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Universal Health Services, Inc. (NYSE:UHS)

Q2 2011 Earnings Call

July 28, 2011 9:00 AM ET

Executives

Steve Filton – SVP, CFO and Secretary

Alan Miller – Chairman and CEO

Analysts

A. J. Rice – Susquehanna Financial

Justin Lake – UBS

Adam Feinstein – Barclays Capital

Ralph Giacobbe – Credit Suisse

Darren Lehrich – Deutsche Bank

Tom Gallucci – Lazard Capital Markets

Whit Mayo – Robert

Frank Morgan – RBC Capital Markets

Christine Arnold – Cowen

Kevin Fishbeck – Bank of America

John Rex – JPMorgan

John Ransom – Raymond James

Arthur Henderson – Jefferies & Company

Jake Hindelong – Ticonderoga

Operator

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

Thank you. I would now like to turn the conference over to Steve Filton. Sir, you may begin.

Steve Filton

Thank you and good morning. I am Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the second quarter ended June 30th, 2011. As discussed in our press release last night the company recorded adjusted net income per diluted share of $1.04 for the quarter compared to $0.68 during the second quarter of 2010 as calculated on the supplemental schedules included with last night’s press release.

We are maintaining our previously announced guidance for the full year with earnings per diluted share expected to be $3.85 to $4. During this conference call we will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast projections and forward-looking statements.

For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking estimates and risk factors in our Form 10-K for the year ended December 31st, 2010, and our Form 10-Q for the quarter ended March 31st, 2011. We’d like to highlight just a couple of developments in business trends before opening the call up to questions.

On a same-facility basis in our acute care division, revenue increased 6.1% during the second quarter of 2011. Adjusted admissions to our hospitals owned for more than a year were down approximately 1% for the quarter. On a same-facility basis, revenue per adjusted admission increased 7.1% over last year’s quarter. The increased revenue was due to higher acuity, improved payer mix, and strong commercial pricing.

We define operating margin 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. The impact of the prior year items included on the supplemental schedules are not included in our divisional operating margin.

On a same-facility basis, operating margins for our acute care hospitals increased to 15.2% during the second quarter of 2011 from 14.2% during the second quarter of 2010. The margin improvement resulted mainly from improved payer mix, higher acuity and strong commercial pricing.

Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to 239 million and 190 million during the three month periods ended John 30, ‘11 and ‘10 respectively. As a percentage of gross revenue the combined total of bad debt, charity care and uninsured discount was slightly lower than last year’s second quarter.

On a same-facility basis, revenues in our behavioral health division increased 6.2% during the second quarter of 2011. Adjusted patient days at our behavioral hospitals owned for more than a year increased 3% during the second quarter and revenue per adjusted day increased 3.8% compared to the comparable prior year quarter. These same favorable trends were present in the results of the recently acquired PSI facilities which largely met our financial expectations for the second quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 26.7% during the quarter ended June 30, 2011 as compared to 27.4% during the comparable prior year period, primarily due to the temporary closure of some capacity at one of our Pennsylvania facilities to repair certain physical plant problems.

Our cash flow from operating activities was $173 million during the second quarter of 2011 as compared to $88 million in the second quarter of 2010. Our accounts receivable days outstanding increased to 44 days during the second quarter of 2011 from 42 days in 2010.

At June 30, 2011, our ratio of debt to total capitalization was 63% and the ratio of debt to EBITDA was 3.8 times. We spent $60 million on capital expenditures during the second quarter. We opened a total of 176 new behavioral health beds at some of our busiest facilities during the first two quarters of 2011 and anticipate opening another 150 new beds during the remainder of this year.

At this point Alan and I would be pleased to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from A. J. Rice with Susquehanna Financial.

A. J. Rice – Susquehanna Financial

Hi, everybody. Thanks. Maybe just asking about the margins on the same-store basis on both sides of the business. You had a positive margin trend on the acute care side, it sounds like on a same-store basis. When you drill down to the specific expense items what were some of the dynamics there. And just to confirm, if you ex out that unusual item you would have been positive it sounds like on the psych side? I just want to make sure that’s true.

Steve Filton

Okay, A. J. Yeah, I think that on the acute side, much as was the case in Q1, the very strong revenue performance, revenues up 6%, is really what contributes to the margin expansion, and I think if you look through our expense items, we felt I think we were particular successful on the supply line, but just in general, I think we are always going to feel that that sort of margin growth, particularly on the acute side, we ought to have margin expansion and just as we’ve done in Q1 and Q2.

On the behavioral side, as you suggested, we called out, or I called ant in my remarks the fact that we were a couple of million dollars behind due to the closure of the capacity of this one Pennsylvania facility in the quarter, combined with a couple of smaller nonrecurring expense items in the quarter. We calculate our margins probably would have on an adjusted basis, would have been ahead of last year by 20 or 30 basis points.

A. J. Rice – Susquehanna Financial

Okay. And then just maybe one other one. Obviously with the events of earlier in the week, there’s focus specifically on Medicare mix and acuity levels and you said that your overall acuity was up nicely. I don’t know if you have the case mix overall number by any chance, but – or what the trend was there, but also have you – and I don’t know if you’ve even done this, but have you drilled down and seen whether you had any anomalies or unusual activity in your Medicare book specifically?

Steve Filton

A. J., I think the three elements that we’ve highlighted as contributing to the strong revenue performance in acute care are essentially the exact same three that we highlighted in Q1.

A. J. Rice – Susquehanna Financial

Right.

Steve Filton

Higher acuity and that’s true in our Medicare book of business as well as our non-Medicare book. Better payer mix, and as we talked about in Q1, what we really mean by that is lower – a lower level of uninsured patients. And basically we talked in Q1 about the fact that after a couple of years of having uninsured admissions grow by 5 and 6%, uninsured admissions were sort of flat in Q1 and they are sort of, flat in Q2. So that trend continued. And then finally, we sited in both quarters strong commercial pricing, and again, in each of the cases, the trends continued from Q1 into Q2.

A. J. Rice – Susquehanna Financial

Okay. So you just haven’t seen any change, basically.

Steve Filton

We really have not.

A. J. Rice – Susquehanna Financial

Okay. All right. Thanks a lot.

Operator

Your next question comes from Justin Lake with UBS.

Justin Lake – UBS

Thanks. Good morning. First question, Steve, just on the new capacity build-out, the acute business continues to run pretty strongly. Can you give us an idea of what the contribution is from the capacity you put on-line in 2010 for the second quarter, what it added year-over-year to the EBITDA growth? And then more importantly, can you give us an idea what you think that could contribute from an EBITDA standpoint next year on a year-over-year growth basis?

Steve Filton

Sure, Justin. Alan, I think in his quote specifically in the press release, highlighted the contribution of the large acute care capital projects, and by that I think he was referencing the three large capital projects we’ve talked about for a couple of years now, and that’s the new tower at Summerlin in Las Vegas, and then the replacement facilities for Texoma and Palmdale in California. Combined, there’s probably $4 to 5 million of capital investment in those three projects.

Two of which opened in early 2010 and Palmdale opened in late 2010. Those projects I think as a result of the recession have taken a little bit longer to ramp-up than we originally anticipated, but are clearly ramping up, and I would say the three facilities combined contributed at least half of the EBITDA growth that we had as a company in Q2, which again is why I think, you know, Alan specifically called that out in his comments in the press release.

As far as what they will contribute in the future next year, I’m not going to be specific. I’m sure when we give our 2012 guidance we’ll be more specific, but I think the expectation is that each of those three project will continue to improve.

Justin Lake – UBS

Okay, great. And Steve, the 0 to 2% EBITDA growth target that you had for the acute care business this year, that was excluding the contribution from these projects?

Steve Filton

Yeah. Definitely Texoma and Palmdale. Summerlin is little bit harder to sort of, segregate out because obviously it’s an existing hospital with existing capacity, so it’s a little bit harder to do. But for the most part, yes. I think we – those trends we sort of talked about in our same-store facilities.

Justin Lake – UBS

Okay, great. And then lastly, the cash flow in the quarter and year-to-date, free cash flow is $240 million. Just curious if you have a target there for the full year?

Steve Filton

You know, I think in our Q1 call we talked about using a number of about 400 million. I still think that’s a reasonable estimate. Obviously, if you annualize the first six months you’ll get a higher number, but certainly our guidance implies that our earnings will be lower in the second half of the year.

You have to take that into account. I think we would suggest that our capital spend, which has been very, very tight in the first six months is likely to increase a little bit in the second half of the year. So I think that $400 million number is still not – it’s probably a bit of a conservative estimate but not a bad place holder.

Justin Lake – UBS

Okay. Just last quick number question...

Steve Filton

Yeah, Justin, can I interrupt for one second, the one thing I should call out, though, sort of a nonrecurring item is, we did sell one of the PSI facilities that were acquired by the FTC to sell in the beginning of July, and if we sell the other three facilities that we acquired just to sell that would be an element of cash flow that would obviously be above and beyond what folks have seen in the first half of the year.

Justin Lake – UBS

Okay. Steve, can I just throw out one quick numbers question, and then I’ll jump off. The $1.04 number you reported, I assume x these items you talked about in the behavioral business probably looks more like $1.06. Can you just compare that to what your internal plan was for EPS in the second quarter?

Steve Filton

Yeah. I mean, our reported EPS was probably $0.04 or $0.05 ahead of our internal number.

Justin Lake – UBS

The reported number was $0.04 to $0.05 ahead and if we include the adjustment it might have been $0.06 or $0.07 ahead then?

Steve Filton

Yes.

Justin Lake – UBS

Okay, great. Thanks a lot Steve.

Operator

Your next question comes from Adam Feinstein with Barclays Capital.

Adam Feinstein – Barclays Capital

Hi, thank you. Good morning, everyone. Everything looked very strong here. I just wanted to get some clarity on a couple things. Maybe just, Steve, in your starting point just talk about Las Vegas a little bit and you talked about the improved payer mix trends for the company. Let us know how Las Vegas done in the quarter? And then just want to get a – see if you had any update on the Sierra contract also, since I know that contract was coming up for renewal in June?

Steve Filton

Sure. So I’ll talk about Sierra first, Adam. Pretty much the comments that we made, I think in Q1 still apply. We – I think we’ve made throughout Q2. We have the contract with Sierra is actually expired. We have an agreement in principal in place with Sierra as to a new to three-year contract with a rate increase that falls well within our sort of quoted managed care price increase range.

We continue to go back and forth with Sierra over some very detailed conversations about essentially how to allocate that increase to specific diagnoses and procedures etcetera. And we believe we’ll conclude those conversations in short order and sign a formal contract at that point.

As far as the overall trends in Las Vegas, we said in Q1 that the beat in Q1 and the very significant beat in Q1 was largely driven by Vegas performance, very strong payer mix. I think we’ve seen those positive payer mix trends continue into Q2. We have seen volumes weaken a little bit in Las Vegas in Q2. And so as a result, I think that the improvement in EBITDA in the acute division in Q2 is sort of a more widely dispersed among the acute portfolio and not as concentrated in Las Vegas as it was in Q1, although Las Vegas still is ahead of where it was in Q2 of last year.

Adam Feinstein – Barclays Capital

And since you mentioned the portfolio, Steve, maybe just an update on the McAllen in Southwest Texas market.

Steve Filton

Yeah. I mean, I think the comments there would be similar to what we’ve been saying for the last few quarters. Again, we’ve seen soft volumes in that market, but improved payer mix trends, and so the market actually continues to, frankly, outperform where we thought they’d be this year, which has been a positive, obviously. But again, I think it’s largely reflective of the overarching trends that we’ve seen which are, weaker volumes than we expected but better payer mix.

Adam Feinstein – Barclays Capital

Okay. And then, just maybe a question for Alan, just wanted to get your though, so you guys have owned PSI for two full quarters now. So just relative to your expectations going into it, just curious to get your observations in terms of how the integration of PSI has been going.

Alan Miller

The integration is going well. We’re pleased with it. And we have found areas of upside. We’re working on a couple of problems but on balance, we’re very happy with it.

Adam Feinstein – Barclays Capital

Okay. And then just on that same topic, Steve, the synergy numbers you guys outlined, you’re still comfortable with the same range relative to what you talked about earlier?

Steve Filton

Yeah, I mean, we’ve – from the outset side of this 35 to $45 million synergy number which was meant to refer to the amount of corporate overhead savings we thought were available as a result of the transaction and as we have on numerous occasions, we’ll reiterate today we think we are very much on track to meet that within the sort of two-year period that we set for ourselves in the beginning.

Adam Feinstein – Barclays Capital

All right, thank you very much.

Steve Filton

Thank you.

Operator

Your next question comes from Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe – Credit Suisse

Thanks. Good morning. Steve, may be just going back to – you talked about the temporary closing of the Pennsylvania facility. Maybe just give us a sense, how long was that closed for? Is it now open? What were the issues there? Any details there would be helpful.

Steve Filton

Yeah. As I said in my comments, Ralph, we had some physical plant problems that, in order to repair them we had to close down some capacity. Not all of the – the facility is still open. I believe I don’t have the date in front of me. I believe it was closed for most of the second quarter, and we expect it to the reopen sometime fairly soon, mid to late August. So we may have a bit of a lingering effect into Q3, but then it should be behind us.

Ralph Giacobbe – Credit Suisse

Okay. And then, can you maybe talk about where you are in terms of capacity in the Psych business overall?

Steve Filton

Our occupancy rates continue to run for both portfolios in the high 70s, and I think from our perspective, that still means that there are any number of facilities that are operating at what we would deem to be inefficient levels of occupancy, meaning that we’re turning patients away, and that’s why we’ve added, as my comments indicated, 175 or so beds so far this year, and we expect to add another 150 in the balance of the year.

And I think at a similar rate in the following couple of years, I think we still think there’s an opportunity again in the entire portfolio for facilities that quite frankly are operating at that high 70s, low 80s, in some cases even higher than that occupancy levels at relatively attractive investments, invest in new capacity and earn a decent return.

Ralph Giacobbe – Credit Suisse

And then just in terms of going back to the acute care pricing mix, was the best I think we’ve seen in eight years, can you may be just – is there a way to parse out a little bit what you think is coming from kind of the pure pricing versus acuity versus payer mix and then maybe just more importantly for the second half of the year, do you think you can sustain in that area, just given what appears to be kind of relatively easy comps?

Alan Miller

Sure. Well, to some degree, Ralph, I’m going to express the same sentiments we expressed in Q1. We’re extremely pleased with the very robust revenue performance in acute care but we remain cautious about it because obviously we’re still in an economic recovery that appears to just about everybody to be fairly fragile and uneven, and so particularly as it has affected the numbers of uninsured, we saw dramatic drop in those in Q1, and we sustained that in Q2.

We’d like to be able to believe we’ll be able to sustain that completely going forward but are not quite so sure. We’ve also seen an increase in acuity in Q1 and again in Q2. I think to some degree that’s a function of the fact that the flip side is that we’ve got weaker admissions and the admissions we’re losing tend to be the less acute, more discretionary and elective sort of procedures, so what we’re left with are the more acute procedures, but I think we continue to believe that it’s quite possible and probably even likely that the acute care pricing backs off as the year goes on.

The other thing that I think we know is coming is that Medicaid pricing is going to decline as the year goes on. As we’ve said many times, Medicaid pricing was flat to down 1% in the first half of the year. We expect it to be much more down 3% or 4% in the back half of the year and that will affect our overall pricing, both on the acute and frankly even more so on the behavioral side, so that’s another cautionary area that we’re keeping an eye on in the back half of the year.

Ralph Giacobbe – Credit Suisse

Right. And then Steve, if I could squeeze in one last one, I know it’s only a month into the quarter but I need just general observations, either positive or negative of the trends relative to kind of what you’ve reported for second quarter or first half of the year.

Steve Filton

As is always the case, when we have these calls, the only real metric that we have any real insight into at this point is volumes and I would say that the early indications of Q3 are no different than they were in Q2, which is pressure on acute care volumes and strength on the behavioral side.

Ralph Giacobbe – Credit Suisse

Okay. That’s helpful. Thank you.

Operator

Your next question comes from Darren Lehrich with Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everybody. I just wanted to go back to Vegas and I guess my question is a little more specific in regards to the Summerlin capacity expansion.

Alan or Steve, I guess just the way I would frame the question is given that the Summerlin is probably your highest margin asset in the market, is it possible that maybe we’ve seen more of a structural change in your Vegas margin profile going forward? It just seems like we’ve seen so far since that’s ramped up much better acute margins. And I just want to make sure we’re thinking about that Summerlin expansion in context?

Alan Miller

Look, I think, Darren, your overall point is correct. I mean, by the way, I’m not sure it’s terribly specific to Summerlin in the sense that just like when we talk about behavioral capacity expansion, if we can expand capacity in existing facilities and fill that capacity, then that’s probably the highest return investment we can make, because there’s little sort of fixed costs, fixed operating costs, that’s associated with it. I think it’s part of the reason why we’ve been able to drive behavioral margins up as much as we have in the last few years.

We haven’t had as many opportunities to do that on the acute side. Summerlin has been a unique opportunity, but, yes, I think and part of the problem with Summerlin is we opened that Summerlin capacity in January of ‘10, and in the teeth of this terrible recession, particularly in Las Vegas, and so we didn’t get much impact out of it in 2010. In fact, I think Summerlin’s volumes didn’t change much.

But clearly in ‘11 we’re starting to see some ramp-up, some incremental capacity, and that’s absolutely helping Summerlin’s margins and the company’s margins, and they indicated to Justin in answer to the question before, I think we would expect it would continue to get better as the economy improves and demand improves.

Darren Lehrich – Deutsche Bank

Okay. That’s helpful. And then one thing I just wanted to clarify. Did you bring some facilities on balance sheet? There was I guess a little bit of a higher D&A number and correspondingly a lower rent expense number, and I just want to make sure I understand what was going on there. That was relative to my model, so– ?

Alan Miller

Yeah. I know nothing really in the quarter, Darren. We’ll go back and look. But I suspect it’s probably just a tweaking of our depreciation for the opening balance sheet of PSI and some of the new projects, but nothing of an operational nature came on-line in Q2.

Darren Lehrich – Deutsche Bank

Okay. So are you suggesting there was some kind of true-up in D&A in the period that we might want to call out or think about?

Alan Miller

I mean, I would to have go back and look. All I would suggest is I think that the Q2 depreciation is the right run rate to use.

Darren Lehrich – Deutsche Bank

Okay. And then just the last thing, and I don’t want to wordsmith here too much, but, Steve, you said PSI is performing generally in line, so maybe a little more of a qualification perhaps. I just want to make sure I’m hearing what you’re saying and not reading too much into it. But, Alan, I think you gave us a general sense, but is there anything specific you would want to call out, just as regards to how you’re characterizing it?

Alan Miller

No, I think that what I was trying to say in my comments are simply that obviously we give same-store metrics because we have them on very strong admissions and pretty robust pricing, etcetera, and I think we were just trying to make the point that we’re seeing those same metrics in the PSI facilities as well. Alan, I think pointed to the fact that we’ve seen some areas of improvement, things like overtime and registry expense, but I think we’ve been able to impact almost immediately without any real change to the operations or disruption in the operations.

I think, for the most part, you’ve heard us say that most of the operational changes that we – and improvements we would hope to make to the PSI facilities will be done in the 2012 and ‘13 timeframe, but those are the only points we’re trying to make. And we’re not trying to wordsmith or be cute about anything here. So it’s pretty straightforward from our perspective.

Darren Lehrich – Deutsche Bank

All right. That’s great. Thanks a lot.

Operator

Your next question comes from Tom Gallucci of Lazard Capital Markets.

Tom Gallucci – Lazard Capital Markets

Thanks a lot. Good morning, everybody. Maybe, just follow up on that last point. As you think about the operational opportunities longer-term, any updated thinking on margin potential at PSI facilities?

Steve Filton

Tom, I think that again this is another one of these issues – I think what we have to in Q2 is largely a reiteration of what we’ve said before. I think that the difference between the two companies’ apples-to-apples margin were probably a couple of hundred basis points. The UHS margins were better.

I think we believe that probably half of that is structural in nature and has to do with the fact that PSI had a bit more of an emphasis and skewed towards the residential business, which by definition has a lower margin. Of the remaining 100 basis points, I think, we think that a measurable amount of that can be closed over time. And by 2012, 2013, we should be able to close, again, a measurable portion of that.

Tom Gallucci – Lazard Capital Markets

Okay. And the admissions growth continues to be very strong. Do you have a sense of what you think the market is growing versus maybe what you’re taking either in terms of share or how much additional capacity is generating the volume that you’re seeing?

Steve Filton

I think it’s hard or difficult for us to, sort of, parse out what portion of admission growth comes from market share increase or capacity increase. I mean, I will say this – we’ve made this comment before – that without the capacity additions that we’ve done for a number of years and that frankly PSI had been doing for a number of years and that we believe we’re going to continue to do for several years, it would be difficult for us to get to 7% admission growth.

So, certainly, some of that growth is attributable to the capacity expansion. We believe that some of it’s attributable to the benefits of Mental Health Parity legislation, although frankly that’s even harder to precisely define.

And we also believe, as I think your question suggests, Tom, that we think some of it is just due to the strength and increasing demand for behavioral services, in general. And they’ve proved to be less, sort of, economically sensitive than acute care demand and acute care volumes, but it’s difficult to sort of parse it into pieces.

Tom Gallucci – Lazard Capital Markets

Okay. And last one from me. You mentioned maybe pricing backing off a bit in the second half. You pointed to Medicaid. I guess, Medicare, maybe a little pressure there. And managed care, though, you said it’s been strong. What ranges are you seeing for new contracts, sort of, price increases, and is that steady up or down as you look out?

Steve Filton

Yeah. I mean, the managed care pricing range that we’ve quoted for some time now has been this 5 to 7%. And I think by characterizing managed care pricing on the strong side implies that we’ve been at the high end of that range, and we’ve not really seen any significant changes in that in the last couple quarters.

Tom Gallucci – Lazard Capital Markets

Great. Thanks a lot.

Operator

Your next question comes from Whit Mayo from Robert.

Whit Mayo – Robert

Thanks. Maybe, first question just for Steve or Alan. I think you’ve got a new executive that joined to run the acute care segment. Can you talk a little bit about Marvin, his experience coming from the non-profit world, what he brings to Universal, and just maybe any general comments about any newer priorities that division may have or if this hire signals anything that we should be aware of?

Alan Miller

Well, Marvin is an exceptional executive. He both has a financial background and an operating background. He is extremely highly thought of in the industry. I’ve had a number of people contact me and congratulate me on having a man of his caliber join us. He’s highly experienced. So we are very delighted he’ll be with us in a couple of weeks.

We think that – as I mentioned, his strength is across the board, but he has a background in strategy. He’s very good with managed care and doing different projects and doing different joint ventures. He’s an excellent operator, and he had been designated chief financial officer. So he brings an unusual combination. He’s experienced, and we’re very excited about having him join the company.

Whit Mayo – Robert

Okay Great. And maybe, Steve, just update us on your thoughts with regards to buying physician practices. Are you warming up to the idea more, have you bought any at this point, or is it just still not prevalent in many of your markets?

Steve Filton

Yeah. Whit, I think, what we’ve said about physician practice acquisition is that we’re approaching it judiciously and definitely on market by market basis. I think that we believe that some of the benefits of physician practice acquisition have been overstated. We think that frankly the history of the industry has demonstrated that on more than one occasion. But, on the other hand we also recognize and acknowledge that particularly in certain markets; there is competitive pressure to do so. So it’s a bit of a mixed bag.

In some markets, we’re pursuing physician acquisitions pretty aggressively and have already completed some. In other market, like a Las Vegas, physician practice acquisition has really kind of been a non-event in the market itself, and we’re certainly not doing anything to disrupt that dynamic. So it’s a bit of a mixed bag, and as we, I think, approach this business in general, we do what we think is right in every individual market to suit market facts and circumstances.

Whit Mayo – Robert

That’s helpful. And just maybe last one, just high-tech and thinking about stage one meaningful use, just any updates on the internal investments or general thoughts.

Steve Filton

Yeah, I mean, I think, first of all, as we’ve I think disclosed before, we’ve brought one hospital live on the Cerner system, which we – is the system that we think will qualify for the meaningful use criteria. We have schedule to bring the remaining 24 hospitals live over the course of the next two years. We have submitted applications to a number of states for Medicaid reimbursement for 2011. Some of the state Medicaid programs allow reimbursement really based just on your commitment to implement a system as opposed to meeting the same sort of criteria that Medicare and the high-tech act required.

It is conceivable. We’ve applied for those funds. We think that we could receive by the end of 2011 some not insubstantial amount, but we’re also continuing to talk with our accountants and auditors about how we would recognize that. I know that some of our peers have already recognized those revenues. I think we are inclined generally to recognize the revenues as we implement the system, but we’ll do whatever the industry deems to be the appropriate accounting treatment.

Whit Mayo – Robert

Maybe any book-ins to think about what the cash could be that you think you may receive from the states in 2011, or is it just too early to tell?

Steve Filton

I mean, I – we’ve applied for amounts that probably fall between 10 and $20 million. I wouldn’t speculate at this point on the likelihood of what we might receive in 2011.

Whit Mayo – Robert

Yeah, all right. Thanks a lot, Steve.

Steve Filton

Thanks.

Operator

Your next question comes from Frank Morgan with RBC Capital Markets.

Frank Morgan – RBC Capital Markets

Good morning. I’m – it sounds like with PSI largely integrated I was just curious what’s your appetite might be for either acute or behavioral acquisitions going forward. That was my first question. And then a second one, I think you mentioned, not to be too picky here, but on the Sierra, you mentioned one of the things that you’re trying to wrap up is the specifics on how you allocate the rate increases. I think you said a cross diagnosis. I’m just curious, is that a normal negotiation that you would have? Thanks.

Steve Filton

Sure. So on the acquisition front, Frank; I guess, as somebody’s question before indicated, our cash flow and debt repayment plans are ahead of schedule. I think our run rate leverage is sort of around 3.1 times, and again, is ahead of where we expect it to be at this point and certainly ahead of the 4.0 times we were at, right around when we announced the acquisition.

So we’re very pleased with our leverage position. We feel it affords us a great deal of flexibility and we are actively pursuing opportunities in both business segments to expand where that makes sense.

And again, I think it’s – as it always does, it’s sort of the whole array of opportunities. One-off acquisitions, capacity expansions, larger acquisitions, and I think UHS has a well-deserved reputation for approaching these in an opportunistic and disciplined way, and I think that’s going to be our approach, but certainly our leverage and capital structure has us feeling that we have very few limitations if there are good opportunities out there.

Frank Morgan – RBC Capital Markets

And then on the Sierra?

Steve Filton

I’m sorry. Yeah, it’s hard I guess for me to describe what’s kind of a normal managed care negotiation, Frank. The Sierra negotiation is a little different because I think some of our contracts have more differentiation existing between diagnoses, etcetera.

The Sierra contract was – as large it was it was largely kind of a single rate contract, and we were trying to be a bit more nuanced in this go-round, and I think that’s what’s causing a little bit of the extra work here at the end. But I don’t think it’s terribly – indicates a terrible departure from what would be the shape and structure of other managed care contracts.

Frank Morgan – RBC Capital Markets

Okay, thank you.

Operator

Next question comes from Christine Arnold with Cowen.

Christine Arnold – Cowen

Hi. Couple of follow-ups. First based on your comments on Sierra I trust that there aren’t changes in the ultimate payment terms of how we get the same pricing spend having is that true?

Alan Miller

Well what I said, Christine is obviously we believe we’ve agreed upon an increased amount, and, yes, we think we’re going to get that regardless of what we agree to, that whatever we agree to in terms of the specific diagnoses and allocation of rates to procedures it will total to the agreed upon increased amount.

Christine Arnold – Cowen

Okay. All right. So there’s no risk in the details here.

Alan Miller

We don’t believe so.

Christine Arnold – Cowen

Okay. And then the three facilities that you’re selling, could you remind us what the sell proceeds are likely to be on that in the second half?

Alan Miller

The sale proceeds are likely to be somewhere in the $100 million range when all the deals are completed, but I can’t guarantee they will all be completed in the second half of the year.

Christine Arnold – Cowen

And then this may not be possible, but is it on the acute care pricing side possible to put numbers around, gee of the 7.1% pricing in acute, we think we got two percentage points on CMI, we think we got better commercial pricing execution of something else, and then payer mix was worth something else? Or is that not something that’s quantifiable?

Alan Miller

Yeah, I think the easy answer is I’m sure it’s possible, Christine. It’s certainly not possible for me right now, but we will try and put some more substance around that and maybe include it in some of our conference presentations, etcetera, perhaps in Q3.

Christine Arnold – Cowen

Okay. And then final question, can you confirm if you have an uninsured patient your net revenue that you book is less than it is for insured patients?

Alan Miller

Sure. For a truly uninsured patient, in almost every case, there’s going to be a charity care and uninsured discount, and the amount of net revenue associated with that patient is going to be extremely low, quite frankly. The only exception to that would be if you add a patient who, for whatever reason, you concluded that even though they lacked insurance had the means to pay their bills and you were not taking any discount, I can assure you those patients are few and far between.

Christine Arnold – Cowen

Great, thank you.

Operator

Your next question comes from Kevin Fishbeck with Bank of America.

Kevin Fishbeck – Bank of America

I was just looking at the psych margins again. And if I back into it, it looks like the same-store psych margins were up sequentially, but the non-acquired margins were down sequentially. Is there any reason for that?

Alan Miller

I think the problem in doing that, Kevin is we include some other nonrecurring items in the non same-store stuff that I think is going to distort your attempt to do that analysis. I would tell you that I think that if you will, using the term same-store margins for both the UHS and PSI facilities are both up, and they’re both up by similar amounts on a sequential basis.

Kevin Fishbeck – Bank of America

Okay. That makes sense. And then the 300 plus beds that you guys are looking to build this year, I think that that number is less than what you and Psych Solutions used to be doing separately but combined. Any thought about why that number is the right number here versus maybe what the pro forma company used to be doing?

And I guess I would have thought there might be some catch-up about some of the issue with Psych Solutions was they did not really continue to build beds last year. I thought there might actually be some pickup.

Alan Miller

Yeah, it’s all – those are all fair comments, Kevin. I think the challenge that we have in adding psych beds is that obviously people like to model them in a very ratable way and a very predictable way, and it’s hard to do.

I think we believe that there is a pipeline of potential bed capacity expansion that’s pretty significant. Again, in both portfolios, because of regulatory issues and licensing and to a lesser – local zoning issues, we are working as fast as we can to add those beds, but, I think the pace is likely to pick up in ‘12 and ‘13.

Kevin Fishbeck – Bank of America

Okay. And then last question, one of the things that I think in the past when we talked about taking the improvement on the acute care side and released – factoring it into the numbers going forward, one of the things is that you were looking for as far as payer mix was not only just uninsured being down but also commercial volumes being up. So I guess when we think about the mix trends is it right that we’re seeing uninsured volumes down but we still haven’t seen a rebound in commercial volumes?

Alan Miller

That’s absolutely correct.

Kevin Fishbeck – Bank of America

Okay. All right. Thanks.

Operator

Our next question comes from John Rex with JPMorgan.

John Rex – JPMorgan

Thanks. One more question, as we look to understand revenue yields better and kind of what’s going on there. Can you just size explicitly – and maybe I just missed this – what the percentage change in your case-mix index was in the quarter?

Steve Filton

I think the case-mix index is probably – Medicare case-mix index is probably 3 or 4% higher than it was in the comparable quarter last year, and I think our non-Medicare case-mix increased by a similar amount.

John Rex – JPMorgan

And was that – if you go back 1Q, would have that been a similar move or was this a step-up?

Steve Filton

I believe that the increase in both quarters was fairly similar, although sequentially Q2 was yet higher than Q1.

John Rex – JPMorgan

Okay. So the absolute – if I saw the absolute case-mix index, it was sequentially higher.

Steve Filton

Yes. So at least from a Medicare perspective, our case-mix index – we made this comment in Q1, but I’ll reiterate – is now – it’s the highest it’s ever been.

John Rex – JPMorgan

All right. And with regards to kind of some of the commentary that HCA was making earlier, specifically as it relates to cardiovascular surgeries and such, have you seen any shift there in that specific category?

Steve Filton

No, I would say – and again, as you might imagine, John, I mean, we’ve been largely focused this week on our own results and not paying too much attention to what others have reported, but I know that HCA talked a little bit about cardiovascular procedures, in general, and ICD procedures specifically.

We’ve seen those procedures decline. I don’t think – I certainly wouldn’t say that that’s new to Q2. I think that decline has been fairly secular and has been in place for some time now. So, again, I don’t think there was anything terribly different about that trend for us in Q2. And obviously, we’ve seen an uptick in enough other procedures to move the acuity needle up.

John Rex – JPMorgan

Great. And then on the Psych business, so residential has been somewhat a headwind. You’ve commented in the past in terms of length of stay and states moving that. Can you size what’s – if you just break out the Medicaid residential business, what’s happened to length of stay over the past year? I’m just trying to see how much of a headwind that is and understand kind of what that’s inserting in the overall length of stay in Psych.

Steve Filton

Well, I think, you can just sort of go from the overall numbers. I mean, these are rough numbers, but admissions are up 7%, patient days are up 3%, which sort of implies that length of stay is down 4.

What that really means is because of the length of stay decline is focused in the residential business, the length of stay is down even more than that in the residential business. But that order of magnitude, I think, gives awe sense of what we’re talking about.

John Rex – JPMorgan

I mean – and should we think of that as still an accelerating trend from the stays? I guess what I mean by this – is there still a long way to go for the states in terms of cutting length of stay in that business or should we be basing out? And that just comes back to – do we ever see any benefit in the consolidated length of stay from Mental Health Parity and other things like that?

Steve Filton

Well, I would answer the question in two ways, John. I mean, one is – look, I think that the reduction in length of stay on the part of state Medicaid programs is part in parcel with the reduction in Medicaid rates. I mean it is just another mechanism for the states in their own minds to pay less for mental healthcare.

I think, from a clinical perspective, what our clinicians would argue is one of the reasons you’re seeing admissions so strong even in the residential business as well as the acute business is that it is a sort of clinically flawed strategy that you’re just discharging these parents sooner and they’re just coming back to the facility faster.

So I’m not sure that it’s an effective strategy on the states’ part, but I’m not sure they are going to abandon it. So I think, as long as we continue to see Medicaid rate cuts, we’re likely to see Medicaid length of stay cuts as well.

John Rex – JPMorgan

Okay. Thank you.

Operator

Next question comes from John Ransom with Raymond James.

John Ransom – Raymond James

Hi. I guess, it’s either for Steve or Alan. A couple things. One, Alan, I’d be interested in your perspective on how, if and when, the debt ceiling drama ends. And secondly, could you just talk specifically about the former PSI facilities? I mean, when they ran these facilities, we would seemingly get a press release every week about some patient care issue.

What have you guys done specifically either to address that or to maybe improve the regulatory response, when something happens, because we would notice sometimes they would choose to fight the regulators versus work with them when there was a problem?

Alan Miller

Let me talk, John, about the problems that they may have had. We have dedicated a great deal of effort and a number of people to reviewing all the procedures, particularly in the quality area, and we’re working our way through the facilities. So I’m very confident that whatever number of incidents they have had in the past and the problems will be a lot less going forward. We have very capable group, and I think we’re doing well in that regard.

With regard to the debt ceiling, I was telling Steve this morning, I view that pretty much the way I view the NFL problem. I think that ultimately it will get resolved. The business round table a couple of weeks ago, 400 companies, we sent a letter in to the administration telling them that they had to resolve the situation before we fell off a cliff somewhere, and I think that’s going to happen.

And I don’t know how. There’s a vote today, as you know, and we’ve all been following this as it goes along. Now there’s a vote in the house, and then it goes to the Senate, then the President, but I can’t imagine that ultimately something doesn’t get done in the short run to avoid what could be a huge problem. And I think we’ll actually, for the hospital business, and healthcare in general, I don’t think there will be too much emphasis on us in the short run.

John Ransom – Raymond James

Okay. Thanks. And just one more follow-up on Psych I mean was it – after you’ve done these things for a while do you think the quality issue was it a training issue, was it that you had to hire new people and replace a lot of the people that you had, was it just regulatory – sluggishness on regulatory response?

Steve Filton

John, I think the company was more focused on acquisitions and growing the company and showing size growth, quarter-by-quarter and not as detailed on the operations.

John Ransom – Raymond James

Okay. Thanks.

Operator

Your next question comes from Art Henderson with Jefferies & Company.

Arthur Henderson – Jefferies & Company

Hi, thanks for taking the question. Steve, going back on the CapEx, I know you talked a little bit earlier on in your comments about that number, but if I take the first half of the year, annualize out what you’ve spent, it’s about 232 million, and I think in your comments you said 325 to 350 is still on target.

So I’m curious, if I – is there going to be some incremental spend in there in the back half that would get to you that number, or is that expectation a bit high, the CapEx will ultimately be lower?

Steve Filton

Yeah, Art, I mean if what I said was interpreted to be that we’re still going to get to that original capital spend guidance, I’m glad you asked the question, because I don’t think that’s really going to happen. You know, I think it’s far more likely that we – what I tried to say was that the pace of the spent will pick up in the second half of the year. I think the number we get to is much more likely to be kind of a 275 to 300 number.

Arthur Henderson – Jefferies & Company

Okay, 275 to 300. And then going back on – Alan, I know you were just talking about your perspective on Washington, and you mentioned short term hospitals are going to be okay. I was just curious, has the dynamic in Washington changed dramatically from – when you came out of the Healthcare Reform Bill and you had some visibility there, are they a bit more intolerant on making sure that the hospitals have extended visibility are you having to – seems like the number of ads that get run on TV supporting the hospitals and pushing against cuts seems to have gone up so I’m just curious like what kind of demands are being made on the hospital sector to the extent that you could talk about those at the moment?

Steve Filton

Well, the hospital industry has been running the ads, so they haven’t been a big surprise to us. You know, there’s a hospital in every community, and it’s a big employer in every community, and all of the legislators are well aware of the importance of the hospital, and its importance in people’s lives. So we just keep pointing that out.

And beyond that, I think you know what we all know, and that there has been a great deal of expense beyond what the nation brings in, and there will be areas looking to reduce expense. But I don’t – I think it’s got to be done carefully, and I don’t see that legislators will want to do that at the hospital level without very, VERY carefully reviewing what they’re doing and doing it very judiciously.

Arthur Henderson – Jefferies & Company

And one last follow-up to that. To the extent that there are a lot of non-profits out there that are sort of tearing on the edge, I mean in times like this as your phones start ringing off the hook more from people looking to partner up, or is there any sort of change in that dynamic?

Alan Miller

I don’t know that there is. As Steve had mentioned, we’re very active. We’re talking to a lot of people, and where we find an opportunity, we’re in a position to act on it. We’re feeling good about our financial situation, so that’s all I could say with regard to your question.

Arthur Henderson – Jefferies & Company

Okay. All right. Well, thank you, Alan. I Appreciate. Thanks, Steve.

Steve Filton

Sure. I think we have time maybe for one more question.

Operator

Okay. (Operator Instructions) And your next question comes from Jake Hindelong of Ticonderoga.

Jake Hindelong – Ticonderoga

Okay. Good morning. Just a couple of questions, guys. First up, it’s on guidance. So your first two quarters ran ahead of budget, so I seem to be on trend. Would it be fair to assume that if the remainder of the year stays more or less on that trend that we could focus on the high end of your guidance range?

Steve Filton

Jake, I mean to be fair, I think the idea of having a range out there is that we’re suggesting that that’s our range. Once we start suggesting in essence where in the range we should be, I think we’ve changed our range. So we’re going to just stick with telling you what our range is.

Jake Hindelong – Ticonderoga

Okay. Great. Thanks, Steve. And then just secondly on the behavioral facilities that you’ve been divesting or that you’re planning to divest over the next couple of quarters, what kind of EBITDA multiples are you seeing?

Alan Miller

We, I think, said from the beginning that we thought we could dispose of the four facilities for a turn or two less than what we bought them for and I think we still think we’re kind of in that range.

Jake Hindelong – Ticonderoga

Thanks, guys.

Steve Filton

Okay. Well, we thank everybody for their time this quarter, and we look forward to speaking with everyone again after the third quarter results.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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