環球健康 (UHS) 2011 Q4 法說會逐字稿

Good morning. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 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 call over to your host, Mr. Steve Filton. Sir, you may begin.

Thank you and good morning. I am Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services' results for the full year and fourth quarter ended December 31, 2011.

During the conference call, Alan and I will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. We 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, 2011.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the Company recorded net income attributable to UHS per diluted share of $4.04 for the year and $0.98 for the quarter. After adjusting for a reduction in malpractice reserves relating primarily to prior years, our adjusted net income attributable to UHS per diluted share for the quarter ended December 31, 2011 was $0.91.

Included in the quarter is a year-to-date reduction to our effective tax rate due to final implementation of certain state income tax planning and the securing of certain state tax credits.

We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and doubtful accounts divided by net revenue. Our operating margins increased to 16.7% during the quarter ended December 31, 2011 as compared to 15.7% during the comparable prior-year period.

On a same facility basis, revenues in our Behavioral Health division increased 6.3% during the fourth quarter of 2011. We note that the PSI facilities are included in our same-store data for one month this quarter. Adjusted admissions and patient days to our Behavioral Health facilities owned for more than a year increased 8.3% and 4.1% respectively during the fourth quarter. Revenue per adjusted patient day rose 2.4% during the fourth quarter of 2011 over the comparable prior-year quarter. Operating margins for our Behavioral Health hospitals owned for more than a year increased to 24.7% during the quarter ended December 31, 2011 as compared to 22.6% during the comparable prior-year period.

On a same facility basis in our Acute division revenues increased 1.6% during the fourth quarter of 2011. The increase resulted primarily from a 1.3% increase in revenues per adjusted admission. Adjusted admissions to our hospitals owned for more than a year were relatively flat. The relatively muted revenue growth reflects a $6 million reduction in the quarter of Medicaid disproportionate share and UPL reimbursements primarily related to Texas, as well as the continued impact of negative economic trends in certain of our local markets.

On a same facility basis, operating margins for our Acute Care hospitals decreased to 13.3% during the fourth quarter of 2011 from 14.4% during the fourth quarter of 2010. We also note that there are no EHR-related revenues included in our quarterly financial statements.

Our Acute Care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $248 million and $208 million during the three-month periods ended December 31, 2011 and 2010. As a percentage of Acute Care net revenues, bad debts, charity care expense and the uninsured discount in this year's fourth quarter were at levels higher than those experienced during the fourth quarter of 2010. However, due primarily to the increase in Behavioral Health revenues and the very low levels of bad debt and uninsured discounts in that business, our overall percentage of bad debts, charity care and uninsured discounts were lower than those experienced during the fourth quarter of 2010.

Our cash from operating activities was approximately $156 million during the fourth quarter of 2011 as compared to $89 million in the fourth quarter of 2010. Our accounts receivable days outstanding increased to 49 days during the fourth quarter of 2011, primarily due to a slowdown in Medicaid payments from the state of Illinois. At December 31, 2011, our ratio of debt to total capitalization was 61%.

We spent $90 million on capital expenditures during the fourth quarter. Included in our capital expenditures were the construction costs related to a 97-bed replacement behavioral hospital in Kentucky, which recently opened and the ongoing construction of a new Acute Care hospital in Temecula, California. We opened a total of 263 new Behavioral Health beds at some of our busiest facilities in 2011. And effective in the first quarter of 2012, we have completed all of the divestitures required by the FTC as part of the PSI acquisition. Proceeds from these divestitures totaled approximately $115 million, consistent with our expectations.

Excluding the unfavorable $0.04 per diluted share EHR impact described in our press release, our estimated range of earnings per diluted share attributable to UHS for the year ended December 31, 2012 is $4.33 to $4.48 on projected net revenues of $7.2 billion. We should note that this revenue figure excludes the previously announced Knapp acquisition, which is not included in our 2012 guidance.

Our net revenues for 2012 have been adjusted to reflect reclassification of our provision for doubtful accounts, which, beginning January 1, 2012, will be reflected as a deduction from revenues rather than as an operating expense. Alan and I will be pleased to answer your questions at this time.

(Operator Instructions). A.J. Rice.

Thanks. Hello, everybody. Thanks for the comments on the guidance obviously, Steve, but could you maybe tell us, in your mind, maybe give us a little bit of flavor for what you see to be the swing factors in the 2012 guidance? And I know you -- you know, key operational variables, you know, might in your mind move you to around in that.

And then I know you don't typically give quarterly guidance, but I think you are facing a fairly tough comp in Vegas in the first quarter because I think it was fairly strong last year. Can you give us any sense at all about maybe first-quarter outlook in light of that because I assume that the way you'd lay out the guidance is the rest of the year the comps will get considerably easier, particularly as you move to the back half of the year?

Sure, A.J., I mean actually you have asked for a lot of information in short order, but that is fine. I think as we reflect back on 2011, it was a tale, particularly in the Acute segment, of two halves of the year. As you suggest, early in the year, particularly in the first quarter and particularly in the Las Vegas market, we saw a significant improvement in our payer mix and as a consequence a rise in our revenue growth per unit and we were not able to sustain that as the year went on as unemployment after coming down in the beginning of the year in Las Vegas rose again as the year went on.

So revenues in the Acute segment rose on average and that is inclusive of bad debt, something like 5.5% in the first half of the year and only about 2.5% in the back half of the year. Our 2012 guidance for the Acute division is more reflective of the way we exited the year and pegs revenue growth for the Acute segment in kind of the 3%, 3.5% range, much more closely to what we are currently running.

On the Behavioral side, again, the results have been more consistent and our guidance for 2012 reflects that consistency. We estimate that we will be able to grow revenues in the sort of 6%, 6.5% range and that is the premise of our guidance.

From a quarterly perspective, you raise, I think, a very fair point and you are right, we don't give quarterly guidance, but we would certainly try and remind people that we had a very strong first half of the year and extremely strong first quarter. I think if you look at it historically in what I would sort of call a normal year, we have earned something like 52% of our pretax earnings in the first half of the year and 48% in the back half, give or take a percentage or two.

In 2011, I think those numbers were closer to 58%, 59% in the first half of the year. We would suggest, and our own internal guidance suggests that 2012 will return to kind of a more normalized allocation with us earning something like 51% or 52% of our overall annual earnings in the first half of the year. So I think as you all think about your models and your allocations of our guidance or your own guidance, obviously, I would suggest that you sort of keep those guidelines in mind.

Okay. Just last thing, on the Knapp acquisition, you said that that is not in the guidance. Can you give us sort of your update on that? And then if it were to close, would that be something that you would say is sort of neutral this year or could it be additive at some point this year?

Sure. So we announced the Knapp acquisition I think back at the end of November. Subsequent to that, the selling Board of the hospital realized that they had a legal obligation to obtain approval for the sale from an independent hospital authority board and they have been in the process of attempting to do that and are determined to do it. They've run into some obstacles. We have largely sort of stepped aside as they try and resolve this problem. We stand ready to complete the deal. If in fact they get the requisite approvals, we are prepared to move forward.

The main reason I mentioned that Knapp wasn't in the guidance is because I think some people were struggling a little bit with our revenue projections without Knapp in the guidance. As far as an earnings perspective, we were always thinking that in 2012 the Knapp transaction would be fairly neutral to having any impact on our 2012 earnings.

Okay, all right. Thanks a lot.

Adam Feinstein.

All right, thank you. Good morning, Alan. Good morning, Steve. Maybe just a starting point and just want to say it was a great year for you guys. I was just looking back through my notes and I guess we started the year initially at about $3.55, so certainly a very strong year even with some of the headwinds you highlighted, Steve, in the Acute Care space. But maybe just a quick update in terms of just the key markets, get some more color on Vegas and then on the McAllen market also, Steve.

Sure, Adam. So when I talked about or referred to kind of a tale of two halves of the year, a lot of that, I think, is a function of our individual and most important markets. The Vegas market really outperformed in the beginning of the year. They saw their unemployment rate drop in a short period of time from a high of about 15% to something like 12% in the first quarter of 2011. But then as the year progressed, unfortunately, that unemployment rate bounced back to 14% and our payer mix consistently sort of deteriorated with that metric.

Right now, I think it is sort of status quo in the market. Our volumes were -- relatively our Vegas volumes were relatively soft in Q4. Payer mix remains stable to maybe very slightly down. There is a lot that has been written about the market, much more focus quite frankly on the gaming industry that suggests that, by the end of 2012, the market will start to see some broader economic recovery. For the most part, we really have not embedded any of that in our guidance. Our guidance simply assumes that the payer mix situation stabilizes and as a result of that, that our revenue growth ticks up a very slight amount from where we are today.

The South Texas, particularly the McAllen market, much the same. We have disclosed in a number of previous quarters that the economy down there has been fairly soft over the last four or five quarters. That market is plagued by some unique issues, border violence issues in Mexico that, obviously, are again very unique to that market and much the same, our expectations are that not a lot of that changes in a significant way in 2012.

Okay. Just a couple of follow-up questions. I guess with the PSI integration fully ramped up now, I guess you had outlined the base case, $40 million in synergies and potentially another $20 million just from improved margins. So just, Steve, any update in terms of just relative to the initial base case in terms of how you are thinking about just the overall impact from that?

So I think that the corporate overhead synergies, Adam, we estimated we would achieve about half of it literally out of the gate with the transaction a year ago and we would achieve the remaining half of the $40 million that you alluded to over the course of a couple years. I think that has gone very much according to plan. I think we are largely there. We have gotten most of those overhead savings. There may be a few million dollars to go in 2012, but I think we are certainly the lion's share of the way there.

As far as the margin improvement, I think as you start to see the Behavioral results or start to dig into them a little bit more, I think you will see that we actually -- while we didn't anticipate getting a lot of margin improvement in 2011, I think you will see that we actually were able to achieve a little bit of that margin improvement in '11. I think the general sense that there were somewhere between 50 and 100 basis points available margin improvement over a couple of years, I think we still share that view. Again, I think we got a little bit of it in '11 and I think our sense is we will get the rest of it in '12 and to some degree in '13 as well.

Okay. And then just maybe a final question for Alan. Maybe just if you could just talk a little bit about your view in terms of the overall environment and just clearly a lot of things going on in Washington, but just your thoughts in terms of just managing in this environment with some of the uncertainty in Washington.

Adam, I don't think much is going to happen if anything. The election is coming up in terms of legislation. As you know, some of the Obama Care has been modified, rolled back exemptions, so that will be very interesting to see what the Supreme Court does and what happens in the election. So we don't anticipate anything much during the year waiting for the election.

The one thing I would note is that there appears to be a lot of opportunities coming up. The nonprofits are uncertain, more uncertain than others and there is a lot of opportunities. And we have done well in terms of integration of site solutions, so we are optimistic.

All right. Well, thank you very much, guys.

Tom Gallucci.

Good morning. Thank you. Just two questions. One -- both on Behavioral Health. The first, there has been some focus in Washington on the Medicare side. If you go back a few months in terms of the lookback toward PPS, just wondering what your latest views are there in terms of the potential for change or not on the Medicare side. And then number two, clearly your volumes have been very strong. I am just wondering if -- real big picture -- how you're sort of seeing the supply demand equation out there? It seems like whenever you build a bed, it fills fairly quickly. So where do you think these people are getting care before the beds are built? Is there still a significant supply demand imbalance or really where do you think the volume is coming from?

Sure, Tom. So taking the reimbursement question first, CMS had announced previously that, when they came out with their annual Medicare rate update for Behavioral, they would likely sort of do as you suggested, a retrospective lookback on the PPS program and perhaps make some tweaks of the system. Some people I think interpret that to mean that they would consider some major overhauls. There was some conversation at a MedPAC meeting or two in that regard.

Our expectation, we've said this for a while, is that sometime soon in the spring, CMS will announce the rate update for fiscal 2012. We think that that is likely to be accompanied at the most by some small changes in the psych PPS system. But, at this point, we do not anticipate any significant revamps or redos or overhauls of the system and largely anticipate that it will be business as usual in terms of Medicare reimbursement.

In terms of volume strength in the Behavioral Business, we have attributed it to a few different dynamics. You have focused on the one, which is our continued capacity expansion and we have certainly benefited from that and we have been clear that we didn't think we could be putting up the sorts of growth numbers that we are if we were not doing this sort of and have been doing this regular capacity expansion that, at least in our own portfolio, now been ongoing for probably six or seven years.

I will say this, Tom, I mean I think it is not just a question of the old field of dreams dynamic that if you build it, they will come. I think we have been very prudent and our operators have been very prudent in identifying those situations, those markets, those hospitals that have an unmet demand, that are currently turning patients away, that are operating at very high occupancy levels. That is where we have been adding beds and as a consequence, as you have suggested, when we add beds, we have been pretty successful in filling them fairly quickly.

I think we have also benefited from the fact that behavioral demand has not been as recession-sensitive as demand in acute care services or frankly demand in other healthcare services. That has been helpful in terms of weathering the recession and finally, we certainly have been helped legislatively by mental health parity legislation, which has kind of taken a while to gain traction and to kick in, but I think we have clearly benefited from that over the last few years.

So we continue to pursue our capacity expansion program. We have got many, many hundreds of beds in the pipeline, various stages in the pipeline. We often have sort of regulatory zoning issues that we have to overcome, but we are working very aggressively because we think that the demand -- we are not seeing any diminution in that demand and so we want to be in a position in those markets where it called for to take advantage of the growth.

Great, thanks a lot.

Ralph Giacobbe.

Thanks, good morning. Just wanted to go back to the guidance. I guess I am sort of wondering, Steve, when you mentioned that kind of 3% to 3.5% on the Acute Care side and 6% to 6.5% on the Behavioral side, maybe if you could help us sort of bridge what that means sort of on the EBITDA side of things? Obviously, the last couple quarters, top line on the Acute Care side has been weak, which has led to sort of declines in the EBITDA number. So I am just wondering how you are thinking about sort of the operating earnings growth in both of the businesses.

Sure. I think on the Acute side, Ralph, that 3%, 3.5% revenue growth would generally get you to an EBITDA performance that would be flat to very slightly up. I think that there are a few tailwinds that push that up a little bit in the sense that we have talked over the last year or two about our Acute Care capital projects. That's new capital that we have employed in Texoma and in Palmdale and a new tower at Summerlin and those projects continue to ramp up and I think provide a little bit more uplift than we would get just from kind of same-store results.

And also, I think we have talked about some of the drag that we felt from our Southwest facility over the last couple of years, which has been very focused on some regulatory compliance issues. We seem to be largely -- have that behind us and so we are hoping for a pickup in that market as well. So that maybe pushes the EBITDA -- provides a little bit of cushion for that growth.

On the Behavioral side, again, I think our view is that 6% or 6.5% of revenue growth should translate into high single digit EBITDA growth and that includes -- I think going back to Adam's questions -- some improvement in the legacy or the -- excuse me -- the acquired PSI portfolio. So I think that is sort of how the guidance rolls up to the growth that we project in the guidance.

Okay, all right. That's helpful. And then just going back to the kind 1Q. Tough comp in the commentary. Helpful to get sort of that split first half to second half. I guess to get sort of a little more granular, would you be able to sort of suggest -- do you expect EPS to sort of be up or down in the first quarter relative to what you reported in the first quarter of '11? Like do you expect EPS to grow?

Yes, I think, again, if you sort of do the math on the percentages that I suggested, it would sort of lead you to believe that we may well be a little bit behind last year in the first quarter and then make it up as the year progresses.

Okay. Okay. That is all I had. Thank you.

Justin Lake.

Thanks, good morning. Two questions here. First, for Alan. Alan, in the release, you discuss being encouraged by opportunities to expand your presence in the Behavioral Health business. Can you flesh that out for us?

Well, I have nothing specific to tell you, but, because of our position, when anyone wants to sell or anyone wants to have a new facility built, we are the obvious one that they come to. So we are very -- as Steve was pointing out, we have been expanding our existing facilities, but we are looking at other things as well.

Are you seeing the pipeline for M&A or de novo opportunities expand versus where it has been the last few years where -- tell me if I'm wrong -- I don't think there has been much in the way of M&A since, obviously, the Psych Solutions.

Psych Solutions. But there is more business out there. We just had a conversation about building beds and seeming to fill them up when we build them. So there is demand out there and we are preeminent in that business and people come to us. So we are encouraged that we will continue to have opportunities, both internally and for new facilities.

Great. And then just, Steve, a second question was wondering if you could walk us through the cash flow and CapEx expectations for 2012.

Sure, Justin. So I think that our CapEx numbers, which I think we disclose in the 10-K, but were in that sort of $350 million range, $350 million, $360 million in terms of estimated CapEx for 2012, which is a little bit of a tick up from this year and it is reflective of kind of a ramp up in spending on the Temecula hospital that we mentioned in our prepared remarks. It is also reflective of a new patient tower we are building in our hospital in West Palm Beach, Florida, as well as much kind of smaller, but cumulatively impactful numbers of all this Behavioral expansion that we are doing both again in our legacy portfolio and in the acquired PSI portfolio as well.

Cash flows, if you sort of run through our guidance and use the income numbers in our guidance, I think cash flows are -- free cash flow after CapEx is in the kind of $450 million, $500 million range in 2012 and our guidance presumes that the bulk of those cash flows go towards the repayment of debt as they have for the past 12 to 15 months.

And Steve, you mentioned the repayment of debt there. And maybe I'll ask this to Alan specifically. As you think about capital deployment there, Alan, obviously, you bought the psych business. You made some commitments to deleverage yourself back to investment grade. In the meantime, there has been -- just recently there has been some really interesting deals from HCA in the debt markets. You are paying down very low cost debt for 2013. Any thoughts on where there might be opportunity to change tack there and amend expense, extend some of these debt deals and instead of paying down 4% debt, buy back stock or do accretive acquisitions that might be more shareholder-friendly?

I think you have covered just about all the opportunities. We are looking at -- the Company is opportunistic and we are considering all of the above. In terms of -- let me be a little more specific. Potentially buyback, acquisitions and expansion of our existing portfolio and having come down to 60%, 61%, we are moving in a very strong direction financially.

Great. And if I could ask just one last specific question. Steve, in terms of the debt, have you actually talked about -- with these deals going on, just curious if you have talked to bankers about what the debt markets might look for you and if you have any estimate for us in terms of if you were to do a transaction here, just amend, extend, maybe even a recap, what would the debt markets look like versus -- or the interest expense look like on that debt versus what you currently have?

Sure, Justin. So I think it is worth noting -- well, first of all, the easy answer to your question is we are always talking to our banks and looking at what is happening in the markets currently. So that is a process that literally is sort of ongoing all the time. I think if you look at what our peers have done in the last month, let's say, those, I think, refinancing deals have been driven by one of two motives or maybe both. One is to lower their interest rates and interest expense and two is to extend their terms out.

As far as lowering interest rates, even with the refinances that have taken place, our interest rate structure is still by far the best out there. I think that it would be difficult for us in this market to improve our interest rates much, if at all. So that is tough for us.

And then in terms of extending our terms out, again, without getting into the specifics of our peers, our terms already go out a good four or five years. So we don't sort of feel that same kind of immediate pressure to do that. So again, we are always looking at the market and we will continue to do so and if opportunities arose along the menu that Alan discussed, we are always interested in what we could access the markets for additional capital. So we are always doing that. But, again, I mean I think, at the moment, the general sense is to continue on the track and the trajectory that we have been on.

Great, thanks for all the color, guys.

Gary Lieberman.

Thanks, good morning. Maybe you could just give us an update on where you are with regards to your managed care contracting for 2012 and 2013 and any color in terms of what you are seeing on the renegotiations both on the Acute and Behavioral side?

Sure, Gary. It's an interesting area. I know a lot of the folks on the call routinely are having conversations with the managed care companies and I know the managed care companies tend -- only because I read many of your reports -- to paint a picture of a landscape that is changing a great deal, that has a lot of sort of new dynamics in terms of narrower networks and tiered networks and contracts that are much more aligned with quality metrics, etc.

I think in real time and on the ground with our contracts, we are not seeing very many of those same dynamics. Our contracts tend to look very much like they have looked before and our rate increases have tended to be fairly healthy. We have talked about getting rate increases in the 5% to 7% range for many quarters now and I think we feel like we can continue to be comfortably in that range.

Most of our contracts for 2012 are in the books at this point. There is a small percentage more towards the end of the year that aren't and a goodly number of our 2013 contracts are already committed to. And again, I think we are very comfortable that we remain in that range of at least 5% to 7%. And without a whole lot of other changes to our contracts and by the way, I mean I'm not sure that we would be averse to some of those other dynamics. I think we feel like we have got very strong provider networks in many of our markets and we would be anxious to be in a tiered network where we were obviously the top-tier narrower network and we are anxious in many of our markets to have quality metrics play a larger role, etc. But we are just not seeing a lot of that.

Any sense or any thoughts on what types of benefit design changes you saw in '11 or might see in '12 and the impact that that has had on utilization, if any?

I think the managed care companies are always in a better position than the providers are to give specific information about that. I mean I think our sense generally is that the trends that we have seen for the last few years continue and that is a continued shift in the payment obligation from the company or the insurance plan or the managed care organization to the patient or the employee themselves. And so we are in the position of having to collect a larger portion of the bill from the patients themselves than from the insurer.

But I don't know that we have a lot of great data on exactly how much that has occurred, etc. Certainly that trend towards a greater payment obligation to the part of the employee or the patient, and combined with the weak economy, certainly has I think been a significant and maybe the most significant contributing factor to the muted demand that the Acute business has seen over the last few years as patients, where they are able to, are postponing and deferring more discretionary, more elective care. No question we continue to see that trend.

Great. Thanks for the color.

Kevin Fischbeck.

Hi, good morning. I wanted to follow up on a couple of questions that were asked earlier. As far as the -- I just wanted to clarify around the Acute Care Hospital EBITDA outlook, I think you said the 3% to 3.5% revenue growth would lead to flat to up slightly EBITDA. Why won't you be able to kind of keep margins flat with that type of revenue growth and then grow EBITDA in that 3% to 3.5% range?

Yes, I think, Kevin, the nature of our business model, even though it's no different than our peers, is that this is largely a fixed and semi-fixed cost business. And I think that there has always been sort of a relatively modest amount of revenue growth that sort of covers, if you will, your cost inflation. And I think we believe in this environment it is roughly that sort of 3%, 3.5%. We certainly have a number of initiatives underway to restrain our inflationary cost inflation to the degree that we can or the growth of our cost.

But our best guess is kind of in that 2.5% to 3.5% range is probably the rate at which you can kind of keep your EBITDA flat. Now, obviously, I think the corollary to that is a little bit of growth above and beyond that I think should lead to real margin expansion. And obviously, if you can't get there, which is sort of the position we have been in the last couple of quarters, you have seen some margin contraction.

But I guess if your revenue and your costs are growing at the same rate, doesn't that mean your EBITDA is going to be also growing 3%, 3.5%?

Yes, and, again, Kevin, I mean I don't mean to cut it too finely here, but we are right around there. So if our -- you are absolutely right. I mean this is just a math exercise. If revenues grow at 3% and costs grow at 3% then we should have some expansion. If revenue grows at 3% and costs grow at 3.25%, we probably have relatively flat EBITDA. I mean I think we are operating in a pretty narrow range when you are talking about those assumptions.

Okay. And then as far as the deal environment, I don't know if I'm reading too much into it, but I think Alan had made some comments kind of about the deal outlook and being encouraged by it. And historically, as a company, you guys have been some of the most cautious around Acute Care hospital acquisitions because you have a very specific target deal in mind. I mean do you see that that pipeline is actually starting to heat up there or was I reading too much into that?

We hear about a lot of deals. We hear about a lot of stresses in the Acute business so we are looking and some folks thought we wouldn't do the psych deal before. So we are always looking and the big thing is getting a good property, good price and having the ability to do it. I think we are there for all of those.

Okay.

I also would just clarify, Kevin, while you're absolutely right that we haven't done a great deal of external M&A on the Acute side in the last few years, as I mentioned earlier, we have put about $0.5 billion of new capital into some very large projects. I ticked them off before -- Texoma, Palmdale, new tower at Summerlin. I think to a large degree, we have concluded that we could more prudently, economically prudently build new capacity than buy it from somebody else.

And I think as Alan suggested before, we continue to go through that thought process as well. We are not stuck on expanding EBITDA in one particular way. If there are opportunities to grow existing EBITDA streams in our existing markets and existing franchises in both Behavioral and Acute, we are going to pursue that. But we have definitely not been stuck on the sort of notion that kind of one size or one transaction fits everything that we want to do. So we have been fairly aggressive or employed a fair amount of capital in growing our Acute business over the last few years even though it has not been, as you appropriately pointed out, so much on the M&A side.

And then I guess last quarter, you guys made some pretty bullish commentary about just how you saw the dislocation in the stock price, kind of a historic drop, if you will, in Q3. In Q4, you were buying back stock. The stock has come back up. Is share repurchase still a big part of the mix or should we read into your comments earlier that kind of debt paydown is really still the first use of capital?

I mean, again, I think I was clear that I think debt paydown remains our first use of capital. We continue to generate, however, a fair amount of cash and I think Alan I thought was very clear in saying that all other options are on the table, including share repurchase. So we are actively evaluating and pursuing all those other options at the same time.

Okay. And then last question on the Medicaid side, I think in the 10-K you said that the fiscal '12 Medicaid rates were down 3% to 4%. What is your calendar '12 outlook for Medicaid?

All right, so just to frame it for everybody, most state Medicaid years run from July to June and we presumed or we essentially know now that from July of '11 through June of '12 that our Medicaid rates are down on average about 3% or 4%. What our guidance and our budget presumes is that in July of '12 that Medicaid rates improve, at least relatively improve and maybe are down kind of or flat to down maybe 1% beginning in July of '12.

Okay, great. Thanks.

Darren Lehrich.

Thanks. Good morning, everybody. Just a couple of specific questions here. I guess, first, as it relates to the Behavioral business, you obviously picked up some contract-related businesses, some things that you haven't been in before. I would be curious to see your thoughts on how you are viewing that set of businesses and whether that is something you are going to be putting a little more emphasis in terms of growth going forward.

Yes, so, Darren, I mean as part of the PSI acquisition, we acquired what used to be called the legacy Horizon business, which was their management contract business. Just to be clear, we had a management contract business for many years. In more recent years, and specifically I think after psych PPS was implemented, we didn't necessarily see that as a tremendous growth business.

But PSI was successful with Horizon and we have embraced that business and focused on it and continue to try and grow it. It is still a relatively small piece of the overall Behavioral portfolio and I think quite frankly just given the size of the portfolio, it is unlikely to change from a relative level of importance in that sense. But it is a business that we remain -- Horizon remains I think the biggest contract provider in the country and we certainly wanted to maintain that position.

Sure. Okay, that's helpful. And then just the contract business that you have in the construction management side of things, obviously, a separate business entirely. But is there anything at all in the 2012 guidance set related to that? And maybe just update us briefly on whether there is going to be much there going forward.

We continue to pursue that business. Again, I would describe it as something that, while we think it makes sense and as we are able to get contracts, they can be reasonably lucrative, it is likely to remain a small part of the business. We do have -- I think we've mentioned this before -- a new contract to build a hospital in Florida. There is probably a couple of pennies of income in our 2012 guidance that are reflective of that particular contract. And again, we continue to look for incremental opportunities to that.

Okay, that's helpful. And then just last question here as it relates to the Cerner implementation. You have maybe shifted some things around with regard to your HITECH contribution. Can you just update us there on how that is coming together and how we should be thinking about the impact on expenses mainly in 2012 as you move through that process?

So, again, just to put this in historical perspective, we signed our Cerner contract at the very end of 2009, spent the next 18 months or so on the design phase of that project and implemented our first hospital on Cerner in roughly July of 2011. We then have a plan and a schedule that has us converting the balance of our 25 Acute Care hospitals over the course of the next 24 months or so. And we have been adhering to that schedule.

So, obviously, as we implement those hospitals, we have been deferring -- from a financial reporting perspective, we have been deferring the design and implementation fees and we start to amortize them as we bring each hospital live. That will be the bulk of sort of the incremental effect and when we talk about -- when we talked in our guidance about sort of the incremental expense related to Cerner or to the EHR implementation, it is really mostly those -- kind of the investment-type costs that will start to be amortized.

From an operating perspective, Darren, we had an EHR system in place prior to Cerner, basically a homegrown system that we had operating costs associated with that. We generally feel that the operating costs related to Cerner will simply replace the operating costs that we had in our homegrown system and there won't be a whole lot of incremental expense. There may be some as we do the transition, kind of duplicative expense at each hospital, a couple of months of duplicative -- duplication, etc., but not a whole lot.

So I think our view is that operating expenses remain largely the same. What I will sort of call the one-time capital investment, which we have pegged at $6 million or $7 million for each of our Acute Care hospitals is really the source of the bulk of the incremental expense and then, obviously, we hope that a significant portion, albeit not all of that, winds up getting reimbursed through HITECH reimbursement.

Got it. Okay, thanks a lot.

Christine Arnold.

Hey there. A couple questions on the Behavioral Health division. Can you clarify? Are you expecting your psych PPS update to be about 3% in October 2012?

I believe our guidance presumes it is between 2% and 3%, yes.

Okay. And then can we walk through some math here? As I think about the psych business and the fact that you are converting maybe 150 basis points of revenue from Medicaid to commercial within your Behavioral book because you are taking now commercial patients and residential and then you are converting residential beds to acute, you are targeting 150 to 200 beds, that is maybe 2% to 3% of beds, it seems to me you should get at least a 100 basis point boost to pricing given that Medicaid pays 50% of -- 40% to 50% of what commercial does. Is that embedded in Behavioral guidance in terms of the pricing or is that upside?

Well, first of all, I have to say that you are way better at doing math in your head than I am. So I am not sure I fully am able to follow that. But I think your point is that we are doing a number of things to shift away from our reliance on Medicaid, particularly in our residential business. I think the two things that you cited are that we are taking more commercial patients, which historically we really had very few commercial patients in our residential business, and secondly, we are converting at least a small number of beds from residential to acute, which again should have the effect of shifting away from a reliance on Medicaid.

I think that, again, while I didn't follow the precise math that you went through, the fact that we have been able to sustain fairly high Behavioral revenue growth in the third and fourth quarters of this year despite the fact that we have had 3% or 4% cuts in our Medicaid reimbursement I think is reflective in part -- it is obviously reflective of the strong volumes that we have, but it is also reflective of what you are suggesting, which is some efforts on our part to reconfigure our payer mix a little bit to a more favorable and less Medicaid-reliant payer mix. So again, while I can't comment on the precise math that you have talked, I think in general your sentiment is correct.

So there is still room to move on mixing more commercial into the residential and moving up the 200 residential beds to acute?

Yes, I think we continue to look at those opportunities again to take commercial patients where we have not necessarily taken them before and to convert residential beds where that opportunity exists. I don't think we feel like we have exhausted either of those opportunities yet.

Okay. And then just on Acute pricing, if I look at your net revenue per adjusted admission, it was up 1.3% in the quarter in Acute. If I take out the $6 million from the disproportionate share in Texas and UPL and also South Carolina, I get to 1.9%.

Operator, did we lose Christine? Hello?

Whit Mayo.

Steve, can you hear me?

I can hear you.

Okay. I have maybe just first just a random question. There have been a string of what I think are somewhat interesting local press reports in the past month or so that seem to point to a number of closures of state-owned psych hospitals and it seems like a lot of these states are just taking those state funds and the patients and transferring them to the private freestanding providers. And I was just curious if you or Debbie have seen this in any of your markets or just any thoughts on that.

Yes, I mean I've seen some of those same press releases, Whit. Again, I think as you know, historically, the patient population that has tended to occupy state behavioral facilities is not the same as the patient population we normally treat in our facilities. I don't think we have really had the experience of getting a significant load of patients from a state facility in any of our markets. Maybe if that starts to happen with more frequency, we might see that. But it is not an easy sort of trade in essence because I think, in a lot of cases, these state hospitals are treating a more chronically ill population that is designed for people who stay for longer periods of time and quite frankly I just don't think we are equipped, in many cases, to treat that same patient population.

Yes, it seems interesting, some like Medicaid-like indigent care payment that they are giving providers. But I guess maybe to follow on that, I think what Christine was sort of getting at, just can you talk maybe about UPL in 2011 and how it differed from 2010 and maybe thoughts on 2012 and if you want to comment just on any other pickup in other supplemental funds, provider taxes, it would be helpful.

Yes, so I think that our UPL and disproportionate share, which we sort of combine as our kind of two special Medicaid reimbursement programs, I think in total were down somewhere between $12 million and $14 million from 2010 to 2011. We called out that $6 million of that reduction was in Q4. In our guidance for next year, we presume that those same -- that same reimbursement is down probably another $7 million to $9 million in our 2012 guidance. Again, most of that is Texas although there are some other states. Provider taxes were down, as I recall, about $3 million this year and again, I think our guidance presumes that they are down $1 million or $2 million next year. So that gives you a sense of how those numbers move next year.

Yes, and maybe just back on the psych business for a second. Can you just sort of remind us where you are with some of your cost trends, just wages, payroll, supplies, pharma? Is there any reason -- I guess my question is is there any reason that those unit costs would grow faster than your revenue over the foreseeable future?

Well, look, I think the Behavioral business has a number of advantages that you have been able to see in our financial statements now for a while. First of all, the revenue growth in Behavioral has clearly been more robust than it has been in Acute and that allows us a lot more operating leverage getting back to the conversation I was having with Kevin before. If we think 2.5% or 3% is sort of the kind of breakeven EBITDA growth rate or revenue growth rate, we have been well above that in Behavioral and you see that in our expanding margins.

The other aspect of it is I think we just don't have quite the same level of cost inflation on the Behavioral side. Mainly because you don't have that sort of what I will call technological component, the cost of drugs or pharmaceuticals and medical equipment technology that you really have on the Acute side. So if anything, I think -- which I think is the thrust of your question -- that cost inflation on the Behavioral side may be 50 or 60 basis points lower than it is on the Acute side.

Okay, thanks. And maybe just one final editorial. I think you have now accumulated over $80 million in prior-year favorable developments from MedMal for the past three years and most companies would have taken full credit for that. So I just wanted to recognize your progress on that front.

I appreciate that, Whit. Thanks. We have generally been very conservative in that regard and I appreciate somebody noticing.

Kimberly Purvis.

Thanks. You had mentioned that EBITDA improvement in the PSI portfolio was expected in 2012. What will be driving that? Is that improved volumes, pricing or something else?

I think it is a little bit of everything, Kimberly. Although I think generally we had the sense when we did the acquisition that the UHS facilities on average were run a little bit more efficiently and that most of the savings or most of the margin gap closure would result from improved expense control.

And can you give a little bit more specific information on that? I mean is it personnel? What exactly is that? Rental expense, just a little bit more color there?

I think it is across the board. I mean, obviously, if you look at our Behavioral segment financial statements and 50% or more of our costs are salaries and wages. So, obviously, some of those savings will come from the labor side of the business, but I think we feel it sort of comes pro rata, if you will, from across the income statement and just I think is a function of a 30-year history we have of running that business and having the best margins in that business and just doing it as efficiently as anybody else.

Thanks, thanks for taking the question.

Christine Arnold.

Hey there. Sorry, not sure what happened there. I was attempting to ask about the Acute pricing, which was up kind of 1.3% net revenue per adjusted admission in the quarter and excluding the $6 million from UPL DSH, it was only up 1.9%. But to get to 3%, are we assuming a payer mix improvement in 2012 or maybe better Medicare pricing? Can you just tease out in addition to the Medicaid improvement where else you see pricing improvement on Acute?

Sure. I would make one point before that, Christine and that is, when we talk about Acute Care or we talk about revenue growth in general, we are always talking about inclusive of bad debt expense. So earlier in the call, when I talked about our revenue in Acute Care growing at 5.5% in the first half of the year and 2.5% in the back half of the year, that was inclusive of bad debt. So I think if you include the bad debt in either Q3 or Q4, you are looking at a number that is much closer to 2.5%.

But to your point, that still is a little lower than our guidance for 2012 presumes and I think that the increase in our guidance -- I did try and tease this out before, but perhaps I wasn't transparent enough -- comes from a couple of things. I mean one is the improvement in some of these facilities that we have invested quite a bit of money in -- Texoma, Palmdale and Summerlin -- that continue to ramp up. That is number one.

And number two is we do assume, while there is no recovery in volumes or uptick in volumes in our guidance, we do assume there is some stabilization in our payer mix. And certainly, in Q3 and Q4, we saw our payer mix deteriorate a little bit, not a great deal, but a little bit and again, the presumption is that in order to goose that revenue growth number up in Acute Care, we would have to see that payer mix stabilize in 2012.

Got it. And Medicare, what are you assuming for Medicare October 2012?

Again, I think it is that same 2% to 3% that we talked about in Behavioral. Obviously, they are two different numbers, but they coincidently wind up being the same magnitude.

Perfect. Thank you.

There are no further questions in queue at this time.

Okay, well, we thank everybody and we look forward to speaking to everyone again after our first quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.