環球健康 (UHS) 2013 Q1 法說會逐字稿

Good morning. My name is Keisha and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services Q1 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you, Mr. Filton, you may begin your conference.

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 first quarter ended March 31, 2013. 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. 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 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 $1.21 for the quarter. After adjusting each quarter's report of results for the items disclosed on the supplemental schedule included with last night's earnings release, adjusted net income, attributable to UHS increased 8% to $1.22 per diluted share during the first quarter of 2013 as compared to $1.13 per diluted share during the first quarter of last year.

On a same facility basis, revenues in our behavioral health division increased 2.4% during the first quarter of 2013. Adjusted admissions to our behavioral health facilities owned for more than 1 year increased 0.6% and adjusted patient days were relatively flat during the first quarter. Revenue per adjusted patient day rose 2.6% during the first quarter of 2013 over the comparable prior year quarter. Operating margins for our behavioral health hospitals owned for more than 1 year increased to 28.4% during the quarter ended March 31, 2013 as compared to 26.8% during the comparable prior year period.

On a same facility basis in our acute division, revenues increased 0.7% during the first quarter of 2013. The increase resulted primarily from a 1.5% decrease in adjusted admissions to our hospitals owned for more than 1 year, and a 2.2% increase in revenue per adjusted admission. On a same facility basis, operating margins for our acute-care hospitals decreased to 16.0% during the first quarter of 2013 from 19.0% during the first quarter of 2012.

Our acute-care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $230 million and $312 million during the three month periods ended March 31, 2013 and 2012 respectively. The decrease in charity care and uninsured discounts recorded at our acute-care hospitals during the first quarter of 2013 as compared to the first quarter of 2012 was offset by an increase in the provision for doubtful accounts which amounted to $218 million during the first quarter of 2013, as compared to $125 million during the first quarter of 2012.

As a percentage of acute-care net revenues, bad debts, charity care expense, and the uninsured discount in this year's first quarter were at levels higher than those experienced during the first quarter of 2012. 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 first quarter of 2012.

Our cash from operating activities was approximately $188 million during the first quarter of 2013 as compared to $127 million in the first quarter of 2012. Our accounts receivable days outstanding increased slightly to 56 days during the first quarter of 2013. As previously disclosed, our accounts receivable days outstanding have been inflated somewhat by an increase in receivables from the State of Illinois.

As of March 31, 2013, our accounts receivable include $72 million due from Illinois, the collection of which has been delayed by budgetary and funding pressures experienced by the state. However, thus far, in April 2013, we have received approximately $42 million of cash payments from Illinois, a substantial portion of which applies to the state's outstanding receivables as of March 31, 2013. At March 31, 2013, our ratio of debt to total capitalization was 56.4%. We spent $96 million on capital expenditures during the first quarter, included in those capital expenditures were the construction costs related to the ongoing construction of a new acute-care hospital in Temecula, California.

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

(Operator Instructions)

A.J. Rice, UBS.

Hi. Thanks. A couple of questions if I could. First of all, obviously there's been a lot of discussion about the volumes and the softness of volumes due at least in part to the calendar. I would love to get your perspective on the extent to which you believe the calendar may have impacted you this quarter. Also, any early read on April where maybe the calendar would swing more favorable.

Sure, A.J. I think actually, historically, as a Company, we tended not to point to the calendar as explanatory, the changes in volumes. This quarter, it is hard to get away from it. Obviously we have one less day for leap year. That affects both of our business segments. And then we have Easter occurring in March of this year and last year it occurred in April. It is always difficult to frame what the impact is of those sorts of things. One thing that we look to and certainly has caught our attention is that April volumes in both of our business segments have rebounded fairly measurably. I think it reinforces the idea that there may have been some shift in business from March into April. It is difficult to quantify in any sort of precise way, but certainly that is the feel that we have.

Okay. Maybe two more things on that, then. There's been some discussion that especially the Easter shift has had a pronounced effect on commercial lines, even in the midst of soft volumes, generally. Did you guys see that? And also, like you said, we don't typically talk about it too much on the behavioral side, but can you comment on how the calendar might have affected the behavioral business specifically? Does it have impact on both volume and price, or is it more just volume?

From a payer mix perspective, we saw trends, I think, continue in the quarter of declining commercial volume, declining Medicare volume, and more particularly, both managed Medicare and managed Medicaid volume. That is an unfavorable trend. But to be fair, it is not a trend that is particularly new to this quarter. If the calendar exacerbated that some, that is hard to tell. Unlike volumes, which we can see improving or rebounding in April, I cannot really -- I do not have a read on payer mix in April. I cannot really comment on that.

Okay.

As far as the behavioral business goes, I think that obviously leap year is just a mathematical sort of calculation. I think again it affects both businesses equally. As far as the holiday goes, I think historically those kinds of holiday shifts have had more of an impact on the residential business than the acute behavioral business because kids tend to go home for the holidays, et cetera. Again, we definitely saw some weakness in the residential business in the quarter. Absolutely not a new phenomenon, but it certainly could have been exacerbated by the calendar.

Okay. Then just lastly, on your acute-care margin trend, that is sort of consistent with what you have shown for a while now. Would you attribute that largely to the top line pressure, the volume pressure, or would you -- I think last time you called out some physician costs. Is that still -- are you still seeing that as well?

Yes. I think that primarily the pressure comes from the fact that our same store revenue grew by less than 1%. As we have talked about many times, it is difficult to drive any sort of margin improvement or expansion with revenues that are not a little more robust than that. Also, as you suggest, A.J., and as we talked about last quarter -- and I think folks can see on the other operating expense line, we continue to have some growth in that line that is a result of our increased activity in physician employment and physician acquisition.

Okay. All right. Thanks a lot.

Ralph Giacobbe, Credit Suisse.

Thanks. Good morning. Just staying on the volume topic. Steve you usually go through the geographic markets during Q&A. I was hoping you could do that if there is anything sort of worth highlighting, Vegas, Texas, et cetera?

Ralph, actually from a gross volume perspective, Vegas had a relatively decent quarter compared to the rest of the portfolio. But one of the phenomena that we saw beyond just kind of a sheer volume weakness or gross volume weakness in the quarter was just a lack of intensity or acuity, surgical weakness. Surgeries were down 5%, both in and outpatient surgeries approximately. Those phenomenon, along with the payer mix dynamics that I talked about with A.J. were clearly present in the Vegas market and for the most part, present throughout the portfolio.

Okay. All right. That is helpful. Just going to the behavioral side, can you talk about the margins there? Obviously a very strong result considering the soft top line. Is that sustainable? Should we be thinking about investments that you need to make ahead of 2014? Or maybe just how do you think about that margin profile as we think ahead?

Look, I think we have talked about that in general when same-store revenues grow by 2.5% it is tough, even in the behavioral segment, to drive margin expansion. We were particularly pleased by the results in Q1. I think the operators, obviously, are doing a great job there. I think we are still getting some benefit as we have talked about in the improvement in the PSI portfolio margins. We said that we would improve those margins during '12 and '13. We think that we got a lot of that improvement in '12, but I think there was a little bit more to go, and we certainly got some more of it in the first quarter. I do not think that we can sustain EBITDA growth at 9% every quarter with only 2.5% revenue growth. I think it is reflective of the opportunity in the business to continue to expand margins as long as we can continue to grow the top line. I do not see any reason why we can't.

Okay, and then just my last one. I want to talk about sort of about next year and exchanges. Have you -- I guess, at this point, have you negotiated exchange contracts? If you have, can you give us a sense of what percentage maybe of what the book you have maybe negotiated and any color on the rates that you are getting on the exchange? Thanks.

Our commentary in that regard is really pretty consistent. We have negotiated, really, a small number of exchange contracts. For the most part, they have been negotiated at our average or maybe slightly below our average commercial rates. But in that neighborhood. It remains a small number of contracts, and at least right now, I do not think the pace of those contract negotiations are picking up. We anticipate, obviously, that will occur later this year. We anticipate that they will occur again at something pretty close to our average commercial rates, but that remains to be seen.

Okay. Thank you.

Joshua Raskin, Barclays.

Just a follow up maybe on Vegas and then maybe some of D.C. in there as well, the BILS data is showing some improvement in the unemployment trends, specifically in those markets. I'm curious. Are you seeing any change in those specific markets around levels of insurance or anything else that would indicate maybe some economic stability?

Well, Josh, I think we talked about this a little bit in Q4. I think that we saw some improvement in the Vegas market in Q4, consistent as you suggest was some of the overarching kind of macroeconomic data that has been coming out of that market for the last few quarters. I do not think -- Q1 was clearly weaker in that market, but as we have discussed and as some of our peers have discussed, that weakness seems to be far more pervasive than just a single market here or there. I do not know how to read the Q1 Vegas performance or how to reconcile that to the improving market data that continues to come out of that market.

Our general expectation is the market is improving. You get that from the data, I think you get that if you are in the market. You just have a sense that it is picking up. The expectation is we will begin to feel that in our business fairly consistently in due time. Although, I think we have been pretty transparent about the fact that we are not at that point just yet.

Right. And no discernible change in benefit level, trends, or things like that that have increased co-pays and deductibles?

I know there's been a fair amount of conversation after the two pre-announcements in the space this quarter that maybe there has been a big pickup in high deductible plans, et cetera. Honestly, I think as a provider, and I assume our peers would say much of the same thing, we are not in a great position to have a lot of data to support that. From what I have read, the managed-care companies sort of indicate that high deductible plans and the like continue to grow and gain market share, but not in a terribly dramatic way. I do not know that anybody, including us, is really chalking up the first-quarter weakness, particularly the late first quarter weakness, to dramatic changes in benefit plan design.

Just last one for me, Steve. Just on guidance. Could you help us? What do you have included in your guidance with respect to the fourth quarter around Medicare reimbursement? How are you thinking about IPPS and do you have DSH cuts that's included in there already.

We definitely have DSH cuts. We discussed that in our fourth quarter call that we included DSH cuts based on a calculation that our DSH would be negatively impacted by about $50 million annually. We have got a quarter of that in the fourth quarter of our guidance this year. As far as the IPPS rate, I do not have it right in front of me. But my recollection is we were sort of in the flat to up 0.5% range for the IPPS rates beginning in October.

Okay, perfect. Thanks.

Whit Mayo, Robert W. Baird.

Thanks. Good morning. Steve, I am not sure if you have a great answer for this. But I will take a stab anyway. Any thoughts on whether or not you guys think that CMS could make a determination on whether it declines to apply the IMD exclusion to the newly eligible Medicaid population? I know that it is a tough question.

I'm sorry. You were asking me what we think the likelihood of that is?

Yes, well, I know that CMS is reviewing whether or not they are going to apply the IMD exclusion or not. I just was kind of curious on your updated thoughts for what you anticipate potentially happening.

Right. Obviously, as an industry, the behavioral industry, including us, has pressed for that and we think the IMD exclusion is not really beneficial to the overall population, et cetera. And it just is not a great idea and that there would be a lot of macro benefits to be had from it being lifted. We certainly have pressed and lobbied CMS as an industry to do so, but as with so many other things in terms of what the government will ultimately do, I think it is hard for us to get any sort of realistic projection or guesstimate of how that is going to play out. I think we think it will be decided, however, relatively soon. We will know one way or the other relatively soon.

Yes, okay. And I guess even regardless of whether or not it applies to the newly expanded Medicaid population, there should potentially be a fairly large addressable psych market with newer, enhanced benefits. Do you think that there is an opportunity to accelerate some bed expansion projects to potentially capture some of this volume?

I think there is a few different issues. There are a number of, I will call them sort of regulatory decisions pending that I think stand to at least potentially benefit the behavioral business. The final regulations on the mental health parity legislation are due out and our hopes would be that they strengthen those regulations and that they particularly address or note that they are relevant and that they address the residential as well as the acute business. That is one area, the IMD exclusion is another area. I think that our view is that those developments, as well as just reform in general, and the newly expanded or newly insured population that will arise as a result of reform, all should potentially create more behavioral demand.

In addition, quite frankly, to the existing demand that we continue to try to meet. We are always looking at our behavioral expansion program and seeing if there are ways that we can accelerate it and make it responsive to where we believe that demand either exists today, specifically in focus markets, or where we think it will develop. That is a big focus of our behavioral health management team as we move forward.

Okay, and maybe just one last final one if you could just spend a second on capital priorities or leverages now below three times now. Just maybe an update on what you are thinking over the balance of this year.

I think, again, our commentary is going to be consistent with what it has been historically. That is that we remain relatively agnostic about capital deployment, meaning we are anxious to deploy capital wherever we think it is going to earn the greatest return. We just talked about earning those terms in terms of organic expansion within our behavioral business. That is clearly an area where we are going to continue to focus. But we also are looking at M&A opportunities in behavioral. We will continue to look at M&A opportunities in acute.

There is a lot of commentary from our peers that that pipeline is as active as it has ever been. We have tended to be a little more judicious than some of our peers about acting on some of those opportunities, but we are absolutely evaluating them. We continue to invest and reinvest in our acute care business. I mentioned in my comments about our Temecula, California hospital which is opening late in the year. We're just going to continue to do what we have always done which is try and deploy capital in the most efficient way to earn the highest returns.

Okay. Great. Thanks a lot.

Chris Rigg, Susquehanna.

Good morning. Thanks for taking my question. I just want to clarify some comments earlier. I think you said you saw some volume weakness in the acute care side, specifically in the managed Medicaid and Medicare Advantage side. If I did hear that correctly, are you implying that you actually saw fewer people walk through the door of the hospital or you have just seen sort of like some of your other peers have talked about an increase in observation visits that have put pressure on actual inpatient admissions?

I'm sorry, Chris, if I misspoke, I apologize, or if I was not clear enough. What I talked about, when talking about our payer mix dynamics was that, we saw less commercial business and less traditional Medicare business and more managed Medicaid and managed Medicare business in the quarter.

Okay. And then just with regard to Texas and the southern Texas market, you have had a couple of the Medicaid HMOs talk about some retroactive payment updates. You're seeing them also talk about pushing some of that along to the provider side, not necessarily hospitals per se, but are you guys expecting anything beneficial on the Texas Medicaid site given what the managed care guys are seeing?

It is hard to say. I would say that I do not think that we are necessarily seeing that now. I do not think that we have really -- we have seen some pressure on utilization and length of stay as a result of the penetration of managed Medicaid and those South Texas markets, similar to what we've seen when managed Medicaid or Medicare comes to any market. I do not know that it has been a huge needle mover in the market. If there is to be some relief going the other way, maybe some rate relief, I do not think we have seen it yet. We are certainly well-positioned to take advantage of that if that is going to be the case.

Last question. Just a follow up on the M&A question a minute ago. When you think about pricing, particularly in the acute side, are you guys viewing the Affordable Care Act as a game changer and sort of take out multiples going forward? I guess I just want to get your sense in terms of where the M&A environment is evolving to given the changes we're going to have next year? Thanks.

It is a complicated question, and I do not think there is an easy answer to it. I think that as we look at potential acquisition opportunities, in the same way we look at our own business, we certainly view the Affordable Care Act and the infusion of a newly insured population as generally a net benefit in almost all markets and for most hospitals. We also acknowledge that there is likely to be continuing rate pressures from both government and private payers in the future. Again, I think we are as much interested in the positioning of a potential acquisition target, where they are in the market, what their market share is, how well they are positioned to integrate with physicians, et cetera. Again, all the same criteria we use to think about our own hospitals as much as we are about the mathematics of reform and rate changes, et cetera. All of those dynamics come into play as we think about potential acquisitions.

Okay. Great. Thanks a lot.

Tom Gallucci, Lazard.

I just had a couple of follow-ups, Steve. On the exchanges, you mentioned not a lot of negotiation necessarily done at this point for yourselves. Are you seeing any other providers be more active? I know you typically have a pretty strong share in your markets. Do you think, will those with less share are maybe offering lower prices to get into narrower networks, or do you see any other dynamics going on more broadly in your markets that are of interest?

No, Tom. I do not think that the lack of activity on our part is in any way unique or an indication that we are sort of lagging the activity in our markets. I think it is a reflection that the payers have been slow to move. My sense is that a number of the payers, and maybe particularly some of the larger players are being very deliberate about making their decisions on what they are doing. I think to some degree, that is why this process is developing a little slower than people expected that it might. It is not a question of -- we have not negotiated any rates, but we are standing by as we see more competitors doing so. That is not the case.

Okay, good. And maybe just sticking on the pricing side. I just want to make sure you give us an update on your broader commercial negotiations and if there is any change there either in terms of rates or types of contracts, pushing more risk towards your way or anything like that?

No. I think from a rate perspective, rates continue to be comfortably in that 5% to 7% range that we've talked, rate increases that we have talked about for some time. In terms of new and different kinds of contracting with significantly narrower networks or risk-taking, et cetera, while I think that is a subject of conversation in a lot of markets, the actual, on the ground presence of those kinds of new arrangements is really very limited.

Okay, and then maybe to shift into behavioral real quick. Length of stay, obviously it has been under pressure. I think you've commented in the past that you might've thought from a clinical perspective it would have bottomed already. Is there any signs of bottoming at this stage or it's just sort of more of the same?

I think is the latter. I think it is more of the same. I think -- and I probably should have been clear about making this point before. We have talked before about the fact that as the pressure, particularly on length of stay, continues in the residential stay of the business, we continue, where appropriate, to convert beds to acute behavioral, to shift beds to acute behavioral. Again, I think that is part of the margin growth explanation even in a relatively muted revenue environment as we are shifting more business to the higher-margin segment of the two, from residential behavioral to acute behavioral. And frankly, I think we'll continue to do that because again, as you suggest, we're not really seeing those dynamics change in the residential business. We saw length of stay decline, again, in the residential business in Q1, whereas length of stay in the acute behavioral business remained pretty stable.

All right, okay. And then last one. I know it is a smaller deal, but now that you have got your hands dirty a little bit there on Ascend, any color that you could offer.

I think for the most part the Ascend acquisition is proceeding the way that we would have expected. There is always pluses and minuses in individual facilities. Again, we are very enthusiastic about that deal.

Okay. Thanks a lot.

Gary Lieberman, Wells Fargo.

On for Gary. I guess going back to the acute care volumes. I was wondering if you are specifically seeing a reversal in the trends away from observation stay in the quarter?

I think, observation visits increased year-over-year for us. Although, sequentially, it certainly seems to indicate, at least again, for us, that we are starting to see that activity level out some.

Okay. And then moving onto the behavioral. Obviously, you have given a lot of color on the margin benefit. But has Ascend, or did you see any margin benefit from the Ascend deal this quarter, and should we expect it to sort of ramp similar to the PSI deal?

No. I think we have been clear that the Ascend margins, quite frankly, were already higher than ours, in large part because that was a business that was almost exclusively acute behavioral and did not really have much of a residential component. We really thought that the improvement opportunity in the Ascend side was to increase capacity over time in facilities that were already running at pretty high occupancy rates. So, again, obviously the Ascend numbers do not affect our same-store comparisons, but in terms of goosing our overall margins a little bit, they do that. Although, again, it is a pretty small piece of business, so the moving of the needle is relatively minor.

Got it. As far as the regulatory, I guess, factors that you listed that could impact 2014 in behavioral, I was just curious how you guys are thinking about some of the alternatives that the states are considering for Medicaid expansion? Is that something you guys are paying attention to in potentially impacting your behavioral business?

Sure. I think, in general, we welcome any sort of insurance expansion. Generally, we are able to treat patients profitably that have some sort of insurance, whether it is government or private insurance. These negotiations between the states and the feds, and these nuances of exactly how insurance expansion is going to take place, we are certainly watching with interest. At the end of the day, just generally have the sense that any insurance expansion that takes place is going to be beneficial to us.

Okay. Thank you. That is all I have.

Kevin Fischbeck, Bank of America.

Okay. Great. Thanks. I just wanted to go to the guidance. I guess since I do not remember you actually specifically talking about it, that means that you're reaffirming it, but just in particular some of the components with the weak start to the same store revenue growth on both the acute and the behavioral side, do you still feel good about that 2.5% to 3% top line growth on acute, and I guess 4% to 5% on behavioral? Or do you think that number may come in lower but there is cost items that kind of leave you comfortable with the EPS range?

Sure, Kevin. I think taking the two business segments separately, because we discussed in our guidance, our guidance is premised on the acute care revenue growth in the 2.5% to 3% for the year. We obviously fell short of that. In Q1, again, I think that our general sense is that the latter half of Q1 was particularly weak. We attribute a lot of that to the calendar. Like I said, some of the rebound in April reinforces that notion for us. I think we view that latter Q1 performance as largely an anomaly.

In our minds, there is no real change to our initial guidance. And until we see otherwise, that would be the case. On behavioral side, I think as we discussed, in our end of the year call, I think you're right, we are expecting revenue growth in the 4% to 4.5% range. I think the Q1 performance is an indicator that on the behavioral side, we have some flexibility that even if we do not get there at the top line, we have an opportunity to get there from the EBITDA perspective. It just gives us more reason to be comfortable with our initial guidance on the behavioral side.

Okay, all right. That makes sense. Can you just also talk about the charity care number in the quarter. Was there a change in the charity care policy that kind of shifted the numbers between charity care and bad debt in the quarter? Is there a reason for that?

I don't think an actual change in policy Kevin, but I will say from a practical application perspective, we certainly got a bit more aggressive about qualifying people for charity care, meaning I think less people qualified for charity care and more people went through the actual collection process in the hopes that in the end, we would collect and net a little bit more incrementally. Now, at the end of the day, it creates this fairly significant cosmetic shift because to the degree that we do not collect, more of that is reflected as bad debt than is reflected as charity care. In the end, the overall uncompensated care totals did not change dramatically and largely came in where we expected. I do not think it was a significant bottom-line issue in the quarter.

Okay. And actually, going back to guidance for a second. Often times, there is a delta between where consensus is and maybe where you guys are internally. Do you guys view Q1 as an in-line quarter versus your own plan?

Yes. I think that the overall results for the quarter were in line with our own expectations. Although, they broke out, as I am sure they did, in most people's models, with better than expected behavioral performance. Slightly lower than expectations on the acute side.

Okay, that makes sense. And then lastly, any update on the subpoena that you guys announced last quarter.

No. For the most part, as you might expect, it was a broad subpoena. We are in the process of gathering the documents that have been requested which is a fairly significant effort in and of itself. That will continue for some time and then I suspect it will take the government some time to sort through it. My guess is that there may be no update on this for a while. Certainly, not for this quarter.

Okay. Great. Thanks.

Darren Lehrich, Deutsche Bank.

Good morning everybody. Just a few things left here. I want to go back to the volume question, Steve, wondering if you have a read at all on ER visits in the quarter. I'm just curious on how that trended for you and whether less traffic there also was a contributor?

Yes, ER business were relatively flat compared to the prior year quarter, which, again, I think was fairly consistent with our adjusted admission activity, the two of those really mirror each other pretty closely. So it was sort of consistent with a more muted activity. We have seen ER visits growing by more than that in the previous quarters to this.

Sure. Okay, that is helpful. And then, I guess, a couple broader topics. One is just healthcare IT implementation and just wondering how that is progressing. Sometimes big projects like that can take on their own lives. I am just curious how that is going for you guys?

We began the actual implementation of our EHR system into our hospitals after the design phase in the middle of 2011, right around July of 2011. The plan that we had at the time was to have all 25 of our acute care facilities converted by July of 2013, basically a 24 month run rate. I know we are only a few months away from that, and we believe we are going to meet it from a timing perspective. To the credit of a bunch of our internal personnel, that process has gone really without any sort of major disruption, which is quite an accomplishment. We're very pleased with the way that has gone. You do not see me, but I am knocking on wood just to ensure that we finish up in the same fashion.

That is great. I guess all of the DNA guidance that is built in EPS will stand, then, in terms of you starting to depreciate all of that?

Yes. DNA will ramp up as the year goes on as more and more facilities come live on EHR. And then obviously in Q4 it will ramp up again when we open our Temecula facility.

Great, and then I guess, I don't know if Alan is still in the room, but just wanted to get some comments. Sometimes you give us some commentary on just physician employment activity and alignment activity. I know that alignment strategy has been a big focus for you guys in many of your markets. How do you see that playing out? How are some of those trends impacting your acute business?

We are moving into that cautiously. It is important that we position ourselves to build networks. As the transition in the industry goes forward, we are going to be in a position to do very well with it. We have put together a group that is buying physician practices on a selective basis and managing them. We are, I think, very well positioned to do networking and to be in a position to go after contracts as the exchanges come about, et cetera. The business is in transition as you well know.

Alan, do you see yourselves taking on any risk? Just wondering if you were organizing yourself any differently to basically take some of the risk-based contracts or if that is just further down the road for you guys at this point?

It is down the road. There is an actuarial aspect to that, we are not in the business. Again, depending on how the networks shape up and who our potential partners might be, we will consider anything along those lines.

Okay. Great. All right. I think that is it. Thanks.

Frank Morgan, RBC Capital Markets.

Good morning. Most of my questions have been answered. I wanted to go back to the charity care issue and the charity care policy. Was there any particular markets were, that kind of precipitated the need for that, or did you notice any kind of different pattern in those markets to result in this more aggressive attempt at collections?

No, Frank, I think it was kind of an overall observation that maybe we, the pendulum had swung a little too far in terms of putting folks in the charity care designation when in fact there may have been an opportunity to collect at least some of their portion of the bill. But, no, I do not think it was driven by a particular market. Like I said, I realize it has sort of a significant cosmetic impact on the income statement. I think at the end of the day, while it was the right thing to do operationally, it is not going to make a huge different to our results.

Okay, just one other random one here. You mentioned on your early contracting with exchanges, without saying any names, could you characterize the kind of parties you are contracting with now? Is it Blue Cross? Or how would you characterize those contracts that you have negotiated? And I'll hop off. Thanks.

The only thing I would say, Frank, is I think they tend to be some of the smaller contracts we have. In none of the cases have we negotiated among our really low margin significant contracts? Other than that, I'm not sure there's anything -- any sort of common theme to be drawn.

Kevin Campbell, Avondale Partners.

Taking my question. I just really had one here. I was hoping you guys can describe a little bit the systems you have in place to flex costs to handle volumes? Clearly volumes continue to be sort of a challenge. Some have done a better job than others apparently this quarter of flexing those costs down. I was just hoping maybe you could talk a little bit about what you guys do specifically to adjust to soft changes in volumes in your markets?

Honestly, Kevin, I think we probably, I talk about we, the for-profit industry tends to approach this in much the same way. We have some fairly sophisticated electronic systems for tracking and trying to match staffing levels to volumes literally on a shift by shift basis. The challenge for the industry, I think in general, for hospitals in general, is that there is a significant amount of your staffing that is fixed and semi-fixed and is very difficult to adjust to in short increments and to quick changes in volumes. That is the real challenge. I think much like our peers we certainly try and adjust the volumes in as real a time as possible.

What about your utilization of contract nurses? You have a particularly -- any differences, you think, versus peers? Do you use less of them?

I am sure we all have the same goal which is to use as little outside agency nurses as possible, just because I think from a quality perspective and a cost perspective, it is preferable to not do so. But there certainly is a proper use for temporary nurses when they truly are temporary. And it varies by market. There are markets where it is definitely more of a challenge to hire nurses than others. Again, we're very focused on that and try and work through it as best as possible.

All right. Thank you very much.

Gary Taylor, Citigroup.

Good morning. Just one question. Steve, is there any update on your Medicaid DSH in Texas coming through that reorganization of the UPL program into the uncompensated care pool and the regional health partner pool? Is there any piece of your 2013 guidance that is predicated on UPL funding that is not yet finalized or is that all in place?

No. I think that all of our UPL revenue that we have in our guidance is based on established plans. I think as we disclosed in our 10-K, some of those are dependent on Inter-Governmental Transfers that have to take place and contributions that have to be made by third parties. We expect that they will be made, but I think we disclose that conditionality in our 10-K. I think all of the plans have been approved.

Okay, that's it. Thank you.

(Operator Instructions)

Justin Lake, JPMorgan.

Thanks, good morning. A few questions here. First, Steve, you mentioned a measurable bounce back in volumes. I'm just curious if you can help us delineate, is that measurable in your mind even beyond what we know is the calendar benefits you're going to get in April from the Easter Passover shift?

The way I think about it, Justin, it just strikes me, and obviously we still have a few days to go in April, is that when we combine the March and April volumes, that they will look sort of more normalized than either month on its own will have looked. I think that was the challenge in Q1 is that March looked a lot weaker than any of us would have expected. That seems to have been an industry wide issue, not just a UHS issue. I don't know how the other companies feel, but I think we feel like when we look at April and March combined, again, just from a volume perspective and just from a gross volume perspective, not talking about ER visits or surgical activity, but just adjusted admissions, it's going to look more normal when the months are combined.

And March was down materially. So to get to up slightly, which we kind of think of is normal, April is up fairly materially then, right?

Yes.

Okay. Beyond that, you mentioned the benefits of psych parity, so beyond more people getting new coverage in terms of the uninsured, obviously, we're going to see some better benefits within the existing individual and small group market. Can you, is there anything you could do to try to help us quantify the potential impacts there just in terms of are there big co-pays and deductibles? Or are patients having to leave earlier than they typically would like to because they only have 10 days of coverage instead of 30 type of thing? Anything you can help us with there?

I think it is difficult to do. There been a number of pieces put out, some by analysts, some by the industry itself, I think that talk about tens of millions of people who either will have new coverage altogether or expanded coverage as a result of some of the dynamics that we are talking about. I think it is extremely difficult for us to take that macro data and convert it in any way to a precise opportunity for us. But I think the observation that we would have, and I think others have had as well, is that it is a fairly significant opportunity and one that obviously we are tracking very closely and will respond to as it arises and we think about capacity expansion and all of those other dynamics.

Okay. Thanks. Lastly, I just wanted to go back a couple of years. In, I think 2011, you had some really material hospital projects go online in terms of expansions, it's clear the business overall has been tough from there, but just wanted to get an update in terms of how those expansions have looked versus expectations. And maybe even what kind of EBITDA you are generating from them versus, if I remember correctly, it was $400 million to $500 million of CapEx you spent on those three projects.

The three projects you're referring to are replacement hospitals that we built in Texoma, which is north of Dallas, and Palmdale, which is north of LA, and then the large patient tower addition that we did at our Summerland facility in Las Vegas. I think as we've discussed over the period, the challenge has been, particularly in the California and Las Vegas markets, that we opened that capacity in the teeth of pretty significant recessionary challenges. I think in our minds, what that did was it extended the ramp-up period that we would have otherwise anticipated. I think that is still the case. For sure we do not feel like we are getting the full benefit of the Summerland and Palmdale projects yet. I think we continue to feel that we ultimately will, but we're not quite there yet. On the Texoma side, I think which was a market that was less hurt by the recession, I think we really have benefited already and our earning pretty reasonable returns on that project already.

Okay. Great. Does that change your thoughts on capital deployment on the hospital side going forward in terms of increasing the hurdle rate for new projects or anything? Or do you really just feel like this is a macro issue and it will sort itself out?

Yes, obviously if we had had perfect foresight, I am not sure that we would've timed these projects to open in 2010 in two areas that were really hurt by the recession. But when the projects had begun two or three years earlier, obviously we did not have that perfect amount of foresight. No. Again, when we undertake projects like that, we do so because they make sense in the marketplace, because the demand is there, because we think that the long-term positioning is correct. We are not really making short-term bets on the local economy or anything like that. Again, with perfect hindsight, we might have timed them differently but that is about it.

Great. Thanks for all the color.

There are no further questions at this time from the phone lines. Are there any closing remarks?

No. We would just like to thank everybody for their time and look forward to speaking with everybody next quarter. Thanks.

This does conclude today's conference call. You may now disconnect.