Universal Health Services Inc Class B UHS
Q3 2013 Earnings Call Transcript
Transcript Call Date 03/01/2013

Operator: Good morning. My name is Ginger, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services' Q4 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

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

Steve G. Filton - SVP and CFO: Thank you. Good morning, I am Steve Filton. Alan Miller our CEO is also joining us this morning. Welcome to this review of Universal Health Services results for the full-year and fourth quarter ended December 31, 2012.

During this conference call Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent 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, 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 $4.53 for the year, and $1.39 for the quarter. After adjusting for a reduction in malpractice reserves relating primarily to prior years, the gain on the sale of our Auburn facility and the incentive income and expenses associated with the implementation of electronic health record applications at our acute care hospitals. Our adjusted net income attributable to UHS per diluted share for the quarter ended December 31, 2012 was $1. Included in the quarter is an increase to our effective tax rate due to non-deductible transaction costs related to the Ascend acquisition.

On a same facility basis revenues in our Behavioral Health division increased 4.5% during the fourth quarter of 2012. Adjusted admissions and patient days to our Behavioral Health facilities owned for more than a year increased 5% and 0.5%, respectively, during the fourth quarter. Revenue per adjusted patient day rose 4% during the fourth quarter of 2012 over the comparable prior year quarter.

We defined operating margins as operating income or net revenue less salaries, wages and benefits other operating expenses, supplies expense and doubtful accounts divided by net revenue.

Operating margins for our Behavioral Health hospitals owned for more than a year increased to 27.6% during the quarter ended December 31, 2012, as compared to 25.3% during the comparable prior year period.

As discussed in the Form 10-K we filed last night the OIG has served a subpoena requesting various documents concerning UHS and several of its behavioral facilities.

At the present time we are uncertain as to the focus, scope or extent of the investigation, viability of the facilities and/or potential financial exposure if any in connection with this matter. On a same facility basis in our acute division revenues increased 3.1% during the fourth quarter of 2012. The increase resulted primarily from 1.7% increase in adjusted admissions and 1.4% increase in revenues per adjusted admission.

On a same facility basis, operating margins for our acute care hospitals decreased to 14.4% during the fourth quarter of 2012 from 15.5% during the fourth quarter of 2011.

Our acute care hospitals provide a charity care and uninsured discounts based on charges at established rates amounting to $206 million and $248 million during the three-month periods ended December 31, 2012 and 2011, respectively. As a percentage of acute care net revenues, bad debts, charity care expense, and the uninsured discount in this year's fourth quarter were at levels higher than those experienced during the fourth quarter of 2011. However, due primarily to the increase in Behavioral Health revenues and the very low levels of bad debt and uninsured discounts in that business, our overall percentage of bad debts, charity care, and uninsured discounts were lower than those experienced during the fourth quarter of 2011.

Our cash from operating activities was approximately $280 million during the fourth quarter of 2012 as compared to $156 million in the fourth quarter of 2011. Our accounts receivable days outstanding increased to 56 days during the fourth quarter of 2012 as we continue to have a substantial Medicaid receivable from the State of Illinois. At December 31, 2012 our ratio of debt to total capitalization was 58%.

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

During 2013, we expect to spend approximately $360 million to $385 million on capital expenditures, which include expenditures for capital equipment, renovations, new projects at existing hospitals and construction of new facilities. Excluding the favorable $0.13 per diluted share, EHR impact described in our press release, our estimated range of earnings per diluted share attributable to UHS for the year ended December 31, 2013 is $4.35 to $4.50 on projected net revenues of $7.4 billion. We are pleased to answer questions at this time.

Transcript Call Date 03/01/2013

Operator: A.J Rice, UBS.

AJ Rice - UBS: Couple of questions if I could ask. First of all, it's good to see a return to the positive on the inpatient acute care volumes. Can you give us a little more flavor? Do you have a sense of how much if any, the flu impacted that or maybe in terms of geographies, was that Vegas-driven churn, was that more broad-based, any color would be helpful?

Steve G. Filton - SVP and CFO: Sure AJ. I think that like everybody we experienced a busier flu season this past winter than we've had in several years, although again I think as most hospital providers have reported for us, it was probably more of an ER dynamic and more ER visits than actual inpatient admissions. I think we believe we had a bit of a pick-up in inpatient admissions but don't believe it to be a material number or certainly a material impact from a financial statement perspective for the quarter. As far as the improved, I think both volumes and payor mix in the acute division for the quarter I think that strength was relatively pervasive throughout the division. It was not focused in one or two markets, but more of a trend that we tended to see throughout the facilities and throughout the portfolio.

AJ Rice - UBS: On your 2013 guidance, I know you gave us the numbers for the HITECH incentives and so forth. How about just operating assumptions, are you assuming any kind of churn either in the acute business or steady statement side, can you give us a little more flavor for some of the key underlying assumptions there?

Steve G. Filton - SVP and CFO: Yeah, I think that the guidance for next year is generally premised on stabilizing trends underlying the business. On the acute side, I think that it is reflective of the sort of revenue growth that we saw in the third quarter that is kind of in the 2.5%, 3% range split sort of evenly between pricing and volumes. Obviously, we have factored into our guidance as our peers, the effective sequestration beginning in April and the effect of both the disproportionate share encoding cost that will become effective in October as part of the affordable care act. On behavioral side I think just generally more of the same 4% or 5% revenue growth and mid-single-digit EBITDA growth and then obviously we got a full-year of the Ascend facilities in our guidance for next year.

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

Alan B. Miller - CEO and Chairman: I think A.J. as you suggest the trend in behavioral care has been and have these investigations focused on clinical practices and I would say that the content of the subpoenas would suggest that that's largely the focus here. I will say that I believe the government often pursues the technique in which they are trying and tie together what they perceived to be clinical issues and quality deficiencies than with an argument that false claim has been filed because there is not adequate care et cetera we have no idea that's where the government is going in this case and you certainly couldn't predict that.

Operator: Joshua Raskin, Barclays Capital.

Joshua Raskin - Barclays Capital: Just first question on the behavioral, following up I think it is a sort of 4% to 5% on the revenue growth. I think historically you guys have targeted something sort of north of 5%, 5.5%. So is there some of the bed conversion impact still going on, I am just curious is, 4% to 5% now a better sort of long term Behavioral Health growth rate?

Steve G. Filton - SVP and CFO: Josh, I think that the key variable that has sort of tampered little bit of our expectations from something, little bit higher than 5 let's say, is the length of stay issue as you saw on the press release and I reiterated in my prepared remarks. Admissions grew a very solid 5% or adjusted admissions grew 5%, but adjusted patient days only grew 0.5% and obviously the dynamic there as we continue to see length of stay compression and because of vast majority of our reimbursement as on a per diem basis that length of stay compression which is very much focused in the residential component of our behavioral business continues to temper our revenue growth. Now we speculate and we believe and I think from a clinical perspective we particularly believe that there is a natural floor to that length of stay compression in reduction that at some point and I think our clinical people would argue we're probably past that point. The continued early discharge of these patients is really not clinically effective treatment protocol. So we'll see, I mean, but I think our expectation that we grow at the current rates is that we continue to see those length of stay pressures.

Joshua Raskin - Barclays Capital: So you are actually assuming another reduction in length of stay in the behavioral side for…

Steve G. Filton - SVP and CFO: I think we're assuming that trajectory continues as it is now.

Joshua Raskin - Barclays Capital: Then just second question. You mentioned the coding and DSH cuts that are effective October, can you size those, maybe what your DSH payments were on both Medicare and Medicaid and just sort of give us the sense as to what the actual dollar impact you think could be in the fourth quarter?

Steve G. Filton - SVP and CFO: So, I think the issue vis-a-vis the fourth quarter cuts from the ACA really are surrounding Medicare disproportionate share. Our annual Medicare disproportionate share reimbursement is in the neighborhood of a little over $100 million. We're assuming that about half of that goes away. I know there have been discussions on some of our peers calls about some of the mechanics that go into that calculation and we by no means can be terribly precise about it, but we're assuming about half of that goes away, so something like $50 million of DSH begins to be cut in the fourth quarter, obviously, a quarter of that is something in the neighborhood of $13 million or $14 million impact in the fourth quarter of '13.

Joshua Raskin - Barclays Capital: That's just fourth quarter impact?

Steve G. Filton - SVP and CFO: Correct.

Joshua Raskin - Barclays Capital: Then the coding adjustment?

Steve G. Filton - SVP and CFO: The coding adjustment which also is just the fourth quarter is another $4 million or $5 million.

Joshua Raskin - Barclays Capital: $4 million or $5 million for the quarter?

Steve G. Filton - SVP and CFO: Correct.

Operator: Tom Gallucci, Lazard Capital Markets.

Tom Gallucci - Lazard Capital Markets: I guess just, Steve, the margins in the quarter in the acute care side were still under a little bit of pressure, revenues rebounded. I'm wondering if you had any thoughts there and sort of what your expectations are in that regard as you think about '13?

Steve G. Filton - SVP and CFO: Tom, you probably have heard me say and other say that I think generally our view is that when we get to about 3% same-store revenue growth on the acute side that we feel that's a sufficient level of growth to have at a minimum sort of flattish EBITDA, maybe even slightly improved and we were down a little bit in the fourth quarter. I think that the single biggest driver of that was probably $4 million or $5 million of incremental expense associated with physician employment and physician practice acquisition. Those who follow us know we probably have not pursued those physician strategies at least in terms of the significant dollars of investment as aggressively as some of our peers but we are certainly doing it in some of our markets and clearly you saw that impact a little bit in the fourth quarter of 2012. As far as 2013 goes, I think generally we sort of view it as a sort of a push in our guidance, meaning that we don't think our physician expenses grow much. I think we feel like whatever new investment we make in 2013 will be offset by some of the efficiencies we are able to achieve in the existing practices that we have.

Tom Gallucci - Lazard Capital Markets: So does that suggest that you sort of anticipate more stable margins as we think about the coming year?

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

Tom Gallucci - Lazard Capital Markets: Then just wondering on the balance sheet and sort of the acquisition side of things, obviously you did Ascend wondering sort of what your, thinking is on delevering and sort of what the pipeline might look like particularly on the acute care side and your appetite there?

Steve G. Filton - SVP and CFO: Yeah, I don't think our view has changed really at all there, Tom, you have heard us say before, we are tend to be opportunistic and we are always looking at opportunities to either strengthen our existing acute care franchises and behavioral as well or to penetrate new markets or enter new markets that look particularly compelling. I think one of the hurdles to that for a number of years now has been distill what we view is fairly rich valuations for a lot of these acquisitions which make it very hard to earn a reasonable return. I think UHS has a history of being very judicious about where we invest and what we invest in and I see that continuing. On the other hand, as you've heard Alan and I talk about, I think on these calls before there is obviously a great deal of change going on in this industry and I think it's causing not-for-profit hospitals in particular and we their future plans and we may see an uptick in activity in the M&A landscape and we will certainly be paying attention to that and evaluate those opportunities as they arise.

Operator: Frank Morgan, RBC Capital Markets.

Frank Morgan - RBC Capital Markets: Just one quick one here to start with. On the guidance, what is the implied cash flow from ops where you would see on the year based on your EPS guidance?

Alan B. Miller - CEO and Chairman: So I think when you factor in Frank the CapEx projections that we detailed I think you are talking about free cash flow in the $4.50 range.

Frank Morgan - RBC Capital Markets: Secondly, just on reform, it looks like the expectations are shifting, you see a lot more benefit from Medicaid expansion early on or reform process. I’m just curious as it relates to your behavioral healthcare business, do you think there's a big enough of the impact there to really affect your bad debt expenses early on particularly without adult male population that you may have been in the past that may now be covered under reform. So any thoughts that you could see some kind of material improvement in bad debts on the behavioral side in 2014 when the reform cranks up?

Steve G. Filton - SVP and CFO: So, obviously as you can tell Frank and others I mean our bad debt percentage in behavioral runs fairly low already its in that 2.5% to 3% range and so I think our view from the outset of thinking about reform has been that. The opportunity on the behavioral side while there is some opportunity to reduce our uncompensated load. The big opportunity in that regard is on the acute side. The larger I think opportunity on the behavioral side is to have an expanded universe of patients that have coverage either through Medicaid as you suggest or through the exchanges who might be eligible for admission to our hospitals who were not previously eligible. I think we've articulated in prior presentations et cetera that its difficult to quantify that opportunity in any precise way. But we think that it may be a significant portion of the population that will now have in short health benefits that have them today.

Frank Morgan - RBC Capital Markets: Than only one final. On length of stay are there any particular states where you are seeing more focus on the issue of length of stay management and I'll hope off thank you?

Steve G. Filton - SVP and CFO: I think for the most part as I was saying before to Josh, that the length of stay issue I think is generally focused in our residential business which is the smaller component of our behavioral business, it's very much a Medicaid and Medicaid managed care issue, but I don’t know that it's particularly focused on a particularly aggressive payer I just think in general we are seeing most Medicaid payors whether they're the traditional state payers or the managed payors being more rigorous about their utilization review et cetera. I mean, obviously we see it a little bit more aggressive in certain states than others but it's pretty much an across the board phenomena.

Operator: Kevin Fishbeck, Bank of America Merrill Lynch.

Joanna Gajuk - Bank of America-Merrill Lynch: This is Joanna Gajuk in today for Kevin. Just on the topic of the reform, you mentioned – you talked about (some of those), but I guess, what relates to both businesses, can you talk about what is your expectations or what you see out there in terms of rates on the new exchanges? Some of your peers commented they were able to secure some contracts already. So, any color you can provide where you see those rates are falling?

Steve G. Filton - SVP and CFO: Joanna, I can certainly comment on expectations. I think we've said from the beginning that our expectations of the commercial exchange rates would fall into our range of commercial pricing. But, I think, we've also said that as recently literally just weeks ago that we've really not negotiated any firm rates on exchanges et cetera. I know that's a little bit different than some of our peers who in this earnings season have been able to point to some actual contract negotiations. We're unable to do that. I mean, again, I think our expectations are very similar to our peers, but I don't know that we can point with any sort of certainty to actual negotiations that have been concluded as is some of our peers.

Joanna Gajuk - Bank of America-Merrill Lynch: Then a different topic in terms of your outlook for next year. Can you give us a little color on what do you expect on the Medicaid rates?

Steve G. Filton - SVP and CFO: I think our expectation about Medicaid rates is that they remain similar to this year, so that in the sort of July of '13 Medicaid pricing cycle. I think we've presumed in our guidance that Medicaid rates remain sort of flat or maybe down 1%, very similar to what they did in the July of '12 cycle.

Joanna Gajuk - Bank of America-Merrill Lynch: The last one, can you just talk a little bit more about the Vegas performance and your expectations there for this year?

Steve G. Filton - SVP and CFO: As I said previously, I think that the overarching trends that were present in the Acute business in the fourth quarter, which were slightly improved volumes and slightly improved payor mix were generally present throughout the portfolio and that there were not necessarily any markets that were really extremely positive performing or negative. I think again, we saw the general improvement throughout the portfolio. I think our basic view of '13 are generally stable trends again as it comes to volumes and payor mix. I think it's a little too early to read into the fourth quarter performance that we are on a kind of a steadily increasing trajectory at this point. As I noted to a previous question, I think some of the benefit, although not a huge number, but some of the impact in Q4 may have been in the flu. I think some of that carries over into at least January or so of the first quarter, so we will see. I mean, I think we'd like to see another quarter or two of that sort of strong performance to presumably really had a turn here. But otherwise I think generally our 2013 outlook is for stabilizing trends in the acute division.

Operator: Justin Lake, JPMorgan.

Justin Lake - JPMorgan: Steve if we could start off on the psych side with the OIG. Is there anything that you can tell us in terms of billing of psych that is historically being controversial that maybe they could be looking at here?

Steve G. Filton - SVP and CFO: I mean again, I think it's very difficult, Justin, for us to really predict with any sort of level of accuracy what the government's angling for, I think I suggested in an earlier comment to a question, the bulk of the request I think is on patient records or its four patient records etcetera, which would lead you to believe it's, the focus is probably more on clinical matters, although, again, I think there's a history of the government trying to convert that, if you will, into a billing issue. But no, I mean, it's not like we've had a pattern of kind of billing issues or irregularities in the Behavioral business by any means.

Justin Lake - JPMorgan: Steve, is this is – my recollection is the OIG have been looking into one of the facilities previously – or not one of these batch, but you've had the OIG looking at, they are asking for information on one of the other facilities, right?

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

Justin Lake - JPMorgan: Well, I’m just curious if there is anything you can look at in terms of how those investigations went and what they were looking at that you might be able to share with us here?

Steve G. Filton - SVP and CFO: No, I mean the PSI investigation, which began frankly well before our ownership I think again the subpoena goes back to 2008 and nothing has ever really come of that investigation and as far as the Peachford investigation goes. We've had no indication from the government, other than our response to the subpoena, no feedback from them about what they are looking for. Just let me say, I have no reason to believe that either of those previous investigations are connected to this current subpoena.

Justin Lake - JPMorgan: If we kind of jump away from that, free cash flow for 2014, Steve can you give us a number I assume there is nothing in guidance for deployment there, so can you kind of walk us through what your thoughts are for 2013, for capital deployment?

Steve G. Filton - SVP and CFO: Just from a guidance perspective I think our convention always has been to assume that all of our free cash flow goes towards the repayment of debt and last at the time of giving guidance we have a specific transaction that is very far along which is not the case this year. We've assumed as I indicated to the previous question about $450 million of free cash flow and that all that goes to repayment of debt.

Operator: Ralph Giacobbe, Credit Suisse.

Ralph Giacobbe - Credit Suisse: Steve, are you aware of maybe others in the industry also getting a similar request from OIG or you don’t know?

Steve G. Filton - SVP and CFO: Unaware, I mean Ralph I think the only way we'd be aware is if folks have disclosed that and I don’t know that we would have any other way knowing that.

Ralph Giacobbe - Credit Suisse: Then just switching gears here, on the behavioral side I guess as you think about next year, do you think you have the capacity to kind of deal with the potential bump in volume into 2014? Then I think in the past you've mentioned they are uninsured today that, I guess you have the potential opportunity or may not accept to some degree in your facilities. Is there any way for you to give a sense or to measure the magnitude of that number?

Steve G. Filton - SVP and CFO: So let me answer your latter question first. I think it's difficult to do. It's sort of trying to capture a patient population who effectively either get care elsewhere today or frankly doesn't get care at all. So that's just not a number that we have easy access to. We do know just from sort of ongoing operations et cetera that there's a significant Universal people, I mean again, this is not particularly unique to us, but we know there's a fairly significant Universal people who don't have insurance and therefore don't have access to the current system. If they get insurance we'll have access to the system. As far as our ability to absorb that increased demand, I would suggest to you that if you go back and look at our occupancy rates for the last 10 years in the Behavioral division you'll see that just recently in sort of 2005 or so we were running 85% occupancy in our Behavioral division, we currently run in mid-to-upper 70s, so we certainly could move higher. Now, when we were running in the mid-80s is when we began a program of fairly aggressive capacity expansion because I think we believe that that's a fairly inefficient level of occupancy and we're turning away insured patients at that level of occupancy. But I think the answer is, in the short-term if demand were to increase, as we expect that it might to some degree, we can certainly accommodate that in the short run and then begin plans to add new beds relatively quickly and aggressively much as the way we've been doing so for the last seven or eight years.

Ralph Giacobbe - Credit Suisse: Just my last one, is there anything we need to consider in terms of guidance of incremental cost in '13 that may roll off in 2014, just in general or maybe to prepare for a reform?

Steve G. Filton - SVP and CFO: I don't know that to prepare for reform is really specific. I will say that one probably UHS specific item in guidance is – that's probably a little different and people have not anticipated is we are opening in the back half of 2013, our hospital in Temecula, California. We've certainly discussed that construction before but it opens in the sort of September, October timeframe and there's probably a good $16 million, $17 million, $18 million in our guidance and our budget of startup losses and costs associated with that, with that opening which obviously is somewhat of a drag on our back half of '13.

Ralph Giacobbe - Credit Suisse: Back half meaning sort of 4Q, sort of a way to think about an offset from some of the pressures that you talked about earlier from the DSH cuts and coding is that the way to think about it?

Steve G. Filton - SVP and CFO: It's not an offset. It's a further headwind and it's sort of startup costs in Q3 and then operating losses in Q4.

Ralph Giacobbe - Credit Suisse: Right. But the point being that those don't repeat next year.

Steve G. Filton - SVP and CFO: No, the presumption would be that as the facility operates, there's probably their startup losses continue into the first half of '14, but by the back half of '14, we would start to turn that around.

Operator: Chris Rigg, Susquehanna.

Chris Rigg - Susquehanna: Just to follow-up a little bit on the last question, can you just remind us sort of the total investment expansion, investment money running through the P&L in 2012 whether it's Wellington or behavioral bed development versus what you are expecting in 2013 to Temecula, and additional beds on the behavioral side.

Steve G. Filton - SVP and CFO: Chris I think it's about the same, I mean I’ll just round the numbers and say that we are going to spend $375 million in CapEx in ’12, we will spend like amount in ’13 probably 100 million of that is maintenance capital that’s mostly focused in the acute division that’s capital. But basically is just there to upgrade the equipment and keep the facilities the running etcetera, no real return being associated with that and then another 100 to 150 of behavioral expansion and another 100 to 150 of acute expansion.

Chris Rigg - Susquehanna: But in terms of what's running to the income statement is that also about, are you saying that’s also about the same?

Steve G. Filton - SVP and CFO: I apologize, cause I know when you say capital…

Chris Rigg - Susquehanna: Yes, maybe it was unclear, I got caught a little off guard there when the queue open, but with regard to you said you are going to spend $16 million, $17 million, $18 million in Temecula, I’m sure you had the similar – something similar for Wellington and then also in terms of is there anything on sort of behavioral startup cost. I’m just trying to figure out apples-to-apples what the investment headwinds running to the income statement would be.

Steve G. Filton - SVP and CFO: I got that. I think that the Temecula startup losses and startup costs are unique in the sense that Wellington we opened a bed tower in an existing facility and that is not anywhere remotely close to the same sort of level of startup cost et cetera we are talking about a brand new Greenfield hospital in Temecula, it's a much different dynamic. Most of the behavioral expansion is like the Wellington tower its additional beds at existing facility, again there is nothing comparable this year to that Temecula number next year.

Chris Rigg - Susquehanna: On the OIG subpoena I am not sure what you can say here, but could you give us a sense for the revenue exposure with regards to the facilities that are cited into subpoena?

Steve G. Filton - SVP and CFO: I had a few analysts say to me last night that they simply went to AHD data or whatever for the facilities identified and got 6% or 7% of our consolidated revenues and I think that’s a fairly accurate number of the 10 or 11 facilities that have been identified.

Operator: Kevin Campbell, Avondale Partners.

Kevin Campbell - Avondale Partners: Just a couple of modeling questions at this point. The sale of the acute care hospital, where exactly does that impact the income statement in the fourth quarter, if we wanted to back that out in our own models and really same question for the favorable reserve impact, which line item in which segment does that effect.

Steve G. Filton - SVP and CFO: They are both on the other operating expense line and obviously Auburn is an acute facility, the malpractice reserve effects both divisions, although its probably skewed to the acute division.

Kevin Campbell - Avondale Partners: From the Temecula hospital what sort of quarterly DNA jump should we see it from 3Q to 4Q from that opening?

Steve G. Filton - SVP and CFO: Its $150 million investment to be amortized or depreciated over 25 years.

Operator: Gary Lieberman, Wells Fargo

Gary Lieberman - Wells Fargo: You've talked in the past about transitioning some of the RTC beds into Acute. Can you give us a sense of sort of where you were I guess either as a percentage of revenue or percentage of volumes at the end of '12 and where you might hope to be at the end of '13?

Steve G. Filton - SVP and CFO: Yeah, Gary. So I think roughly the Behavioral revenue split is about 75%, acute behavioral 25%, residential behavioral – I think our view is that as we convert beds, maybe we're effecting that split by 50 basis points or 75 basis point a year is the general sense of what we can accomplish.

Gary Lieberman - Wells Fargo: Then I guess just in terms of either anticipating the impact from health care reform or as you see more volumes from reform, can you speed that up or would you be satisfying any additional demand mainly from new additional beds on the acute side?

Steve G. Filton - SVP and CFO: Yeah, I think the general sense is that adding beds in the Behavioral space can be accelerated – the process can be accelerated some if the demand is there. We've probably said before that the biggest challenge or hurdle to adding beds on the Behavioral side tends to be kind of the regulatory local zoning sorts of issue. So, sometimes that's not within our control, but yeah, generally I think our view is that if reform results in a measured increase in demand, that we will accelerate the expansion program that we've already been had underway for seven or eight years and so we're quite familiar with how to do it and what needs to be done and that we can make that happen somewhat faster.

Gary Lieberman - Wells Fargo: Then can you just remind us what type of average commercial rate increases are incorporated into the guidance for 2013?

Steve G. Filton - SVP and CFO: I think our commercial rate increases on the acute side have been averaging 5 to 7 and then I believe we still feel we are in that range on the behavioral side of that number is historically a couple of hundred basis points lower and I think remains so in our guidance. So those numbers honestly have not changed very much in the past few years.

Gary Lieberman - Wells Fargo: No material changes in contract terms or contract types?

Steve G. Filton - SVP and CFO: Not yet.

Operator: John Ransom, Raymond James.

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

Steve G. Filton - SVP and CFO: John, I mean, I think what we saw was a shift from charity and uninsured discounts to bad debts. As you've heard me comment any number of times over the years, we view the uncompensated expense sort of all as one large pool. So we never spend a lot of time trying to analyze or explain shifts between the categories. I think in general, our view was that payor mix improved a little bit in Q4 and these are really acute care observations that even though we continue to see decelerating commercial and Medicare volumes and accelerating Medicaid and uninsured volumes, both the rates of deceleration and acceleration were somewhat muted or more mitigated in Q4. So, I think we had a view that actually (PMX) got a little better in the quarter.

John Ransom - Raymond James: If nothing happen with mix and all of the flow through as your pricing, how much bad debt go up for you year-over-year?

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

John Ransom - Raymond James: Is there any I know a while back you guys were a little more optimistic about deploying some capital on the key care side. Has your enthusiasm lack your way in term of pipeline since that time?

Steve G. Filton - SVP and CFO: Yes, I wouldn’t describe it as either John, I mean I think we have a very kind of opportunity specific view of the world and that is we evaluate every opportunity on it's own if an individual opportunity make sense we will pursue it. So, I don't know that I think that would make any kind of macro characterization of our view at the moment. Obviously, the proofs in the pudding, we haven’t made a ton of external acute investments in the last 4 or 5 years because we have not found them compelling down fairness as we have mentioned about Temecula and the Wellington bed tower and Summerlin tower et cetera in Palmdale. We have made a lot of internal capital investments in acute care because we felt like they were the more likely or the more economically prudent investment to earn above average returns.

John Ransom - Raymond James: How many would you say UHS quality assets come on the market in a given year now. And is it more fewer than it was in few years ago.

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

John Ransom - Raymond James: So it's more the pricing than it is of the supply?

Steve G. Filton - SVP and CFO: I believe so.

Operator: Whit Mayo, Robert Baird.

Whit Mayo - Robert Baird: Steve, I think you've called out med mal as a favorable one-time benefit I think almost every year for four or five years now. At what point does that become recurring and your peers all take credit for it, so I'm just wondering what the thinking was on that?

Steve G. Filton - SVP and CFO: Yeah, it's a fair comment Whit. Obviously I think for the most part the reason that we excluded from current operating earnings is that almost by definition it is focused on prior year amounts and prior year reserves. But to your point, UHS has had a long history of taking a very conservative position on its malpractice expense and reserves. I think our main focus is just trying our best to get the current expense, the current year of malpractice provision correct and accurate and we believe we're getting closer to that, but I appreciate your pointing out that we've penalized ourselves to some degree by always tossing these numbers out.

Whit Mayo - Robert Baird: Maybe just any comments on Ascend and the integration and how that's progressing?

Steve G. Filton - SVP and CFO: Obviously it's a much smaller deal and therefore integration in the PSI deal was it's -- we're talking nine facilities. We have commented sort of from the beginning when we announced the deal that we anticipate getting about $200 million in revenues and about $60 million in EBITDA from Ascend and I think we feel like we're very much on track to do that, those are really the numbers that are embedded in our 2013 guidance and we're very pleased – even though it's early on the process we're pleased with the way that integration is going.

Whit Mayo - Robert Baird: Maybe just one last final one. Any thoughts on sort of the sequence of earnings this year, historically you've always had a lot sort of weighted in the first half of the year 4Q and then maybe a year ago or so you felt that that imbalance would balance out, if you will. The calendar looks little tough in Q1. So just wondering if you had any updated thoughts for how we should see sort of the sequence of earnings progressed throughout the year?

Steve G. Filton - SVP and CFO: Other than few of the things that we've discussed I think there will be a little bit of a benefit from the flu in the first quarter and then obviously these reimbursement cuts as well as the Temecula opening that we talked about are skewed towards the latter half of the year. Sequestration's effect is beginning in April and you've got all those cuts within the balance of the year and then you've got the DSH portion share coding cuts in the fourth quarter and then the Temecula drag in the third quarter and fourth quarter.

Operator: (Glen).

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

Steve G. Filton - SVP and CFO: Surgical volumes Glen picked up a little bit in Q4 inpatient volumes were sort of flattish, which is frankly the best they’ve been in a number of quarters and outpatient wad down a little bit, but that was also the best we've seen, probably at least since the first quarter of the year. So much like the other metrics that I talked about in terms of overall volumes and payor mix, surgical volumes showed a bit of an improvement in Q4 as well.

Glen: What's the (acuity) of the surgeries, was it higher than you've seen recently or it was a lower acuity surgeries?

Steve G. Filton - SVP and CFO: Definitely our Medicare CMI was higher in Q4.

Glen: One last question, can you give us any color on what you guys are seeing in your Las Vegas and Texas markets?

Steve G. Filton - SVP and CFO: Did you say in Las Vegas and Texas?

Glen: Yes.

Steve G. Filton - SVP and CFO: Again, as I've mentioned to a few different people, in general the trends that I've articulated a few times, slightly better volumes, slightly better surgical volumes, a little bit better payor mix in the acute division in Q4, we're generally present throughout the portfolio, not necessarily terribly better or worse than in any markets including Las Vegas and South Texas.

Operator: There are no further questions at this time.

Steve G. Filton - SVP and CFO: Okay. Well, we thank everybody, and look forward to speaking to everybody in a couple of months after the first quarter. Thank you.

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