環球健康 (UHS) 2011 Q1 法說會逐字稿

Good morning. My name is Richay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 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). Thank you. Mr. Filton, you may begin your conference.

Thank you. Good morning. I'm Steve Filton, and welcome to this review of Universal Health Services' results for the first quarter, ended March 31, 2011. Alan Miller, our CEO, is also joining us this morning.

As discussed in our press release last night, the Company recorded net income per diluted share of $1.15 for the quarter.

During this conference call, Alan and I will be using words such as believes, expects, anticipates estimates, and similar words that represent forecast 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.

I'd like to highlight just a couple of developments and business trends before opening the call up to questions. On a same-facility basis in our acute care division revenues increased 6.6% during the first quarter of 2011. Adjusted admissions to our acute care hospitals owned for more than a year increased by 0.6% compared to the prior-year quarter. On a same-facility basis, revenue per adjusted admission rose 5.9% during the first quarter of 2011. This increase was due primarily to a favorable change in payer mix and acuity. Our acute care hospitals provide charity care and uninsured discounts based on charges at established rates amounting to $223 million and $176 million during the three-month periods ended March 31, 2011 and 2010, respectively. As a percentage of gross revenue, the combined total of bad debt, charity care and uninsured discount was at its lowest level in four quarters.

We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. On a same-facility basis, operating margins for our acute care hospitals increased to 18.0% during the first quarter of 2011 from 16.1% during the first quarter of 2010. On a same-facility basis, revenues in our behavioral health division increased 6.5% during the first quarter of 2011. Adjusted patient days for our behavioral health facilities owned for more than a year increased 1.8% during the first quarter, and revenue per adjusted patient day rose 4.6% over the comparable prior-year quarter.

This increase was due primarily to a continuing favorable shift from residential to acute business. These same favorable trends were present in the results of the newly acquired PSI facilities, which largely met or slightly exceeded our financial expectations during the first quarter. Operating margins for our behavioral health hospitals owned for more than a year increased to 26.3% during the quarter ended March 31, 2011, as compared to 26.0% during the comparable prior-year period.

Our cash flow from operating activities was $183 million during the first quarter of 2011 as compared to $139 million in the first quarter of 2010. We spent $57 million on capital expenditures during this year's first quarter. At March 31, 2011, our ratio of debt to total capitalization was 65%. The ratio of debt to EBITDA was 4.4 times.

The previously disclosed amendment to our credit agreement which provides for a reduction in the interest rates payable on borrowings under the agreement did not become effective until mid-March, and therefore had minimal favorable impact on our interest expense during the first quarter of 2011.

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

(Operator instructions) Justin Lake, UBS.

First question, Steve, if you can give us an update on Vegas and what you're seeing there?

Yes; Justin, I think that the division-wide trends that I described in my comments -- improved payer mix, higher acuity despite softer volumes, are all present in Vegas. Vegas is clearly ahead of last year on the strength of that improvement in payer mix, mostly a reduction in uninsured patients. I did mention, I think, in the fourth quarter, and I think we've continued to see this trend, that we are starting to fill some of that capacity in the Summerlin Tower, which we opened in the beginning of 2010, really saw that demand pick up late in 2010 and it has continued into 2011. So, generally very favorable results in Vegas that we are very pleased with.

Great, and then just last question on payer mix, it's clear that you mentioned the uninsured volumes being a little bit better. Looking at the managed care reporting season, United Healthcare, WellPoint both reported numbers that were commercial membership well ahead of expectations. From what you are seeing out there right now, are you seeing any benefit from that? Are you seeing -- I think, typically, commercial lines have been 300-400 basis points, at times, worse than overall. Are you seeing any improvement there as far as that disparity?

I think that we continue to see exactly what you describe, the trends of commercial volumes being down in that range below our overall volumes. We are encouraged by the fact that the managed care companies are reporting upticks in commercial utilization because I think we feel like at some point down the road that should be helpful, although I do know that several of the companies seem to also report relatively moderate medical cost trends in the quarter, which again seem to be consistent with our reporting of commercial trends remaining down. But it does appear to be somewhat of an upside as we move into the next few quarters.

And do you have any kind of improvement there in that mix baked into this guidance?

No. I think in our original guidance, which obviously is essentially the guidance that's now in place for the rest of the year, we assume that payer mix would largely stabilize, but not necessary improve a great deal, except towards the latter end of the year. So, I don't think we have a lot of it baked in.

Okay, great, thanks for the color.

Shelley Gnall, Goldman Sachs.

Just want to understand -- the payer mix shift a little bit better, so I'm just taking a look here. So Las Vegas, unemployment rates through February were still very elevated, at 13.7% in Vegas through February. So, unemployment is still very, very high; you're not really seeing any improvement in the commercial volumes yet. So, am I correct in understanding that the benefit of the payer mix shift is that there's just fewer in insured patients coming through your doors. And, if that's the case, can you help me understand, if you know, why that is the case? Is it triaging, or is it being able to help route these patients to safety net hospitals in town? What's driving this improvement out? I don't know that I understand.

Well, Shelly, I think that, as you pointed out, the unemployment rate remains high in certain places like Las Vegas. It was 13.7% in February, February of 2011. But in fact, that's a 150-basis-point improvement over what it was in February of 2010. And in general, we've done a calculation of the unemployment rate in our markets and believe that it's about 80 to 90 basis points improved over what it was at this time last year.

So, despite the fact that it remains high, and certainly in our markets remains higher than the national average, it is still an improved. Now, tying back to Justin's question, I think we are seeing only one element of that benefit. We've seen a reduction in uninsured patients coming to our hospitals. We haven't necessarily seen an increase in commercial utilization, and we haven't really seen the uptick in demand that I think some folks continue to expect to occur as the economy improves. So I think the drop in uninsureds is tied to the drop in unemployment. In some markets like Las Vegas, the speculation of our local folks is that, even though the numbers of employed are not increasing in any measurable way, the unemployment rate is going down because the unemployed are leaving the market. So that's a potential explanation as well.

Okay, thank you. And then, going back to the guidance range, so back in March, March 15 when you raised guidance, it looked like the debt refinancing that had just been completed at the time was a little bit more accretive than the guidance raise at the time. So is any of that differential captured in yesterday's guidance raise?

No; I think that yesterday's guidance raise was really premised on the fact that -- I'd make a couple of comments in that regard. One is that our own budget for the quarter was probably $0.05 or $0.06 ahead of consensus. So, while we exceeded our own budget by a significant amount, it was not quite as much as the consensus beat. And so what we raised our guidance by was the amount that we exceeded our budget and a little bit beyond that.

I think that was mainly meant to take into effect the potential continuation of a few of the trends that we saw in the quarter as opposed to anything having to do with the debt refinancing.

Okay, and would you be willing to share your assumptions for LIBOR in guidance?

I don't have those in front of me, Shelley, but happy to do that at some point.

Okay, no problem. And then just a final question -- behavior health volumes, very strong. I'm just wondering, can you parse out the impact from mental health parity? Is that an important driver here of the strong volumes?

We assume so. We have said consistently that it's difficult for us to precisely identify the impact of mental health parity. It's really not a data point that we can capture in our own admitting data. But the strong behavioral volume growth, the strong behavioral revenue growth has been relatively consistent for the last year, through 2010, and has continued into 2011. We think that some of the pickup in 2010 over 2009 was as a result of mental health parity. I think we believe that some of the continuing strength is a result of mental health parity. But it is impossible, as you suggest, to tease out what the specific impact from that legislative element is.

Okay, would you be willing to share what your expectations are for behavioral volume growth through the rest of the year?

I think we said in our original guidance at the end of the year, Shelley, that we thought that behavioral revenue growth would be in that 5%-6% range. So we actually, in the first quarter, did a little better than our own expectations in behavioral, although from a revenue perspective the real outperformance in Q1 was on the acute care side.

Yes, okay, thank you.

Ralph Giacobbe, Credit Suisse.

Steve, can you maybe talk about the site contribution a little bit more in the quarter, maybe how much synergy you've pulled out at this point and how we should think about that as we move through 2011?

Sure. Again, I always sort of remind people when the question gets asked that when we talked about synergies as a result of the behavioral and PSI acquisition, we were really only referring to this $35 million to $45 million of corporate overhead savings. We had really said pretty consistently from the very beginning that that was the number, that we expected that number to be achieved, about half of it, kind of upfront as we eliminated, in particular, a lot of the senior management salaries and equity compensation, and then the other half of it ratably over the next couple of years. We said at the end of the year, and I'll reiterate today, that we feel we are very much on track to achieve those savings.

The rest of the potential upside from the acquisition, I think, comes from the margin gap that existed at the time of the deal between the two portfolios, that is, the UH is portfolio had an operating margin that was a couple of hundred basis points higher on an apples-to-apples basis then PSI's. And we still think, again, when you do that apples-to-apples comparison, you get to a very comparable number. We have suggested that, while we may get a little bit of that gap closed in 2011, that most of that gap closure, to whatever degree we can accomplish it, is more of a 2012-2013 event. I think all that thinking remains very much the same and consistent.

And then in terms -- obviously, as you mentioned, Vegas was clearly ahead. Can you maybe talk a little bit more about South Texas? I think you were expecting that market to be a little bit of a drag this year -- maybe what you are seeing there?

Yes. You are absolutely right; we said in our -- when we gave our 2011 guidance that part of the presumption was that the McAllen or South Texas market would actually be down. Actually, in the first quarter, it was slightly up. In fairness, I think that's mostly on the strength of strong operations performance, meaning cost controls, etc., because our volumes remain fairly weak in that market there. It's among our weaker markets, as the recession has sort of caught up with that market and it has suffered, I think, also from the whole dynamic of the border violence that you've read about.

So we were pleased that they were slightly ahead of last year. I'm not sure I'm prepared to alter our original presumption that probably for the year, if volumes remain soft, they will probably have a down 2011.

Okay, and then just my last one -- can you maybe give us an update on free cash flow and what your expectations are there? It looks like you did about $125 million in the first quarter. Can you talk about -- is there seasonality in that? I think last time you had said that you expected a high 3s, maybe low 4s in terms of free cash flow. Obviously, the run rate is higher from the first quarter. So what should we consider there, or should we consider anything there?

I would say that, just as we have raised our guidance largely by the amount of, if you will, excess EBITDA in the first quarter, that you have to assume that our cash projections will mirror that. But otherwise, the cash for the rest of the year ought to be in our consensus. And I would also just remind people that, historically, the second quarter includes large interest and tax payments. That's consistent with our cash flow usually works.

Right, okay, all right, thanks, Steve.

Tom Gallucci, Lazard Capital Management.

Can you give us an update maybe on what's going on in California there with some of the new facilities you got in the last year or so?

Yes. The new facilities in California are the Palmdale replacement facility, which replaced our Lancaster facility. That opened in early December of 2010, and that facility has been building volumes and, I think, meeting our expectations. You know, pleased with its performance.

The other new capacity in California is at our southwest dual campus, if you will. We had new capacity at both our Inland and Rancho campuses that was ready to open a while ago, had been tied up with some of the regulatory issues that we were having there. But all that capacity opened within the first quarter as well, and we are starting to get a benefit from that as well.

Are you still in line with your prior expectations on the contribution from Southwest over the course of the year, or any better or worse?

Yes; I think both of those events -- I mean, clearly, the Palmdale opening and I think even the southwest capacity were contemplated in our budget and our guidance. So again, in general, we tended to exceed our own budget in Q1 in most hospitals, in most areas, but I think are generally performing within our expectations.

And would the payer mix commentary be the same for the California markets as well?

Yes; I think the payer mix commentary was really largely true for the entire portfolio. I don't think it was isolated to any particular markets.

And maybe just one last one -- Medicaid, just curious about your latest expectations there and how you are thinking about the second half on that front.

Our original guidance was that Medicaid pricing would be down 2% to 3% for the year, and that was premised on flat to 1% for the first -- you know, flat to down 1% for the first half of the year and down 3% or 4% as more Medicaid cuts kicked in, in the second half of the year. Obviously, that's still what our guidance implies, although I would have to say it's one of the primary reasons why we did not want to raise our guidance really for the balance of the year, because I still think that there's going to be a lot of noise around those Medicaid rates and potential Medicaid cuts.

And, also, I think we'll have a much better sense of that three months from now, when we are doing our second-quarter call. It will be late July, and I think a lot of the states will have definitively acted at that point in time, and we will just have much, much better visibility on Medicaid rates for the balance of the year.

Okay, fair enough, thank you.

Gary Taylor, Citigroup.

Just a few questions -- I want to make sure I understand what you are saying about mix, payer mix in acuity and just understand a little more. So you talked about commercial inpatients still being down in the range of 3% to 4%. But it sounds like you are implying on the uninsured that the absolute number was down. Can you tell us what that number was year-over-year?

Yes; Gary, it was flat to maybe down very slightly, 0.2, 0.3%.

Okay, so when I'm just -- I'm not questioning; I'm just trying to understand. So, for example, in the fourth quarter, where your total inpatient admissions were down about 2.1% versus this quarter, where you were down about 1%, is the thought here that uninsured is flat to down versus being slightly up, and commercial is still down but down a little less, and that kind of drives the difference and why the overall mix is a little better, just thinking about it sequentially?

I think that's right, and then I think you have to tack on to that an increase in acuity in the quarter and -- as well is just strong commercial contractual pricing and an increase in government business, Medicare and Medicaid. And I think all those elements together contribute to the really strong pricing dynamic that we experienced in Q1.

Thinking about acuity, was flu impactful? Because we know flu incidence was up, but it looks like flu activity or flu hospitalizations were not up year-over-year. So is part of the acuity comp helped by less-severe flu year-over-year, or is it primarily in surgical areas?

I think that your observation is correct, that we certainly did not have a busy inpatient flu season by any means. So that may have helped prop up the acuity numbers. But I think HMA mentioned they had their highest acuity number ever. I think we were pretty darned close. So I don't think that can be solely attributable to flu; I think it's as much this dynamic that in this era of muted volumes, where it seems like the healthcare consumers and the hospital consumers are putting off elective and discretionary procedures, in some cases, that the patients we are getting in the hospital and the patients that are coming to the hospital are among the sicker patients.

Got it. Yes, it's a positive trend; it's interesting that the first two companies out of the box both had similar trends on that metric. Just a couple more quick ones.

You guys have always been helpful, helping us think about seasonality of the business. And obviously you've got PSI in there now, which I think historically always looked a little more sequential versus seasonal, and that's a bigger part of your business. And your business has looked always kind of like big first half, just softer seasonal second half. Is that still generally true? Is there anything you want us to be thinking about in terms of our modeling there that's really different from before?

No, I mean -- look, we are certainly aware of the fact that in two of the most recent years, in 2008 and 2009, we had very, very strong first quarters and then, as you suggested, the performance tailed off in the back half of the year. I think, again, as you suggest, that's sort of the classic seasonal model that we have experienced. I think in 2008 and 2009, that seasonality was exacerbated by a deteriorating economy which obviously affected our uncompensated care and payer mix as the year went on.

It's hard to know exactly how that's going to unfold in 2011. Again, we are extremely pleased with the payer mix performance in the first quarter, but I think, as Shelley's question indicated earlier, the underlying economic fundamentals don't yet feel all that strong. So while we think we are certainly poised for a recovery and would hope these trends would continue, we are not certain that we won't see some of that same weakening in the back half of the year -- which, again, is obviously why we've changed our guidance the way that we have, largely to reflect the strong first-quarter performance but to, in large part, keep the rest of our guidance intact for the balance of the year.

Got it, just two more quick ones, and then I'll -- can you update us just on -- you've talked about the trend in residential to acute. Can you update us just on the length of stay for RTC and acute on the behavioral side? I know what, combined, it is, because you disclosed that. But where are you running on RTC versus acute now?

Yes; we clearly have seen growth in admissions in both of the two segments -- or in the two segments, and a decline in length of stay in the two segments although, clearly, the decline in length of stay in residential has been more dramatic than in acute. And I think what that does is it improves the payer -- the revenue per unit on the behavioral side.

But do you have the length of stay, or you don't want to give that?

I don't have it in front of me (multiple speakers) specifically for the two (multiple speakers) --

Last question is, when we look at -- when I look at the quarter versus my model, obviously what you did on same-store revenue in acute beat us, and that was a big chunk of upside. And our behavioral revenue, even though it was a very good same-store number, was a little light of our number. I guess I'm just trying to get to, maybe I mis-modeled the amount of PSI revenue that was represented by the divestitures.

But do you have a comment of either the amount of annual revenue divested, or just what same-store legacy PSI looked like? Was there any weakness just from the transition in terms of same-store revenue? Are -- I -- assuming that's not included in your same-store behavioral revenue number you reported, right?

Correct. No; I think what -- the comments that I made in my prepared remarks, Gary, were that the trends that we saw in our same-store legacy portfolio of 6.5%, roughly, same-store revenue growth, the underlying admission and pricing trends all were very similar between the two portfolios, between legacy, UHS and PSI; and again, in both cases, met or slightly exceeded our expectation. So obviously, it's hard for me to speak to others' models.

But from our own perspective, the behavioral performance was very much in line, slightly ahead of expectations, no surprises from either portfolio.

It sounds like I didn't have the divestitures modeled right.

That may be right.

So, I appreciate that, thank you.

Frank Morgan, RBC Capital Markets.

Steve, any prior-period settlements in the results in the first quarter?

None of a material nature, Frank. I think we actually have a reputation for disclosing those one-time items in fairly excruciating detail. So we had a couple of Medicaid pickups in some places of a couple million bucks that helped a little bit in the quarter, but nothing of any great import.

Okay, good, that's what I thought. Secondly, could you talk a little bit about how managed care pricing, the contracting is looking for next year; where are you in the process? And are you seeing anything different in terms of structures of contracts, length of time over which payers are willing to contract?

No. We commented in our year-end call that some of the negotiations have gotten more contentious, and we pointed to the coalition negotiations in Las Vegas, where we were actually terminated or out of the network for a very brief time as emblematic of that sort of -- a little bit more contentious dynamic that exists. I think we have issued some more termination notices than we have in the past, and probably have received a few.

But at the end of the day, as I indicated in a response to somebody earlier, our contractual pricing remains pretty strong. We are not seeing any wholesale changes in the nature of our reimbursement. There's lots of talk about how reimbursement may look different in the future and as healthcare reform really gains more traction. But I think very little of that is impacting our day-to-day, on-the-ground operations.

Okay, and then finally, if you could give us a little detail maybe on what your ER visits and your surgical volumes were like, both. And was there any difference in surgical volumes between in- and outpatients? Thank you.

Yes, and the trend in surgeries is one that has been in place now for a while. I think our inpatient surgeries were down 3% or 4% and our outpatients were up 3% or 4%, for a net relatively flat surgical dynamic. And I think we've seen that.

And again, I think our ER visits were also kind of in line with our overall admissions, and either flat to down slightly.

Thank you.

Kevin Fischbeck, Bank of America Merrill Lynch.

Good morning, actually this is [Joanna] (inaudible) for Kevin. I have a question on your, I guess, capital deployment strategy here. I guess the Company paid a good deal of that in the quarter, $6 million or so. So I guess the question here is, what's your appetite for capital deployment, whether it was going to be (inaudible) purchased acquisition versus just purely paying down debt?

I think it's going to remain opportunistic, which has really been the hallmark of the Company. I think both Alan and I were asked this question in some form or another on our fourth-quarter call, and articulated to you that we are open to opportunities in both business segments, acute and behavioral, and we'll entertain them seriously as they arise. We won't feel obligated to pursue them, just as we never have. And in the meantime, we hope to generate a lot of cash as this newly combined Company, and until these other opportunities arise for real, we will pay down debt as we do that.

Okay, that's helpful. And also on the acute care side, I guess the cost management was very impressive and it was the best margin, I guess, in maybe eight years or so. So I guess the question is, do you feel the margin is sustainable?

I think that question in large part comes back to the issue of just the real strong revenue growth. What our first-quarter performance demonstrates, and certainly something we've always argued that if we can grow particularly in this inflationary environment revenues by 6% or 6.5%, there is a tremendous amount of operating leverage that should come with that. And I think you see that on our salary and our other operating expense line.

I would call out supply expense, however, as an area in which, on the acute side, and actually even on the behavioral side, we have made some progress, which began -- I think we highlighted it in Q4, and it clearly has continued into Q1. Supply expense on the acute side was actually down on an absolute basis from the first quarter of last year, and I think that's just a reflection of the initiatives that we have put in place to work with our doctors to buy the most efficient but least expensive devices and drugs and -- by vendor, and within each vendor to make those most appropriate selections.

Great, and the last question -- can you give us more color in terms of your talks on the proposed IPPS rule for hospitals? Thank you.

I think that the industry has raised appropriate objections to the amount of coding adjustments that were made to the IPPS rule; and I think, as an industry, will work hard to see if that reduction cannot be mitigated before the final rule is out. But from our own perspective, it's largely in line with what we have, at least in our Q4 guidance -- obviously, it's not effective until October. But for that one quarter, certainly well within the range of what we had embedded in our guidance.

Great, thank you so much.

Whit Mayo, Robert Baird.

Steve, just any update on asset sales? Curious, with what interest you are receiving from the market -- if my math is right, you sold one for 10 times EBITDA or north of that, maybe three turns more than you paid for PSI, which you've got to like. So just any update?

The process continues. You're correct; the potential buyer in Delaware has done a press release announcing that deal. We continue to work through selling the assets in Puerto Rico and Las Vegas as well. I think that we said, when we first announced the deal, that our, again, underlying assumptions are that we would sell these assets for, overall, maybe one or two turns within what we bought the portfolio for. And I think that still remains our expectation and feel like we should meet it, and it shouldn't have any material effect on the overall accretiveness of the transaction.

Does your bank agreement mandate those proceeds going to deleveraging? I can't recall.

No; I don't think specifically. I think, in large part, the answer to that question is similar to my answer to Joanna before, which is we will use those proceeds to repay debt and we will continue to explore other opportunities as they arise.

And just kind of curious about maybe some of the conversations you're having with maybe some other interested parties on packaging and selling any other assets. I'm sure there's no sense of urgency, but just kind of curious about what interest level you are seeing from sponsors or other industry participants.

Yes; in fairness, we are not really focused on that. Obviously, as you know, the four facilities are -- we are obligated to divest of in our agreement with the FTC, and so we are focused on that. And I think our focus is otherwise mostly on the integration of the PSI facilities into the portfolio as opposed, at the moment, to any other portfolio reconfiguration.

Okay, and maybe one Vegas question -- sorry. I think you have a little bit more visibility on the managed care market in Vegas than you've probably had in some time. Can you maybe comment and update us on Sierra and the pending contract there? And just -- what I'm trying to think about is how that contract plus the visibility and stability you have with the coalition contract, how that helps you. CHW is out of the coalition contract. It doesn't sound like HCA is going to come back to Sierra any time soon. Sunrise does get a lot of that out-of-network business.

But I'm just trying to think how that visibility and the stability in the market helps you in terms of working with the physicians, looking at capital projects. I'm just interested in how you see that dynamic.

I think that the key word, in my mind, that you used was stability. We have these two large contracts that were up for renewal, the coalition and the Sierra contract. We have renewed the coalition contract. He have said a number of times that we expect to renew the Sierra contract shortly. in both cases, for terms and for price increases that are within the ranges that we have been suggesting are our ongoing managed care increases.

And that's it. I think that largely just -- we have a very strong franchise in Las Vegas, and I think that the execution of these two renewals just continues to cement that franchise so that we are in a position, which I think we saw in the very beginning of Q4 and now again in Q1, as the local economy starts to improve in Vegas, to really get some leverage out of our very strong market position in that Las Vegas market.

Okay, thanks a lot.

Kemp Dolliver, Avondale Partners.

First, a housekeeping question -- in the release, in the consolidated statistics section, you show the behavioral health EBITDAR margin at 25.4% versus 25.5%. Steve, is that same-store, or is that an aggregate margin?

It's in aggregate margin.

Okay, that would imply that you've closed the margin gap this quarter on the PSI facilities. Is that a correct assumption?

No. I think that most of the margin improvement -- we had some margin improvement on a same-store basis, as I mentioned in my prepared remarks. I think we had it similar on the PSI side, mostly coming, again, from -- I'll sort of just repeat the dynamic that when you have 6.5% revenue growth, you should have some margin expansion, and I think we did in both portfolios. I think that's what you are really seeing there.

Okay, super. Second question is the acute care bad debt.

I believe it was 12.5% for the quarter.

Super, that's all I need. Thank you.

A.J. Rice, Susquehanna.

A couple questions -- maybe, obviously, there's industry controversy created. You guys have avoided the limelight on this, but around admission procedures through the ER. And maybe just give us your perspective and just tell us exactly what you guys do, to watch that and monitor that.

I wasn't aware there was any controversy, A.J.

Okay.

No; look, I think that obviously the attention in the past couple of weeks on the policies and procedures that hospitals use to admit patients in the emergency room -- one of the metrics that I think was put out there as a proxy for measuring that was this observation percentage. We tend as a Company to have a relatively low observation percentage, although it varies pretty dramatically amongst our hospitals.

I think our own take on that and research on that was that in the sense of trying to determine the appropriateness of admissions, it's not a terribly useful statistic. What it shows, at least for our hospitals, is that we probably put less patients in observation status than others. There's, I think, a variety of reasons for it. And in some cases we may slightly disadvantage ourselves by not putting patients in observation and perhaps billing a little bit more for them. But I think, at the end, it's not a material issue.

On the notion of the appropriateness of admissions, I think, by all the measures that have been put out there, one-day stays and, more importantly, the ER conversion rate, the percentage of ER visits that translate into admissions either for overall or for Medicare patients only, UHS is very much in the national norms. And in fact, on the Medicare conversion percentage tends to be on the low end of both the for-profit industry and the national norms.

Switching gears, on the admissions front in the quarter, there has been some comment about weather impacting results. Did you have any sense of -- I mean, your geographies are different than some of the other guys'. But, did you have any impact and you were able to call that out in any way?

Yes. I think, particularly on the behavioral side, I recall in states like Tennessee, etc., we had a far more severe winter than we are normally accustomed to. My general sense is that weather evens out over time, unless it occurred -- and it only distorts things if it occurs at the very end of a quarter or the very beginning of a quarter, let's say.

So I don't think we would think it had a material impact on our results for the quarter, and certainly in the long run of the year it will all sort out.

And then I look at your CapEx number. You did $56 million in the first quarter. I know the previous guidance you had given was $350 million to $375 million. Is it just that sort of back-end loaded, or is there a change in your CapEx expectations for the year?

I think, at the moment, there's not a change. I do think that that lower spend number reflects just the continued prudence that we have in that area and, I think, reflects the natural dynamic that overall capital spending in the space has been reduced and our competitors in our local markets are spending less, and therefore we -- not that we are not always focused on appropriately deploying our capital and spending where we can get the greatest returns, but I think in this environment of more cautious spending overall, we've sort of doubled our focus here.

So I think we are not prepared to say that we are going to reduce that cap spend estimate for the year, but we certainly remain very prudent in the way we are deploying that capital.

And just my last question -- I guess your guidance on the acute care revenue side has been for 3% to 3.5% same-store growth. You did 6.6% this quarter. I guess you commented that maintaining the more moderate expectation on growth to the back half partly reflects conservatism or a cautious view, let's say, around Medicaid. Are there any other dynamics that would suggest -- that were there in the first quarter or that won't necessarily be there for the rest of the year? Or is it just a desire to be conservative in a somewhat uncertain economy still?

I think it's these two dynamics, both of which you have touched on and have been touched on before. Again, I think earlier in the call, Shelley asked the question sort of suggesting that the underlying unemployment metrics and other underlying economic metrics are not as favorable as our own payer mix performance, etc., and maybe we've gotten a little bit ahead of the underlying economy. So there's some caution there that I think we want to see how that all develops.

And then, secondly, as you suggested and we talked about before, we do think these Medicaid cuts are coming in the back half of the year. We've obviously embedded them in our guidance. But we certainly feel like, again, three months from now we will have a much better sense of how appropriately our guidance has reflected them.

Okay, all right, thanks a lot.

Adam Feinstein, Barclays Capital.

Maybe just a question for Alan to start out. Just is this first full quarter with PSI in the numbers and just in the operations -- I guess as you guys have integrated PSI, just curious what your observations are so far just in terms of the operations and the opportunity and what has been the biggest take-away thus far.

I am pleased with how we have been integrating PSI. I think our people have been working very well with the people from PSI, the operators at the facilities. I'm very pleased with that. The margins show it.

I'm also very pleased with what's happening in the acute care division. Cost control and just generally the operations has been excellent, very high margins, probably the highest for the last three years. So I'm pleased with our operation and for all of the UHS people listening on the call, thank you.

All right, great. And the market is pleased, with the stock up here today. Just maybe a follow-up just on PSI. They had had some outstanding issues in a few key markets, most notably the Chicago market. Just curious what has been going on there. Have you guys resolve those? Is that going to be an opportunity for additional volume sometime later in the year?

Adam, I think one of the reasons why we've suggested that there would be not any material margin improvement in the PSI facilities for 2011 and that most of that, in our own projections, was left to 2012 and 2013 is that we really wanted to focus our efforts in this first 12 or 15 months on appropriate integration of the facilities, making sure that all of our policies and procedures in areas like quality and risk management, etc., were all very consistent, just increase the level of focus and discipline in all of our facilities to make sure that -- in this business which can be challenging and difficult in the area of quality/risk management that we were doing everything we could. And we remain very focused on that. So yes, we are focused on the PSI facilities that have had historical problems. There are UHS facilities that have had some problems historically. We are always focused on the ones that we think are most vulnerable, but also focused on facilities to make sure they don't get vulnerable, quite frankly.

So it's a big effort. As Alan said, our operating folks have been working very hard on this integration process, and we feel like it's going well and we feel like we're making progress.

Okay, and just back to Vegas, and you gave a lot of detail so far, so I won't spend too much time there. So obviously better payer mix and better margin. So as you were to think about the margin growth in the quarter in the acute care space for you guys, did Vegas have better growth than the overall numbers? Or was it similar to the overall number?

No, I think, as is often the case with us, Adam, and it has certainly been the case, if you will, in the last couple of years on the downside, that Vegas has deteriorated in the weaker economy faster than our other markets. And I think in Q1 the mirror image is true in that Vegas has recovered a bit faster. But I have said on the call and I'll repeat that those positive trends were present throughout the portfolio, even if they were perhaps a little more evident in Vegas.

Okay, and then just my final question, and you kind of went at this. But maybe just to follow up, so just with the synergies, the $35 million to $45 million, and you talked about the ramp-up there -- so is there any way to think about that in terms of you have already achieved 25% of it, or how should we think about just the timing of the synergies that you outlined?

As far as the $35 million to $45 million, again, Adam, I think the way that we have laid out what we expect the chronology to be is that we would get half of it out of the gate. And we believe we have done so, and the remaining half that we would get over the first two years post transaction. And again, it's obviously early in the two-year cycle, but we think we are on track to do that.

Okay, great. Thank you, guys. Great quarter.

Adam, I always look for you or A.J. to say, good quarter, guys. And culturally now we are moving right to everybody's model. So thanks anyway.

Jake Hindelong, Soleil Securities.

Alan, great quarter.

Thank you, Jake. You are a gentleman, like your father.

Absolutely, absolutely. Just looking down the income statement quarterly through the rest of the year, kind of pro forma, the salaries/wages ratio came in very low on the first quarter, which is impressive. You had overhead synergies, operating leverage and a headcount reduction. Seasonally, is there any reason to think that the first half will be better than the second half? Or is there any one of those items you would point out to me that will get a little tougher or easier in the second half?

I hate to sound like a broken record, Jake, but I think a lot of this really comes back to the issue of the 6.5% same-store revenue growth in acute care. If that number is sustainable, then the operating expenses should continue to look very good because there's lots of operating leverage to be had at that level of revenue growth. Obviously, if that starts to regress back to more -- closer to our expectations of 3%-3.5%, those operating expense percentages will look a little tighter.

Great, thanks Steve. And the headcount reduction from last year -- that should help you, still, a little bit year-over-year in the second quarter. Correct?

Yes; I still think we are getting that benefit of those efficiencies that we achieved in late Q2 or early Q3 of last year.

Okay, and then on supplies, previously it sounded like the Company had planned to push a little bit harder, and that clearly happened in the first quarter. Is that sustainable through the year, do you think, or is that more a result of the operating leverage?

No, no; that's the one, and that's why I called it out separately before. I think that is a new -- now, again, I think some of that was built into our guidance. But that is literally a new initiative that is not necessarily tied to the revenue growth, and I think it has been very -- you've seen the success we've had really in the last two quarters. And hopefully we can sustain that through the year.

Great, thanks. And two more quick questions -- on meaningful use, is there anything in your guidance, and is there any chance that you might get that stimulus payment or some stimulus payment in the fourth quarter?

There is nothing in our guidance. I think there is a small chance that we might be able to get some funds late in the year. But I think it's -- we are literally on the verge of going live with our first fully automated EHR hospital, so we will probably be in a better position to address that question in the second quarter call.

And then on your tax rate, what number is incorporated into guidance for the next three quarters?

It's probably a little bit lower number than we actually realized in Q1. We saw our tax rate creep up a little bit in Q1 because our effective state tax rate went up due to some of the nuances of the PSI transaction. And again, I think we are working on that and probably will have a better sense -- for now, I would use that tax rate. But to whatever degree we are able to lower it, we will keep people posted.

Okay, thank you.

Gary Lieberman, Wells Fargo.

Maybe just going back to the acuity, it sounds like most of it was macro driven. Was there anything specific you could tell us either from service line that you saw tick up more than the other, or any initiatives that you guys have been focused on that could be driving that?

No, I think your description, Gary, of it being macro-driven is probably most accurate.

Okay, and then maybe just turning towards -- you are a little bit closer to the Texas budgeting process. But maybe any insights there in terms of what, in general, is giving you pause or anything specific that you are aware of through that budget process.

Well, the Texas legislature has passed a 10% cut. And I think the general notion is that there's a lot of politicking underway and that it may well be mitigated or reduced in some amount, and we are certainly working through the Texas Hospital Association and appropriate channels to do our part to see if we can make that happen. But Texas, like many states, faces a significant budget deficit. And the Texas legislature has been among the more aggressive states in their approach to the state budget and cutting costs.

So I think it is too early to tell with any certainty whether we will have any success in doing that.

Okay, great, thanks a lot.

Darren Lehrich, Deutsche Bank.

I just had one quick question to follow up on the free cash flow comment, Steve. You guys have had a bit more time to get in the psych solutions facilities and see how they are capitalized and whether there has been expansion opportunities, etc. They had spent a lot of the last several years, and I think, if I recall, your assumption was that the level of spending would be about the same over the course of this year from a CapEx standpoint. Is that still the way you are thinking about it? And is there any updated thought around how those facilities are capitalized at this point?

No; I think that when we first announced the transaction and talked about some of our cash flow assumptions when we first announced the transaction, we had said at that time that we assumed for those purposes that the PSI capital spend over the last couple of years, which was like $120 million to $130 million, would just stay in place.

But I think in our own capital budget for next year, in this $330 million number that we put out there, $335 million, we clearly have presumed a lower spend. Now, we are absolutely continuing to explore bed expansion opportunities in both the PSI facilities and the UHS facilities. But I think even if we aggressively pursue those, we will not wind up spending the same $125 million of CapEx on the PSI facilities that the legacy company spent in the last couple of years.

Okay, very helpful, that's all, thanks.

Christine Arnold, Cowen.

I had a call conflict; so if you've answered this, please just tell me to go to the transcript. The PSI (inaudible) basis points in margin change -- have you implemented some of these programs to maybe cut SW&B over time in those facilities? And how much of that do you really think is achievable, or is that something you need to wait on?

Yes; I think what we've said, Christine, is that we've reduced their expenses or increased their margin very little in terms of absolute initiatives at the outset. Most of that, I think, remains a 2012-2013 event. And I think we will be in a position to give more color and visibility about how much of that we think is achievable over the course of the next few quarters.

And I assume you've talked through the acuity issues pretty extensively. Do you have a sense for why acuity is rising on the commercial side? Because the commercial payers are also starting to see that and really don't have a sense for why that is and are fearful that it will continue and building in higher trends towards the latter part of the year, which would certainly be positive for the acute side of your hospital.

Yes, I think that is demand has softened, Christine, it's just a function of the folks who are coming to the hospitals are tending to be the sicker patients, both commercial and government patients.

Great, and Texas UPL, not an issue for you?

We don't believe so.

Perfect, okay, thanks.

And there are no further questions at this time.

Okay, we'd like to thank everybody for their time and look forward to speaking with everybody next quarter.

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