環球健康 (UHS) 2011 Q2 法說會逐字稿

Good morning. My name is Shirrette and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services second quarter 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. I would now like to turn the conference over to Steve Filton. Sir, you may begin.

Thank you, and good morning. I'm Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the second quarter ended June 30, 2011.

As discussed in our press release last night, the Company recorded adjusted net income per diluted share of $1.04 for the quarter compared to $0.68 during the second quarter of 2010 as calculated on the supplemental schedules included with last night's press release. We are maintaining our previously announced guidance for the full year with earnings per diluted share expected to be $3.85 to $4.00. During this conference call, we 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, and our Form 10-Q for the quarter ended March 31, 2011. We'd 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 revenue increased 6.1% during the second quarter of 2011.

Adjusted admissions to our hospitals owned for more than a year were down approximately 1% for the quarter. On a same-facility basis, revenue per adjusted admission increased 7.1% over last year's quarter. The increased revenue was due to higher acuity, improved payer mix, and strong commercial pricing. We define operating margin as operating income or net revenue less salaries, wages, and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues.

The impact of the prior year items included on the supplemental schedules are not included in our divisional operating margin. On a same-facility basis, operating margins for our acute care hospitals increased to 15.2% during the second quarter of 2011 from 14.2% during the second quarter of 2010. The margin improvement resulted mainly from improved payer mix, higher acuity and strong commercial pricing. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $239 million and $190 million during the three-month periods ended June 30, 2011 and 2010, respectively.

As a percentage of gross revenue the combined total of bad debt, charity care and uninsured discount was slightly lower than last year's second quarter. On a same-facility basis, revenues in our behavioral health division increased 6.2% during the second quarter of 2011. Adjusted patient days at our behavioral hospitals owned for more than a year increased 3% during the second quarter and revenue per adjusted day increased 3.8% compared to the comparable prior year quarter. These same favorable trends were present in the results of the recently acquired PSI facilities which largely met our financial expectations for the second quarter.

Operating margins for our behavioral health hospitals owned for more than year increased to 26.7% during the quarter ended June 30, 2011 as compared to 27.4% during the comparable prior year period, primarily due to the temporary closure of some capacity at one of our Pennsylvania facilities to repair certain physical plant problems. Our cash flow from operating activities was $173 million during the second quarter of 2011 as compared to $88 million in the second quarter of 2010. Our accounts receivable days outstanding increased to 44 days during the second quarter of 2011 from 42 days in 2010.

At June 30, 2011, our ratio of debt to total capitalization was 63% and the ratio of debt to EBITDA was 3.8 times. We spent $60 million on capital expenditures during the second quarter. We opened a total of 176 new behavioral health beds at some of our busiest facilities during the first two quarters of 2011 and anticipate opening another 150 new beds during the remainder of this year. At this point, Alan and I would be pleased to answer your questions.

(Operator Instructions) And your first question comes from A.J. Rice with Susquehanna Financial.

Hi, everybody. Thanks. Maybe just asking about the margins on the same-store basis on both sides of the business. You had a positive margin trend on the acute care side, it sounds like on a same-store basis. When you drill down to the specific expense items what were some of the dynamics there? And just to confirm, if you ex- out that unusual item you would have been positive, it sounds like, on the psych side? I just want to make sure that's true.

Okay, A.J. Yes, I think that on the acute side, much as was the case in Q1, the very strong revenue performance, revenue is up 6%, is really what contributes to the margin expansion, and I think if you look through our expense items, we felt, I think we were particular successful on the supply line, but just in general, I think we're always going to feel that that sort of margin growth, particularly on the acute side, we ought to have margin expansion and just as we've done in Q1 and Q2.

On the behavioral side, as you suggested, we called out, or I called out in my remarks the fact that we were a couple million dollars behind due to the closure of the capacity of this one Pennsylvania facility in the quarter, combined with a couple of smaller non-recurring expense items in the quarter. We calculate our margins probably would have, on a an adjusted basis, would have been ahead of last year by 20 or 30 basis points.

Okay. And then just maybe one other one. Obviously, with the events of earlier in the week, there's focus specifically on Medicare mix and acuity levels and all. You said that your overall acuity was up nicely. I don't know if you have the case mix overall number by any chance, but -- or what the trend was there -- but also have you -- and I don't know if you've even done this, but have you drilled down and seen whether you had any anomalies or unusual activity in your Medicare book specifically?

A.J., the three elements that we've highlighted as contributing to the strong revenue performance in acute care are essentially the exact same three that we highlighted in Q1.

Right.

Higher acuity, and that's true in our Medicare book of business as well as our non-Medicare book.

Okay.

Better payer mix, and as we talked about in Q1, what we really mean by that is a lower level of uninsured patients. Basically, we talked in Q1 about the fact that after a couple of years of having uninsured admissions grow by 5% and 6%, uninsured admissions were sort of flat in Q1 and they were sort of flat in Q2. So that trend continued. And then finally, we cited in both quarters strong commercial pricing, and, again, in each of the cases the trends continued from Q1 into Q1.

Okay. So you just haven't seen any change, basically?

We really have not.

Okay. All right. Thanks a lot.

Your next question comes from Justin Lake with UBS.

Thanks. Good morning. First question, Steve, just on the new capacity build-out, the acute business continues to run pretty strongly. Can you give us an idea of what the contribution is from the capacity you put on-line in 2010 for the second quarter, what it added year-over-year to the EBITDA growth? And then, more importantly, can you give us an idea what you think that could contribute from an EBITDA standpoint next year on a year-over-year growth basis?

Sure, Justin. Alan, I think in his quote specifically in the press release, highlighted the contribution of the large acute care capital projects, and by that I think he was referencing the three large capital projects we've talked about for a couple of years now, and that's the new tower at Summerlin in Las Vegas, and then the replacement facilities for Texoma and Palmdale in California. Combined, there's probably $400 million to $500 million there as a capital investment in those three projects, two of which opened in early 2010 and Palmdale opened in late 2010.

Those projects, I think, as a result of the recession have taken a little bit longer to ramp up than we originally anticipated, but are clearly ramping up, and I would say the three facilities combined contributed at least half of the EBITDA growth that we had as a Company in Q2 which, again, is why I think Alan specifically called that out in his comments in the press release. As far as what they will contribute in the future next year, I'm not going to be specific. I'm sure when we give our 2012 guidance we'll be more specific, but I think the expectation is that each of those three projects will continue to improve.

Okay, great. And, Steve, the 0% to 2% EBITDA growth target that you had for the acute care business this year, that was excluding the contribution from these projects?

Yes, definitely Texoma and Palmdale. Summerlin is a little bit harder to sort of segregate out because obviously it's an existing hospital with existing capacity, so it's a little bit harder to do. But for the most part, yes. I think we -- those trends we sort of talked about in our same-store facilities.

Okay, great. And then lastly, the cash flow in the quarter and year-to-date, free cash flow is $240 million. Just curious if you have a target there for the full year?

I think in our Q1 call we talked about using a number of about $400 million. I still think that's a reasonable estimate. Obviously, if you annualize the first six months will you get a higher number, but certainly our guidance implies that our earnings will be lower in the second half of the year. You have to take that into account.

I think we would suggest that our capital spend, which has been very, very tight in the first six months, is likely to increase a little bit in the second half of the year. So I think that $400 million number is still not -- it's probably a bit of a conservative estimate but not a bad place holder.

Okay, just last, just quick numbers question, Steve.

Yes, Justin, can I interrupt for one second. The one thing I should call out, though, as sort of a non-recurring item is, we did sell one of the PSI facilities that we were required by the FTC to sell in the beginning of July, and if we sell the other three facilities that we're required to sell that would be an element of cash flow that would obviously be above and beyond what folks have seen in the first half of the year.

Okay. Steve, can I just throw in one quick numbers question and then I'll jump off. The $1.04 number you reported, I assume ex- these items you report you talked about in the behavioral business probably looks more like $1.06. Can you just compare that to what your internal plan was for EPS in the second quarter?

Yes. Our reported EPS was probably $0.04 or $0.05 ahead of our own internal budget.

The reported number was $0.04 to $0.05 ahead and if we include the adjustment it might have been $0.06 or $0.07 ahead then?

Yes.

Okay, great. Thanks a lot, Steve.

Your next question comes from Adam Feinstein with Barclays Capital.

Thank you. Good morning, everyone. Everything looked very strong here. Just wanted to get some clarity on a couple things. Maybe just, Steve, maybe a starting point, just talk about Las Vegas a little bit. You talked about the improved payer mix trends for the Company. Maybe just let us know how Las Vegas did in the quarter. And then just want to get the [C-bedding] update on the Sierra contract also, since I know that contract was coming up for renewal in June.

Sure. So I'll talk about Sierra first, Adam. Pretty much the comments that we made, I think, in Q1 still apply and we've, I think, made throughout Q2. We have -- the contract with Sierra has actually expired. We have an agreement in principal in place with Sierra as to a new three-year contract with a rate increase that falls well within our sort of quoted managed care price increase range.

We continue to go back and forth with Sierra over some very detailed conversations about essentially how to allocate that increase to specific diagnoses and procedures, et cetera, and we believe we'll conclude those conversations in short order and sign a formal contract. As far as the overall trends in Las Vegas, we said in Q1 that the beat in Q1 and the very significant beat in Q1 was largely driven by Vegas performance, very strong payer mix. I think we've seen those positive payer mix trends continue into Q2.

We have seen volumes weaken a little bit in Las Vegas in Q2. And so as a result, I think that the improvement in EBITDA in the acute division in Q2 is sort of more widely dispersed among the acute portfolio and not as concentrated in Las Vegas as it was in Q1, although Las Vegas still is ahead of where it was in Q2 of last year.

And since you mentioned the portfolio, Steve, maybe just an update on the McAllen in southwest Texas market?

Yes, I mean, I think the comments there would be similar to what we've been saying for the last few quarters. Again, we've seen soft volumes in that market, but improved payer mix trends, and so the market actually continues to, frankly, outperform where we thought they would be this year, which has been a positive, obviously. But, again, I think it's largely reflective of the overarching trends that we've seen which are weaker volumes than we expected but better payer mix.

Okay. And then just maybe a question for Alan. Just wanted to get your thoughts, you say you guys have owned PSI for two full quarters now. Just relative to your expectations going into it, just curious to get your observations in terms of how the integration of PSI has been going?

The integration is going well. We're pleased with it. We have found areas of upside. We're working on a couple of problems. But on balance, we're very happy with it, Adam.

Okay. And then just on that same topic, Steve, the synergy numbers you guys outlined, you're still comfortable with the same range relative to what you talked about earlier?

Yes, I mean, we've -- from the outset cited this $35 million to $45 million synergy number which was meant to refer to the amount of corporate overhead savings we thought were available as a result of the transaction. And as we have on numerous occasions, we'll reiterate today we think we are very much on track to meet that within the sort of two-year period that we set for ourselves in the beginning.

All right, thank you very much.

Thank you.

Your next question comes from Ralph Giacobbe with Credit Suisse.

Thanks. Good morning. Steve, maybe just going back to, you talked about the temporary closing of the Pennsylvania facility. Maybe just give us a sense, how long was that closed for? Is it now open? What were the issues there? Any details there would be helpful.

As I said in my comments, Ralph, we had some physical plant problems that in order to repair them we had to close down some capacity. Not all of -- the facility is still open. I believe, I don't have the dates in front of me. I believe it was closed for most of the second quarter, and we expect it to reopen sometime fairly soon, mid- to late August. So we may have a bit of a lingering effect into Q3, but then it should be behind us.

Okay. And then can you maybe talk about where you are in terms of capacity in the psych business overall?

Our occupancy rates continue to run for both portfolios in the high 70s, and I think from our perspective, that still means that there are any number of facilities that are operating at what we would deem to be inefficient levels of occupancy, meaning that we're turning patients away. And that's why we've added, as my comments indicated, 175 or so beds so far this year, and we expect to add another 150 in the balance of the year, and I think at a similar rate in the following couple of years.

I think we still think there's an opportunity, again, in the entire portfolio for facilities that, quite frankly, are operating at that high 70s, low 80s, in some cases even higher than that occupancy levels at relatively attractive investments, invest in new capacity and earn a decent return.

And then just in terms of -- going back to the acute care pricing mix, it was the best I think we've seen in eight years, is there a way to parse out a little bit sort of what you think is coming from the pure pricing versus acuity versus payer mix? And then maybe just, more importantly, sort of for the second half of the year, do you think you can sustain in that area, just given what appears to be kind of relatively easy comps?

Sure. Well, I mean to some degree, Ralph, I'm going to express the same sentiments we expressed in Q1. We're extremely pleased with the very robust revenue performance in acute care but we remain cautious about it because, obviously, we're still in an economic recovery that appears, I think, to just about everybody to be fairly fragile and uneven, particularly as it has affected the numbers of uninsured. We saw a dramatic drop in those in Q1, and we sustained in that Q2. We'd like to be able to believe that we'll be able to sustain that completely going forward but are not quite so sure.

We've also seen an increase in acuity in Q1 and again in Q2. I think to some degree that's a function of the fact that the flip side is that we've got weaker admissions and the admissions we're losing tend to be the less acute, more discretionary, and elective sorts of procedures. So what we're left with are the more acute procedures. But I think we continue to believe that it's quite possible and probably even likely that the acute care pricing backs off as the year goes on.

The other thing that I think we know is coming is that Medicaid pricing is going to decline as the year goes on. As we've said many times, Medicaid pricing was sort of flat to down 1% in the first half of the year. We expect it to be much more like down 3% or 4% in the back half of the year and that will affect our overall pricing, both on the acute and, frankly, even more so on the behavioral side. So that's another kind of cautionary area that we're keeping an eye on in the back half of the year.

And then, Steve, if I could just squeeze in one last one. I know it's only a month into the quarter but I need just general observations, either positive or negative, of the trends relative to kind of what you've reported for second quarter, first half of the year?

As is always the case, when we have these calls, I mean, the only real metric that we have any real insight into at this point is volumes, and I would say that the early indications of Q3 are no different than they were in Q2, which is pressure on acute care volumes and strength on the behavioral side.

Okay, that's helpful. Thank you.

Your next question comes from Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everybody. I just wanted to go back to Vegas, and I guess my question is a little more specific in regards to the Summerlin capacity expansion. Alan, or Steve, I guess just the way I would frame the question is given that the Summerlin is probably your highest margin asset in the market, is it possible that maybe we've seen more of a structural change in your Vegas margin profile going forward? It just seems like we've seen so far since that's ramped up much better acute margins. And I just want to make sure we're thinking about that Summerlin expansion in context.

Look, I think, Darren, your overall point is correct. I mean, by the way, I'm not sure it's terribly specific to Summerlin in the sense that just like when we talk about behavioral capacity expansion, if we can expand capacity in existing facilities and fill that capacity, then that's probably the highest return investment we can make because there's little sort of fixed costs, fixed operating costs, that's associated with it. I think it's part of the reason why we've been able to drive behavioral margins up as much as we have in the last few years.

We haven't had as many opportunities to do that on the acute side. Summerlin has been a unique opportunity, but, yes, and part of the problem with Summerlin is we opened that Summerlin capacity in January of 2010, in the teeth of this terrible recession, particularly in Las Vegas, and so we didn't get much impact out of it in 2010. In fact, I think Summerlin's volumes didn't change much. But clearly in 2011 we're starting to see some ramp up, some incremental capacity, and that's absolutely helping Summerlin's margins and the Company's margins. And as I indicated to, I think, Justin in answer to the question before, I think we would expect it would continue to get better as the economy improves and demand improves.

Okay. That's helpful. And then one thing I just wanted to clarify. Did you bring some facilities on balance sheet? There was, I guess a little bit of a higher D&A number and correspondingly a lower rent expense number, and I just want to make sure I understand what was going on there. That was relative to my model.

Nothing really in the quarter, Darren. We'll go back and look but I suspect it's probably just a tweaking of our depreciation for the opening balance sheet of PSI and some of the new projects, but nothing of an operational nature came on-line in Q2.

Okay. So are you suggesting there was some kind of true-up in D&A in the period that we might want to call out or think about?

I mean, I would to have go back and look. All I would suggest is I think that the Q2 depreciation is the right run rate to use.

Okay. And then just the last thing, and I don't want to wordsmith here too much, but, Steve, you said PSI is performing generally in line, so maybe a little more of a qualification perhaps. I just want to make sure I'm hearing what you're saying and not reading too much into it. But, Alan, I think you gave us a general sense, but is there anything specific you would want to call out, just as regards to how you're characterizing it?

No, I think that what I was trying to say in my comments are simply that, obviously, we give same-store metrics because we have them on very strong admissions and pretty robust pricing, et cetera, and I think we were just trying to make the point that we're seeing those same metrics in the PSI facilities as well. Alan, I think, pointed to the fact that we've seen some areas of improvement, things like overtime and registry expense that I think we've been able to impact almost immediately without any real change to the operations or disruption in the operations.

I think for the most part you've heard us say that most of the operational changes that we -- and improvements we would hope to make to the PSI facilities will be done in the 2012 and 2013 timeframe, but those are the only points we're trying to make, and we're not trying to wordsmith or be cute about anything here, so it's pretty straightforward from our perspective.

All right. No, that's great. Thanks a lot.

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

Thanks. Good morning, everybody. Maybe just following up on that last point, as you think about the operational opportunities longer term, any updated thinking on margin potential at PSI facilities?

Tom, I think that, again, this is another one of these issues, I think what we have to say in Q2 is largely a reiteration of what we've said before. I think that the difference between the two companies, apples-to-apples margins, were probably a couple hundred basis points, the UHS margins were better. I think we believe that probably half of that is structural in nature, and has to do with the fact that PSI had a bit more of an emphasis and skew towards the residential business which by definition has a lower margin. Of the remaining 100 basis points, I think we think that a measurable amount of that can be closed over time, and by 2012, 2013, we should be able to close, again, a measurable portion of that.

Okay. And the admissions growth continues to be very strong. Do you have a sense of what you think the market is growing versus maybe what you're taking either in terms of share or how much additional capacity is generating the volume that you're seeing?

I think it's hard or difficult for us to sort of parse out what portion of admission growth comes from market share increase or capacity increase. I mean, I will say this. We've made this comment before, that without the capacity additions that we've done for a number of years and that, frankly, PSI had been doing for a number of years and that we believe we're going to continue to do for several years it would be difficult for us to get to 7% admission growth.

So certainly some of that growth is attributable to the capacity expansion. We believe that some of it is attributable to the benefits of mental health parity legislation, although, frankly, that's even harder to precisely define. And we also believe, as I think your question suggests, Tom, that we think some of it is just due to the strength and increasing demand for behavioral services in general, and they've proved to be less sort of economically sensitive than acute care demand and acute care volumes, but it's difficult to sort of parse it into pieces.

Okay. And last one from me. You mentioned maybe pricing backing off a bit in the second half. You pointed to Medicaid. I guess Medicare, maybe a little pressure there, and managed care, though, you said it's been strong. What ranges are you seeing, new contracts sort of price increases and is that steady, up or down, as you look out?

Yes, I mean, the managed care pricing range that we've quoted for some time has been this 5% to 7%, and I think by characterizing managed care pricing on the strong side implies that we've been at the high end of that range, and we've not really seen any significant changes in that in the last couple quarters.

Great. Thanks a lot.

The next question comes from Whit Mayo with Robert Baird.

Hey, thanks. Maybe first question just for Steve or Alan. I think you've got a new executive that joined to run the acute care segment. Can you talk a little bit about Marvin, his experience coming from the non-profit world, what he brings to Universal, and just maybe any general comments about any newer priorities the division may have or if this hire signals anything we should be aware of?

Well, Marvin is an exceptional executive. He both has a financial background and an operating background. He is extremely highly thought of in the industry. I've had a number of people contact me and congratulate me on having a man of his caliber join us. He's highly experienced, so we are very delighted he will be with us in a couple of weeks.

We think that, as I mentioned, his strength is across the board, but he has a background in strategy, he's very good with managed care and doing different projects and doing different joint ventures. He's an excellent operator, and he had been designated Chief Financial Officer, so he brings an unusual combination. He's experienced, and we're very excited about having him join the Company.

Okay, great. And maybe, Steve, just update us on your thoughts with regards to buying physician practices. Are you warming up to the idea more? Have you bought any at this point or is it just still not prevalent in many of your markets?

Whit, I think what we've said about physician practice acquisition is that we're approaching it judiciously and definitely on market-by-market basis. I think that we believe that some of the benefits of physician practice acquisition have been overstated. We think that, frankly, the history of the industry has demonstrated that on more than one occasion. But, on the other hand we also recognize and acknowledge that particularly in certain markets, there is competitive pressure to do so.

So it's a bit of a mixed bag. In some markets, we're pursuing physician acquisitions pretty aggressively and have already completed some. In other markets, like a Las Vegas, physician practice acquisition has really kind of been a non-event in the market itself, and we're certainly not doing anything to disrupt that dynamic. So it's a bit of a mixed bag, and as we, I think, approach this business in general, we do what we think is right in every individual market to suit market facts and circumstances.

That's helpful. Just maybe last one, just HITECH, thinking about stage one meaningful use, just any updates on the internal investments or general thoughts?

Yes, I mean, I think, first of all, as we've, I think, disclosed before, we've brought one hospital live on the Cerner system, which is the system we think will qualify for the meaningful use criteria. We have a schedule to bring the remaining 24 hospitals live over the course of the next two years. We have submitted applications to a number of states for Medicaid reimbursement for 2011. Some of the state Medicaid programs allow reimbursement really based just on your commitment to implement a system as opposed to meeting the same sort of criteria that Medicare and the HITECH Act require.

It is conceivable, we have applied for those funds. We think that we could receive by the end of 2011 some not insubstantial amount, but we're also continuing to talk with our accountants and auditors about how we would recognize that. I know that some of our peers have already recognized those revenues. I think we are inclined generally to recognize the revenues as we implement the system, but we'll do whatever the industry deems to be the appropriate accounting treatment.

Maybe, any bookends to think about what the cash could be that you think you may receive from the states in 2011, or is it just too early to tell?

We've applied for amounts that probably fall between $10 million and $20 million. I wouldn't speculate at this point on the likelihood of what we might receive in 2011.

All right, thanks a lot, Steve.

Thanks.

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

Good morning. I'm -- it sounds like with PSI largely integrated I was just curious what your appetite might be for either acute or behavioral acquisitions going forward? That was my first question. And then the second one, I think you mentioned, not to be too picky here, but on the Sierra, you mentioned one of the things that you're trying to wrap up is the specifics on how you allocate the rate increases. I think you said across diagnoses. Just curious is that a normal negotiation that you would have? Thanks.

Sure. On the acquisition front, Frank, as somebody's question before indicated, our cash flow and debt repayment plans are ahead of schedule. I think our run rate leverage is sort of around 3.1 times, and, again, is ahead of where we expect it to be at this point and certainly ahead of the 4.0 times we were at right around when we announced the acquisition.

So we're very pleased with our leverage position. We feel it affords us a great deal of flexibility and we are actively pursuing opportunities in both business segments to expand where that makes sense. And, again, I think it's, as it always does, it's sort of the whole array of opportunities. One-off acquisitions, capacity expansions, larger acquisitions, and, again, I think UHS has a well-deserved reputation for approaching these in a opportunistic and disciplined way, and I think that's going to be our approach. But certainly our leverage and capital structure has us feeling that we have very few limitations if there are good opportunities out there.

And then on the Sierra?

Oh, I'm sorry. Yes, it's hard, I guess, for me to describe what's kind of a normal managed care negotiation, Frank. The Sierra negotiation, I guess, is a little different because I think some of our contracts have more differentiation existing between diagnoses, et cetera. The Sierra contract, as large as it was, it was largely kind of a single rate contract, and we were trying to be a bit more nuanced in this go-round, and I think that's what's causing a little bit of the extra work here at the end. But I don't think it's terribly -- or indicates a terrible departure from what would be the shape and structure of other managed care contracts.

Okay, thank you.

Next question comes from Christine Arnold with Cowen.

Hi. Couple follow-ups. First, based on your comments on Sierra, I trust that there aren't changes in the ultimate payment terms? You'll probably get the same pricing you've been having, is that true?

What I said, Christine, is obviously we believe we've agreed upon an increased amount, and, yes, we think we're going to get that regardless of what we agree to, that whatever we agree to in terms of the specific diagnoses and allocation of rates to procedures it will total to the agreed upon increased amount.

Okay. All right. So there's no risk in the details here?

We don't believe so.

Okay. And then the three facilities that you're selling, could you remind us what the sale proceeds are likely to be on that in the second half?

The sale proceeds are likely to be somewhere in the $100 million range when all the deals are completed, but I can't guarantee they will all be completed in the second half of the year.

Okay. And then this may not be possible, but is it, on the acute care pricing side, possible to put numbers around, gee, of the 7.1% pricing in acute, we think we got two percentage points on CMI, we think we got better commercial pricing execution of something else, and then payer mix was worth something else? Or is that not something that's quantifiable?

Yes, I mean, I think the easy answer is I'm sure it's possible, Christine. It's certainly not possible for me right now, but we will try and put some more substance around that and maybe include it in some of our conference presentations, et cetera, perhaps in Q3.

Okay. And then final question, can you confirm if you have an uninsured patient your net revenue that you book is less than it is for insured patients?

Sure. I mean, for a truly uninsured patient, in almost every case, there's going to be a charity care and an uninsured discount, and the amount of net revenue associated with that patient is going to be extremely low, quite frankly.

The only exception to that would be if you add a patient who, for whatever reason, you concluded that even though they lacked insurance had the means to pay their bill and you were not taking any discount. I can assure you those patients are few and far between.

Great, thank you.

Your next question comes from Kevin Fischbeck with Bank of America.

I was just looking at the psych margins again. And if I back into it, it looks like the same-store psych margins were up sequentially, but the non-acquired margins were down sequentially. Is there any reason for that?

I think the problem in doing that, Kevin is we include some other non-recurring items in the sort of non-same-store stuff that I think is going to distort your attempt to do that analysis. I would tell you that I think that, if you will, using the term same-store margins for both the UHS and PSI facilities are both up, and they're both up by similar amounts on a sequential basis.

Okay. That makes sense. And then the 300-plus beds that you guys are looking to build this year, I think that that number is less than what you and Psychiatric Solutions used to be doing separately but combined. Any thought about why that number is the right number here versus maybe what the pro forma company used to be doing?

And I guess I would have thought there might be some catch-up. I thought some of the issue with Psychiatric Solutions was they did not really continue to build beds last year. I thought there might actually be some pickup.

Yes, it's all -- those are all fair comments, Kevin. I think the challenge that we have in adding psych beds is that, obviously, people like to model them in a very rateable way and a very predictable way, and it's hard to do. I think we believe that there is a pipeline of potential bed capacity expansion that's pretty significant, again, in both portfolios. And because of regulatory issues and licensing and to a lesser extent local zoning issues, we are working as fast as we can to add those beds, but I think the pace is likely to pick up in 2012 and 2013.

Okay. And then last question, I guess one of the things, I think, in the past when we've talked about taking the improvement on the acute care side and really starting to just factor it into the numbers going forward, one of the things that you were looking for as far as payer mix goes was not only just uninsured being down but also commercial volumes being up. So I guess when we think about the mix trends is it right to say that we're still just seeing uninsured volumes down but we still haven't seen a rebound in commercial volumes?

That's absolutely correct.

Okay. All right. Thanks.

Your next question comes from John Rex with JPMorgan.

Thanks. One more question as we look to understand revenue yields better and kind of what's going on there. Can you just size explicitly, and maybe I just missed this, what the percentage change your case mix index was in the quarter?

I think the case mix index was probably, the Medicare case index was probably 3% or 4% higher than it was in the comparable quarter last year and I think our non-Medicare case mix increased by a similar amount.

And with that, if we go back 1Q would that have been a similar move, or was this a step-up?

I believe that the increase in both quarters was fairly similar, although sequentially, Q2 was yet higher than Q1.

Okay. So the absolute -- if I saw the absolute case mix index, it was sequentially higher?

Yes. At least from a Medicare perspective, our case mix index, we made this comment in Q1, but I'll reiterate it in Q2, it is the highest it's ever been.

Right. And with regards to some of the commentary that A.J. was making earlier, specifically as it relates to cardiovascular surgeries and such, have you seen any shift there in that specific category?

No, I would say, and, again, as you might imagine, John, I mean, we've been marginally focused this week on our own results and not paying too much attention to what others have reported, but I know that HCA talked a little bit about cardiovascular procedures in general and ICD procedures specifically. We've seen those procedures decline. I certainly wouldn't say that that's new to Q2. I think that decline has been fairly secular and has been in place for some time now. So, again, I don't think there was anything terribly different about that trend for us in Q2, and obviously, we've seen an uptick in enough other procedures to move the acuity needle up.

Okay, great. And then on the psych business, so residential has been somewhat a headwind. You've commented in the past in terms of length of stay and the states moving that. Can you size, if you just break out the Medicaid residential business what's happened to length of stay over the past year? Just trying to see how much of a headwind that is and understand kind of what that's inserting in the overall length of stay in psych?

Well, I think you can just sort of go from the overall numbers. These are rough numbers, but admissions are up 7%, patient days are up 3%, which sort of implies that length of stay is down 4%. What that really means is that because of the length of stay decline is focused in the residential business, that length of stay is down even more than in that in the residential business but that order of magnitude, I think, gives you a sense of what we're talking about.

I mean, should we think of that as still an accelerating trend from the states? I guess what I mean by the [states] is there still a long way to go for the states in terms of cutting length of stay in that business, or should we be basing out -- and this comes back to do we ever see any benefit in the consolidated length of stay from mental health parity and other things like that?

Well, I would answer the question in two ways, John. I mean, one is, look, I think that the reduction in length of stay on the part of state Medicaid programs is part and parcel with the reduction in Medicaid rates. It is just another mechanism for the states in their own minds to pay less for mental health care.

I think from a clinical perspective what our clinicians would argue is one of the reasons you're seeing admissions so strong, even in the residential business as well as the acute business, is that it is a sort of clinically flawed strategy that you're just discharging these patients sooner and they're just coming back to the facility faster. So I'm not sure that it's an effective strategy on the states' part but I'm not sure they are going to abandon it. So I think as long as we continue to see Medicaid rate cuts we're likely to see Medicaid length of stay cuts as well.

Okay, thank you.

Your next question comes from John Ransom with Raymond James.

Hi. I guess this is either for Steve or Alan. A couple things. One, Alan, I'd be interested in your perspective on how, if and when the debt ceiling drama ends? And secondly, could you just talk specifically about the former PSI facilities? I mean, when they ran these facilities, we would seemingly get a press release every week about some patient care issue.

What have you guys done specifically either to address that or to maybe improve the regulatory response when something happens? Because we would notice sometimes they would choose to fight the regulators versus work with them when there was a problem.

Let me talk, John, about the problems that they may have had. We have dedicated a great deal of effort and a number of people to reviewing all the procedures, particularly in the quality area, and we're working our way through the facilities. So I'm very confident that whatever number of incidents they have had in the past, the problems will be a lot less going forward. We have a very capable group, and I think we're doing well in that regard.

With regard to the debt ceiling, I was telling Steve this morning, I view that pretty much the way I view the NFL problem. I think that ultimately it will get resolved. The Business Roundtable a couple weeks ago, 400 companies, we sent a letter in to the administration telling them that they had to resolve the situation before we fell off a cliff somewhere, and I think that's going to happen. I don't know how.

There's a vote today, as you know, and we've all been following this as it goes along. Now there's a vote in the House, then it goes to the Senate, then the President, but I can't imagine that ultimately something doesn't get done in the short run to avoid what could be a huge problem. And I think we'll, actually, for the hospital business, and health care in general, I don't think there will be too much emphasis on us in the short run.

Okay. Thanks. And just one more follow-up on psych. Was it -- after you've owned these things for a while do you think the quality issue -- was it a training issue? Was it that you had to hire new people and replace a lot of the people that you had? Was it just regulatory -- sluggishness on regulatory response?

John, I think the Company was more focused on acquisitions and growing the Company and showing size growth quarter-by-quarter and not as detailed on the operations.

Okay. Thanks.

Your next question comes from Art Henderson with Jefferies & Company.

Hi. Thanks for taking the question. Steve, going back on the CapEx, I know you talked a little bit earlier on in your comments about that number, but if I take the first half of the year and annualize out what you have spent, it's about $232 million, and I think in your comments you said $325 million to $350 million is still on target. So I'm curious, if I -- is there going to be some incremental spend in there in the back half that would get to you that number, or is that expectation a bit high, the CapEx will ultimately be lower?

Yes, Art, if what I said was interpreted to be that we're still going to get to that original capital spend guidance, I'm glad you asked the question, because I don't think that's really going to happen. I think it's far more likely that we -- what I tried to say was that the pace of the spend will pick up in the second half of the year. I think the number we get to is much more likely to be kind of a $275 million to $300 million number.

Okay, $275 million to $300 million. And then going back on -- Alan, I know you were just talking about your perspective on Washington, and you mentioned short-term hospitals are going to be okay. I was just curious, has the dynamic in Washington changed dramatically from -- when you came out of the healthcare reform bill and you had some visibility there, are they a bit more intolerant on making sure that the hospitals have extended visibility?

It seems like the number of ads that get run on TV supporting the hospitals and pushing against cuts seems to have gone up. So I'm just curious like what kind of demands are being made on the hospital sector to the extent that you could talk about those at the moment?

Well, the hospital industry has been running the ads, so they haven't been a big surprise to us. There's a hospital in every community, and it's a big employer in every community, and all of the legislators are well aware of the importance of the hospital, and its importance in people's lives. So we just keep pointing that out.

And beyond that, I think you know what we all know, and that there has been a great deal of expense beyond what the nation brings in, and there will be areas looking to reduce expense. But I don't -- I think it's got to be done carefully, and I don't see that legislators will want to do that at the hospital level without very, very carefully reviewing what they're doing and doing it very judiciously.

And one last follow-up to that. To the extent that there are a lot of non-profits out there that are sort of teetering on the edge, I mean, in times like this does your phone start ringing off the hook more from people looking to partner up, or is there any sort of change in that dynamic?

I don't know that there is. As Steve had mentioned, we're very active. We're talking to a lot of people, and where we find an opportunity, we're in a position to act on it. We're feeling good about our financial situation, so that's all I could say with regard to your question.

Okay. Well, all right. Thank you, Alan. Thanks, Steve.

Sure. I think we have time maybe for one more question.

Okay. (Operator Instructions) And your next question comes from Jake Hindelong with Ticonderoga.

Okay, good morning. Just a couple of questions, guys. First up, it's on guidance. So your first two quarters ran ahead of budget. July seems to be on trend. Would it be fair to assume that if the remainder of the year stays more or less on that trend that we could focus on the high end of your guidance range?

Jake, I mean, to be fair, I think the idea of having a range out there is that we're suggesting that that's our range. Once we start suggesting in essence where in the range we should be, I think we've changed our range. So we're going to just stick with telling you what our range is.

Okay, great. Thanks, Steve. And then, just secondly, on the behavioral facilities that you've been divesting, or that you're planning to divest over the next couple quarters, what kind of EBITDA multiples are you seeing?

We, I think, said from the beginning that we thought we could dispose of the four facilities for a turn or two less than what we bought them for, and I think we still think we're kind of in that range.

Thanks, Steve. Thanks, guys.

Okay. Well, we thank everybody for their time this quarter, and we look forward to speaking with everyone again after the third quarter results.

Thank you for participating in today's conference call. You may now disconnect.