環球健康 (UHS) 2012 Q4 法說會逐字稿

Good morning, my name is Ginger and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services 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. Mr. Steve Filton, you may begin your conference.

Thank you. 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, 2012.

During this conference call Alan and I will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors, and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2012.

We'd 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 $4.53 for the year and $1.39 for the quarter. After adjusting for a reduction in malpractice reserves relating primarily to prior years, the gain on the sale of our Auburn facility, and the incentive income and expenses associated with the implementation of electronic health record applications at our acute care hospitals, our adjusted net income attributable to UHS per diluted share for the quarter ended December 31, 2012, was $1.00.

Included in the quarter is an increase to our effective tax rate due to nondeductible transaction costs related to the Ascend acquisition. On a same facility basis, revenues in our Behavioral Health division increased 4.5% during the fourth quarter of 2012. Adjusted admissions and patient days to our Behavioral Health facilities owned for more than a year increased 5% and 0.5%, respectively, during the fourth quarter.

Revenue per adjusted patient day rose 4% during the fourth quarter of 2012 over the comparable prior year quarter. We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense, and doubtful accounts, divided by net revenue. Operating margins for our Behavioral Health hospitals owned for more than a year increased to 27.6% during the quarter ended December 31, 2012, as compared to 25.3% during the comparable prior year period.

As discussed in the Form 10-K we filed last night, the OIG has served a subpoena requesting various documents concerning UHS and several of its behavioral facilities. At the present time, we are uncertain as to the focus, scope, or extent of the investigation, the liability of the facilities, and/or potential financial exposure, if any, in connection with this matter.

On a same facility basis in our Acute division, revenues increased 3.1% during the fourth quarter of 2012. The increase resulted primarily from a 1.7% increase in adjusted admissions and a 1.4% increase in revenues per adjusted admission. On a same facility basis, operating margins for our acute hospitals and decreased to 14.4% during the fourth quarter of 2012 from 15.5% during the fourth quarter of 2011.

Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $206 million and $248 million during the three-month periods ended December 31, 2012 and 2011, respectively. 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 2011. 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 2011.

Our cash from operating activities was approximately $280 million during the fourth quarter of 2012 as compared to $156 million in the fourth quarter of 2011. Our accounts receivable days outstanding increased to 56 days during the fourth quarter of 2012, as we continue to have a substantial Medicaid receivable from the state of Illinois.

At December 31, 2012, our ratio of debt to total capitalization was 58%.

We spent $81 million on capital expenditures during the fourth quarter. Included in our capital expenditures were the ongoing construction costs related to a new acute care hospital in Temecula, California. We opened a new bed tower at our Wellington hospital in West Palm Beach, Florida early in October. We opened a total of 270 new behavioral health beds at some of our busiest facilities in 2012.

During 2013, we expect to spend approximately $360 million to $385 million on capital expenditures, which includes expenditures for capital equipment, renovations, new projects at existing hospitals, and construction of new facilities.

Excluding the favorable $0.13 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, 2013, is $4.35 to $4.50 on projected net revenues of $7.4 billion. We are pleased to answer questions at this time.

(Operator Instructions) A.J. Rice, UBS.

Thanks. Hi, everybody. A couple questions, if I could ask. First of all, it's good to see obviously a return to the positive on the inpatient acute care volumes. Can you give us a little more flavor? Was that -- I mean, do you have a sense of how much, if any, the flu impacted that? Or maybe in terms of geographies, was that a Vegas driven turn, or was that more broad-based? Any color would be helpful.

Sure, A.J. I think that, like everybody, we experienced a busier flu season this past winter than we have had in several years. Although, again, I think as most hospital providers have reported, for us it was probably more of an ER dynamic and more ER visits than actual inpatient admissions. I think we believe we had a bit of a pickup in inpatient admissions, but don't believe it to be a material number, or certainly a material impact from a financial statement perspective for the quarter.

As far as the improved, I think, both volumes and payer mix in the Acute division for the quarter, I think that strength was relatively pervasive throughout the division. It was not focused in one or two markets, but more of a trend that we tended to see throughout the facilities and throughout the portfolio.

Okay. And then if you -- on your 2013 guidance, I know you gave us the numbers for the high-tech incentives and so forth. How about just operating assumptions? Are you assuming any kind of turn, either in the acute business or steady state in the psych? Can you give us a little more flavor for some of the key underlying assumptions there?

Yes, I think that the guidance for next year is generally premised on stabilizing trends underlying the business. On the Acute side, I think that it is reflective of the sort of revenue growth that we saw in the third quarter. That is kind of in the 2.5%, 3% range, split sort of evenly between pricing and volumes.

Obviously, we have factored into our guidance, as have our peers, the effect of sequestration beginning in April and the effect of both the disproportionate share in coding cuts that will become effective in October as part of the Affordable Care Act.

On the Behavioral side, I think just generally more of the same -- 4% or 5% revenue growth and mid-single-digit EBITDA growth. And then obviously we have got a full year of the Ascend facilities in our guidance for next year.

Okay. And then just the last question maybe, I don't know how much you can say on the OIG subpoena, but clearly a lot of the regulatory and questions that have been related to the psych business over really the last decade have been more clinical type of questions as opposed to billing questions. Is there any way to look at the wording of the thing and make any assessment as to whether it's -- which of those two directions it seems to be going?

No. I think, A.J., as you suggest, the trend in behavioral care has been to have these investigations focus on clinical practices. And I would say that the content of the subpoenas would suggest that's largely the focus here.

I will say that I believe the government often pursues a technique in which they try and tie together what they perceive to be clinical issues and quality deficiencies then with an argument that a false claim has been filed because there is not adequate care, et cetera. We have no idea if that's where the government is going in this case and certainly couldn't predict that.

Okay. All right. Thanks a lot.

Josh Raskin, Barclays Capital.

Hi. Thanks. Good morning. Just a first question on the Behavioral, Steve, following up. I think you said sort of 4% to 5% on the revenue growth. I think historically you guys have targeted something sort of north of 5%, 5.5%.

So was there some of the bed conversion impact still going on? Or, I'm just curious. Is 4% to 5% now a better sort of long-term Behavioral Health growth rate?

Josh, I think that the key variable that has sort of tempered a little bit of our expectations from something a little bit higher than 5%, let's say, is the length of stay issue. As you saw in the press release and I reiterated in my prepared remarks, admissions grew a very solid 5%, or adjusted admissions grew 5%, but adjusted patient days only grew 0.05%. And obviously the dynamic there is we continue to see length of stay compression. And because the vast majority of our reimbursement is on a per diem basis, that length of stay compression, which is very much focused in the residential component of our Behavioral business, continues to temper our revenue growth.

Now, we speculate, and we believe, and I think from a clinical perspective we particularly believe that there is a natural floor to that length of stay compression and reduction, that at some point, and I think our clinical people would argue we've probably passed that point, the continued early discharge of these patients is really not a clinically effective treatment protocol.

So we'll see. But I think our expectation that we grow at the current rates is that we continue to see those length of stay pressures.

Okay. So you are actually assuming another reduction in length of stay in the Behavioral Health side (multiple speakers).

I think we are assuming the trajectory continues as it is now.

Okay. Got you. And then, just a second question, you mentioned the coding and DSH cuts that are effective October. Can you size those, maybe what your DSH payments were on both Medicare and Medicaid and sort of give us a sense as to what the actual dollar impact do you think could be in the fourth quarter?

Yes. So I think the issue vis-a-vis the fourth quarter cuts from the ACA really are surrounding Medicare disproportionate share. Our annual Medicare disproportionate share reimbursement is in the neighborhood of a little over $100 million. We are assuming that about half of that goes away.

I know there have been some discussions on some of our peers' calls about some of the mechanics that go into that calculation and we, by no means, can be terribly precise about it, but we are assuming about half of that goes away. So something like $50 million of DSH begins to be cut in the fourth quarter. Obviously, a quarter of that is something in the neighborhood of $13 million or $14 million impact in the fourth quarter of 2013.

Okay. And that's just a fourth-quarter impact.

Correct.

Okay. Got you. And then the coding adjustment?

And then the coding adjustment, which also is just the fourth quarter, is another $4 million or $5 million.

$4 million or $5 million for the quarter.

Correct.

Okay, perfect. Okay. Thanks.

Tom Gallucci, Lazard Capital Markets.

Good morning, guys. Thank you. I guess just, Steve, the margins in the quarter in the Acute Care side were still under a little bit of pressure. Revenues rebounded. I'm wondering if you had any thoughts there, and sort of what your expectations are in that regard as you think about 2013.

Yes, Tom, I mean, you probably have heard me say and others say that I think generally our view is that when we get to about 3% same-store revenue growth on the Acute side, that we feel that is a sufficient level of growth to have at a minimum sort of flattish EBITDA, maybe even slightly improved, and we were down a little bit in the fourth quarter.

I think that the single biggest driver of that was probably $4 million or $5 million of incremental expense associated with physician employment and physician practice acquisition. Those who follow us know we probably have not pursued those physician strategies, at least in terms of the significant dollars of investment, as aggressively as some of our peers. But we are certainly doing it in some of our markets and, clearly, you saw that impact a little bit in the fourth quarter of 2012.

As far as 2013 goes, I think, generally, we sort of view it as sort of a push in our guidance, meaning that we don't think our physician expenses grow much. I think we feel like whatever new investment we make in 2013 will be offset by some of the efficiencies we are able to achieve in the existing practices that we have.

Does that suggest that you sort of anticipate more stable margins as we think about the coming year?

Yes, I mean, I think what it suggests, Tom, in my mind is that we believe that if we can get to that level of growth that we had in Q4, that is 3% growth, that we ought to be able to have margins that are relatively flat or slightly improving. Obviously, the real challenge in the budget next year is to get to that level of revenue growth with all of the reimbursement cuts that we've highlighted so far.

Right, right. Okay. And then just wondering on the balance sheet and sort of the acquisition side of things, obviously you did Ascend. Wondering sort of where your thinking is on delevering and what the pipeline might look like, particularly on the Acute Care side, and your appetite there. Thanks a lot.

Yes, I mean, I don't think our view has changed really at all there, Tom. You've heard us say before, we tend to be opportunistic. And we are always looking at opportunities to either strengthen our existing Acute Care franchises and Behavioral as well, or to penetrate new markets or enter new markets that look particularly compelling.

I think one of the hurdles to that for a number of years now has been the still what we view as fairly rich valuations for a lot of these acquisitions which make it very hard to earn a reasonable return. I think UHS has a history of being very judicious about where we invest and what we invest in, and I see that continuing.

On the other hand, as you've heard Alan and I talk about, I think, on these calls before, there is obviously a great deal of change going on in this industry and I think it's causing not-for-profit hospitals in particular to rethink their future plans. And we may see an uptick in activity in the M&A landscape, and we will certainly be paying attention to that and evaluate those opportunities as they arise.

Okay. Thank you.

Frank Morgan, RBC Capital Markets.

Good morning. Just one quick one here to start with. On the guidance, what is the implied cash flow from ops number you would see on the year based on your EPS guidance?

So I think when you factor in, Frank, the CapEx projections that we detailed, I think you're talking about free cash flow in the $450 million range.

Okay. Secondly, just on reform, it looks like expectations are shifting. You see a lot more benefit from Medicaid expansion early on in the reform process.

I'm just curious, as it relates to your Behavioral Healthcare business, do you think there is a big enough impact there to really affect your bad debt expenses early on, particularly with that adult male population that you may have been treating in the past that may now be covered under reform? So any thoughts that you could see some kind of material improvement in bad debts on the Behavioral side in 2014 when reform cranks up?

So obviously, as you can tell, Frank, and others, I mean, our bad debt percentage in Behavioral runs fairly low already. It's in that 2.5% to 3% range. And so I think our view from the outset, of thinking about reform, has been that the opportunity on the Behavioral side, while there is some opportunity to reduce our uncompensated load, the big opportunity in that regard is on the Acute side.

The larger, I think, opportunity on the Behavioral side is to have an expanded universe of patients that have coverage, either through Medicaid, as you suggest, or through the exchanges, who might be eligible for admission to our hospitals who were not previously eligible. I think we've articulated in prior presentations, et cetera, that it's difficult to quantify that opportunity in any precise way, but we think that it may be a significant portion of the population that will now have insured mental health benefits, that don't have them today.

Okay. And then one final on length of stay; are there any particular states where you're seeing more focus on the issue of length of stay management? And then I will hop off. Thank you.

I think for the most part, as I was saying before to Josh, that the length of stay issue, I think, is generally focused in our residential business, which is the smaller component of our Behavioral business. It's very much a Medicaid and Medicaid managed care issue, but I don't know that is particularly focused on a state or a particularly aggressive payer. I just think in general we are seeing most Medicaid payers, whether they are the traditional state payers or the managed payers, being more rigorous about their utilization review, et cetera.

I mean, obviously, we see it a little bit more aggressive in certain states than others. But it's pretty much an across-the-board phenomenon.

Thanks.

Kevin Fischbeck, Bank of America Merrill Lynch.

Good morning. Actually, this is Joanna Gajuk in today for Kevin. Thanks for taking my question.

Just on the topic of the reform, you mentioned -- you talked about the psych business, but I guess what relates to both businesses, can you talk about what are your expectations or what you are seeing out there in terms of rates on the new exchanges? Some of your peers commented they were able to secure some contracts already. So any color you could provide, where you see those rates falling.

Joanna, I can certainly comment on expectations. I think we've said from the beginning that our expectations are the commercial exchange rates would fall into our range of commercial pricing. But I think we've also said that, as recently as literally just weeks ago, that we've really not negotiated any firm rates on exchanges, et cetera.

I know that's a little bit different than some of our peers who, in this earnings season, have been able to point to some actual contract negotiations. We are unable to do that. I mean, again, I think our expectations are very similar to our peers, but I don't know that we can point with any sort of certainty to actual negotiations that have been concluded as did some of our peers.

That makes sense. And then on a different topic in terms of your outlook for next year, can you give us maybe a little bit more color on what you expect on the Medicaid rates?

I think our expectation about Medicaid rates is that they remain similar to this year, so that in the sort of July of 2013 Medicaid pricing cycle, I think we've presumed in our guidance that Medicaid rates remain sort of flat or maybe down 1%, very similar to what they did in the July of 2012 cycle.

Okay. Thank you. And the last one, can you just talk a little bit more about the Vegas performance and your expectations there for this year?

As I said previously, I think that the overarching trends that were present in the Acute business in the fourth quarter, which were slightly improved volumes and slightly improved payer mix, were generally present throughout the portfolio and that there were not necessarily any markets that were really extremely positive performing or negative. I think, again, we saw the general improvement throughout the portfolio. I think our basic view of 2013 are generally stable trends, again, as it comes to volumes and payer mix.

I think it's a little too early to read into the fourth quarter performance that we are on a kind of a steadily increasing trajectory at this point. As I noted to a previous question, I think some of the benefit, although not a huge number, but some of the impact in Q4 may have been the flu. I think some of that carries over into at least January or so of the first quarter.

So we'll see. I think we'd like to see another quarter or two of that sort of strong performance to presume we've really had a turn here. But otherwise, I think generally our 2013 outlook is for stabilizing trends in the Acute division.

Great. Thank you so much. That's all for me.

Justine (sic) Lake, JPMorgan.

Thanks. Good morning. Steve, if we could start off on the psych side with the OIG, is there anything that you can tell us in terms of billing of psych that has historically been controversial, that maybe they could be looking at here?

I mean, again, I think it's very difficult, Justine (laughter), for us to really predict with any sort of level of accuracy what the government is angling for. As I think I suggested in an earlier comment to a question, the bulk of the request, I think, is on patient records or is for patient records, et cetera, which would sort of lead you to believe it's -- the focus is probably more on clinical matters. Although, again, I think there's a history of the government trying to convert that, if you will, into a billing issue. But, no, it's not like we've had a pattern of billing issues or irregularities in the Behavioral business, by any means.

Got it. And, Steve, my recollection is the OIG had been looking into one of the facilities previously -- not one of this batch, but you've had the OIG looking at or asking for information on one of the other facilities, right?

Well, I mean, there's a little bit of history here. I mean, PSI had a facility that had a Department of Justice subpoena that I think goes back all the way to 2008. We've disclosed an investigation of our Peachford facility for at least several quarters, so it's not the first time a behavioral facility has been investigated, if that's the question.

Well, I'm just curious that if there's anything you can look at in terms of how those investigations went and what they were looking at that you might be able to share with us here.

No. I mean, the PSI investigation, which began, frankly, well before our ownership, I think, again, the subpoena goes back to 2008. Nothing has ever really come of that investigation. And as far as the Peachford investigation goes, we've had no indication from the government other than our response to the subpoena, no feedback from them about what they're looking for.

And, Justin, just let me say, I have no reason to believe that either of those previous investigations are connected to this current subpoena.

Got it. Okay. So -- and then if we kind of jump away from that, free cash flow for 2014, Steve, can you give us a number? I assume there is nothing in guidance for deployment there, so can you kind of walk us through what your thoughts are for 2013 for capital deployment?

Yes. Just from a guidance perspective, I think our convention always has been to assume that all of our free cash flow goes towards the repayment of debt, unless at the time of giving guidance we have a specific transaction that is very far along, which is not the case this year. So we've assumed, as I indicated in the previous -- to the previous questioner, about $450 million of free cash flow, and all that goes to repayment of debt.

Okay. That's it for me. Thanks a lot.

Thanks.

Ralph Giacobbe, Credit Suisse.

Thanks. Good morning. Steve, are you aware of maybe others in the industry also getting a similar request from OIG? Or do you not know?

Unaware. I mean, Ralph, I think the only way we would be aware is if folks have disclosed that, and I don't know that we would have any other way of knowing that.

Okay. And then just switching gears here, on the Behavioral side, I guess as you think about next year, do you think you have the capacity to deal with the potential bump in volume into 2014?

And then, I think in the past you have mentioned there are uninsured today that I guess you have the potential opportunity, or may not accept to some degree in your facilities. Is there any way for you to give a sense or to measure the magnitude of that number?

So let me answer the latter question first. No, I think it's difficult to do. It is sort of trying to capture a patient population who effectively either get care elsewhere today or, frankly, doesn't get care at all. And so that's just not a number that we have easy access to.

We do know, just from sort of ongoing operations, et cetera, that there is a significant universe of people -- and, again, this is not particularly unique to us, but we know there is a fairly significant universe of people who don't have insurance and therefore don't have access to the current system, and who, if they get insurance, will have access to the system.

As far as our ability to absorb that increased demand, I would suggest to you that if you go back and look at our occupancy rates for the last 10 years in the Behavioral division, you'll see that as recently as 2005 or so, we were running 85% occupancy in our Behavioral division. We currently run in the mid-to-upper 70%'s. So we certainly could move higher.

Now, when we were running in the mid-80%'s is when we began a program of fairly aggressive capacity expansion, because I think we believe that that's a fairly inefficient level of occupancy and we are turning away insured patients at that level of occupancy. But I think the answer is, in the short term, if demand were to increase as we expected it might, to some degree, we can certainly accommodate that in the short run and then begin plans to add new beds relatively quickly and aggressively, much as the way we have been doing so for the last seven or eight years.

Okay. All right. That's helpful. And then just my last one, is there anything we need to consider in terms of the guidance of incremental cost in 2013 that may roll off in 2014, just in general or maybe to prepare for reform?

I don't know that to prepare for reform is really specific. I will say though one probably UHS-specific item in guidance that's probably a little different, and people have not anticipated, is opening in the back half of 2013 our hospital in Temecula, California. We've certainly discussed that construction before, but it opens in the sort of September-October time frame. And there's probably a good $16 million, $17 million, $18 million in our guidance in our budget of startup losses and costs associated with that opening, which, obviously, is somewhat of a drag on our back half of 2013.

Back half meaning sort of 4Q as sort of a way to think about an offset from some of the pressures that you talked about earlier from the DSH cuts and coding? Is that the way to think about it?

Well, it's not an offset, it's a further headwind and it's in (multiple speakers).

Right. Right.

It's sort of startup costs in Q3 and then operating losses in Q4.

Right. But point being that those don't repeat next year.

No. The presumption would be that as the facility operates, there's probably -- the startup losses continue into the first half of 2014, but by the back half of 2014 we would start to turn that around.

Okay. Great. All right. Thank you.

Chris, your line is open.

Chris Rigg? Okay. Sorry. I couldn't hear you. Thanks for taking my questions, Steve. Just to follow up a little bit on the last question, can you just remind us the total investment expansion -- investment money running through the P&L in 2012, whether that's Wellington or Behavioral bed development, versus what you are inspecting in 2013, Temecula and additional beds on the Behavioral side?

Yes, Chris, I think it's about the same. I mean, I'll just round the numbers and say that we are going to spend $375 million in -- well, we spent $375 million in CapEx in 2012. We will spend a like amount in 2013.

Probably $100 million of that is maintenance capital that's mostly focused in the Acute division. That's capital that basically is just there to upgrade the equipment and keep the facilities running, et cetera. No real return being associated with that.

And then another $100 million to $150 million of Behavioral expansion and another $100 million to $150 million of Acute expansion.

But in terms of what's running through the income statement, is that also about -- are you saying that's also about the same?

I don't really -- I apologize, because I don't -- when you say capital --

I guess what -- yes, maybe it was unclear. I got caught a little off-guard there when the queue opened.

But with regard to -- you know, you said you're going to spend $16 million, $17 million, $18 million on Temecula, I'm sure you had something similar for Wellington and then also in terms of is there anything on Behavioral startup costs. I'm just trying to figure out apples-to-apples what the investment headwinds running through the income statement would be.

Okay. No, I got that. I think that that Temecula startup losses and startup costs are unique in the sense that at Wellington we opened a bed tower in an existing facility, and there is not anywhere remotely close to the same level of startup costs, et cetera. We are talking about a brand-new, greenfield hospital in Temecula. It's a much different dynamic.

Most of the Behavioral expansion is like the Wellington tower. It is additional beds at existing facilities. So, again, there is nothing comparable this year to that Temecula number next year.

Okay. And then on the OIG subpoena -- and I'm not sure what you can say here, but can you give us a sense for the revenue exposure with regard to the facilities that are cited in the subpoena?

Yes, I had a few analysts say to me last night that they simply went to AHD data or whatever for the facilities identified and got 6% or 7% of our consolidated revenues. And I think that's a fairly accurate number of the 10 or 11 facilities that have been identified.

Okay. Thank you.

Kevin Campbell, Avondale Partners.

Good morning. Thanks for taking my questions. Just a couple of modeling questions at this point. The sale of the Acute Care hospital, where exactly does that impact the income statement in the fourth quarter if we wanted to back that out in our own models? And really same question for the favorable reserve impact; which line item and which segment does that affect?

So they are both on the other operating expense line, and obviously Auburn is an acute facility. The malpractice reserve affects both divisions, although it's probably skewed to the Acute division.

Okay. And then from the Temecula hospital, what sort of quarterly D&A jump should we see from Q3 to Q4 from that opening?

You know, it's a $150 million investment to be amortized or depreciated over 25 years.

Okay. Great. That's all I have. Thank you very much.

Gary Lieberman, Wells Fargo.

Good morning. Thanks for taking the question. You've talked in the past about transitioning some of the RTC beds into Acute. Can you give us a sense of where you are, I guess either as a percentage of revenue or percentage of volumes at the end of 2012, and where you might hope to be at the end of 2013?

Yes. Hi, Gary. So I think roughly the Behavioral revenue split is about 75% acute behavioral, 25% residential behavioral. I think our view is that as we convert beds, maybe we are affecting that split by 50 or 75 basis points a year, is kind of the general sense of what we can accomplish.

Okay. And then I guess just in terms of either anticipating the impact from healthcare reform, or as you see more volumes from the reform, can you speed that up? Or would you be satisfying the additional demand mainly from new additional beds on the Acute side?

Yes, I think the general sense is that adding beds in the Behavioral space can be -- the process can be accelerated some if the demand is there. We have probably said before that the biggest challenge or hurdle to adding beds on the Behavioral side tends to be kind of the regulatory local zoning sorts of issues, so sometimes that's not within our control.

But, yes, generally, I think our view is that if reform results in a measured increase in demand, that we will accelerate the expansion program that we've already been -- had underway for seven or eight years. And so we are quite familiar with how to do it and what needs to be done, and that we can make that happen somewhat faster.

Okay. And then can you just remind us what type of average commercial rate increases are incorporated into the guidance for 2013?

Yes, I mean, I think all of our commercial rate increases on the Acute side have been averaging 5% to 7%, and I believe we still feel are in that range. On the Behavioral side, that number is historically a couple hundred basis points lower, and I think remains so in our guidance. So those numbers, honestly, have not changed very much in the past few years.

Okay. And no material changes in contract terms or contract types?

Not yet.

Okay. Great. Thanks a lot.

John Ransom, Raymond James.

We've noticed with you and some others that the charity and bad debt blipped up a little bit in the fourth quarter, which seems a little odd kind of where we are in the employment recovery. Do you have any thoughts about that?

John, I mean, I think what we saw was a shift from charity and uninsured discount to bad debts. As you've heard me comment any number of times over the years, we view the uncompensated expense sort of all as one large pool, so we never spend a lot of time trying to analyze or explain shifts between the categories.

I think in general, our view was that payer mix improved a little bit in Q4. And these are really Acute Care observations that, even though we continue to see decelerating commercial and Medicare volumes, and accelerating Medicaid and uninsured volumes, both the rates of deceleration and acceleration were somewhat muted or more mitigated in Q4. So I think we had a view that actually payer mix got a little better in the quarter.

Okay. Yes. If nothing happened with mix, and all that flowed through was your pricing, how much would bad debt go up for you every year?

Yes, I mean, so I think in general our gross pricing continues to go up between 6% and 8% a year, so you can sort of do that math. I mean, that in and of itself drives a lot of the increase in bad debt and charity care expense. I don't have a calculation in front of me, but I think you can kind of do that back of the envelope.

Right. Is there any -- I know a while back you guys were a little more optimistic about deploying some capital on the Acute Care side. Has your enthusiasm waxed or waned on your pipeline since that time?

Yes, I wouldn't describe it as either, John. I mean, I think we have a very kind of opportunity-specific view of the world, and that is we evaluate every opportunity on its own. If an individual opportunity makes sense, we will pursue it.

So I don't know that I think I would make any kind of macro characterizations of our view at the moment. And, obviously, the proof is in the pudding. We haven't made a ton of external acute investments in the last four or five years because we have not found them compelling.

Now, in fairness, as we've mentioned about Temecula and the Wellington bed tower and Summerlin Tower, et cetera, and Palmdale, we've made a lot of internal capital investments in Acute Care because we felt like they were the more likely -- or the more economically prudent investments to earn above-average returns.

How many, would you say, UHS quality assets come on the market in a given year now? And is it more or fewer than it was a few years ago?

Again, I think there are more assets that come to the market today. I think that there are lots of -- a reasonable number of quality assets that come on the market. Again, we are not the only party out there bidding for those assets, et cetera. So I think, more than anything, it becomes a price valuation issue in terms of whether you can acquire the asset at a valuation that allows you to earn a reasonable return.

Okay. So it's more the pricing than it is the supply.

I believe so.

Okay. Thanks.

Whit Mayo, Robert Baird.

Hey. Thanks. Steve, I think you have called out med-mal as a favorable one-time benefit I think every year almost for five years now. At what point does that become recurring? I mean, your peers all take credit for it, so I'm just wondering what the thinking was on that.

It's a fair comment, Whit. Obviously, I think for the most part, the reason that we exclude it from current operating earnings is that almost by definition it is focused on prior year amounts and prior year reserves. But to your point, UHS has had a long history of taking a very conservative position on its malpractice expense and reserves.

I think our main focus is just trying our best to get the current expense -- the current year malpractice provision correct and accurate. And we believe we are getting closer to that, but I appreciate your pointing out that we have penalized ourselves to some degree by always tossing these numbers out.

Sure. And maybe just any comments on Ascend and the integration, and how that is progressing.

Yes, I mean, obviously, it's a much smaller deal and therefore integration than the PSI deal was, as we're talking nine facilities. We have commented sort of from the beginning when we announced the deal that we anticipated getting about $200 million in revenues and about $60 million in EBITDA from Ascend. And I think we feel like we are very much on track to do that.

Those are really the numbers that are embedded in our 2013 guidance. And we are very pleased. Even though it's early on in the process, we are pleased with the way that integration is going.

Great. And maybe just last, final one. Any thoughts on the sequence of earnings this year? Historically, you've always had a lot sort of weighted in the first half of the year for Acute, and then maybe a year ago or so you felt that imbalance would balance out, if you will. And the calendar looks a little tough in Q1. So just wondering if you had any updated thoughts for how we should see the sequence of earnings progress throughout the year.

No. I mean, other than a few of the things that we have discussed, I mean, I think there will be a little bit of a benefit from the flu in the first quarter. And then obviously these reimbursement cuts, as well as the Temecula opening that we talked about, are skewed towards the latter half of the year.

Sequestration is effective beginning in April and then you've got all those cuts over the balance of the year. And then you've got the disproportionate share coding cuts in the fourth quarter, and then the Temecula drag in the third and fourth quarter.

Okay. That's helpful. Thanks a lot.

(Operator Instructions) Glen Losev, WallachBeth.

Yes. Hi. Steve, can you comment on surgical volumes in 4Q relative to the first nine months of the year and what your expectations are for, let's say, 2013?

Yes, surgical volumes, Glen, picked up a little bit in Q4. Inpatient volumes were sort of flattish, which is frankly the best they've been in a number of quarters. And outpatient was down a little bit, but that was also the best we've seen probably at least since the first quarter of the year. So, much like the other metrics that I talked about in terms of overall volumes and payer mix, surgical volumes showed a bit of an improvement in Q4 as well.

And was the acuity of the surgeries, was it higher than you've seen recently or it was a lower acuity surgeries?

Well, definitely our Medicare CMI was higher in Q4.

And one last question. Can you give us any color on what you guys see in your Las Vegas and Texas markets?

Did you say in Las Vegas and Texas or--?

Yes.

Yes. No, again, as I mentioned to a few different people, in general, the trends that I've articulated a few times -- slightly better volumes, slightly better surgical volumes, a little bit better payer mix in the Acute division in Q4 -- were generally present throughout the portfolio, not necessarily terribly better or worse in any markets, including Las Vegas and South Texas.

All right. Thank you.

There are no further questions at this time.

Okay. Well, we thank everybody and look forward to speaking to everybody in a couple months after the first quarter. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.