into the overall inpatient surgical weakness just coming off the heels of some slower growth rates out of the manufacturers last week?

I don't know that we would peg the decline in any particular service line. Again, I think the inpatient surgical side seems to be dominated by cardiology and orthopedics. I think we have seen a bit of weakness in both, but it's not a particular service line.

Any comments on -- and I'm sorry if I missed it, but on the professional liability of the minimal malpractice gain. Is there any material change in your forward run rate there?

My expectation, Gary, and obviously we have not set our 2011 budget yet, but my expectation is that there will be is a measurable decline. One of the things that we've done, I mean this is the second year in a row where we had a significant positive adjustment in our malpractice expense that essentially we are not really getting or taking any credit for in our ongoing financials, so we continue to work with our actuary to refine our estimates so that our current expense is more properly reflected and it's not just reflected in these sort of periodic non-recurring, recurring adjustments. My gut is that our 2011 malpractice budget will be measurably lower than our prior year.

That's helpful, thanks. And then just finally, anything you can share at this point in terms of looking at some of the legal costs associated with PSYS, just reading the financial disclosures and obviously there's been media reports and things, as well, but it looks like there's a different professional liability tail on that acquired business perhaps than what you have become accustomed to. So is there thoughts that cover with excess carriers just is capped, or you bring that into your coverage umbrella or that there could be a need to set up a one-time reserve? Is there anything specific at this stage in terms of how you may treat some of their trailing liability issues?

They have a lower attachment level for their commercial insurance that I think our view would be certainly in the beginning, we would keep in place. We are anxious to get in and get a better feel for it. It's a little bit harder from the malpractice perspective to get all the measurements that we would normally need to evaluate. I know on the workers comp side, that is an area where we've tended to have better experience and we frankly look forward to that as an area where there is upside opportunity for us. So it's just another one of those areas, Gary, where we feel we have done pretty well over the years and are anxious to get in and implement our policies, et cetera, in the hopes that we can make some improvement in the PSI operating results in that area.

Thank you.

(Operator Instructions). There are no further questions.

Okay, well we thank everybody for their time and look forward to speaking with you next quarter.

This concludes today's conference call. You may now disconnect.