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Universal Health Services, Inc. (NYSE:UHS)

Q4 2008 Earnings Call

February 27, 2009 9:00 am ET

Executives

Steve G. Filton - Chief Financial Officer

Alan B. Miller - Executive Chairman, Chief Executive Officer, President

Analysts

Shelly Knoll - Goldman Sachs

Adam Feinstein - Barclays Capital

Ralph Giacobbe - Credit Suisse

Darren Lehrich - Deutsche Bank Securities

Erin bloom - Goldman Sachs

David Bachman - Longbow Research

Albert J. Rice - Soleil-Pomeroy Research

Frank Morgan - RBC Capital Markets

[Margo Marta] – [unspecified firm]

John Rex - J.P. Morgan

Robert LaGaipa - Oppenheimer & Co.

Jeffrey Englander - Standard & Poor’s

Operator

Good morning. At this time, I would like to welcome everyone to the fourth quarter and year end 2008 earnings release conference call. (Operator Instructions). Mr. Filton, you may begin your conference.

Steve G. Filton

Good morning. 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, 2008.

As discussed in our press release last night, the company reported income from continuing operations per diluted share of $3.80 for the year and $0.81 for the quarter. After adjusting for the reserve established in connection with the ongoing investigation of our South Texas Health System affiliates and the liquidation distributions from the malpractice insurer, our adjusted income from continuing operations per diluted share for the quarter and at December 31, 2008, were $0.87.

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, 2008.

We would like to highlight just a couple of developments in business trends before opening the call off to questions.

Revenues for the fourth quarter increased 5% over the prior year’s quarter, exclusive of the impact of new facilities, most notably Centennial Hills and the revenues related to construction management contract revenue have increased by 2%. On the same facility basis in our acute care division, revenues increased 2.2% during the fourth quarter of 2008. The increase resulted primarily from a 3.3% increase in revenue per adjusted admission.

Admissions to our hospitals owned for more than a year were down 0.4% for the quarter. In the Las Vegas, Nevada market, although the opening of the Centennial Hills Hospital has negatively impacted our same store admissions comparisons to the extent that it cannibalized some of its volume from our existing facilities. The better than expected operating results at Centennial Hills contributed to a greater than 9% increase in total admissions in the Las Vegas market during the fourth quarter of 2008 over the comparable quarter of 2007.

We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense, and provision for doubtful accounts divided by net revenues. On a same facility basis, operating margins for our acute care hospitals increased to 13.9% during the fourth quarter of 2008 from 13.6% during the fourth quarter of 2007.

Our acute care hospitals provided charity and uninsured discounts based on charges at established rates amounting to $163 million and $140 million during the 3-month periods ended December 31, 2008, and December 31, 2007. Even after adjusting for certain re-classes between charity care and other discounts, the percentage of net revenue, bad debts, charity expense, and the uninsured discount in the fourth quarter were at levels higher than those we experienced for the fourth quarter of 2007.

On a same facility basis, revenues in our behavioral health division increased 4.0% during the fourth quarter of 2008. This increase resulted from increased patient volumes and an increase in revenue per adjusted patient day. Admissions to our behavioral health facilities owned for more than a year increased 0.7% during the fourth quarter. Revenue per adjusted patient day rose 4.8% during the fourth quarter of 2008 over the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year decreased to 23.2% during the quarter ended December 31, 2008, as compared to 23.5% during the comparable prior year period.

Our cash flow from operating activities was approximately $67 million during the fourth quarter of 2008 as compared to $26 million in the fourth quarter of 2007. At December 31, 2008, our ratio of debt to total capitalization was 39% and the ratio of debt to EBITDA was 1.77.

We spent $115 million on capital expenditures during the fourth quarter. Included in our capital expenditures were the construction costs related to a new 171-bed hospital in Palmdale, California and the 220-bed Texoma Replacement Hospital, both of which are scheduled to be completed and opened in 2010.

In Las Vegas, we are also underway with a major bed tower expansion of our Summerlin Hospital, and in California, we are in the process with a major expansion of emergency room, imaging, and women’s services to our Southwest Health Care campuses in Riverside County.

During the fourth quarter of 2008, we repurchased approximately 1.2 million shares of our class B common stock. We currently have 2.4 million shares remaining under the previous authorized share repurchase program.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Shelly Knoll with Goldman Sachs.

Shelly Knoll - Goldman Sachs

Steve, can you remind us why the bad debt trends tend to show sequential improvement into the fourth quarter, and then specifically this quarter, what have you seen on patient mix and why that didn’t impact bad debts more in this quarter?

Steve G. Filton

I think, Shelly, we’re pretty consistent in encouraging people to look at bad debt and charity care and uninsured discounts in their entirety. I have to concede that sometimes I can’t explain the shifts between the various categories and I’m not sure frankly if they’re terribly important. I think we saw slight modest uptake in our uninsured volumes in the fourth quarter and that’s clearly reflected in an overall increase in again the total of bad debt, charity care, and uninsured discounts. So, even though bad debts looked like they were fairly low in the quarter, I think if you sort of normalize that, our adjusted revenue per admission was only 3.3% because of the high charity care. So, if you want to think about bad debts being higher and revenue per admission being a little bit higher, you can think about it that way as well, but clearly the overall trend of patient mix was a slight increase, not terribly dramatic but a slight increase in the number of uninsured, and I think that was reflected in a higher uncompensated care expense in the quarter.

Shelly Knoll - Goldman Sachs

And then as you think about the guidance for next year, mostly what we’ve heard from your competitors is an expectation that the rising unemployment is going to impact both admissions and bad debt expense, can you tell us what you’ve included in your forecast for bad debt for 2009?

Steve G. Filton

I think our best guess is that we’re likely to see the trends that we’ve experienced in the back half of 2008 continue into 2009, and right now I’m just talking about the acute care business, but I think we would expect in 2009 that our same store admissions would be flat to slightly down, 0% to 1% down, and that uncompensated care depending on again where you want to put it, but uncompensated care expense probably will rise by something like 50 to 75 basis points.

Shelly Knoll - Goldman Sachs

Okay, and then just quickly on the behavioral health business, any benefits or pressures from either the stimulus, plan, or what you saw in the President’s preliminary budget you think would have a meaningful impact on the business?

Steve G. Filton

Again, I think those are too very sort of separate and discrete questions; as far as the stimulus plan goes, there is a significant $87 billion of additional federal matching moneys to go to the state to subsidize their Medicaid programs, and that I think should be beneficial to us on both sides of our business because clearly many many states have seen significant pressures on their Medicaid programs and we’ve seen Medicaid cuts in many of the states in which we operate, both acute and behavioral. So, I think that should certainly be helpful. As far as the President’s budget package, obviously, we have always argued that any initiatives that provides insurance to any or all of the 45 to 50 million of Americans who don’t have health insurance currently would generally be a good thing for hospitals in general and for us in particular. We don’t know exactly how that’s going to be funded. Obviously, some of it is through tax increases, some of it is through Medicare advantage reductions, some of it is through provider cuts, and we’ll need to see how all that sorts out, but again, at the end of the day, our general sense and this goes for both behavioral and acute is the more people that have health insurance, the better that is for hospital providers.

Alan B. Miller

The SCHIP program which was passed increases the number of children by 4 million, which is good for us, and it adds $35 billion over 5 years. So, that’s an increase for healthcare providers, which is already on the books.

Operator

Your next question comes from the line of Adam Feinstein with Barclays Capital.

Adam Feinstein - Barclays Capital

I’ll start with Vegas, Steve, I just wanted to get some followup, it sounded like pretty strong growth there as Centennial had a really nice quarter, you said 9% growth, I was just curious if you could talk about operating profit growth in margins in Vegas also, and just what are your thoughts in terms of what’s driving the growth there and do you think it’s sustainable for 2009?

Steve G. Filton

Adam, I think that it’s worthwhile saying that the trends that we’ve seen in Vegas beginning with the back half of 2008 are that volumes have remained fairly strong, and that’s I think both kind of overall volumes in the market, but certainly, our market share trends continue to be favorable as well, but payer mixes where we’re clearly seeing the weakness in the Vegas economy, I know you’re well aware that unemployment rates are fairly high, foreclosure rates are high, it’s a market that is under probably a disproportionate amount of pressure compared to the national average, and so, payer mix has certainly declined, and again, our uncompensated care expense has logically increased in that market, and I think that’s sort of our expectation that those trends will continue. So, in the fourth quarter especially, I think the increase in uncompensated care caused a decline in our operating margins in the Vegas market. I think one of the more encouraging broader stories of the quarter from our perspective is that despite a decline in operating margins in the Vegas market, overall acute margins increased, which obviously means that we’ve been able to offset that decline in other markets, and I know that was a concern of a lot of people given the overall economic weakness in Vegas, so we were quite pleased with those results.

Adam Feinstein - Barclays Capital

And then the minority interest line item was a little bit lower, was that related to Vegas? I think last quarter you had some items related to surgery centers, so just wanted to get some clarity there.

Steve G. Filton

No, I think the decline is related to Vegas, and basically, as I just mentioned, mostly related to an increase in uncompensated care in that market.

Adam Feinstein - Barclays Capital

And then just on the psych business, what are your thoughts in terms of what’s going on there. Yesterday, one of your competitors had a difficult quarter; you guys had a better quarter, but did see a slow down in the growth rate, so just curious in terms of do you think there’s been any change there? One of the things that came out yesterday was some concern about the economy impacting the psych business, so just curious to get your thoughts in terms of what’s going on there.

Steve G. Filton

I think two things are noteworthy, one is that we went into the fourth quarter with a very difficult comparison to last year’s fourth quarter. Our same store admissions in last year’s fourth quarter rose by over 7%, the competitor that you referred to last year’s fourth quarter had an admission growth rate of 1.5%; so, we obviously had a much tougher comparison going into the quarter, and really even before the economy ever weakened, we suggested to people that beginning with the fourth quarter of ’08, because of those comparisons, people’s expectations, our expectations clearly had to be more modest for behavioral admission growth, but there’s also another question, and I think we’ve been saying this for some time that the behavioral business is not recession proof by any means and that it is likely that we would see and that we have experienced some softening in our business as a result of the economy. We’re certainly seeing some payers, for instance, Medicaid payers in particular, but other payers as well looking to control utilization a little more tightly, looking to direct patients to lower cost settings where that’s appropriate, but I would think we would argue that in many cases it is not appropriate, but moving people from acute to residential settings, from residential to home care settings, etc., and so I think that has certainly affected some of the slow down in our behavioral admissions, and also, even though it’s not a huge part of our business, we do have some of our more niche and specialty programs where patients are really paying the bills out of their own pocket, and those self-pay programs are certainly being impacted by the weakening economy as well. So, I think it’s a combination of a very difficult comparison for us, and some amount of weakening that is caused by the overall economic slow down.

Adam Feinstein - Barclays Capital

And my final question, on the guidance just to follow up on that, you guys have talked in the past about 6% to 8% type of growth number, so are you thinking about that for 2009 within psych?

Steve G. Filton

I think that it probably comes down to the lower end of that range, Adam. I’m guessing that, our thinking now again, sort of continuing the trends that we’ve experienced is that, more reasonable admission expectations are probably in the 1% to 2% range to tack on to that 3% to 4% pricing growth that has been easier to achieve, and I think that you get sort of close to the low end of that range. I think it will be very difficult in this environment to get to the high end of that range.

Operator

Your next question comes from the line of Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe - Credit Suisse

First, going back to the budgets at just high level, one of the things talked about was bundling hospital payments seems a little bit far reaching, but I guess just one, it would be helpful to get your general thoughts on that, and then second, sort of as it relates to that, you guys have a more diversified portfolio, any interest in expanding into other service lines, sort of like an IDN type model as we look forward?

Steve G. Filton

As far as the first question, Ralph, about the bundling, I know as you know the real savings from that bundling item don’t take place until 2015 or so, so it’s several years out. In addition it’s not absolutely clear how that’s going to work, but I assume what will happen is that Medicare will essentially give some sort of bundle payment to the hospital providers and then the hospital providers will need to negotiate rates with the long-term care providers. It will put us at odds to some degree with the long-term care providers, but I think in that sort of dynamic, the acute care providers have a little bit more leverage, and certainly with our market share in most of our markets, etc., we would definitely believe we would have a little more leverage. So, when the time comes, we will negotiate what we would hope to be, rates that would allow us to continue to earn a reasonable profit on those patients who will then transition to long-term care. As far as your diversified portfolio question, I think historically the company is open to other lines of business. We have a surgery center business, used to be a little bit bigger than it is now. We’ve historically had some forays into other businesses, we’re open to that, but we’re also I think of the mind that we know what we do well and we tend to try and emphasize and continue to reinvest in the things we do well, but we’re always open to other opportunities both in other business lines, geographically; I think our approach has always been to respond prudently to those sorts of opportunities.

Ralph Giacobbe - Credit Suisse

And then, any changes to your uninsured discount policy this quarter, obviously pretty decent jump; I know you talked about more uninsured admissions, but is there anything more to that than just the uninsured admits up?

Steve G. Filton

No, there’s no change to our policy, and as I kind of alluded to with Shelly before and I think I’ve said on these calls before, and honestly, I don’t spend a lot of time trying to analyze the changes between bad debt and charity care and uninsured discount. At the end of the day, if we’re not getting paid, it’s not hugely important to me what bucket we put that nonpayment in; so, just as I said to Shelly, we tend to look at that whole uncompensated care bucket in its entirety, and no, we certainly have not had any accounting changes that should impact that in the quarter or should impact going forward.

Ralph Giacobbe - Credit Suisse

And then just my last one, going back to Vegas, could you maybe just remind us that CRA deal that you signed or United now, where we are in that contract, when that comes up, and then to the extent that you can comment to the concerns that potentially have a HCA kind of trying to get back in or any rumblings around that would be helpful.

Steve G. Filton

As far as our contract which was signed in the second quarter of 2008 was a 3-year contract, so we’re not even one year into the contract; HCA which has been out of the United/CRA network for 2 years now. We have always said that at some point we expect that HCA would get back into the network; they’d been out for a long time. We certainly are not privy to the specific conversations that may or may not be taking place between HCA and United/CRA, but I think at this point, we feel like our market position, particularly with the opening of Centennial this past year has been pretty well solidified and that even if HCA were to get back in the network at some point that the impact on us would be a lot less disruptive than it might have been a couple of years ago had HCA gotten back in the network right away. So, it certainly would impact us to some degree, but we’re feeling pretty comfortable with where we stand not only with the United/CRA as a payer but with all the payers in the market.

Operator

Your next question comes from the line of Darren Lehrich with Deutsche Bank Securities.

Darren Lehrich - Deutsche Bank Securities

Couple questions with regard to your outlook and the guidance; Steve, I wanted to maybe just get more of a global view from you; it looks like you’re guiding revenue growth for the company to be up a little over 6%, and I wanted to know just sort of how that breaks down, how you’re thinking about that given some of the components already, and then, when you look at the earnings leverage that’s kind of built into the model, could you just talk a little bit about how you’re thinking about that in the outlook; it sounds like bad debt will be up a bit, so where’s the leverage coming from and then have you built any buy-back into the guidance just to give us a sense for this year count outlook?

Steve G. Filton

I think on the acute side, and I think I’d probably sort of ticked these basic assumptions off already, but our presumption is that volume growth next year will be flat to slightly down, sort of 0% to 1% negative, pricing ought to be in that 3.5 to 4.5 range, and the bad debt or uncompensated care expense wherever you want to put it goes up by 50 to 75 basis points. I think when you put those metrics into a model, you’re going to come to an acute care EBITDA model that is flattish again depending on how you mix a little bit and deal with expenses you may get a little bit of a different answer. On the behavioral side, again I think I ticked these metrics off, but the expectation for next year is may be 1% to 2% admission growth and 3% to 4% pricing growth, and really in the behavioral business no real change in uncompensated care. If you put those metrics in a model, I think you’ll get sort of modest mid-single digit EBITDA growth on the behavioral side. So, the behavioral has modest EBITDA growth, relatively flat on the acute side, and then on the non-operating items, we get some benefit from lower interest expense next year both from lower rates as well as lower levels of outstanding debt, and then lower share count, and I think again if you kind of plug all those dynamics in, you can comfortably get to a number well within our guidance.

Darren Lehrich - Deutsche Bank Securities

You haven’t built in and I don’t think you typically build in additional buy-back, is that still the case?

Steve G. Filton

No, we don’t. Our guidance obviously includes all the buy-backs that we’ve done in ’08, but it does not presume that we do any buy-backs in ’09.

Darren Lehrich - Deutsche Bank Securities

And then maybe, Alan, if you could just give us your perspectives, I know you’d like to spend time out in the market, maybe give us a view on how you think some of the economies are faring; you did a pretty remarkable job managing the expenses in the fourth quarter given the environment, but may be just give us your outlook on how your economies are faring and where you think the big risks are in the portfolio?

Alan B. Miller

Obviously, we’ve talked about Las Vegas and Las Vegas is interesting because they seem to want to continue to open hotels, and seems to me that they’re looking just a little bit over the hill and expecting things to to ramp back up, and obviously we all know that the housing market has been hit in Las Vegas a lot. There’s a lot of speculation in Las Vegas. So, that’s going to be squeezed out. Florida is another area that’s having some difficulties, but we’ve had a very good experience now in South Texas which has been an area we worked on diligently, and the other thing to think about is that the company is spread all around the country, and so while we are hurt in certain markets, our overall results show that we are spread around, we are into basic lines of business which is helpful, and with all this money going in it should be helpful to us. What happens in the long run with regard to inflation and the like is nothing that I’m prepared to talk about, but the Democratic Party plans of spending money and extending coverage.

Darren Lehrich - Deutsche Bank Securities

Alright, and then just one last thing here Steve as it relates to the other revenue segment which has the contract and various other things, but still has been a little volatile, hard to model frankly; it looks like it was $70 million in the period; what else is in there now?

Steve G. Filton

Basically what’s in there from a revenue perspective, Darren, is the construction management contract or surgery center business; we’ll take a look at them and follow up offline.

Operator

Your next question comes from the line of Erin bloom from Goldman Sachs.

Erin bloom - Goldman Sachs

I just wanted to get a little more detail on the behavioral business, and so I’m curious about what is the mix between drug or alcohol rehab patients and/or psychiatric inpatients, and I’m wondering if you’re seeing different admission trends in those two different groups?

Steve G. Filton

I don’t have the exact data in front of me at that level of detail, but drug and alcohol treatment over the years has become a smaller piece of our revenue pie in the behavioral division. We have just a couple of facilities that are dedicated exclusively to that treatment, and then in a number of other facilities we have a service line, but it’s a relatively small part of our business, in large part because I think a good deal of the drug and alcohol treatment business in today’s clinical environment is done on an outpatient basis; there are certainly some inpatient treatments, but it has moved over the years to more of an outpatient basis.

Operator

Your next question comes from the line of David Bachman from Longbow Research.

David Bachman - Longbow Research

I’m wondering if you would be willing to provide some color on the acute outpatient business, maybe just what you’ve been seeing in different aspects of that business whether it’s ER, outpatient surgeries, just something without that revenue spin on the adjusted admission piece of it?

Steve G. Filton

Our experience has been, and I think this has been true for some time, that our outpatient business which the business itself I think is dominated by the emergency room component of our business and its spin-off business that goes along with that, but our outpatient business in general has moved fairly consistently with our inpatient business, within a hundred basis point. So, if acute admissions were down 0.4% in the quarter than outpatient volumes, however you want to measure it, ER visits, outpatient revenue would move within like I said 50, 60, or 100 basis points to that. We’ve not had big diversions, positive or negative, or a big gap between the way our outpatient volumes have run or our inpatient volumes have run for some time.

David Bachman - Longbow Research

Okay. I know last year you signed an agreement for some emergency room management services as well as some other services, but how has that played out for you so far; have you been pleased with that decision?

Steve G. Filton

What we did last year was sign a contract with a company that provides as you suggest both emergency room and some other physician related services, and really what we did was sign a contract that from our perspective guaranteed us certain discounted rates if we continue to expand that business, but didn’t obligate us in any way to use that company for emergency room or any other service. So, from our perspective, it was just a contract that provides us greater flexibility and guaranteed discounts, and in our minds that was a prudent business decision and I think we still cannot believe that.

David Bachman - Longbow Research

Okay. And then just one other question on the other operating expense line; obviously we see that move around a little bit, but although overall expenses looked good for the fourth quarter that was a little bit higher than we had been expecting; is there anything going there? How do we think about that line moving forward for 2009?

Steve G. Filton

This goes back a little bit to the question that Darren asked; probably the most volatile item in other revenues and other expenses is our construction management accounting where we’re recording the cost, the entire cost of building a hospital for a third party, and then being reimbursed by that third party for those costs as well as some sort of service fee, and those numbers can be as large in the 12 months as $60 million, $70 million, or $80 million; so they can be $20 million or $25 million in a quarter on both the revenue and expense line, and again, just really depending on the timing of payments, they can be used somewhat distorted. And the other piece of it is that we have a contract underway. That contract will extend out probably about halfway into ’09, maybe a little bit later into ’09, we continue to try and get other contracts, but it’s hard to predict. I’d like to give you more predictability or a better guide to predictability on that line, but it’s a little difficult to do. The other item that’s in that other operating expense line in the fourth quarter is our reserve for the South Texas investigation. So, that obviously is not something that anybody would have modeled in.

Operator

Your next question comes from the line of A.J. Rice - Soleil-Pomeroy Research.

Albert J. Rice - Soleil-Pomeroy Research

A couple of question; first of all, following up on the share repurchase; what is the level of cash flow from operations that you guys would receive for ’09; do you have a specific guidance on that number?

Steve G. Filton

I think our general sense is that operating cash flow and less capital expenditures next year ought to be in the $125 million to $150 million range.

Albert J. Rice - Soleil-Pomeroy Research

Any comment about your attitude toward the repurchase? I know you said you didn’t have any in the numbers at this point, but you did quite a bit in the second half of last year. Is that the assumption going forward?

Steve G. Filton

Just to be clear, we don’t have any in our guidance because that’s just always been our historical practice not to include it in guidance. It’s not meant to kind of be a signal of any sort of thinking. I think we talked in the third quarter and I think this view hasn’t changed a great deal. Certainly at the levels that our stock is currently trading which after yesterday’s activity is probably closer to the 4.5 times EBITDA range. It’s going to be hard to find other investment opportunities that are equally as compelling. Obviously, we don’t know what’s going to happen to our share price, we don’t know exactly what other opportunities will be available and at what price, but I think we would certainly echo what we’ve said which is that we find our own shares at this price to be a pretty compelling investment.

Albert J. Rice - Soleil-Pomeroy Research

Okay. On the same-store numbers that you laid out, I guess, and your assumptions taken on the acute care side; I guess you have a couple of dynamics that are affecting those numbers, and the obstetrics that you did away with down at Magellan, I guess that starts to impact you even in the fourth quarter, but definitely in the first quarter, and Centennial Hills, you’ll anniversary that at some point; are those enough to move the needle on the admissions numbers? Can you comment on any effect that that will have as those go through the same store numbers?

Steve G. Filton

What you’re referring to is in the fourth quarter of 2007; the Physician Hospital and Magellan opened OB services and clearly impaired our OB volumes in that market for the following four quarters. Now, that effect anniversaried itself in the fourth quarter of ’08; so it’s no longer an issue beginning with the fourth quarter of ’08. I know this is not the question you asked, but I’ll comment on it anyway. I think the good news in the Magellan market is that we’ve replaced that OB business which has been largely Medicaid business that wasn’t terribly profitable with better paying business in part and I think it is just adding onto what Alan said before, some of the other markets that are performing well including Magellan in 2008 and part of the Magellan performance is that we’ve again supplemented that lost Medicaid volume with better paying cardiology and other business. Centennial Hills opened in January of ’08 and it was not included in our same store numbers in all of ’08. Beginning in the first quarter of ’09, Centennial will be included in our same store numbers. Those two factors as well as everything else that we’ve talked about in the call are all going to our thinking about what 2009 looks like, and again, at the end of the day we come up with acute care volumes that should be relatively flattish going into 2009 on a same store basis, and that’s our best guess.

Albert J. Rice - Soleil-Pomeroy Research

Okay. And then maybe one last thing on the guidance; obviously you don’t typically give anymore quarterly guidance, but my sense would be that the first quarter last year was a very strong quarter; needless to say probably surprised you guys, is there any comments that I can get you to make about you might lay out the quarters, the things we should keep in mind, is that the right thing to highlight there, or are there are any comments you’d make?

Steve G. Filton

I think you’ve pretty much done it for me A.J., I appreciate that. I think it is worthwhile reminding people that the first quarter of 2008 was really an extraordinary performance. I think, I’m doing this from memory, but I think we beat consensus estimates by $0.30 or something. We said at that time and it certainly turned out that way that we thought as the year went on the numbers would come down to more historical means and they certainly did. So, I think as people think about allocating our guidance amongst the quarters for ’09, they ought to just keep in mind that that first quarter comparison in particular will be a difficult one.

Alan B. Miller

Hi A.J. Glad to have you back. You know a lot about the business, glad to hear you.

Operator

Your next question comes from the line of Frank Morgan from RBC Capital Markets.

Frank Morgan - RBC Capital Markets

I was hoping you could give me a couple of numbers, Steve; what were surgical volumes both on an inpatient and outpatient basis as well as the ER visits?

Steve G. Filton

I don’t have the exact numbers in front of me, Frank, but following up on the way I answered a question previously, I think again, our surgical volumes and our ER visits have, I think, tracked admission rates for a couple of years now, within a hundred basis points pretty regularly. So, my recollection is that’s the way the fourth quarter went as well.

Frank Morgan - RBC Capital Markets

You mentioned a growth in the uninsured, could you talk a little bit more about what that was in terms of percentage of total admits, and maybe, talk a little bit about what would the volume growth have been absent the growth in the uninsured population?

Steve G. Filton

I think that our uninsured volumes were growing at probably 75 or 100 basis point rate faster than our overall admission rates. So, as I said before, I try to characterize it slightly ahead, but certainly not dramatically ahead.

Frank Morgan - RBC Capital Markets

Okay. And then one last one here, in terms of your ’09 guidance, how do you think about the various state programs, the UPL, the DSH programs, all those in terms of your outlook there that’s embedded in the guidance?

Steve G. Filton

Most of those programs run on a state fiscal year basis. So, at this point I think all of our dispro programs have been renewed through the state fiscal years which generally go to either June or August of next year. There is some uncertainty about some of the UPL programs in Texas, but I think we’ve accounted for that uncertainty in our guidance. We’re not assuming a best case scenario. We’re sort of assuming a most likely scenario. So, I think our guidance takes all that into account. It takes the definitive renewals of the dispro program and tries to take a shot at the UPL stuff sort of straight down the fairway.

Operator

Your next question comes from the line of (Margo Marta).

(Margo Marta)

I wondered if you could break down CapEx between maintenance and expense in projects. Also on the budget proposals, is there anything else in there regarding hospitals? And specifically on pricing, this year you’re getting good pricing for Medicare; what do you see in the coming years for Medicare and commercial pricing.

Steve G. Filton

As far as CapEx goes, I think that we have generally said and we believe that maintenance CapEx, which is really an acute care phenomenon; there is pretty minimal maintenance CapEx on the behavioral side. The maintenance CapEx on the acute care side is about 2% of revenues. Everything else in capital spending on the acute care side tends to be expansionary. I think it’s worthwhile and we certainly have said it before to note that a significant chunk of our capital spending both in 2008 and going into 2009 are tied up in some very large capacity expansion projects, and I mentioned them in my prepared remarks; the new hospital in Palmdale, California; the new hospital or the replacement hospital in Denison, Texas; the Summerlin Bed Tower, the expansion of surgical capacity or the replacement of surgical capacity in our Valley Hospital in Las Vegas; I mean in total probably those four and maybe our California Riverside County projects are somewhere around 60% of our capital spend in ’09 or our projected capital spend. So, there are some big pieces of committed projects in our capital spend.

As far as pricing for next year and budget proposals, there is really not that I’m aware of a specific take on the Medicare market basket increase yet that the Obama administration has tackled. As commercial rates go, I think the big outstanding question obviously is that there has been some amount of Medicare Advantage cut that the Obama administration has signaled, and presumably that will create some pressure on our Medicare Advantage pricing at some point. Again, the only thing that we can say about that is that our whole approach to a core business strategy is to create significant market, share positions in markets, etc., specifically and probably most importantly to create leverage in managed care negotiations. So, it’s not to say we won’t be affected by those kinds of declines or whatever, but we certainly have at least a fairly strong negotiating position. So, I think that has to be written. Again, the good news from a pricing perspective which we wouldn’t have necessarily predicted three or four months ago is that I don’t think Medicaid will be nearly as big a pressure point going into 2009 because of all that money that the stimulus package makes available.

(Margo Marta)

Okay. What percentage of acute care reimbursement is Medicaid and also of psychiatric, what percentage is Medicaid?

Steve G. Filton

On the acute side it’s about 12% or 13% and on the behavioral side it’s more like 25%.

Operator

Your next question comes from the line of John Rex from J.P. Morgan.

John Rex - J.P. Morgan

Just a couple of quick ones here; what exclusively have you built in for the ’09 in terms of the Medicaid reimbursement outlook, in particular for states that have announced or were you to expect reductions and how you’ve offset that against the stimulus provisions?

Steve G. Filton

John, I think we for a while have said that our expectations from Medicaid price increases in ’09 was 0% to 2%, and I think the way things were going towards the latter end of ’08, we were worried about being able to stay in that range even in the lower end of that range. I think from our perspective what the stimulus package monies do is allow us much greater comfort to think that we can get into that 0% to 2% range. More specifically, I think we feel like the cuts that have already been announced we’re assuming will remain in place although if some of them are restored that’ll be a plus, but I think our assumption is that from here on out we really won’t see any further cuts where the states won’t have to make further cuts because this money will be available to them.

John Rex - J.P. Morgan

How did you handle California with their recent action?

Steve G. Filton

California implemented Medicaid cut back in July of ’08. Certainly that cut is reflected in our guidance. They have in the recent budget that’s passed further Medicaid cuts; our assumption is that those won’t have to be enacted because the monies of the stimulus package provides. I also think it’s worth noting that our percentage of Medicaid business in California is less than our acute care average. So, our exposure in that state from a Medicaid perspective is not as great as it is in some other places.

John Rex - J.P. Morgan

Any updated color commentary on the January and February volume trends; anything looking much the same essentially as you saw in the 4Q essentially; just any color commentary on that.

Steve G. Filton

I think as everyone is aware, we had this mechanical issue of one less day in February this year. So that certainly is just a cosmetic thing, but generally I think we’re just seeing a continuation of the same trends, softness in volumes on both sides of the business, but not terribly dramatic; I know again, this is not the question you’re asking, but I probably should have mentioned when some other people asked questions about guidance; we are finding a little bit more operating leverage in both businesses, I think you clearly saw that in the fourth quarter, the operators as I mentioned in the third quarter did a good job, again in the fourth quarter of controlling expenses, and I think that the one positive about this economic environment, it’s hard to find any positive, but the one positive is that this sort of deflationary environment has allowed us to control wage rates and other operating costs in a way that in all honesty 6 or 7 months ago we probably wouldn’t have imagined we’d be able to do. So, I think volumes are going to continue to be soft, but our leverage point on volumes is probably than we would have thought a while ago.

John Rex - J.P. Morgan

So you expect that line item to maybe show a little better in ’09 than when it gets down to the salaries and wages line?

Steve G. Filton

I think so. In the sense, when you say better, I think in the sense that what we would have projected to be our rate of increase in wages 5, 6, or 7 months ago is clearly slower today. I don’t mean to imply that wages are going down.

Operator

Your next question comes from the line of Robert LaGaipa from Oppenheimer & Co.

Robert LaGaipa - Oppenheimer & Co.

Two question; I guess one relates with the healthcare plan of the President’s budget. You talked several times about volume improvement as a result of extended coverage, and I guess my question is related to the margin end of things. Obviously, part of the plan is flat fee admissions into hospitals including 30 days of followup care. What’s your expectation in terms of margins as a result of the plan, if you have any thus far?

Steve G. Filton

I think the devil is in the details Robert, and I think until we see some more precise details it would be difficult for us to tell you what we would expect to happen to margins. As (Margo) I think just asked before, we don’t even know what our Medicare market basket increase will be next year. So, it’s very difficult to say. And by the way, I am not sure we did say that we expected volume improvements from extended coverage. I think we just generally have said that we think extended coverage is a good thing in a business where bad debts run 10% or 12% of revenues on the acute side and charity care is more than that, and that certainly having more people with healthcare coverage is a good thing, but I don’t think we’ve tried to take a stab at all at how that would impact volumes in any sort of precise way.

Robert LaGaipa - Oppenheimer & Co.

Fair enough, and just one quick followup; this relates to pricing expectations in terms of the guidance for this year. Is there any variability we should be aware of moving forward in relation to this forecast, and where would it come from?

Steve G. Filton

I think, almost by definition, of course there is variability and I think if you look at what it has been in the most recent past, I think it’s probably a decent guide. I think the pricing has held together pretty well over the past year and our expectation again with the Medicaid relief and the SCHIP relief that Alan referred to. I think we feel like our pricing is likely to hold and I think that the variability is likely to come on the volume side, that’s been the case. We think that volume declines will be relatively modest or the growth on the behavioral side will be relatively modest, but that’s a variability. Then, the uncompensated care component has probably been the single greatest most volatile metric in the entire acute care business for a number of years now and I suspect it will continue to be particularly in a difficult economy. So, I think that’s where the variability is likely to occur if it does.

Operator

Your next question comes from the line of Jeff Englander from Standard & Poor’s.

Jeffrey Englander - Standard & Poor’s

A quick question, and I apologize if you’ve covered this in your prepared remarks; I hopped in a little late. First in terms of Mental Health Parity which kicks in in October, any meaningful impact from that?

Steve G. Filton

Jeff, I’m not sure that’s something we can say in any sort of precise way, but it’s one of those things that can only be a good thing for us, but I don’t think we have enough data points or enough of a database to be able to say that there is this universe of people who have been unable to seek care in the past because their behavioral benefits didn’t measure up to their acute care benefits, but presumably, there is some universe and we will have the advantage of having those people covered. It really gets back t this question of more people covered by more health insurance can only be a good thing for the provider community and Mental Health Parity provides that. So, we think it’s a plus, but it would be impossible for us to tell you what the precise impact is.

Jeffrey Englander - Standard & Poor’s

The other question is on your competitor’s call yesterday they mentioned that they had had some experience with higher rates per claim on the liability side, and I’m just wondering if you can give us any color about what your experience has been on a per-claim basis in terms of that same element.

Steve G. Filton

I’m not sure that I have or actually I’m sure that I don’t have the claim-level data available to me right now. I will say this and make couple of comments just about malpractice experience. Obviously, first of all because we have our two businesses, the bulk of our malpractice expense is associated with our acute care business, and then just in terms of our historical experience, we’ve always been pretty transparent in what we disclose about our malpractice experience. Our cash flow statement shows both the amount of malpractice expense we provide and the cash claims that we pay out, and if you look at least over the last three years the amount that we provide exceeds the amount that we paid out by at least $10 million a year, and in many cases by substantially more than that. So, we’re very comfortable with the levels of expense and the levels of reserves in malpractice.

Jeffrey Englander - Standard & Poor’s

The question really was if there was any increase in terms of the general levels of payout amounts on the claims, in a broad sense, not down to specific claim level.

Steve G. Filton

I would think just from a trending perspective we actually had a favorable malpractice adjustment back in the second quarter of 2007 and I would say that since then our experience has been largely favorable. So, we certainly are not anticipating any catch-up adjustments or anything like that. I think, at a minimum our reserves have certainly sufficiently and fairly stayed in.

Alan B. Miller

I don’t think you can approach this on just a broad basis. I think there’s a quality aspect to this as well, and all provision of services are not the same having to do with quality.

Operator

We have no further questions at this time.

Steve G. Filton

We thank everybody for their time and we’ll talk to you again fairly soon at the end of the first quarter. Thank you.

Operator

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

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Universal Health Services, Inc., Q4 2008 Earnings Call Transcript
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