環球健康 (UHS) 2010 Q4 法說會逐字稿

Good morning. My name is Brandi and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter and year-end 2010 earnings 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)

Mr. Steve Filton, Chief Financial Officer, sir, you may begin.

Good morning. Thank you. I am Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the full year and fourth quarter ended December 31, 2010.

As discussed in our press release last night, the Company recorded net income attributable to UHS per diluted share of $2.34 for the year, $0.38 for the quarter. After adjusting for the PSI transaction costs, a reduction in malpractice reserves relating primarily to prior years, the write-off of certain construction costs, and the charge associated with split dollar life insurance agreements, our adjusted net income attributable to UHS per diluted share for the quarter ended December 31, 2010, was $0.58.

During this conference call Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, projections, and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2010.

We would like to highlight just a couple of developments in business trends before opening the call up to questions. On a same-facility basis in our acute care division revenues increased 2.3% during the fourth quarter of 2010. The increase resulted primarily from a 2.4% increase in revenues per adjusted admission. Adjusted admissions to our hospitals owned for more than a year were relatively flat in the quarter.

We define operating margins as operating income or net revenue less salaries, wages, and benefits, other operating expenses, supplies expense, and doubtful accounts divided by net revenues. On a same-facility basis operating margins for our acute care hospitals increased to 14.4% during the fourth quarter of 2010 from 13.5% during the fourth quarter of 2009.

Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $208 million and $162 million during the three-month periods ended December 31, 2010 and 2009. As a percentage of net revenue bad debts, charity care expense, and the uninsured discount in this year's fourth quarter were at levels higher than those experienced during the fourth quarter of 2009.

On a same-facility basis revenues in our Behavioral Health division increased 5.9% during the fourth quarter of 2010. Adjusted patient days to our Behavioral Health facilities owned for more than a year were relatively flat during the fourth quarter. Revenue per adjusted patient day rose 5.9% during the fourth quarter of 2010 over the comparable prior-year quarter.

Operating margins for our Behavioral Health hospitals owned for more than a year decreased to 24.0% during the quarter ended December 31, 2010, as compared to 24.6% during the comparable prior-year period. Our cash from operating activities was approximately $102 million during the fourth quarter of 2010 as compared to $57 million in the fourth quarter of 2009. At December 31, 2010, our ratio of debt to total capitalization was 66%.

We spent $62 million on capital expenditures during the fourth quarter. Included in these capital expenditures were the construction costs related to a new 121-bed hospital in Palmdale, California, which opened in December.

In November 2010 we acquired Psychiatric Solutions Inc. for a total purchase price of approximately $3 billion consisting of $2 billion in cash plus the assumption of approximately $1 billion of PSI's debt, the majority of which has since been refinanced. PSI was formally the largest operator of freestanding inpatient behavioral health facilities operating a total of 105 inpatient and outpatient facilities in 32 states, Puerto Rico, and the US Virgin Islands.

The facilities acquired by us, with an aggregate of approximately 11,500 licensed beds, offer an extensive continuum of behavioral health programs to critically ill children, adolescents, and adults. Combined with our previously existing behavioral health operations consisting of 101 behavioral health facilities located throughout the US and Puerto Rico, we believe this acquisition makes us the largest facility-based provider in the behavioral health sector.

As stated previously, we believe we can achieve operating expense reductions during the first year following the acquisition primarily through the elimination of corporate overhead. This acquisition also helps diminish our geographic concentration in certain markets, thereby diversifying our overall portfolio and reducing our reliance on one hospital or network of hospitals in any particular market.

Net revenues generated at our behavioral health facilities which accounted for 30% of our consolidated net revenues during 2010 and 25% of our consolidated net revenues during 2009 are projected to account for approximately 44% of our consolidated net revenues during 2011, including the projected revenues generated at these recently acquired facilities.

Our estimated range of our earnings per diluted share of attributable to UHS for the year ended December 31, 2011, is $3.50 to $3.65 on projected net revenues of $7.6 billion to $7.7 billion. This guidance includes the impact of Medicaid reductions in the states we operate in, which we estimate to be negative 2% to 3% for the full year of 2011.

As you know, this is a fluid dynamic; however, there can be no assurance that the ultimate reductions will not exceed our estimates which potentially could require downward revision of the 2011 earnings guidance. The guidance excludes the favorable impact of a potential amendment to our $3.45 billion credit agreement which could reduce our borrowing costs.

Although we can provide no assurance that we will successfully complete the proposed amendments on terms acceptable to us, if in fact the amendment is successfully completed, it could favorably impact our 2011 earnings guidance by $0.15 to $0.17 per diluted share.

Alan and I would be pleased to answer your questions at this time.

(Operator Instructions) Tom Gallucci.

Good morning. Thanks, Steve. I guess just two questions.

First, on the quarter, the thing that jumped out at me was the Acute Care EBITDA margin on a same-store basis being up year-over-year after being down most of the year. Can you talk about the key factors driving that?

Sure, Tom. I think you can look at it probably a couple of different ways. I think we highlighted in the press release and Alan's comments that we clearly in Q4 saw some improvement in the Las Vegas market, which as you know has been under some pressure for a while now, for several quarters. What was clearly -- in the fourth quarter 2010 the Vegas results were ahead of last year.

I think what drove those dynamics in Vegas were largely present through the rest of the portfolio. While we saw our acute care volumes actually weaken a little bit in the quarter, we saw payer mix improve. And when I say payer mix improve I think mainly we saw our uninsured admissions rising at a slower pace than they have been rising for the last, I would say, six or eight quarters. So that was an encouraging sign.

Then I think the third big piece of what we clearly saw in the quarter was very good expense control throughout the acute care portfolio. We talked in Q2 and Q3 about some of the expense control initiatives that we were implementing during this difficult economic environment. And clearly in Q4 we began to see traction on a number of those larger initiatives.

Okay. So as you think about 2011 then with those comments around volume and mix, what have you factored in for your expectations there?

Our outlook, Tom, for 2011 for the acute segment is still relatively muted given the overall economic environment. We have projected revenue growth in the 3%, 3.5% -- same-store revenue growth in the 3%, 3.5% range, which is mostly a result of kind of flattish volumes and 3%, 3.5% price increases.

We seem to be coming out of 2010 in a way that makes even those -- what were relatively modest outlooks seemed achievable because, quite frankly, we didn't even get to those hurdles in 2010.

Okay. And on the mix side you would expect continued stabilization sort of given where unemployment is?

Yes, I think that stabilization is the key word, Tom. I think we expect, and our guidance and budget for next year implies, stabilization. Not necessarily any significant improvement, but a stabilization of the trends that, for the most part, were on the decline through 2010.

Okay, thank you very much.

Whit Mayo.

Steve, just wanted to go back to Tom's questions about Vegas just for a second. The improvement that you mentioned in self-pay was that primarily at your downtown hospital or is that more broad-based throughout the market?

First of all, I would say, Whit, that those comments were applicable to most of our acute care facilities and I think it's true in Vegas as well. Probably the biggest improvement we saw in Vegas in Q4 was at Summerlin, which is one of our suburban hospitals and our largest hospital in the portfolio.

I think, as you know, we actually built significant -- that addition at Summerlin which we opened in the beginning of 2010 and as we have noted in our previous three quarterly calls, hadn't really seen much of an impact of that. Finally, again in the fourth quarter, we saw some of those new beds begin to be occupied and clearly Summerlin had the strongest quarter of our Vegas hospitals.

Okay. And I think if I recall correctly, I think some of our local operators in Vegas have been working on some new ortho contracts. Can you just refresh us just what your local and company-wide strategy is on high-cost implants and any early successes you have seen or expect to see over the course of the year?

Yes, I mean I think in general, and again this is not a comment specific to Las Vegas, our approach on the supply side is to focus on the high-end cost items in areas like cardiology and orthopedics and neurosurgery and spines, etc., and really to work with our physicians in our physician groups to try and lever to the most efficient and cost effective implants and devices that are available to us. Again, I think that, along with our other functional expense category, you saw us gain some traction in Q4 and hopefully that momentum can continue into 2011.

Okay. Maybe just one other question just with regards to Palmdale. Was there any material drag in the quarter from any preopening cost and maybe if you could give us a sense for whether or not we are at breakeven now and what opportunity you see in that market relative to the old facility?

Sure. So as we, I think, said in the run up to Palmdale, we expected in the quarter that it opened, and it opened in December, we would experience $2 million or $3 million of start-up costs. And I think in fact we did see that in the quarter, so it was a little bit of a drag.

I think that obviously the project adds considerable capital costs to our income statement. Our general outlook is that we will experience increased EBITDA in that market in 2011, largely offsetting the increased capital costs and probably largely resulting in kind of a net neutral result for 2011. Then as we come out of 2011 and into 2012 we would start to see more accretive results out of that project.

Just the Medicare certification, you have received that already?

Yes, essentially we are operating under the same license we had at our old facility.

Okay. Thanks a lot, Steve.

Justin Lake.

Good morning. Steve, first on the acute care outlook. Did you give that -- I apologize if I missed it -- as far as the EBITDA growth? And maybe you could just run us through the acute care and the behavioral EBITDA growth you have built in the guidance.

Sure. I think what I was saying to Tom earlier was that our same-store revenue assumptions in acute care are about 3%, 3.5% same-store revenue growth. I think that translates to an EBITDA picture that is largely sort of flattish to up slightly, maybe 2% or 3%.

On the behavioral side, again continuing the trends that we saw in 2010, a little more robust. Probably revenue growth in the 5% or 6% same-store range. And when I say same-store I really mean obviously the UHS legacy facilities growing at that rate as well as the PSI facilities growing at that rate. And that translates probably to EBITDA growth in sort of the mid to upper single digits -- 5%, 6%, 7%.

Okay. Just a numbers question on the behavioral side. Do you have -- I know PSY has had some moving parts in the third quarter that might not be repeatable. Can you give us a jumping off point for what you think the right EBITDA number is for the combined business coming out of 2010 that we should grow that 5% to 7% off of?

Sure. I think that what we have encouraged people to do before is to look at their first six months of 2010 results. If you adjust them seasonally, meaning that generally the first half of the year is a little stronger than the second, but if you take the first six-month results and adjust them seasonally I think that is a reasonable jumping off point to then look at how their EBITDA then builds in 2011.

So is -- do you see that business as kind of generating around -- I think I have estimated around $700 million of EBITDA. Is that ballpark, Steve?

You mean our total Behavioral business?

Yes.

That is about -- that is certainly in the neighborhood, Justin.

Okay. Then you had some positive commentary on payer mix in the fourth quarter, both in Vegas and throughout the acute care business. I was curious, given that you are reporting, we are at March 1 now, do you have any -- was there any continuation there or any commentary on the first two months of the year as far as payer mix?

I think those positive payer mix trends continued into January from an acute perspective. It's still a little early to have any comment on February from a payer mix perspective.

So I think the trends that were existent in Q4 seemed to have largely continued into the first quarter of 2011. Meaning continued volumes that are muted sort of at best on the acute side. At least signs that the payer mix continues to stabilize and that we continue to have -- exercise good control over our expenses.

Great. Thanks.

Ralph Giacobbe.

Good morning. Steve, can you maybe talk -- you have talked about Vegas, maybe get into South Texas a little bit? You had talked about uninsured improving. Is that the trend there, are you not seeing it there? And what are the expectations in that market?

Yes, Ralph. I think that we have commented before as we looked forward to 2011 that in some respects the South Texas or the McAllen market will likely be the Las Vegas market, if you will, of 2011. Meaning that while we hope to get some improvement there, it has been under some pressure from a weaker local economy.

The recession seemed to have come late to that market. It didn't really hit in 2009, but it certainly hit in 2010. We have been largely down in 2010 in that market and I think that at least the near-term outlook is that we will be down there as well. But if in fact the Las Vegas market continues to stabilize and maybe gradually improve that is probably a positive trade-off for us because the Vegas market is obviously bigger and contributes more to us.

So if one of the two markets has to be down, not an easy choice to make, but it will be easier if the McAllen market is down. But those trends, those negative trends continue in the McAllen market.

Okay. Then just going back to the Medicaid side. I know you had said 2% to 3%; maybe if you could just break that out in terms of first half versus second half that would be helpful. And then in terms of Medicaid, is there -- do you guys think of it differently in terms of risks for the acute care business as opposed to the psych business?

Sure. First of all, we believe that most of our Medicaid rates are largely fixed through either -- most of the state's fiscal years are either through June or through August, and so I think our view is that Medicaid rates should be probably flat to down 1% in the first half of the year. Then our general sense and expectation is that in the second half of the year as FMAP subsidies expire and state budgets remain under pressure that rates drop to maybe down 3% or 4% for this blended rate and down 2% or 3% for the year.

As I said, I think there is a great deal of uncertainty and fluidity that surrounds that. We have experienced some big headlines over the last few weeks and month and likely to experience a few more as we move forward.

And as far as how we think about Medicaid for the two businesses, at least up to now, at least from a rate perspective, most of the states have generally had these fairly broad cuts and they have not been terribly nuanced or directed to one business segment or one service line over another. I will say that the one dynamic that we have seen on the behavioral side, and we certainly saw it in Q4, is that in addition to the pricing pressure we have seen pressure on our length of stay, particularly in the residential business. That is an element that really is unique and specific to the behavioral business and, quite frankly, I don't see that changing.

Okay. And then just my last one, can you talk a little bit about cash flow expectations for the year? I know you had some projects that inflated CapEx trends the last couple years on the acute care side. Maybe where are we there and just general expectations for free cash?

Sure. I think our capital projections for next year are that we will spend $350 million to $375 million. I mean that is, in effect, a reduction from our historical level of spending. It's obviously inflated to some degree by an element of PSI capital spending that we have taken on.

But I think that given -- if you take our projected earnings guidance, that projected capital spend, you get to a free cash flow number in the high 300s, low 400s.

Okay, great. Thank you.

Shelly Gnall.

Thank you. Just could you help me make sure that I heard this correctly? What were the key drivers of the contraction in the Behavioral Health operating margin, the same-store margin year-over-year [and to the] fourth quarter that related to the length of stay?

No, I don't actually think that the length of stay drove the EBITDA contraction. I think the 60 basis points of same-store margin contraction came from just a couple of non-recurring items, Shelly.

One is we have got a facility in the suburban Philadelphia market that we are in the process of closing and we had some -- $1 million or $2 million of operating losses there in Q4 as we wind down to an ultimate closing in Q1 of 2011. Then we accrued $2 million or $3 million for some sort of previously disclosed Medicaid take back or give back issues that we have in the state of Virginia.

So I think if you account for those two non-recurring items, our same-store operating margins would have been ahead of last year and essentially kind of on the trend that we have seen them grow at for the last several quarters.

Okay. So you would have seen a little bit of operating margin expansion on the same-store basis on just sort of continued operations run rate?

Yes.

Okay, great. Thanks. Then it looks like you are expecting a return to sort of 2%-ish Behavioral Health same-store volume growth. Can you update us on where we are with mental health parity? Has that tailed and have we sort of seen the end of that tail end and we are returning back to sort of historical volume trend in Behavioral Health?

You know, the challenge, Shelly, which you know, you certainly have heard us articulate before is it's very difficult for us to identify what element of our volume growth is specifically attributable to some benefit from mental health parity. Obviously volumes rebounded in 2010 from where they were in 2009. And while we think that is attributable to a number of things, including the capacity additions that we have continued to add and that PSI continued to add, we certainly believe that both companies benefited from the impacts of the mental health parity legislation.

Our behavioral volumes have continued to be strong into 2011 as well and so we have anticipated that we would continue to get some benefit from the mental health parity legislation in 2011 as some plans that didn't fully comply with the law in 2010 would comply in 2011. Again, at least just from a directional perspective, our volume trends remain strong so we think we continue to get some benefit into 2011.

So I hate to be too granular, but can you break down the Behavioral Health revenue growth for us then? Are you expecting -- what is the volume and pricing expectation in that 5% to 6% revenue growth?

Yes, I think it's probably about half and half. I think our general sense is that pricing grows by 2% to 3% and volumes grow by 2% or 3%.

Okay, but that mental health implies -- the mental health parity implies that that volume could be a little bit north of that if you continue to see the benefit.

Yes, it's difficult to tell and obviously there is a lot of moving parts. I mentioned before that offsetting that to some degree is pressure we are feeling from many of our Medicaid payers, both on the length of stay and the admission side, etc. So we don't want to get too far ahead of ourselves in that regard, but -- and there is no question that I think we view the mental health parity impact as a plus. We viewed it as a plus in 2010 and we view it as a continuing plus in 2011.

Okay, great. Thank you. Then just one more if I could.

I think part of the reason in your large urban markets that you have seen less bad debt pressure than we had expected is because there is a number of either charity hospitals or not-for-profit hospitals or clinics for the uninsured. Can you give us an update on how they are faring?

Unemployment in Las Vegas I believe is 14.9% through December, so can you just -- is dam holding? Are those facilities still able to treat the uninsured or, if these sustained high unemployment trends continue, could you start to see some actual negative mix shift in 2011?

I think it's hard to predict, Shelly. And by the way, I think we are on both sides of this equation. In many of our large markets we essentially wind up operating the safety net hospital, if you will. We certainly operate again, and I use that term broadly, but we operate the safety net hospital in markets like McAllen and Manatee County, Florida, and Aiken, South Carolina, and Amarillo, Texas.

As you suggest, in markets like Las Vegas there are other large, other large safety net hospitals. In the case of Las Vegas it's a county hospital, and its troubles have been widely reported in the local press. Again, I don't think it's terribly unique or different than most safety net hospitals and it's, frankly, one of the reasons why we believe that there has to be some floor to these proposed Medicaid cuts. Because while they hurt all hospitals that have any sort of Medicaid utilization, they really can do, I would say almost sort of life-harming damage, to these safety net facilities.

So in our markets they are holding but it's a pretty precarious position. And I think it is something that the states and the legislatures are going to have to take into consideration as they look at further Medicaid cuts going forward.

Thank you so much for the color.

Kevin Fishbeck.

Okay, thank you. I think that you made some comments about the Psych Solutions opportunity and particularly you talked about the clear visibility into savings on the G&A expense. But I don't think you made any comments regarding operationally what the opportunity is there.

Do you have any color there about what you think the opportunity is after looking at that for a couple of months?

Kevin, yes, first of all, let me sort of take the two pieces of it. From a corporate overhead savings, from the time that we announced the deal back in mid-May, we have framed that opportunity as a $35 million to $45 million opportunity over the course of the first few years. We have taken the opportunity on a number of occasions since then to reiterate and reconfirm that assumption, and would do so again today.

We have also highlighted the fact that our operating margins were a couple hundred basis points better than PSI's and viewed that as an opportunity in the future, but never attempted to frame it or to give with any precision when or how we would realize it. And I think we are in largely the same position.

I think the work that we have done in the couple of months since the acquisition closed reconfirms for us that there are opportunities on those operating margins. We are approaching it deliberately; however, we are focusing on making sure that the facilities are delivering high-quality care first and foremost as our first and foremost priority. Then I think we believe that the effort to really get to the improvement in operating margins is much more likely to be a 2012 and 2013 event, and there is very little of that included in our 2011 guidance.

Okay, that makes sense. I guess in the past you have given a little bit of -- I know you don't give quarterly guidance but you have given some guidance about where earnings have fallen or fall in the first half of the year versus second half of the year. Because -- I would think it might be important to do that this year insofar as the timing of G&A saves but also the timing of the Medicaid rates.

I mean how -- do you think the progression net-net is the same as it normally is or it's going to be more back-end loaded or front-end loaded from an earnings perspective?

First of all, I will be perfectly honest, Kevin, and tell you that with everything that we have been focused on the quarterly progression of earnings has not been a high priority for us. So I have not looked at what the Street numbers are out there and have no real observation about them.

I will say this, as we think about the year I don't know that another than the corporate overhead savings, which sort of are cumulative and continue to grow, I don't know that there is anything -- and also the Medicaid cuts, which again I have referenced are more back-end loaded, those are the two items that I think have some sort of different behavior than what were normally accustomed to. Otherwise, I think our quarterly earnings progression shouldn't be terribly different than it was historically or terribly different than PSI's was.

Okay. And then the refinancing, wanted to touch on that. Is it purely an interest amendment that you are doing here or is there any other flexibility or key things that you are looking for in that amendment?

Yes, I mean the conversations that we have been having with our banks is largely focused on an amendment that would effectively, simply reprice and lower our existing borrowing costs for some upfront payment to do so. It really is not terribly more complicated than that.

And the $0.15 to $0.17 was that an annual number or is that for 2011, assuming it's only in place for nine months or something like that?

Right. It was intended to describe what we thought the impact would be for 2011.

Okay, so it might be -- it would be more than that depending on the timing (inaudible).

Yes, there is a few moving parts. Again, if we complete the amendment, we will give more color at the time that we announce that.

Okay. And then last question, how should we think about the cost control initiatives that you mentioned really helping the margin in Q4? Is Q4 fully loaded there or is there more to come that we will see in 2011?

We have really talked about two very broad initiatives. One, at the end of Q2 we talked about a headcount reduction that took place probably the beginning of Q3, and I think you are just seeing the full impact of that in Q4. That doesn't really grow in any way. I think you are just getting the full effect of that in Q4.

I think this -- in answer to somebody's question before, I definitely pointed out or highlighted that we got some traction in Q4 on some of our supply initiatives. The hope is that momentum would continue into 2011.

Okay, great. Thanks.

Darren Lehrich.

Thanks. Good morning, everybody. A couple of questions here.

I guess I wanted to just start off in Southwest Texas, actually Southwest system in California an update there. I know your K mentioned a few things; I just wanted to make sure I understand. The survey was the week of January 11; what is the timing and have you gotten any indication or update there?

Then the access to the new capacity, I guess you have been allowed to move into that new capacity last month. What does that do for you? Is that something that you can take up quickly with occupancy or is that something that does not really happen yet?

Yes, so, Darren, as you suggested, there is a few different things going on. We had built at both of our campuses that make up Southwest Healthcare at both Inland Valley and Rancho Springs new capacity, emergency room critical care capacity, some consolidation of services. And when we had our regulatory issues last year, the California Department of Health would not allow us to occupy that new space.

They did a survey, as you point out, in early January with the specific purpose of determining whether we could occupy that new space. We passed that survey. We are in the process of occupying that new space and believe that should certainly be helpful to us.

We built that new space because there were, quite frankly, some very severe capacity constraints. The emergency rooms and critical care beds in those hospitals were very stressed and overburdened, and we believe that having that capacity open will allow us some immediate advantage.

Now, I do want to remind everyone that we also have what we describe or what is described as a full book survey that we expect from the CMS and the California Department of Health later in 2011 in the summertime, just to sort of hopefully give us clearance on the sort of range of regulatory issues we have had at that hospital.

Then finally, we have disclosed in the last couple of quarters that there is some new capacity that a not-for-profit competitor is opening in the market, probably towards the end of the first quarter. So a number of moving parts. Obviously, the capacity additions should be a net plus for us. The new capacity our competitor is opening will be a negative, although hard to judge at this moment exactly how much, so we will have to wait and see.

Okay. Just stepping back from the Acute Care guidance, Steve, it seems like you are still being pretty conservative in the outlook in terms of EBITDA growth being relatively flattish. Obviously, the economy is where it is, but based on your comments around stabilization in some key markets, on payer mix and some of these things that may actually year-over-year help you out like in the Southwest where I don't think you really made any much money at all last year. I guess can you just help us put that into context?

And Alan, you are on the line. You had a quote in the press release about what you are seeing in the economy. So I guess curious why you don't think that would translate a little bit more into EBITDA growth for acute.

Darren, I will answer the question sort of from a financial perspective, and Alan can certainly add his thoughts. To me, the big issue is if you look, for instance, at Q4 which has certainly been our most encouraging quarter in some time, our net revenue growth inclusive of bad debt is still in sort of the 2% range. And while at that level and at that range we can have a quarter or two of increasing margins, it is hard to sustain increasing margins at that level of revenue growth.

So if we don't get some rebound in volume or some not only stabilization but improvement in payer mix, it is tough to create an acute care model that really generates more than the sort of flattish to modestly growing EBITDA that I described as being sort of the premise of our guidance. So that is from a financial perspective how we get to those numbers.

I mean, if Alan has any color he wants to just sort of add generally to how we are looking at the business, that is fine. But just so you have the sense of at least financially how we are looking at it.

No, the only thing I would add is that we generally are conservative. And there are so many Steve calls them moving parts happening now that I think it's unwise to really look at too much -- focus on the upside rather than try to -- we always try to deliver what we are talking about. And I think it's in that vein.

Two more quick things if I could. I think relative to your peers, Steve, you have been a little bit more reluctant to bring the discount policy up a lot, and I guess I am curious if you are thinking any differently about discounts. I know there has been some limitations in some of your markets. And I just have one more question.

Yes, I think we actually did that in Q3. We talked more about it on the Q3 call. I think the market where we were sort of the most reluctant to bring the discount policy, make it a kind of more generous or robust policy was Las Vegas. We finally did that in Q3.

And so, in my mind, our discount policy now kind of across the portfolio is sort of fairly reflective of what the market sort of does and what other hospitals do. So I don't think we are terribly out of sync with any of our market peers any longer.

Okay. My last question and I guess thanks for all the legal disclosures. That is probably more than we have seen on PSI's exposures ever, so I appreciate that.

I guess the question here is you talk about two qui tams and I just want to confirm where those are. Are those new, are those carried over from the PSI? And then you did have a settlement with Sierra Vista, you haven't disclosed the number. I am assuming that is not a material number.

That is correct. We didn't disclose the amount of the settlement because we didn't consider it material.

Look, to be honest, Darren, I think that these qui tam lawsuits are, unfortunately, a price of doing business in the environment that we are in. The Government, I think, very much encourages those kinds of things says a way for them to both assure compliance and generate additional tax or penalty revenues, if you will.

We certainly are very focused, both at our own legacy facilities and at the newly acquired PSI facilities, to have all the controls in place to make sure that we have as few of those as possible. But I just don't know that any organization of this size can make themselves bulletproof in that regard, although it's certainly our goal.

Okay, thanks a lot.

Gary Lieberman.

Thanks. A fair amount of discussion still amongst a number of hospitals about the acquisition opportunities that are out there on the Acute Care side. Maybe if you guys could talk about the willingness you are to consider acquisitions that make sense and maybe even specifically any markets where you think it might make sense?

Sure. First of all, I would just comment on the acquisitions that have generally been taking place. I think that they have tended to be on what I sort of would characterize as the two ends of the spectrum. That is they have either been fairly rural facilities, which as you know has not really been our business model for some time, or in these really large urban transactions in places like Detroit or Boston, etc., which also have not really been sort of our sweet spot.

We, in fact, have pursued a number of kind of mid-size market type transactions over the last few years. Interestingly, they tended to go to other not-for-profit or to not-for-profits not to other for-profits.

I think at the end of the day obviously we have taken a big bite from a leverage perspective on the PSI transaction and certainly that is a little limiting to us, both from a leverage perspective as well as just a focus perspective. But we are committed not to let any opportunities that make inherent sense to our company and particularly to any existing markets that we are in, both behavioral and acute. We are certainly not going to allow any sort of impairment of our existing franchises, etc., if there are opportunities out there.

So we remain vigilant to those and I think we will continue to do so.

Do you think with the reduction in the activity from the not-for-profits that the likelihood of increases that maybe some that wouldn't have gone your way you end up getting over the next year or so?

Steve, one of the things that I think you have to look at is some of the facilities that are coming on the market are not doing very well. I am just thinking about the Catholics in particular in a lot of instances. So you got to be very careful with regard to these acquisitions.

And to reiterate what Steve was saying, we are in the market, we are active, and we are not going to let any really good opportunities go by.

Okay, thanks a lot.

AJ Rice.

Thanks. Hi, everybody. A couple questions if I could. First of all, obviously there is a range to the guidance, $3.50 to $3.65, and you guys mind what sort of swings you from the low end to the high end? What are the main variables there?

First of all, AJ, since Alan already complimented me on using the phrase I will repeat it, there are a lot of moving parts. And obviously the guidance, I think, to some degree is just reflective of the fact that we are certainly not or we don't know with precision what is going to happen with things like volumes and payer mix and Medicaid rates and all that. And so the range of guidance is certainly in some form or fashion designed to provide some amount of flexibility as those fallout wherever they do.

I think the other piece of it -- I think it was Kevin Fishbeck who I talked about a little bit about the PSI opportunities. I think in a broad way the high end of the guidance would presume that maybe we begin to realize a little bit of the PSI operating margin opportunity improvement, probably more towards the backend of 2011 at the lower end of the guidance probably presumes that, as I described it to Kevin, that that doesn't really occur until 2012 or 2013.

Okay. I don't know if there is anything to say on this question, but I will ask it about PSI in a little differently than what you were asked earlier.

You have been is there a couple months, a few months now. Is there anything, either positively or issues, that have surprised you and what you have ended up with that are different than what you saw as an outside observer?

I would say both to some degree, AJ. I think that we have talked, really since the deal was announced, about just sort of a general sense that we have that we have operated our behavioral business and our operators have just had a little more kind of focused and disciplined approach to the business. And I think that in the past, again, 2.5 months or so that we have been into the business we have really kind of reconfirmed or revalidated that notion. And I think it's a mixed bag.

So I think we feel like it may require, and it does require, a little more effort to bring that same level of focus and discipline that we are accustomed to in our legacy facilities to the newly-acquired PSI properties. But I think we also feel like the ultimate upside of that effort may be a little greater than we originally thought.

So I think the time frame to get there may be a little bit more elongated and the effort may be a little greater, but I think we feel like in the end the payoff may also be a little bit greater.

Okay. Then just a final question on the two contracts in Las Vegas, just been a lot of discussion about the culinary union and then also the Sierra contract later in the summer or in the early part -- late spring/early summer. Just give us where those stand at this point, if you can.

Sure. So the one that was kind of the most time sensitive was, you referred to it as the culinary, it's now called their Healthcare Services Coalition contract. That actually expired at the end of January and we were technically out of network in that contract beginning in February.

We did just about a week ago sign a new three-year agreement with the coalition, so we are back now formally in the network and will be for the next three years. And as far as the Sierra contract goes, which does not expire until the June time frame, we have an agreement in principle to renew that contract as well for another three-year period.

Okay, great. Thanks a lot.

Adam Feinstein.

Thank you. Good morning, everyone. Just wanted to follow up on Psych Solutions here and maybe just gauge a comment a little bit. You talked about some of the regulatory stuff, but just curious if you have any updates on some of the bigger markets where you were working on some of the issues like Riveredge, just curious in terms of that.

And then secondly, I mean you have talked a lot about synergies and the opportunity but how should we think about this near-term milestone in terms of the integration process? So besides just a synergy number, what are some of the initiatives that you guys are really tracking that we can focus on to get a better understanding of the integration process?

Sure, Adam. I mean, again, I think that from a financial perspective we can report relatively easily on again the corporate overhead savings and synergy benchmarking, that $35 million to $45 million number. Again, we have confirmed and reconfirmed that number a number of times.

Probably about half of those corporate overhead savings we have already achieved at the time of closing, mostly with the elimination of the senior management of PSI. But the other half of the savings we probably will achieve more ratably over the course of the next two years or the two years after acquisition, so we will certainly be in a position to report on those savings as they go along.

I think that a lot of the rest of the integration process to some degree has benchmarks associated with it that are not all that transparent to you all in the investor community. And that involves implementing and overlaying our quality, risk management policies and procedures, etc. We are very, very focused on that.

I don't know -- again, we certainly can kind of, I think, provide some color as we move forward on how that is going but I don't know that there are a whole lot of publically published hurdles that we can describe. And then, obviously, the last financial piece of it is to what degree we can improve those PSI operating margins. Again, I think we can certainly endeavor to provide those updates, but I would just remind everybody that we think that is probably more like three or four quarters down the road before we really start to see that with any sort of real measurability.

Okay, great. Just one quick follow-up if I may, maybe a question for Alan. Kind of broad question, but certainly it seems like the industry environment has picked back up.

But I am just curious to get your perspective, Alan, looking back over prior cycles and such how you think about the current environment. Do you think it's accurate to say that the industry environment appears to be a stable and getting better? So just curious to get your broader thoughts looking back at previous cycles as well.

Well, I think the environment will improve substantially when unemployment and the economy improves. There is very strong correlation. So there is an election coming up, national election in 2012, and I think it's very incumbent on the administration to get that unemployment figure down.

They promised 8% so the general feeling is that if they are north of 8% they have got a problem. If they are at 8% or below then they are in pretty good shape. So I think there will be good things happening which would be good for us.

I think with regard to hospitals in general, I think the situation is as fluid now as I think I have seen. So that a lot of institutions are not doing that well, because it's very hard to plan as to what is happening with the healthcare legislation and the challenges and the like, and the unemployment.

Then just generally I think the economy -- look at the economy and look what is happening and what could potentially happen with oil. There is a lot of things happening that are very difficult to predict. So I think this is -- hopefully, it's a lower point. I think as the economy picks up I think we will do better.

And I also think that the administration has certainly been aware that hospitals employ a lot of people. We continue to employ people, continue to add people so that you can't deal too very harshly with the hospital sector. So I think that is good.

They understand that there is an employment factor there as well that they certainly don't want to tinker with. So I think we have certain insulation against a general environment where cost cutting might -- is being discussed.

All right, thanks very much, guys. Appreciate it.

Kemp Dolliver.

Thanks and good morning. First question, Steve, as it relates to PSY and the margins longer term, how much of the opportunity you think hinges on narrowing the occupancy spread between PSY's facilities and yours? Because I think historically you have run probably 100 to 200 basis points higher occupancy than they have?

Kemp, we certainly would, and will, aggressively market their facilities as we do our own. But I will say that just in general we never really described the bulk of the opportunity with PSI as being a top-line opportunity, either in terms of volume growth kind of above and beyond their historical perspectives or contracting leverage or anything like that.

So, again, I will reiterate the comment that I may before. I made it before sort of from an operating perspective, but I think we have made the same observation from a business development and marketing perspective that we feel like we bring maybe a little bit more focus and discipline to those functions than PSI did. And maybe there is some upside to that; we certainly would hope so. But, again, we certainly never premised the improvement from the deal on those sorts of issues.

Okay, super. Question about South Texas as it relates to the physician-owned hospital there. A number of physician-owned hospitals in other markets have been sold recently and have typically gone to a larger in-market player. What is your sense on how that facility is doing and their confidence level and their ability to continue as a stand-alone competitor long-term?

We have said on any number of occasions, Kemp, that they are a very formidable competitor, that they have executed the business model of a physician-owned hospital about as flawlessly as you can do, which has created a lot of pressure for us. On the other hand, we have responded vigorously and, as you know, regained a lot of the lost profitability that we had in that market and feel good about the progress that we have made. We will see.

It's difficult for us to put ourselves in their position and know what they are thinking. I think it certainly is difficult to imagine that they can earn the outsize returns that they have earned in the past, that they can continue to do that. But we will see.

Again, I will just repeat the comment that I was making to Gary Lieberman about acquisition opportunities. I mean that is the perfect example of something that if there are opportunities of any sort in that market, not just a wholesale acquisition but buying physician practices or doing whatever we need to do, we are certainly going to invest the capital we need to to be as competitive as we need to be in a market like that which is obviously very important to us.

So we will certainly watch all those dynamics that you sort of described very closely, but I think it's difficult for me to sit here today and tell you that it's clear to me what the future of that facility is and how we might influence it, etc. But it's certainly something we are going to watch very closely.

Okay, thanks. And the last question relates to the coalition in Las Vegas. That discussion for you all seemed to be more extended, more I guess potentially contentious than it was for the other operators in the market.

Was there a particular issue in that negotiation that was difficult, whether it was rate or some of the other terms they were seeking?

No, I think in many ways, Kemp -- we have made this comment in the last quarter or two as people have asked us about what the environment in managed care contracting is like. We have described it as a little bit more contentious and argumentative, but in the end that the results are not terribly different than they have been.

And I think to some degree the coalition contract is emblematic of that. It went longer than we expected, it resulted in a brief period of essentially a contract termination and being out of the network, but in the end we signed a three-year renewal on terms that, I think in our minds, are very consistent with the terms that we are signing other contracts, etc.

So it exhibits, I think, the fact that both providers and payers are going to the mat a little bit more than they were in the previous few years. But at the end of the day, at least from our perspective as a provider, the end results are still remaining within a range that has been reflective of where we have been over the past few years.

That is great. Thank you.

(Operator Instructions) John Ransom.

Good morning. Could you just give us an update on Texas and Florida, both in terms of Texas UPL, what your assumptions are? And then what effect, if any, you think the move to managed care Medicaid will have on utilization in both states? Thanks.

I think our assumptions in 2011, John, are that our UPL programs continue at effectively the same rates that they are operating now and at the moment I don't know that we have reason to believe otherwise.

As far as a move to Medicaid managed care, I think we have always had a view that in some respects we operate more effectively with managed Medicaid and Medicare payers than we do with the traditional government payers in the sense that -- I think commercial payers are just better at setting out the rules of the road in advance. You know what is expected, you know how you are going to get paid, you know the utilization review techniques, etc.

What you don't have with managed care payers that you have with the government is this sort of after-the-fact, three year after-the-fact audit where they come in and they say in retrospect you really didn't meet admission criteria or this was done improperly, etc. So that is a very tough way to do business.

So I think we certainly have dealt with managed Medicare for many years. We have dealt with managed Medicaid in many markets for many years. It's not something that I think we view as an obstacle. It's a predictable business model and if it's implemented, we will deal with it.

Okay, thanks a lot.

And there are no further questions.

Okay. Well, we thank everybody for your time and look forward to speaking with everybody in the next couple of months at the end of our first quarter.

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