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Executives

Victor L. Campbell - Senior Vice President

Richard M. Bracken - Chairman and Chief Executive Officer

R. Milton Johnson - President, Chief Financial Officer, Principal Accounting Officer and Director

Samuel N. Hazen - President of Operations

Juan Vallarino - Senior Vice President of Employer & Payer Engagement

Analysts

Albert J. Rice - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

HCA Holdings (HCA) Q4 2012 Earnings Call February 5, 2013 10:00 AM ET

Operator

[Audio Gap]

Earning Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Mr. Vic Campbell. Please go ahead, sir.

Victor L. Campbell

Thank you very much. Good morning, everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I, would like to welcome you on today's call, including those of you listening to our webcast. With me here this morning as usual is our Chairman and CEO, Richard Bracken; our President and CFO, Milton Johnson; and Sam Hazen, President of Operations. Several other members of the HCA senior management team are here with us as well to assist during the Q&A.

Before I turn the call over to Richard, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. Many of these factors are listed in today's press release and in our various SEC filings.

Many of the factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statement, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information or future events.

This morning's call is being recorded, and a replay of the call will be available later today. With that, let me turn the call over to Richard Bracken.

Richard M. Bracken

Thanks, Vic. Good morning to all and thanks for joining us on our call this morning. I'd like to start today by providing a few general thoughts on our fourth quarter performance as well as some observations for the entire year. And then following this, I have a few comments that I'd like to make about our ongoing work to analyze the potential effects of the health care reform legislation.

So for the fourth quarter. Generally, we were pleased with our overall performance for the quarter. For the most part and from an operations perspective, the trends we have been reporting in prior quarters in the year continued to play out in the fourth quarter. Favorable growth in patient volumes driven by market growth, as well as continued improvement in market share performance and favorable expense management helped to offset continued pressures in growth of per unit revenues. Our favorable volume performance has allowed us to operate more efficiently by spreading our fixed costs over a larger base and accordingly, helped overcome some of the revenue pressures.

As is our standard practice, in just a moment, Milton and Sam will provide detail in all of this, but my general takeaway for the quarter and really for the year is that our positions in our key markets remain strong. Our markets are growing, our operating agendas are structured appropriately, they are focused and they are effective. And the public and the communities we serve increasingly choose our delivery networks for their health care needs. We are working hard to earn their choice by providing convenient access to our facilities, a comprehensive scope of services and technologies, a high level of service and quality clinical care. Regardless of how the health care delivery in America evolves, we believe these are key ingredients for success.

Same facility equivalent admissions grew 5% in the fourth quarter, making 21 straight quarters or over 5 years straight of volume gains. This year's early and difficult flu season did impact our fourth quarter inpatient and emergency room volumes. However, growth in both these indicators were strong even when normalized for flu-associated volumes. Same facility emergency room visits in the fourth quarter were robust, increasing 12.7% over the prior year and increased 8.6% for the entire year. Throughout all of 2012, revenues increased to $33 billion, an 11.2% growth over the prior year; and adjusted EBITDA rose to $6.531 billion, a 7.8% increase over prior year. EBITDA, as previously reported, reflects the consolidation of our HealthONE venture for the full year, HITECH income and net Medicare settlements in the first quarter of 2012.

Cash flow from operations in 2012 remains strong, totaling $4.175 billion compared to $3.933 billion last year. And as we have previously stated, our rank priority for use of cash is, first, to invest in our existing markets in 2012. We invested $1.862 billion in CapEx, comprising approximately $1.62 billion on facilities and equipment, which accommodated the development of 400 new beds and $238 million on information technology. Secondly, focus on strategic acquisitions that can provide long-term growth for the company. And following these first 2 priorities, we consider a wide range of strategic options that can improve value to our shareholders, including debt repayment, share repurchase or the distribution of special dividends, which as you know, we did on 3 occasions during 2012.

As you will recall, in October of 2011, we purchased our partner's remaining ownership position in our HealthONE venture. Given the size of this transaction, we thought it might be helpful to share some perspective on the performance following this transaction. Our Denver market continued to perform favorably even exceeding our internal expectations. Adjusted EBITDA increased 11.2%, revenues increased 7.5% and equivalent admissions grew 5.7% over 2011 results.

Now before concluding my prepared comments this morning, I want to provide some general observations we have formulated concerning our analysis of the impacts of health care reform. Our most fundamental observation is while certain areas within the health care reform agenda are settled, many, and I stress, many uncertainties remain. These uncertainties make accurate modeling at this time very challenging. Nevertheless, we, like many of you, are in the process of trying to more fully understand the impact of this legislation and size the longer-term effects that it might have.

Over the past months, Milton has been leading an effort within our organization, along with multiple outside resources, to develop working assumptions that begin to quantify the range of potential impacts of the Affordable Care Act on our company. Let me emphasize that this is preliminary work and is expected to change as details that shape these assumptions continue to mature. Having said all of this, we continue to develop and access our data and intelligence that is helping us to improve our analysis. Our goal is to reach a point, perhaps in the mid to latter part of this year, when we feel comfortable sharing some of our assessments of key assumptions and begin to size the potential impacts of reform.

One belief that we do have is that reform is not all about 2014. We see it as being incremental, varied by market and evolving over a period of years. Consider the following. It's possible that the ramp-up of newly insured enrollees and the exchanges may take 3 to 4 years to reach a steady-state level. These states in our portfolio have not determined yet whether they will expand Medicaid coverage or when they might do so.

The degree of employer opt out into the exchanges, which we believe in part will be influenced by employer size, still is to be determined. And reimbursement rates to providers for exchange products, the utilization patterns of the newly insured and the effects of local market dynamics, to name just a few open issues, still need time to prove out. As time progresses, we should continue to get more clarity around many of these areas, allowing us to refine our model and expectations.

I should probably add that while we all know the amount of the annual market basket reductions that were included in the Affordable Care Act to fund coverage expansion, the computation of the Medicare disproportionate share, or DSH, reallocation which is scheduled to begin this October 1, is more difficult to quantify at this time. Milton will discuss our current thinking on DSH allocation in just a minute.

So as we reflect upon all of this, we believe we are well positioned to perform in the reform environment. And let me close by sharing with you that HCA's performance on the CMS core measures of clinical quality is now at 99.1% as compared with the national average of 97.4% based on their most recent release. We extend our appreciation to our management and clinical teams at these facilities for this performance.

And with that, I'll turn the call to Milton.

R. Milton Johnson

Thank you, Richard, and good morning. I hope most of you had a chance now to review our fourth quarter earnings release issued this morning. Sam and I will provide some thoughts around the fourth quarter results, and then I'll close by addressing our 2013 guidance.

Revenues in the fourth quarter increased 8.5% to $8.434 billion, primarily reflecting consolidation of our HealthONE venture and increased patient volumes. Adjusted EBITDA totaled $1.606 billion, a decline of 2% from the prior year's $1.639 billion. HITECH incentive income declined in the fourth quarter of this year by $40 million to $80 million compared to the fourth quarter of 2011.

Volume trends in the quarter were strong, with same facility admissions increasing 4.3% and same facility equivalent admissions increasing 5%, compared to strong volume comps from last year's fourth quarter of 2.5% and 3.2%, respectively. Our same facility medical admissions increased 6.1%, while same facility surgical admissions increased 0.7% compared to the prior year. Total admissions increased 6%, while equivalent admissions increased 7.1% compared to the prior year.

Same facility Medicare admissions and equivalent admissions increased 5.1% and 5.7%, respectively, in the fourth quarter. Same facility Medicare admissions include both traditional and Managed Medicare. Managed Medicare admissions increased 17.5% on a same-facility basis and represent 27% of our total Medicare admissions.

Same facility Medicaid admissions increased 6.1%, while same facility equivalent admissions increased 8.3% in the quarter. Same facility managed care and other admissions increased 1% in the fourth quarter, our highest quarterly growth rate in 2012. Same facility managed care and other equivalent admissions increased 2% over the prior year's fourth quarter.

Uninsured admissions increased 11% on a same-facility basis in the fourth quarter compared to the prior year. The growth in uninsured admits accounted for approximately 80 basis points of the 4.3% same facility admission growth during the fourth quarter. Same facility uninsured admissions represents 7.6% of total admissions in the quarter compared to 7.2% in last year's fourth quarter.

Same facility emergency room visits were strong, increasing 12.7% in the quarter. On a consolidated basis, ER visits increased 14.1% during the quarter compared to the prior year.

Total same facility surgeries increased 1.4% in the quarter, reflecting an increase of 0.9% in our same facility inpatient surgeries and 1.8% in our same facility outpatient surgeries. During the quarter, we view our revenue growth rate at stable to slightly improving compared to recent trends. Same facility revenue per equivalent admission increased 0.5% in the fourth quarter, consistent with what we've recorded in the third quarter. Excluding the impact of the Texas Medicaid waiver program, revenue per equivalent admission increased 1.8%. During the fourth quarter, same facility Medicare revenue per equivalent admission increased 0.7%. Medicaid revenue per equivalent admission, excluding the Texas Medicaid waiver program, increased 0.9%.

Managed Medicare and other increased 4.8% over the prior-year period, the highest quarterly growth rate yield on our managed care revenue in 2012. Same facility security care and uninsured discounts increased $184 million in the fourth quarter compared to the prior year. During the fourth quarter, same facility charity care discounts totaled $716 million, an increase of $31 million in the prior-year period, while same facility uninsured discounts totaled $1.691 billion, an increase of $153 million from the prior-year period.

We were pleased with our overall expense management in the quarter. Same facility operating expense per equivalent admission increased 1.1% in the fourth quarter compared to the prior year. Same facility operating expense, excluding HITECH and Texas Medicaid waiver program expenses, increased 2.3% in the fourth quarter of 2012, which is fairly consistent with third quarter expense trends.

Salaries per equivalent admission increased 2.2% on a same-facility basis. Same facility productivity performance is measured by man hours per equivalent admission, improved 1.5% over the prior-year period, and same facility wage rate growth was 2.3% in the fourth quarter. Personnel costs associated with physician employment increased by $5 million or 2.2% from the previous year's fourth quarter.

Same facility supply costs per equivalent admission increased 3.6% from the prior-year period, reflecting increased surgical volumes and a reclassification at HealthTrust Purchasing Group that was implemented effective October 1, 2012, a reclassification related to nonequity member administrative fees previously accounted for as a reduction in supply expense being reclassified as HealthTrust Purchasing Group revenues. The amount reclassified was approximately $41 million and contributes 310 basis points to the growth of supply expense per equivalent admission in the fourth quarter. The reclassification had no impact on adjusted EBITDA for the quarter. Same facility other operating expense -- other operating cost per equivalent admission declined 3.7% from the prior-year period, primarily due to a $69 million decline in Texas Medicaid waiver program-related expenses.

We recognized $80 million in electronic health record incentive income in the fourth quarter compared to $120 million in the fourth quarter of last year. This is consistent with our expectations. The company also incurred approximately $19 million in EHR-related expense in the fourth quarters of 2012 and 2011. Substantially all of our hospitals have achieved the second year Stage 1 Meaningful Use and have certified as such during the fourth quarter.

Cash flow from operating activities totaled $1.263 billion in the quarter compared to $1.387 billion last year. The decline was primarily due to increased tax payments. Cash tax payments totaled $190 million in the fourth quarter of 2012 compared to a net cash tax refund of $161 million in the fourth quarter of 2011. Days and accounts receivable at the end of the fourth quarter were 51 days compared to 52 days for the same period last year. And at December 31, 2012, the company's debt-to-adjusted-EBITDA ratio was 4.4x compared to 4.5x at December 31, 2011. At the end of the quarter, we had $2.964 billion of borrowing capacity under our senior secured credit facilities.

With that, now let me turn the call over to Sam.

Samuel N. Hazen

Good morning. I'll begin my comments this morning with more detail on the company's volume trends for the quarter and then provide an update on inpatient market share for the second quarter of 2012.

Volume growth across the company's 14 domestic divisions was very consistent again this quarter. On a year-over-year basis, 13 out of 14 domestic divisions had growth in same facility inpatient admissions, 9 divisions had growth in same facility managed care inpatient admissions. Same facility inpatient admissions, excluding pulmonary or flu-related admissions, were up 3.3%, which represents a strong rate of normalized growth for the quarter.

All 14 domestic divisions had growth in same facility adjusted admissions. 12 divisions had growth in same facility managed care adjusted admissions. The company has implemented specific plans to grow the commercial segment of our business, and we believe our plans are progressing well across most markets. All divisions had growth in same facility emergency room visits again this quarter, reflecting continued success with our many initiatives to gain share in this service line. Additionally, all divisions had growth in managed care emergency room visits, which were up 9.6%. And finally, EMS visits to our emergency rooms grew by 5.9%. All divisions had growth in this area also.

Same facility ER visits, excluding pulmonary or flu-related visits, were up 8.9% for the quarter. This adjusted rate is above our 2012 growth rate for prior quarters and like inpatient admissions, represents a strong rate of normalized growth.

Milton mentioned the improvement in our surgical volumes this quarter. On an inpatient basis, orthopedics, neurosurgery and oncology services showed the strongest growth. On an outpatient basis, orthopedics, women's and GI services were strong. Managed care outpatient surgery volumes this quarter were essentially flat, which is an improvement over recent trends.

Same facility admissions into our adult intensive care and neonatal intensive care units this quarter were up 3.5% and 1.8%, respectively. The growth in our neonatal volume is driven mostly by growth in obstetrics admissions, which grew 4.0% this quarter. Growth in managed care obstetrics admissions was comparable. And finally, on a same-facility basis, behavioral admissions grew 6.7% in the quarter, and rehab admissions grew 15.9%.

Now let me transition to some market share highlights for the 12 months ending second quarter 2012. Again, this is the most current data available, and it represents almost 90% of the company's market. First, the company's overall market share during this period increased by 54 basis points to 23.3%. Second, we gained market share on a sequential basis when comparing the second quarter of 2012 to the first quarter of 2012. This follows sequential market share gains in each of the past 3 quarters as compared to the respective preceding quarter.

Market share for the second quarter was the highest it has been over the past 14 quarters. We gained market share in 13 out of 17 service lines that we monitor. HCA had market share gains in 28 of 37 markets, with strong growth in all major Texas markets, Denver, Miami, Jacksonville, Nashville, Richmond and Las Vegas. We had market share growth in both the commercial and in-migration segments of our business. And finally, overall market demand at HCA's markets for inpatient admissions in this period grew by 0.5%, which is a slight acceleration from the same period 12 months ago. If we use this growth rate as a proxy for inpatient demand in the third and fourth quarters of 2012, we believe HCA will show, when the data becomes available, further gains in market share during these periods also.

As we move into 2013, we believe the components of our organic growth plans, coupled with the continual leveraging of best practices across the company, position us well to drive comparable gains in market share. With that, I'll turn the call back to Milton.

R. Milton Johnson

Thanks, Sam. Before discussing our guidance for 2013, I'd like to comment on our results for 2012 relative to the guidance we gave you last year. Recall that we last revised our 2012 guidance on May 3, 2012.

We hit the high end of our revenue estimate of $33 billion and finished slightly above the midpoint of our range for adjusted EBITDA guidance. Although we were able to meet our guidance for adjusted EBITDA for the year, the underlying metrics were challenging. Our same facility revenue rate growth fell short of the 1.5% to 2% target with 0.3% growth. We were able to offset the revenue rate shortfall with volumes well above our expectations and better expense management than planned.

Now turning to our 2013 guidance. As noted in our earnings release this morning, we estimate for 2013 consolidated revenues should range from $33.5 billion to $34.5 billion. This does not include the impact from acquisitions that may be completed in 2013. Adjusted EBITDA, we estimate a range of $6.25 -- $6.25 billion to $6.5 billion for the year, while earnings per diluted share are estimated to range from $3 to $3.30 for 2013. We estimate equivalent admission growth to range from 2% to 3% for the year. With respect to net revenues per equivalent admissions, excluding the impact of the Texas Medicaid waiver program, we expect growth of 1% to 2% in 2013. We expect to continue to face reimbursement pressure from governmental payers during 2013.

Medicare revenues in our 2013 estimate reflect a composite declining rate of approximately 1.2%, and our estimate assumes the following: 2% payment reduction attributable to sequestration beginning in April; coding recruitment reductions, which were included in the year-end [indiscernible] legislation of approximately $25 million, beginning in the fourth quarter of 2013. Although the rules related to DSH redistribution will not be issued until April, our estimate assumes Medicare DSH reductions of approximately $50 million in the fourth quarter of 2013 resulting from the Affordable Care Act planned for DSH redistribution. We remain hopeful that the final redistribution rule will result in a redistribution that more reasonably reflects the number of uninsured patients we treat at our facility.

Medicaid revenues reflect an estimated reduction of approximately $40 million related to the Texas Medicaid waiver program. Additionally, we expect rate reductions in Managed Medicaid in 2013.

Relative to operating expenses, we anticipate that we continue to benefit from a low inflationary environment in 2013 while continuing to invest in our clinical and EHR development initiatives. Our expense per equivalent admission, excluding the Texas Medicaid waiver program expense, is estimated to increase by approximately 2.5% over the prior year.

Following our IPO in 2011, we adopted a new management equity program with annual grants generally vesting in an expense over a 4-year period. As a result, it will take a full 4 years for this noncash, share-based compensation expense to fully normalize in our adjusted EBITDA run rate. In 2012, the company recognized $56 million related to the program. Our 2013 guidance includes the second year of the program, with noncash, share-based compensation expense increasing to $128 million or a $72 million increase over 2012. The 2013 guidance includes estimated HITECH incentive income of $200 million to $225 million and HITECH-related expenses in the range of $110 million to $130 million.

As I mentioned on last quarter's call, our adjusted EBITDA growth for 2013 will be negatively impacted as compared to 2012 by the net favorable Medicare adjustment, both the rural floor and SSI ratio recorded in the first quarter of 2012 of $170 million, and approximately $115 million less HITECH incentive income in 2013. These 2 items have a 460-basis-point negative impact on 2013 adjusted EBITDA growth. When also considering the noncash, share-based compensation expense growth, the negative impact on 2013 adjusted EBITDA totals 580 basis points.

And with that, I'll turn the call back to Vic.

Victor L. Campbell

All right. Milton, Richard, Sam, thank you. Candice, if you want to come back on and poll for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will go first to A.J. Rice from UBS.

Albert J. Rice - UBS Investment Bank, Research Division

Maybe I'll go back to Richard's comment on the health reform. I think you highlighted 4 major variables: ramp-up in coverage, Medicaid expansion, rates on exchanges and employer dumping. Can you -- I know you guys aren't going to be ready to give specifics for a while, but I wondered if you could tell us, as you think about the variability around each of those, which one has the most -- which ones have the most swing factor to you? And if there's any sense on your part, when you might get visibility on those 4 items?

Richard M. Bracken

Okay. A.J., thank you. And as I look at those variables, they all look important to me. I would say that, though, if I had to pick something that I think is most important, it would clearly be reimbursement rates that we would negotiate exchange products at and really the sort of the utilization rates of the uninsured. And both of these things are going to -- that's why we are struggling to be definitive at this point in time. And what -- the way we look at the work we're doing now is there's a lot of variables out there. And some we're able to begin to size through work that's being done by focus groups and surveys and relative to the employer intentions or potential actions that publics might take in certain markets, and we begin to size pieces of it. But others that are going to be rate-based or utilization-based will take more time to actually come online. We certainly know what our commercial books are at. We've been pretty public about how we think about that. We're looking at each of these markets being independent. We don't have a strategy or a policy that's going to roll out over every market. So this is truly a model that's in development and that we're continuing to get pieces and facts around. And we'll let you know what we have, as we've said, in the middle to latter part of the year. And it'll be what it is at that point in time. There'll still be holes at that point in time. But as much as we've been able to figure out or put some detail around or to the degree in which what we are assuming things, we'll put that out as well.

Albert J. Rice - UBS Investment Bank, Research Division

Okay, just maybe a follow-up on that, a comment around managed care. Can you just sort of update us again where you're at in contracting for 2013 and 2014? And does any of that have exchange-related contracting in it at this point?

R. Milton Johnson

A.J., this is Milton. Right now -- the answer to the second part of the question is no. We -- right now our contracts are structured basically consistent with where they've been over recent years. We've got virtually all of 2013 managed care revenue under contract and that's a contracted rate of 5% to 6%. We've got about half of the managed care revenues for 2014 under contract and similar rate increases and probably 35-or-so percent of '15. So again, as usual, a lot of visibility into our managed care contracting. But really at this point in time, no material exchange products have been negotiated.

Operator

And we'll go next to Chris Rigg from Susquehanna Financial Group.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I guess I just wanted to follow up on the DSH money. So you're basically saying it's $200 million annually, is that correct?

R. Milton Johnson

That's our estimate as of today. And hopefully, when the regs are issued in April, we can have a more favorable outcome. But based on what we know today, what we expect today, it would be an annual negative impact of about $200 million.

Victor L. Campbell

And Chris, this is Vic. We'll see proposed regs come out in April, and the industry will have a period of time to comment and then the final rule usually comes out in August.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And is the money -- what were the Medicare and Medicaid DSH payments in 2012?

R. Milton Johnson

Probably, I'd say, Medicaid and Medicare probably around $650 million or so, $650 million.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then I guess a follow-up on the sort of managed care pricing. And when you think about the way HCA has set up cluster market strategies, local market strength, and you hear the managed care guys talking about they think narrow networks is sort of what you're going to see in 2014, do you view your sort of cluster strategy as being advantageous? Meaning, you're going to be a part of the narrow network, or that allows you to sort of hold the line on pricing and stay kind of status quo is what it is?

R. Milton Johnson

Well, first of all, in health care reform and what Richard was obviously commenting about, it's going to be a very market-by-market driven strategy. There's not going to be a overall HCA cookie-cutter approach. It will be market-by-market. And certainly, there are markets where we may find a restricted network or narrow network attractive. But again, it's going to be based upon market circumstances and taking into account the number of uninsured lives and the market share and the like.

Operator

And we'll go next to Matt Borsch from Goldman Sachs.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

If I could ask a follow-up question on the managed care contracting for the exchanges. If you don't have those rates locked down, do you default to the commercial rates? I just wanted to confirm that. And can you characterize the early pace of the negotiations in terms of what you think the expectations of the health plans are in those negotiations?

Victor L. Campbell

Matt, thank you. We have Juan Vallarino, who heads up our Managed Care Group. You want to address that one?

Juan Vallarino

Sure. Matt, the answer to the first question is our current contracts do not include exchange pricing, so it's a separate bucket. So commercial rates do not apply nor Medicaid rates do not apply. The second, discussions are really too early to go into any substantive rate discussion. Everything we're hearing right now is posturing on both sides. And I think over the next 45 days, you'll see it come to fruition and a lot of good plays out in network sizing, volume assumptions and the like.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

All right. And just if I could as a follow-up on a different topic. How do you interpret the stronger utilization trend that you're seeing? I mean, we've been waiting for utilization demand to firm up somewhat. Historically, there's a -- at least we've looked at and I know some of the actuaries have to pattern a multi-year lag for utilization demand to return after the beginning of an economic recovery. How are you looking at it at this stage?

Victor L. Campbell

All right. I'm going to ask Sam Hazen to address that. And also, I want to encourage folks, hold your questions to one because we got a bunch of people on the line. I'm going to hate to cut people off when we get there. All right. Go ahead, Sam.

Samuel N. Hazen

Well, I think as I've said on my comments, we have seen a slight acceleration in overall demand across HCA's markets. Again, I think that speaks to our portfolio, as we've said before, in that where we're located, which markets we serve, we have in general a better economic circumstance than other markets. So I think that's driving some piece of the demand that we're seeing inside of HCA. The second thing is the strategy of the company is yielding, I think, some results obviously as our market share continues to show improvement. But what we are seeing on the commercial side, it's somewhat encouraging. We've seen sequentially across the quarters a slowdown in overall commercial reductions to the point where the last few quarters have started to get closer to sort of a flat environment inside of HCA's market. And so that's, I think, a function of the lag that you mentioned previously about the economic rebound and how it affects overall demand on the commercial book of business. Obviously, on the Medicare side -- in the Medicaid side, utilization is not controlled to the same degree. It doesn't get the same kind of impact in our estimation as the commercial side does with respect to the economy, but we are seeing that. So as we build our 2013 assumptions, we did factor in those observations and built that into our top line assumptions.

Operator

And we'll go next to Joshua Raskin from Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

I guess my one question just focused on Las Vegas market. I think you guys gave the update that, that was one of the markets that showed the improvement in market share. So I'm just curious, what do you think is driving that? And do you guys have any updated thoughts on potential contract negotiation with the biggest payer there?

Victor L. Campbell

Sam?

Samuel N. Hazen

Well, when we severed our relationship with Sierra, now United, many years ago, we had to reinvent ourselves in that market in order to be effective. And part of that strategy, I think, has served us well with our ability to operate our emergency rooms, our ability to focus on our physician relationships and creating opportunities for them to do business at HCA's facilities. And then we've been very effective in our outreach efforts in that market to compensate for the fact that we're dealing with a very small market when you consider our out-of-network position with Sierra. We've added service lines that have helped us there as well. And so from that standpoint, we've been very pleased with the overall trend lines as it relates to our admission activity and market share performance. We're obviously open to discussions. We have ongoing discussions with the folks in Las Vegas in United. We haven't yet reached any kind of relationship, but we're open to that as the opportunity presents itself, but it has to be at a rate that obviously makes sense for us. We continue to invest in this market. We are adding capacity at a couple of our facilities to accommodate the growth as well as some program development. And we're seeing a little bit of a turn in the economy, which is having a slight impact on our payer mix, not material, but better than it's been over the past few years. So we continue to plug along with the same basic elements of our strategy, and we're reasonably optimistic. It's important to understand Las Vegas only represents about 3% to 4% of the company's volume. It's a very small piece of our overall portfolio. But it is an important market to us, and we continue to focus our efforts appropriately.

Operator

And we'll go next to Justin Lake from JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

My question is a follow-up on reform. I wanted to make sure I'm hearing you correctly. So you're expecting reform to be a multi-year impact, which makes sense. You don't get the full benefit in 2014 of coverage expansion and obviously, there's a lot of moving parts. But given the moving parts for 2014, do you still believe the net impact of reform is likely to be positive overall in the company? Or could the variables you laid out actually lead to a net headwind from reform in 2014?

R. Milton Johnson

Justin, yes, we're not going to give guidance on 2014 health care reform today. As Richard mentioned, we're still working through our views in the model and hopefully later this year, we will be able to give you that information, probably not only for one year but for a multiyear outlook for health care reform.

Operator

And we'll go next to Tom Gallucci from Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

I guess my question is sort of on the acquisition environment. You mentioned strategic acquisition as sort of a second priority for cash. Can you tell us a little bit more about your thoughts there? Is it sort of supplementing within markets? Would you buy big systems in brand new markets? And behavioral and rehab have been really strong contributors on volumes. So are you thinking about ancillary areas like that as well in your acquisition strategy?

Victor L. Campbell

Richard, do you want that one?

Richard M. Bracken

I'll start off on the general acquisition sort of strategy. Of course, we do believe that the environment is certainly more -- there are more opportunities presenting themselves now than there were a couple of years ago, and we're certainly processing more potential opportunities for acquisition. Having said that, acquisitions come up when they come up. They can be choppy. It's a reaction from the marketplace. And we think the marketplace, as it gets more difficult over the future years, there will continue to be more acquisitions, and we will remain very interested in analyzing those. Our filters that we put through acquisitions through are many. I think you know historically, we have been very disciplined buyers. We think that's important going forward. We obviously like acquisitions of not only hospitals but all associated parts of our network strategies that support our markets. So we're open to different kinds of things in our key markets. Clearly, our strategy is to focus on where we have a base of operations rather than de novo market. And relative to de novo markets, we do consider them if we can establish what we feel would be a meaningful network strategy over a period of time and be a meaningful market share player. So I would say the de novo markets are probably lower down on our priority list, but the existing markets and all parts of the network strategy would be in our cross hairs.

Victor L. Campbell

Sam, you want to...

Samuel N. Hazen

Yes, let me just add to Richard's comments. Last year 2012, the company acquired 6 outpatient surgery centers inside of existing markets and obviously, the intent there is to complement our network of access and to develop our new physician relationships. In addition to that, we acquired a surgical hospital in another one of our markets, which expanded our capacity and expanded our reach in that community. And then finally, on the, I'll call it, the sub-accute, we have a letter of intent to acquire a rehab hospital in the market. So we're very focused on adding appropriately to our network through those add-on acquisitions. And that will continue to be our strategy in 2013 as those opportunities surface. In those markets where we think we have substantial market share and the inability to acquire or there's just not anything available in our opinion, we have a move towards adding capacity and adding new facilities. As I mentioned on the last call, we have 4 new hospitals that are under construction in major HCA markets that will -- 2 of them will come online this year in 2013 and 2 of them will come online in early 2014. We think these are long-term plays for the company but at the same time, they're very complementary to existing networks.

Operator

And we'll go next to Ralph Giacobbe from Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Just in terms of the reform assumptions, going back, just to clarify, later this year, should we expect kind of guidance in terms of EBITDA and EPS or just a kind of framework, I guess, first? And then just along those lines, can you talk about what you're doing now or plan to do in 2013 to prepare for 2014 in terms of kind of both operational as well as an outreach perspective? Like how much of a role can you all play in getting people signed up for exchanges and/or processes in place to get them signed up for Medicaid?

Victor L. Campbell

Milton, you want that?

R. Milton Johnson

Yes, so Ralph, what we're anticipating and again, I'm going to keep some flexibility here as we continue to work through this project. But what we anticipate is getting the impact on the company from health care reform, both we see the upside and then how we see the cuts that we -- from on the Medicare program. So it would be kind of a with and without approach is what we're anticipating. It would not -- our outlook would not include anything about the base business in those out years. It would include the impact of health care reform on the base business with whatever market forces we're dealing with in those out years. And it would be presented most likely in a range of EBITDA impact is how we're thinking about it. Relative to what we're doing, I think what -- how we operate the business every day and how we've been operating our business for years will actually position us well in a health care reform environment. So I don't see major changes in how we run the company in a health care reform environment. Obviously, as I said earlier, market-by-market there will be new opportunities, and we will certainly implement strategies to maximize opportunities in those markets.

Operator

And we'll go next to Frank Morgan from RBC Capital Markets.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

I just wanted to confirm, the numbers you gave on rehab and behavioral, were those same-store or were those total?

Victor L. Campbell

Those were same-store numbers.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Okay. Got it. 2 questions, just hoping to get a quick update on the observation stay versus 1-day stay. Has that stabilized? Is it incrementally getting better or worse? And then finally, do we expect any ER volumes spill over into the first quarter that kind of strengthens going to fourth?

R. Milton Johnson

Yes, the observation 1-day stay, that has stabilized, and that has not been an issue for us this year. So it remains stable, and the outlook for that is to remain stable.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

And then ER volumes?

R. Milton Johnson

Sam, I didn't hear what the question.

Samuel N. Hazen

He was thinking about ER volume into '13, early part of '13.

Victor L. Campbell

Yes, and I guess, Frank, I think we really don't comment on current quarter periods of time. So obviously, and by reading the press, there's lots of flu out there. But I think in terms of trying to discuss January or February, we don't want to do that on this call.

Operator

And we'll go next to Sheryl Skolnick from CRT Capital Group.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Since I think I've heard you say we're not going to talk about anything more on reform, I think I'm not going to ask you about reform. So let me ask you a different -- a completely different question then. One of the concerns that I have heard from investors in your stock today is the disconnect between the EBITDA and where consensus is generally in line with your guidance. And so we get the joke that you got 500 basis points plus of pressure but you're still producing EBITDA that's almost in line with what you reported this year. But the EPS seems to be out of whack. So can you help us to understand where we are wrong as a consensus estimate on the Street between the EBITDA and the net income per share line?

R. Milton Johnson

Sheryl, this is Milton. Let me try to walk you through that. So if you think about the range of EBITDA guidance, the $6.25 billion to $6.5 billion for 2013, if you walk down in our assumptions around depreciation, approximately $1.7 billion in depreciation expense, we would expect interest expense to be in the range of about $1.85 billion to $1.9 billion for the year. Tax rate, call it like 38.5%, 39% tax rate and about 467 million roughly shares. So I think if you walk down the EBITDA guidance range with those metrics, you will come up with the EPS range.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. Just a clarification here, when you talk about the tax rate, you're talking about the actual tax rate you apply to pretax less noncontrolling interest?

R. Milton Johnson

Yes, you got -- yes, that's correct.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. So that -- it ends up looking lower than 38% when you do it that way?

R. Milton Johnson

Yes, so you have to take net income before taxes, subtract the minor...

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Minority interest.

R. Milton Johnson

Yes, minority interest, and then you'll see that tax rate be more in line with what you would expect.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

And did you comment at all on cash flows, did I miss that?

R. Milton Johnson

I have not. We will be -- cash flow from operations for next year will probably be in the range of, call it, $3.4 billion to $3.6 billion -- or $3.5 billion to $3.6 billion sort of zone for next year. We will have, in our estimates, higher cash taxes. You will see, based upon the interest number I gave you, slightly higher interest paid in next year. And the CapEx target is going to be approximately $2 billion, which is up from the $1.862 billion this year. So we will see our cash flow from operations expectation is -- would be declined from this year's, I think, record number of $4.175 billion.

Operator

And we'll go next to Darren Lehrich from Deutsche Bank.

Darren Lehrich - Deutsche Bank AG, Research Division

I just wanted to clarify one thing on CapEx. Is there any way for you to break out for us what your IT expenditures are going to be, if that's the swing factor in terms of it growing? So that's a clarification. And then maybe just more of a philosophical question I have for you. We've seen a lot of different organizations respond to some of the CMMI initiatives and some of the payment models that CMMI has been putting out. I guess the question here is, what's HCA's approach to some of this? And do you plan on participating in any of these models? And I'm just curious how you guys are thinking about those opportunities.

Richard M. Bracken

I'll mention one thing on the CapEx, and then maybe, Juan, you can talk a little bit about the CMMI initiatives, or Sam, whoever wants to take that one on. Our CapEx for next year is, from a composition basis, is pretty much similar to what it was this year. We stepped it up a little bit in terms of what we term our routine spend. That's just the spend that goes to fundamental facilities, clinical equipment and the like. So we don't really see a major breakout in technology spending or any major changes in sort of the components of our CapEx allocation.

Samuel N. Hazen

Yes, let me start on the CMI projects that you were mentioning, Darren. The company clearly evaluates any opportunity and any new program that comes out, and we do it with our folks in the field. We evaluate our programs, our position in the marketplace, our position capability and so forth. And we went through the process on the most recent program that was discussed around bundled payments and so forth. And we chose, at this particular point in time, not to pursue participating in those initiatives. We felt there were other initiatives that made more sense for our organization at that particular point in time. We do have a number of tests and pilot programs with various payers across the marketplace, both with our physicians as well as our facilities to understand what impact they have and how we would think about them in other situations across the company. And so we're very connected to that process. It's just that when we don't have enough details or we don't have the necessary situation in place where it makes sense at the time, we make the decision as we do our evaluation. And that's pretty much how we handle this bundled project program that the government was pushing through the industry. And across HCA's markets, there's very few systems that actually participated, and I think it just reflects the other opportunities that exist within those markets.

Operator

And we'll go next to Kevin Fischbeck from Bank of America Merrill Lynch.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. I just wanted to understand if there was anything that we should think about as far as investments that you guys are making to prepare for 2014? We hear a lot about it from the managed care side of things, but haven't really heard about it from the hospital side. Is there anything that you need to do as far as staffing up in front of that potential volume increase in 2014 or investments around contracting or narrow networks or thinking about risk, or anything along those lines that we should be thinking about as the year goes on?

Samuel N. Hazen

This is Sam again. I think Richard mentioned in his comments and Milton alluded to it as well, and I just mentioned that we do have a few pilot concepts that we're exploring that aren't necessarily applicable to reform per se. They're just the dynamics that exist within our markets, and we're responding to that. One thing we have done as we studied our capacity, I think, very carefully is to understand where do we have capacity constraints that we need to address, whether that's with access within a market, whether that's with beds or other capabilities within our facilities. But again, that's sort of normal business for HCA. I wouldn't say it's anything new because of reform. If we do see a spike in demand within our markets like some people assume as reform develops, then we'll have to continually adjust our capacity if our share continues to maintain itself. But that's still sort of normal course of operations for the company. We have a very disciplined approach to understanding our utilization of our facilities, our occupancy rates, our clinical technology needs and so forth, our physician needs. And as we work our way through the market dynamics, study the behaviors of the market, we will adjust as we've been adjusting to the dynamics up to this point. So I don't think you'll see anything dramatically different for the company as we move through the next 18 to 24 months.

Richard M. Bracken

You clearly wouldn't see any additions in variable staffing or anything. That will all be handled on a as-needed basis very close to the time of demand. So we wouldn't see any kind of sort of labor associated with that. The only sort of incidental labor that I would mention that -- and is not really related to reform, is, to Sam's point as to overall sort of market conditions, is our continued investment in our quality agenda, our quality performance teams, our ability to deploy the EHR and Meaningful Use and the like. And those areas we continue to invest labor to prepare ourselves for the future.

Operator

And we'll take our final question from Whit Mayo from Robert Baird.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Wonder [ph] if you would answer this directly but, Milton, was just curious what the actual assumption is you're making for the uninsured declines in that $200 million cut from DSH. And do you have an idea actually when the CBO is going to publish their assumption for uninsured decline?

R. Milton Johnson

Yes, Whit, so what we know, there was a call and a document that was issued by CMS is the basis for our estimates. And basically today, as you're probably aware, DSH is distributed or allocated based upon Medicaid and SSI recipient days. And the new formula would be going to what's uncompensated care. And right now the way that uncompensated care is being designed is, with my understanding, would be charity care and bad debts and then that's multiplied by the cost of charge ratio. Well, what that formula does, it penalizes efficient providers. And also, what it doesn't pick up would be uninsured discounts. And as you know from following the company over a number of years, we give significant uninsured discounts to our uninsured patients. And that's not picked up in the uncompensated care formula, at least not as we understand it today. So as a result, it's not based upon a volume metric, this 75% redistribution, but based upon uncompensated care and the way that's being defined, and then the fact that efficient providers with a lower cost of charge ratio, again, would be hurt in this redistribution and that's the -- the $200 million is the effect upon HCA.

Victor L. Campbell

Yes, and I guess I'd direct you to that call that Milton mentioned was a public call. It was on January 8, and I think there's some slides and information on the CMS website. So again, it's preliminary. We're still waiting for the actual proposed rule to come, but we had to put something in our numbers as we develop guidance for the year.

Richard M. Bracken

And Whit, your comment about the reduction in the uninsured, so as you just heard, this redistribution formula, the $200 million is not attributable to reduced uninsured patients in our facilities. It's attributable to a new formula. And going forward, as health care reform is implemented, the number of uninsured do decrease that pool that would decrease further over time.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Yes, I know -- I mean, it was my assumption that the CBO was just going to make an estimate, and that's what the entire industry had to base their calculation on. So I just wasn't sure if you had an idea when the CBO may actually disclose or publish that.

Victor L. Campbell

No, we really don't.

I tell you, with that, we want to thank everyone. We got done within the hour. So thank you very much. You all have a great day. Mark and I are here all day.

Operator

This concludes today's conference. We thank you for your participation.

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