Universal Health Services, Inc.
Q2 2008 Earnings Call Transcript

Published: 29 Jul 2008

[Operator:]

Good morning, my name is Hamilton and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter Universal Health 2008 earnings release (Operator instructions). Thank you. I will now turn the call over to Mr. Steve Filton. Sir, you may begin.

[Steve G. Filton:]

Thank you, Hamilton. Good morning, I am Steve Filton. Alan Miller, our CEO is also joining us this morning and welcome to this review of Universal Health Services results for the second quarter, date June 30, 2008. Hamilton, I think that static is from Mr. Miller’s line. Perhaps you can mute it until he is ready to answer a question.

[Operator:]

Yes, sir.

[Steve G. Filton:]

Thank you. As discussed in our press release last night, the company recorded net income per diluted share of $1.07 for the quarter, representing a 35% increase over the adjusted net income per diluted share earned during the second quarter of 2007 as calculated on the supplement schedules included with last night’s press release. Combined with our better than expected first quarter earnings, we earned $2.27 per diluted share during the six months ended June 30, 2008, representing a 34% increase over the adjusted net income per diluted share earned during the first six months of 2007. During this conference call we will be using words such as believes, expects, anticipates, estimates and similar words that represent forecast projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our form 10-K for the year ended December 31, 2007. We would like to highlight just a couple of developments in business trends before opening the call up to questions. Revenues for the second quarter increased 8% over the prior year’s quarter. Exclusive of the impact of new facilities, most notably, Centennial Hills and Las Vegas, and the revenues related to a construction management contract whereby we have built a new hospital for unrelated third party, revenues have increased by 7%. A second, smaller construction management contract has recently commenced. On a same-facility basis in our Acute Care division, revenues increased 7.6% during the second quarter of 2008. The increase resulted primarily from a 7% increase in revenue per adjusted admission. Admissions to our hospital owned for more than a year were up .8% for the quarter. In the Las Vegas/Nevada market, although the opening of the Centennial Hills Hospital has negatively impacted our same-store admissions comparisons to the extent that it cannibalized some of its volume from our existing facilities, the better-than-expected operating results at Centennial Hills contributed to a greater than 10% increase in total admissions in the market during the second quarter of 2008 over the comparable quarter of 2007. Also, as we have previously disclosed, newly constructed capacity at the physician-owned hospital in McAllen, Texas opened during the fourth quarter of 2007, unfavorable impacted our admissions in that market. We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. On a same-facility basis, operating margins for our acute care hospitals increased to 14.6% during the second quarter of 2008 from 12.7% during the second quarter of 2007. The margin improvement resulted from continued increases in commercial payer volumes and pricing, the favorable impact of our change in group purchasing organizations, and an increase in overall operating efficiencies. These favorable operating trends were manifested by increased margins in a variety of markets including our South Texas markets, Florida, Washington, D.C. and Las Vegas, Nevada. Our Acute Care hospitals a charity care and uninsured discounts based on charges at established rates, amounting to 143 million during each of the three month periods ended June 30, 2008 and 2007. As a percentage of net revenue, bad debts, charity expense and the uninsured discount in the second quarter were consistent with those levels we experienced for full year 2007. On a same-facility basis, revenues in our Behavioral Health division increased 7.8% during the second quarter of 2008. This increase resulted from increased patient volumes and an increase in revenue per adjusted patient day. Admissions to our behavioral health facilities owned for more than a year increased 8.5% during the quarter and patient days increased 3.1%. Revenue per adjusted day rose 5.1% during the second quarter of 1008 over the comparable prior year quarter. Operating margins for our behavioral health hospitals owned for more than a year increased to 24.8% during the quarter ended June 30, 2008 as compared to 24.6% during the comparable prior year period. Our cash flow from operating activities was approximately $67 million during the second quarter of 2008 as compared to 60 million in the second quarter of 2007. At June 30, 2008, our ratio of debt to total capitalization was 40.6% and the ratio of debt to EBITDA was 1.95. We spent $75 million on capital expenditures during the second quarter. Included in our capital expenditures were the construction costs related to our new, 165-bed Centennial Hills Hospital in Las Vegas that opened in January. And a new, 171-bed hospital in Palm Dale, California that is scheduled to be completed and opened in 2009. In California, we are also underway with a major expansion of emergency room, imaging and women’s services to our Southwest Healthcare campuses in Riverside County, California. Our behavioral health facilities have operated at a very efficient 77% available occupancy rate for the first half of the year. We have multiple projects to add capacity to our busiest behavioral facility. We opened a total of approximately 70 new behavioral health beds during the second quarter and anticipate opening a total of 350 to 450 new beds in 2008. In connection with the government’s on-going investigation of our south Texas health system, we have received notification that at this time, the government will not be pursuing criminal prosecutive action against the company or our south Texas health system. The Department of Justice is still investigation whether or not any individuals independently obstructed justice. The government is continuing its civil investigation of our south Texas health system. We expect to continue our discussions with the government in an attempt to resolve this matter. We would be pleased to answer your questions at this time.

[Operator:]

(Operator Instructions). Our first question comes from the line of Tom Gallucci of Merrill Lynch.

[Tom Gallucci:]

Good morning. Thank you, Steve. You mentioned the strength in Vegas on the volume side and the count, I suspect, was down with the new competition earlier or late last year. Can you talk about, sort of, how the volume was spread throughout the rest of the portfolio? Was it fairly even or were there other extremes, either up or down?

[Steve G. Filton:]

Sure, Tom. Obviously, you always have some ups and downs, but we saw strength. I kind of alluded to profitability in my opening remarks. But we saw strength in admissions in the Washington, D.C. at GW. We saw it in Florida in the Bradenton market where, as we disclosed, for the past three or four quarters, I think we have benefitted from a major construction renovation project that we completed at the end of the second quarter last year. So, I think we saw that strength again throughout the portfolio.

[Tom Gallucci:]

Okay and then on the out-patient side, can you discuss the trends you are seeing there?

[Steve G. Filton:]

Sure. In the first quarter we talked about the fact that surgery volumes were actually a little bit negative in the first quarter. In the second quarter, they turned sort of slightly positive, not a huge change, but we did see a little bit of a rebound in our surgical procedures, particularly out-patient surgery. And we have seen relatively busy ER visits throughout the year; busier in the first quarter, just because of the flu impact, but still busy ER in the second quarter as well.

[Tom Gallucci:]

Okay, final question, just wondering how you are sort of viewing the Medicaid landscape at this point, given the state of the economy and state budgets. Thank you.

[Steve G. Filton:]

Sure, well we have seen--and I think we have talked in previous calls--about Medicaid, announced Medicaid reductions in Florida, which took effect on July 1. California’s was supposed to take effect on July and there is some legal wrangling that has sort of enjoined that for the moment, but may well be retroactive to July 1. Both those changes are worth, probably, a couple of million dollars of negative impact, each, to us in those states. Since, I think, the second quarter call, the state of Nevada has passed Medicaid reductions which will take effect on September 1. We do not have a huge exposure to Medicaid in Las Vegas or Reno and again, probably worth a couple of million dollars in negative impact to us. The best news, I guess, from a Medicaid perspective is that the state where we have the biggest Medicaid exposure is Texas. And at the moment, Texas is not talking about any Medicaid reductions. They are talking about some tinkering with disproportionate share programs and moving that money into the regular Medicaid program. But as we, I think, have articulated in the past, our expectation is that the impact of that will largely by budget-neutral or revenue-neutral to us.

[Tom Gallucci:]

Thank you.

[Operator:]

Our next question comes from the line of Adam Feinstein of Lehman Brothers.

[Adam Feinstein:]

Okay, thank you. Good morning, Steve. Good morning, Alan. Maybe just starting with Vegas, maybe just talk about how would a 10% growth number. Just curious, if you could just comment just about overall profitability in Vegas in terms of margin trends there and then, just curious, in terms of the Centennial Hospital, just sounds like ramping up much better than anticipated. You had initially talked about $0.07 to $0.08 of dilution for the full year, just curious in terms of how you are thinking about that and I have a couple of follow-up questions.

[Steve G. Filton:]

Sure. Well, the Vegas profitability was good for the quarter. On a same-store basis, our profitability was up and, as we have discussed before, for the first half of the year, Centennial has out-performed our own expectations. It was actually close to being EBITDA break even in the second quarter, which is probably about three months ahead of when we thought they would get to that level of profitability. So we are just pleased with general developments in the Las Vegas market. But, our profitability, again, as I sort of commented to Tom, from an admissions perspective, but it is also true about profitability, was relatively strong throughout the portfolio. To have a beat as large as we did, you need to have both portfolio-wide strength as well as, obviously, strength across the two businesses and I think we had that in the second quarter.

[Adam Feinstein:]

Okay and then, I guess in terms of the dilution for the year from Centennial to, I guess, just how do you think about that $0.07 to $0.08 that you talked about earlier in the year.

[Steve G. Filton:]

I think that we will probably, in the end, do better than that, Adam. As long as trends continue, the balance of the year ought to be a little bit accretive at Centennial. And, like I said, we are probably--at the end of the day--about three months ahead of sort of our ramp-up schedule there, which we already thought was a pretty accelerated schedule. But I do not know how much less than the 7 or $0.08 we will be, but we should be a least a few pennies less than that.

[Adam Feinstein:]

Okay and then, just a follow-up question to hear, I guess, as we think about the operating leverage in the business model. Clearly, you guys have been showing upside on the margins. So, just curious, in the last quarter Steve, you talked about some improvement in salaries in benefits. And this quarter it looks like you saw a similar improvement as well as on the supply line item. Just curious, if you could comment on that, any items that really stand out in terms of the cost management.

[Steve G. Filton:]

Sure, Adam. What we said in the first quarter and I think it is equally true in the second is that when you have the strong revenue performance and we had same-store revenue growth in our two business segments in the 7.5 to 8% range, that is obviously pretty strong same-store revenue growth and I think it provides an opportunity for a lot of operating leverage. And I think you saw, again, in the first half of the year, that our operators have taken advantage of that. I think that it is also true that in a little bit of a weaker economy, we have seen some of the pressure come off our wage rates. Our usage of temporary nurses is clearly down over last year for the first six months, which I think is a good indicator of sort of how much pressure there is on wage rates. We mentioned in my prepared remarks that we are getting some benefit from our change in group purchasing organizations, which was effective April 1. So I think we had a few million dollars of benefit from that in the second quarter. And the only other comment that I will make is we have seen a little bit of a bias toward more medical procedures and less surgical procedures and a little bit more acuity on the medical side. And just, generally, medical procedures are less supply-intensive than surgical procedures and so, I think that is driving down our supply expense as well.

[Adam Feinstein:]

Okay and then just a final question here. On the pricing side, has anything changed, Steve, there? It seems like you guys are seeing some acceleration, just curious, I know you finalized the new Sierra contract. You highlighted on the last call, so just curious in terms of--as you think about the pricing environment--have there been a few contracts that have changed or how are you thinking about that?

[Steve G. Filton:]

I think that the dynamics, there are a few dynamics, Adam, that are contributing to what has been a relatively strong pricing environment in the first half of the year. As we anticipated would be the case, I think we have benefitted modestly from Medicare switch to the MSDRGs. So, that has been a modest help to us. I think that, in general, our managed-care pricing, which we have said over the last few years has been going up at a rate of somewhere between 6 and 8% that for the first half of this year. We are kind of on the high end or high end of that range, rather. And then, finally, as we talked about, again, in the first quarter and I think it is true again in the second quarter our just general mix of payers has been good. And it has been weighted more toward managed care and less towards indigent, non-pay patients, and Medicaid patients. And I think all those things together have contributed to the stronger pricing.

[Adam Feinstein:]

Last quarter, you gave a commercial volume number, since you were talking about mixed there, do you have that number again?

[Steve G. Filton:]

Yeah, we talked last quarter about commercial volumes being up about 6% year-over-year in the first quarter and in the second quarter, the numbers were pretty similar.

[Adam Feinstein:]

Okay, great. Thank you very much, great quarter.

[Operator:]

And next we have Jason Gurda of Leerink.

[Jason Gurda:]

Good morning, Steve.

[Steve G. Filton:]

Hi, Jason.

[Jason Gurda:]

Do you have a sense for what the uninsured admission trends were during the quarter?

[Steve G. Filton:]

I think our uninsured admissions were growing at about the same rate as our overall admissions, which I think was the case in the first quarter as well. So, overall, uninsured admissions were growing at about the same rate. Managed-care admissions were growing a little faster. Medicaid admissions, largely as a result of the loss of OB business in McAllen were down and that is kind of the way the mix looks.

[Jason Gurda:]

Okay, you had mentioned in your comments earlier that you had started a second construction project. Could you, maybe, add a little color on that?

[Steve G. Filton:]

Sure, our fist construction management project was initiated in ’06 and between ’06 and ’07, we recorded probably, $10 million of EBITDA related to that project, which is now largely completed. The project, itself is completed and we are just finishing the construction accounting and little bit of clean-up in that regard. We have commenced a second contract with actually, the same not-for-profit system, on a smaller scale that will result in EBITDA to us of probably a couple of million dollars in the back end of 2008 and another couple of million dollars in 2009. And we continue, at the same time, to look for other opportunities for these construction projects. We think we have a particular skill set in this area and we think that it adds value to others and so, we continue to try and market those services.

[Jason Gurda:]

Interesting. One other thing I wanted to touch on was you were going through a little bit of the state Medicaid exposure and some of your expectations. Do you have a sense, overall, what you are expecting for Medicaid in the back half of the year into ’09?

[Steve G. Filton:]

Going into ’08, we said that our pricing guidance presumed that Medicaid pricing would go up like 0 to 1% and the changes that have been announced so far do not really change that very much, so I think we are sort of still in that range for ’08 and although we have not been very precise about it, my guess is that that is sort of the outlook for ’09 as well.

[Jason Gurda:]

Okay, well thank you very much and congrats on the quarter.

[Steve G. Filton:]

Thank you.

[Operator:]

And next we have Ralph Giacombi of Credit Suisse.

[Ralph Giacombi:]

Great, thanks, morning. Just in terms of the guidance, it sort of raised it about $0.10 on a $0.16 beat and just wondering if there is anything in the second half we should be aware of. Obviously, you have talked this in the Medicaid cuts and I guess, just whether guidance assumes sort of the first have trends continue into the second half.

[Steve G. Filton:]

Sure, Ralph. Two things, and we mentioned this in the first quarter as well, it is a little bit difficult because we do not give quarterly guidance, but I think it is fair to say that, while our full-year guidance at the outset of the year was pretty consistent with the Street. Our guidance was a little bit front-end loaded than the Street’s and obviously, by definition, the Street’s was a little bit more back-end loaded. So, I would say that in both the first and second quarters or in the first half of the year, our internal beat, if you will, was somewhat lower than the Street had it. And therefore, when we raised our guidance, I think in both the first and second quarter, I think we were raising our guidance to some degree, more than the beat in each quarter or to accommodate the beat in each quarter, but that is largely sort of an allocation issue across the year. I think the other aspect to be noted is, as everybody knows obviously, we are watching the news about the weakening national economy and some of our local economies carefully and increased unemployment rates in some of our markets, et cetera. And while I think the second quarter results demonstrate this that we have felt little impact from that economic weakness thus far, we certainly cannot guarantee that there will not be some impact later in the year. And so we have tried to be relatively cautious about how we might feel that impact in the back half of 2008.

[Ralph Giacombi:]

Okay and then I think you mentioned case mix, but I do not know if--did you give a percentage for case mix in the quarter?

[Steve G. Filton:]

Actually, I am not sure I mentioned case mix, but I appreciate you saying that because our case mix is up a little bit. Not a whole lot, but I would say probably 3 or 4% our case mix is up.

[Ralph Giacombi:]

Okay and I guess in the first quarter I think you mentioned sort of 2.5, 3% so tracking still, do you think that is sort of a sustainable number or what are seeing, what is driving that?

[Steve G. Filton:]

I wish I could that with some precision, Ralph. As I mentioned before, we have taken sort of a hard look at our mix of procedures and we have noted that, again, there has been a little bit of a bias towards more medical and less surgical procedures. And frankly, that is not necessarily the environment where we think that our case mix would be going up. So, other than to say, I think just in general, I would say that the acute care hospital environment is such that patients who get admitted over the last few years are just sicker and more acutely ill and that trend continues. I do not know that I could point to any other rationale for why we are seeing a little bit of a creep up in our acuity.

[Ralph Giacombi:]

Okay and then just the last one. Can you remind us again sort of the difference between, on the behavioral side, seeing kind of a flattish revenue per adjusted admit stat versus kind of that 5.1% increase in the revenue per adjusted patient day.

[Steve G. Filton:]

Sure. That is almost entirely a function of about a 5% length of stay reduction in behavioral in the quarter. Unlike acute, in behavioral, virtually all of our reimbursement from all payers is on a per diem or per day basis. And so when length of stay contracts as it did in the second quarter, revenue per admission goes down. So, just very simply, if this year we are seeing--or let us say last year we were seeing a Medicare patient on average for ten days at $500.00 a day and this year our average Medicare patient is staying for nine days at $500.00 a day, we are obviously going to have a decline in revenue per admission, but revenue per day will be going by the normal pricing so--

[Ralph Giacombi:]

Is there something that sort of lower length of stay?

[Steve G. Filton:]

I do not think so. Obviously there are some states where you may see a little bit of pressure from Medicaid, managed Medicaid, but I think, in general, probably more than anything else, Ralph, is the idea that this is the third quarter in a row where we have had same-store admissions increases in behavioral in kind of the seven, eight, 9% range. And those numbers, I think, are so significant that our operators have changed their practices a little bit and in order to accommodate the tremendous demand for our services and our capacity. We are doing the best that we can to turn patients over and even if utilization review and clinical practice would allow us to keep the patient an extra day, et cetera, I think sometimes, if it is clinically appropriate, we are discharging that patient just so we can satisfy our waiting list and our demand for referral sources to get patients into our facilities. So, I think you are seeing a little bit after now three quarters of very strong admission growth.

[Ralph Giacombi:]

Okay, great. Thank you.

[Operator:]

And next, we have question from the line of Matthew Bush of Goldman Sachs

[Shelly Knoll:]

Hi, thanks this is Shelly Knoll (ph 00

[Steve G. Filton:]

Well, let us talk about market share first. Clearly, we talked throughout 2007 about a significant shift in market share, largely as a result, obviously of Sierra’s cancellation of their contract with the HCA facility, so there was a significant shift in market share in 2007. We also talked in 2007, however, that as a result of that shift, losing some other business like Medicare and other commercial payers, et cetera. One of the positives for us in the first half of 2008 and particularly in the second quarter is we saw a nice recapture, for instance, of some of that Medicare volume we had lost. So, I think if anything, literally every quarter as market share data comes out, and the nice thing about the Vegas market, is that that data is available on a pretty real-time basis. We are just seeing our market share continue to strengthen and the gap between us and our nearest competitor continues to widen. So, we are very pleased with market share in the Vegas market. As far as the overall economy. Obviously, there is much that has been written, as you well know, about weakness in the Vegas economy, but I think we have been pretty open about saying that we are not feeling a great deal of that thus far. Unemployment rates did go up in Vegas earlier in the year, I think in March or April, but I think in May they actually game down by .10 of a point, so I am not sure that there is a clear continuing progression of upward pressure on unemployment in the market. It is kind of a mixed bag. Some of the gaming properties have announced layoffs, et cetera, but others have announced major hiring. The Winn Properties announced that they are hiring 4 or 5,000 people and there is this city center project that is underway that is going to employ a significant number of people as well. So, we are seeing--and there are still a significant amount of people moving into the city. Even the most recent data from May or June indicates that there are about still--people are moving into Las Vegas at the rate of about 50,000 a year. So, we are carefully watching the metrics in Las Vegas, but as I indicated in response to other questions earlier, our business there remains strong and we are hopeful we can weather whatever weakness may exist there.

[Shelly Knoll:]

Okay, I really appreciate the color, thanks. And if I could just do one quick follow-up on maybe Ralph’s questions on the behavioral health. Can you talk a little bit about what services are seeing the strongest growth in behavioral and maybe, update us on your mix of inpatient and outpatient.

[Steve G. Filton:]

Well, first of all, from an inpatient/outpatient mix, our business has always, on the behavioral side, been heavily weighted toward inpatient. And even in most markets where we have outpatient, with a few exceptions, the outpatient business that we have is largely designed to compliment and ultimately, feed our inpatient business, so it is very much an inpatient-oriented business that we have. In terms of the mix between residential and acute, those numbers remain about the same. We are still, I think more heavily weighted towards the acute side than the residential side and as far as individual service lines, chemical dependence, et cetera, I do not know that we are seeing the strength in admissions focused in a particular service line, et cetera. We are seeing that strength pretty much spread throughout the portfolio service wise, geographic perspective, adults and adolescents. So obviously, I think when you are growing at 7-8-9% pretty consistently for the last few quarters, you have got to have some pretty widespread strength and I think that is what we are seeing.

[Shelly Knoll:]

Okay, great. Thanks, I appreciate it.

[Operator:]

Next, we have Darren Lehrich of Deutsche Bank.

[Darren Lehrich:]

Thanks, good morning, Alan and Steve.

[Steve G. Filton:]

Morning.

[Darren Lehrich:]

I wanted to just go back to the question with regard to the outlook for the second half of the year. We clearly hear what you’re saying Steve about what your internal budgets were and how they were weighted. I guess I just wanted to get your comments on a couple things. If you had to break down what really changes in the second half relative to your earnings levels and perhaps your revenue, how would you frame that for us? Is it weighted towards your bad debt rising? Do you have volume softening? Could you just maybe hit us with the high points that would help us frame what looks to be an unusually lower-weighted second half relative to what you have done in the last at least two years?

[Steve G. Filton:]

Well, first, I will preface it. Alan and I spoke before the call this morning and he reminded me of something Yogi Berra once said that predictions are very hard to make, especially about the future. And I think that is certainly true here, particularly in the volatile environment that we have been operating in the last few years. And now layer on to that the economic uncertainty. I think, in general, Darren, just mechanically what we have done is we had guidance out there for the year. We have beaten that guidance and we have discussed that we have beaten it a little bit less internally than we have beaten perhaps the street’s guidance in the first half of the year. But just generally, we have taken the approach that for the balance of the year; we will meet our original guidance, say for things like interest expense, et cetera, that we adjusted early on in the year and have not really necessarily said that we are anticipating a reduction in volumes or an increase in bad debt. And as we have indicated up to now, we really have not experienced that, but we have taken, as I characterized earlier, a fairly cautious approach to it and we hope to deliver on what we have promised and that is just the position that we have taken.

[Darren Lehrich:]

Okay, that is fair. And you did at one point have a revenue target of 5.13 billion, is that roughly the level you are still looking at, or does the centennial ramp change that outlook in any way?

[Steve G. Filton:]

I don’t’ know that the Centennial ramp has enough of an impact on our consolidated results to really make us rethink that.

[Darren Lehrich:]

Okay, fair enough. And then a couple other things. Just going back to the labor cost management, it has look quite good and I know you are discussing the easing of labor relative to the economy. Can you just give us maybe a spot number at this point where you are and temporary labor cost per patient day? Or however you might measure it where that is in the second quarter and where that’s come from relative to last year?

[Steve G. Filton:]

That number I don’t have in front of me Darren. I’ll be happy to provide it offline. But I do know that our use of temporary labor in total is clearly lower in the first half of ’08 than it was in the first half of ’07 despite the fact that we’ve had pretty strong revenue on both sides of the business, et cetera. So, again, I will be happy to provide more granular detail offline, but the big indicator, I think, is that our overall expense is lower than it was last year.

[Darren Lehrich:]

Okay, I will follow up offline there. And then just back to pricing, maybe to peel back a little bit further there just to make sure I’m hearing you correctly. Have you seen any shift at all that would show up in your pricing trends relative to a shift from inpatient to outpatient catheterizations? And maybe some growth and observation days which get reclassified and maybe paid as lower than inpatient. Is there anything palpable there that you want to highlight to us relative to that pricing number?

[Steve G. Filton:]

I think that both of the trends that you mentioned, which is a shift from in to outpatient, particularly in the cardiac area and more observation days are trends that we certainly have seen over the last few years. I cannot tell you with any precision what our experience has been in the first half of the year. I cannot tell you right this minute. We certainly know that. But obviously, with our pricing strength, I think it is fair to say that we are not experiencing a tremendous amount of pressure from either of those issues or otherwise we would not be able to see the pricing strength that we have seen in the first half of the year.

[Darren Lehrich:]

Okay, and remind me, the Sierra contract renewal took effect, was it May or June? So we saw some of that increase in the quarter.

[Steve G. Filton:]

Yes, I mean it was either late May or early June.

[Darren Lehrich:]

Okay, and then Alan, I just have a question for you about Texoma. Can you just give us some comments about that acquisition and how it has performed? And then one specific question about Texoma is just the physician model which you inherited with that acquisition. Can you talk about how that model may translate to other markets, whether you found any success in that physician group there?

[Alan B. Miller:]

Well they happen to be good at managing a physician group and so we have been studying what they have done. They have been very successful with it and there is a shift now happening with more physicians seem to want to be employed. So we are looking at how they have done it and seeing what we can learn from them. We are bullish on the market. I would say it has been uneven, but we are going to be building in a very good location and it is a growth community. So we are happy with the acquisition. I think that if you look, for example, at what the returns have been, not only centennial but in Bradenton, we did a big construction project there that has really turned the hospital into a wonderful projection, positive earnings, really growing. So we are excited about it.

[Darren Lehrich:]

One of the things that your competitors all seem to struggle with is just the physician employment model and how to really implement that through a portfolio. Is something like Texoma, can you translate that to other markets do you think if you have to do more employment?

[Alan B. Miller:]

I would say we are studying it. We have not been, never got into the buying practices and employing physicians other than the house-based physicians. We never thought it was, and this is over a period of time, very productive. A lot of people retired on our dollar. But the trend now seems to be that with all of the paperwork and the government involvement, a lot of physicians, typically the younger ones, they like to be employed and not be bothered with anything else. And go home and not be concerned about running a business at all. So we are looking at that and we are employing physicians on a very selective basis, but it is a trend that seems to be happening and we all have to deal with it.

[Steve G. Filton:]

Darren, I think that the Texoma experience is actually instructive in the sense that Texoma had a physician employment model for a long time before we bought them. And we know from their sharing their history with us that they struggled with it for many years in the beginning. They lost a lot of money in the beginning on their physician ownership, et cetera. Once the model was developed and the physician ownership and practice built et cetera, we think it is a very effective tool. But as you alluded to our competitors and I think all hospitals rarely implement a physician ownership model without a lot of bumps in the road to get there. So the challenge that we all have is to get to perhaps an effective end game. You know, can you do so without losing too much money and being too disruptive, et cetera. And as Alan said, we are trying to learn from the Texoma experience both before and after our ownership as we think about how we are going to handle this issue in all of our other markets.

[Darren Lehrich:]

Great thanks a lot. I will jump out of the queue here.

[Operator:]

Our next question comes from the line of Gary Leiberman of Stanford Group.

[Gary Leiberman:]

Thanks, good morning.

[Steve G. Filton:]

Hey Gary.

[Gary Leiberman:]

I am not sure if you gave a number about what the bad debts were at the acute care hospitals?

[Steve G. Filton:]

I think our same-store bad debt in acute was 12% in the quarter, roughly.

[Gary Leiberman:]

Okay, do you have a dollar number?

[Steve G. Filton:]

I do. It is right here. It was $114 million in the second quarter.

[Gary Leiberman:]

Okay, and then I guess just to maybe beat the horse completely dead here on Las Vegas, could you talk a little bit, I guess, about whether or not visitors to Las Vegas account for any significant portion of the hospital volumes or any significant portion of the revenue at your hospitals.

[Steve G. Filton:]

Sure, let me make two comments about that. One is that only a relatively small percentage of our market revenues come from the tourist business. When we have attempted to clarify this in the past, it is somewhere in the 3 to 4% of our revenue comes from the tourist business, which is not, frankly, unexpected. Obviously most people are taking a vacation are doing so in what they think is good health and it’s only usually an emergency that would cause them to seek medical treatment while they’re away. The other comment I would make is for those who follow the Vegas and the economy and the gaming industries. Tourist volumes are not really down very much. What is down is the amount of money spent by the average tourist on the average night, et cetera, which is, frankly, as you can imagine, a bigger challenge for the gaming industry than it is for the hospital industry. So two things, we are not overly reliant on the tourist business to begin with other than indirectly as the strength of the gaming industry. And secondly, the amount of tourists visiting the city, which I think are projected to be 37 million this year, it is not really down.

[Gary Leiberman:]

Okay, and then you had benefited I think earlier in the year from some favorable trends on malpractice insurance. Can you update us on terms of has that changed at all I guess in terms of what you’re reserving or what your outlook is there?

[Steve G. Filton:]

Right, so actually I think that that adjustment to our malpractice reserves goes back to the second quarter of 2007, so this quarter actually, the comparison is probably not as favorable as it has been, but in general, the favorable trends that caused us to reduce our malpractice accruals a year ago have generally continued. We think we are benefiting in some of the most important states in which we operate by malpractice tort reform that has been passed in states like Nevada, Texas, and Florida, as well as improvements that we have made to reduce risk, particularly in certain service lines like OB.

[Gary Leiberman:]

Okay, and then maybe just a follow-up question for Alan in terms of what your thoughts are on the acquisition environment both maybe in the acute care business and also in the psych business.

[Alan B. Miller:]

Well, I will start with the acute business. We are active. We are always looking at evaluating. There are a number of players now. We thought it might decline fewer players, but there are people out there. When something good comes on the market or people know about it, there have been a number of players. One came up recently and my understanding was they had 10 or 12 people that were active and had some capabilities. The psych business, you have to be selective. There are a number of startup companies and I am interested in seeing whether funders are going to be as willing to fund new companies as they have been. There are a number of tem out there but we are being selective. We have made, as you know, acquisitions every year. And there are not a lot of them, but we are interested in the ones that have a future, can be productive, we can buy them. The rates are higher than they have been, but they are there. It is not a great number of availabilities as there have been in the past.

[Gary Leiberman:]

Great, thanks a lot.

[Operator:]

And next, we have Justin Lake of UBS.

[Justine Lake:]

Thanks, just a couple quick questions. One on share repurchase, for the last call you mentioned you were going to take a break to look at the M&A opportunities out there. When do you expect to kind of have that evaluation done and kind of make your decision whether you are going to be active in M&A or get back to buying back stock?

[Steve G. Filton:]

Justin, I do not know that we set any sort of timeframes or deadlines for ourselves. As Alan just indicated in his response, the acquisition evaluation process is sort of ongoing and constant. And, frankly, the evaluation of the opportunities to repurchase our own stock are also ongoing and to some extent dependent on how our stock price moves, et cetera. Obviously, at the recent levels, we think our own stock is a fairly attractive buy. But we are always going to look at the opportunities to repurchase our own stock in connection with any opportunities that exist to buy other earnings streams and decide the best way to employ our capital.

[Justine Lake:]

Okay, great, thank you very much.

[Operator:]

And next, we have Frank Morgan of Jeffries & Co.

[Frank Morgan:]

Good morning. A couple questions here. Steve, you mentioned dish payments in Texas. Any other updates on other states like South Carolina and then back to Texas, what about other kind of state or county programs have been a source of funding for you in the past?

[Steve G. Filton:]

Sure, we have talked in previous quarters about the UPL programs in Texas. And I think in essence we have gotten within the last few quarters sort of the all clear on our current UPL programs in Texas. They all seem to have met CMS muster, so I think we are square on that. As I said, Texas is the state where we received by far the most significant amount of Medicaid disproportion in share. And Texas continues to sort of look at kind of a remodeling of their regulations but continue to say, informally at least, that this is intended to be budget neutral. And in the informal conversations we have had with the state of Texas, we do not believe we’re likely to be impacted in any material way either positively or negatively although we should get those rates and know with some certainty this month, meaning August. South Carolina is a much smaller number in terms of our exposure to disproportionate share. I do not believe we have gotten our fiscal ’09 numbers yet. But again, our expectation there is it should not be material, but in general, our exposure to South Carolina is much less, than it is to Texas.

[Frank Morgan:]

Okay, two more and then I will hop. First, were there actually any medical mal released in the prior period reserves in the quarter?

[Steve G. Filton:]

No.

[Frank Morgan:]

Okay, and then finally, any explanation for the weakness in surgical volumes overall?

[Steve G. Filton:]

In all honesty, Frank, we have not been able to do the real deep dive that we did in the first quarter. When we did it in the first quarter, most of the reduction was in cardiology, and within cardiology, it was in stenting procedures. It looked, at least on a preliminary basis, that those volumes came back some in the second quarter. And again, I think in the second quarter our surgical volume sort of moved in line with our overall admissions and I would say that is kind of what we expected. The first quarter they were a little weaker and like I said, that mostly looked like a cardiac stenting issue.

[Frank Morgan:]

Okay, thanks.

[Operator:]

Next we have Kemp Dolliver of Cowen and company.

[Kemp Dolliver:]

Alright, thanks. One question that relates to the earlier acuity discussion Steve, and then what spill-over effect, if any, do you think unless the MSDRGs have had on your commercial business? At least one of the plans has noted that they what they’re seeing is that essentially the coders that learn MSDRGs, they code it for Medicare and then they basically just code everything else the same way just out of human nature and the absence of any double check on it by the payer or even the hospital.

[Steve G. Filton:]

Kemp, I think that for us the vast majority of our managed care reimbursement remains per diem based and so it is not dependent on coding. You know the only large payer quite frankly that we have that has tried to mirror the Medicare MSDRGs frankly has been Texas Medicaid and frankly they struggled with it. We have benefited, not to any great degree, but they have made some retroactive payments, maybe a couple million bucks in the second quarter as a result of not getting it right when they first implemented it. But other than that, I would say the vast majority of our managed care contracts are not subject to reimbursement that would be coding sensitive.

[Kemp Dolliver:]

Okay, good and the acuity increase you mentioned is 3 to 4%, my impression is that is probably relatively strong compared to your history. Is that right?

[Steve G. Filton:]

Yes, actually for a long time, we did not see much movement in our case mix index for the last couple of years, so this modest improvement in the last quarter or two is something that is relatively recent for us at least.

[Kemp Dolliver:]

That is great. Thank you.

[Alan B. Miller:]

Steve, I am going offline now. Bye everyone.

[Operator:]

Our next question comes from the line of Jeff Emander of Standard Imports (ph 00

[Jeff Emander:]

Good morning Steve. Quick question, I believe it was last quarter, but correct me if I am wrong, that you gave some commentary that business was more impacted, not so much by weakness in housing, but by weakness in employment. And you made some comments this morning about the Vegas market. Can you just color on any of the other markets and what you are seeing either anecdotally or otherwise in terms of employment and what impact that might be having in your results.

[Steve G. Filton:]

Sure, I think that the conversation that your are eluding to Jeff is that the first quarter people were asking about whether we were feeling any pinch from a weakening economy in Las Vegas. And I think we talked about the fact that most of the metrics three or four months ago that were negative were housing related. Foreclosure rates were up. Housing starts were down, et cetera. And we speculated that we did not necessarily think that those metrics would have a direct immediate impact on us. And the more likely impact that we would have in any market is frankly the number of people who were unemployed went up mostly because the concern would be that people who lose their jobs would lose their health insurance that came along with their jobs. So at the very end of the first quarter I think we were seeing an uptick in unemployment in Las Vegas and noted that and said that we would watch that carefully. Obviously national unemployment rates have gone up. We have seen them go up in some of our local markets. As we’ve indicated a few times now, I don’t know that we’re really feeling that pinch anywhere, and as a matter of fact, frankly if there was market that we’ve acknowledged we’ve probably felt some of the local economic weakness, it’s been Florida. And frankly we did well in the second quarter in our couple of Florida markets, so we continue to say that we are not seeing much of an impact. And as you know unemployment has risen on a relative basis fairly dramatically, but it is not at terribly high levels compared to what we have experienced historically.

[Jeff Emander:]

Okay, can you make any comments about what you have seen in Texas at all?

[Steve G. Filton:]

The Texas markets I think in general have done better than the national average. I think Texas generally has weathered the storm a little bit better, probably because of the oil industry. In the second quarter, I mentioned in my prepared remarks that our south Texas markets which are primarily in the gallon, but also Laredo and Eagle Pass did well in the second quarter. Alan indicated in one of his responses that Texoma, which is a north Dallas market, has been a little more uneven. Amarillo has been a little more uneven. But we are not seeing any particular weakness and again in the south Texas area we have probably seen some strength actually.

[Jeff Emander:]

Great, thank you very much.

[Operator:]

Next we have David Beal (ph 00

[David Beal:]

Great, thanks. We have heard anecdotally for example that June was a pretty tough collection month for some providers. I wonder if you could just call out any trends that may be notable in terms of month-to-month variations in the key metrics.

[Steve G. Filton:]

I do not have the month-to-month results in front of me David. But my general sense is there are always some ups and downs in the quarter but volume wise, collection wise, it strikes me that our performance was relatively stable throughout the quarter. It is not like we saw things get steadily better over the quarter or steadily worse either way and frankly I think for the most part, we have seen that stability for the entire first half of the year.

[David Beal:]

And just one follow-up, any impact at all from Hurricane Dolly in the south Texas markets?

[Steve G. Filton:]

We were hardest hit in the McAllen market. But even that is sort of a three or four day event mostly rain, leaks or whatever in the facility. And a couple of days of diminished ER and elective volume, but as I recall, I think Hurricane Dolly hit on a Wednesday and by the following Monday I think we were very much back to normal.

[David Beal:]

That is great. Thank you very much.

[Operator:]

Next, we have a question from the line of David Bachman of Langbow Research.

[David Bachman:]

Good morning Steve. Couple of questions on the managed care pricing, let me get back to that. It has obviously been strong. You said 6 to 8% and sort of what you have been looking for this year. Can you talk about how that varies across the portfolio? Are there certain markets that are above or below that, just in general terms?

[Steve G. Filton:]

I do not have enough sort of granular detail in front of me to answer that question sort of accurately David. The answer is I am sure that is the case. And I have mentioned before probably what determines our success in managed care negotiation is probably our relative market strength and market share and the availability of excess capacity in the market and the payers relative market strength and market share more than probably any other issue. But it is not like we are getting 10-12% increases in some markets and 2- 3% increases in other. I would say that the variability is more narrow than that.

[David Bachman:]

It would be more narrow than that. But we can assume that given what you have just said that the Las Vegas market, you would be in a stronger position with capacity coming online and a larger market share there to be at the high-end or slightly above the high end of that range then.

[Steve G. Filton:]

Well, I would not necessarily sort of jump to that conclusion only because the sort of countervailing argument to that is we probably have the strongest managed care player that we negotiate with in that market. And I think we have indicated previously that our renegotiated contract with Sierra was at rates lower than our average rate so you can’t underestimate the strength that that particular payer has in that market.

[David Bachman:]

Okay, well that is helpful. Then just back on the operating leverage front, hopefully you can give us just a little bit more color. I see in the same facility metrics here, average daily census is up about 130 basis-points year-over-year. Can you talk about how much that kind of move just really helps profitability?

[Steve G. Filton:]

Well, I think our results in the first half of the year are reflective of the fact that it is very helpful. This remains both in the behavioral and in the acute business largely a fix cost business. A lot of our expense is wage related. And a lot of that wage expense is fixed and semi-fixed other than sort of a nursing care or on the unit. I would say most of our remaining labor cost is fixed or semi-fixed. The only other real variable cost associated with each incremental patient is the supply expense that patient generates and other that that, again, it is all very fixed and semi-fixed. So when we have an increase in ABC as you framed it, or as I framed it before 7.5-8% increase in same-store revenue, I think there is a significant opportunity for operating leverage. Again, I think the operators have to do their job in order to enjoy it. And in the first half of this year, I have said over and over again I think our operators I think have done a really remarkable job.

[David Bachman:]

Okay, great, and just one last question. You have not talked as much about recruitment of referring physicians as some of the other operators do. Can you give us any metrics on that in the quarter and strength on that front?

[Steve G. Filton:]

Historically we, you are right, have not talked about physician recruitment the way that others have. I think, largely because the companies that really talk about physician recruitment tend to be those that have more rural facilities where literally the recruitment of a single specialist or an orthopedic surgeon or cardiac surgeon or neurosurgeon may well be the only one in the market. It really affects their ability to deliver a service in that market. We tend to operate in markets where we have kind of a broader ability to deliver the service. It is rarely dependent on a single physician. Obviously physician recruitment is an important function to us. Occasionally we will run into problems with recruiting a particular specialty in a particular market. But generally the markets we operate in, in particularly those most important to us, Las Vegas, south Texas, et cetera, these are markets that have been growing. They are growing faster than the national average. And frankly physicians want to practice there and they have not been terribly challenging to recruit to.

[David Bachman:]

Okay and just one last question, on the behavioral side, 350 to 450 beds in ’08, how many of those are online through the second quarter?

[Steve G. Filton:]

I think, I am not remembering the first quarter number exactly, but I think we are sitting at about 200 for the first half of the year.

[David Bachman:]

Okay, so about halfway through. Okay, great. Thanks.

[Steve G. Filton:]

Sure.

[Operator:]

Next we have questions from the line of Gary Taylor of Citigroup.

[Gary Taylor:]

Hi, good morning Steve. Thanks for taking all the questions. A few quick ones on the construction contract, the new one. How much revenue do you think that adds in the back half?

[Steve G. Filton:]

I’m going to guess at this Gary because I haven’t seen a real sort of construction timeline, but I’m thinking maybe 25 to 35 million of revenue and obviously a like amount of operating expense.

[Gary Taylor:]

In just the back half, right?

[Steve G. Filton:]

In just the back half of ’08.

[Gary Taylor:]

Centennial Hills, can you talk about occupancy rate there, even ballpark?

[Steve G. Filton:]

Yes, I think Centennial has been operating probably for the full six months at 40% occupancy, something like that. It is 175 beds, roughly.

[Gary Taylor:]

Still got a lot of room there.

[Steve G. Filton:]

Yes.

[Gary Taylor:]

And on the Medicaid reductions you had commented on Florida, Nevada, California, were those 2008 amounts or were those annualized amounts?

[Steve G. Filton:]

When I talked about a couple million dollars affecting each state, those were annual amounts, so obviously we will only be getting a portion of that in 2008.

[Gary Taylor:]

And then my last question, the one place where if you look at your metrics versus your peers, you have just blown them away year-to-date on is on the commercial admissions growth in the first quarter. I think every other company, including HCA, had negative commercial admissions year-over-year. You are up six. You were up six again. I think we have asked this question before or maybe other people have asked it in a different way on the call but when you look at that 6% growth, do you see a single geography? Do you see a particular service line? Is Vegas a disproportionate driver of that? Could you see a strategy such that you foresaw that you were going to see such a nice pick-up in commercial?

[Steve G. Filton:]

I guess a couple things, no, I do not think that there is a particular market that is really driving that and to be honest, I do not think it is Vegas. I think if anything, Vegas may be a little bit lower than that largely because we saw such a large commercial shift in ’07 in that market. But in the McAllen market, really just as an example, I think we are recapturing some of that commercial business that we have lost over the last few years and then in other markets, we are gaining as well. I think when you talk about individual strategies, Gary, it is a lot of blocking and tackling. I do not think it is the kind of thing that you sort of have an initiative and in one quarter you are able to increase that number. I think it is the result of a lot of, we talked about in the first quarter, the things we have been doing in the last two, three, four years, I think are starting to bare fruition. And I think we are benefiting from that. We are benefiting from being in some strong local markets as well. We have always talked about that. And we are also benefiting from being in and I think this is always a little different than the rural companies. We are in markets where there is a lot of commercial payers and we are not reliant purely on Medicare and Medicaid. But in south Florida and southern California, these are markets that have a very strong commercial bias and we have done well in those markets.

[Gary Taylor:]

You must really be. I mean certainly nationally commercial admissions are not up anywhere close to six so you must really be taking share even in that commercial mix. Just my last question, when you look at on the acute care side, I think the net revenue for just admission was up approximately 7% or somewhere around there presuming that commercial payers by and large pay you better rates than Medicare or Medicaid, have you attempted to kind of ballpark of the 7%? 2% of it is coming because commercial is growing six and Medicare is growing one? Do you have a though of just how much that might be quantifying in that revenue for adjusted admissions growth?

[Steve G. Filton:]

I do not have it at that level of precision, Gary. I think in answering somebody’s similar question before, I would say that we have identified probably three or four dynamics which we think are really bolstering that overall pricing. I think it is the impact of MSDRGs. I think it is just strong managed care contractual pricing. I think it is just the payer mix as you just alluded to, and so I think it’s all those things combined, but no, we have not necessarily attempted to kind of segregate each item and identify what its impact is.

[Gary Taylor:]

Okay, perfect thank you.

[Operator:]

Our next question comes from John Ransom from Raymond James & Associates.

[John Ransom:]

Steve, you have got to be worn out by now. Just a couple of quick questions, a small company, PRSC, is having a tough day and they are talking about some of the things states are doing to cut costs. Are you seeing anything other than just pure rate? Are you seeing anything on the behavioral health side, vis-à-vis narrowing networks, reducing eligibility, reducing length of stay that is unusual at that state budget cycle?

[Steve G. Filton:]

I would not describe it as anything unusual. We may have mentioned in the first quarter some pressures here in Pennsylvania where the Medicaid program is sort of tightening their eligibility and their utilization to reduce length of stay and issues like that and we are responding to that. I may have mentioned that. I think in some cases we have just stopped taking some of these patients because the state is making it so difficult. But overall, I would not say that the gross rate reductions that I mentioned before that we are seeing a pervasive initiatives on the part of the states to reduce spending.

[John Ransom:]

Okay, and my other question is if you look at uninsured and co-pay collection rates, have they stabilized? Have they deteriorated with the economy?

[Steve G. Filton:]

I think we are finding that collection rates have remained pretty stable at least for the last few quarters. I think we have seen collection rates particularly on sort of the portion after insurance, the co-pays and deductibles over the last three or four years, they have declined some. But I do not think in the last two quarters we have seen any material change.

[John Ransom:]

Okay, then I guess one other thing. If you look at Vegas, forgetting kind of the unemployment rate, have you seen any projections about just the sheer number of employed people? Even if the unemployment rate goes down, are the number of people with jobs going to continue to go up? Have you seen any projections around that?

[Steve G. Filton:]

I am not sure I have seen that specific data point, John, but to your point, unemployment’s going up a little bit, but so is the number of people moving into the markets. I am not sure that the amount of employed people has actually declined, but I have not actually seen that?

[John Ransom:]

Is that the number we should look at is the number of people with jobs who have health insurance?

[Steve G. Filton:]

I think that is an important number. I think if there are more people without health insurance, that is a challenge for us as well to the event that they present themselves in our emergency room or whatever, but your point is well taken. I think if the number of people with jobs and with health insurance remains relatively steady that is an important metric as well.

[John Ransom:]

And as far as you know, is HCA still not back in the Sierra network? You mentioned that last quarter, is that still?

[Steve G. Filton:]

I mean there certainly not back in the Sierra network right now. I cannot necessarily comment on whether there are any conversations about getting them back in, but they are definitely not in now.

[John Ransom:]

Okay, thank you.

[Steve G. Filton:]

Thank you.

[Operator:]

And next we have Whit Mayo of Robert Baird. You have an open line sir. We will move to our next question. I am showing that we have not further questions at this time.

[Steve G. Filton:]

Okay, we would like to thank everyone for their time and we look forward to speaking with everyone next quarter.

[Operator:]

Thanks for attending today’s conference. You may now disconnect.