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Executives

Vic Campbell – Senior Vice President

Mark Kimbrough – Chief Investor Relations Officer

Richard Bracken – Chairman and CEO

Milton Johnson – President and CFO

Sam Hazen – President, Operation

Juan Vallarino – Senior Vice President, Strategic Pricing and Analytics

Jon Perlin – President, Clinical and Physician Services Group and Chief Medical Officer

Analysts

Adam Feinstein – Barclays Capital

Gary Lieberman – Wells Fargo

Justin Lake – UBS

A.J. Rice – Susquehanna Financial

Darren Lehrich – Deutsche Bank

Christine Arnold – Cowen And Company

Frank Morgan – RBC Capital Markets

Sheryl Skolnick – CRT Capital

Gary Taylor – Citigroup

Tom Gallucci – Lazard

HCA Holdings, Inc. (HCA) Q4 2011 Earnings Call February 6, 2012 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the HCA Fourth Quarter and Year End 2011 Earnings Release Call. As a reminder, today’s call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Mr. Vic Campbell. Please go ahead, sir.

Vic Campbell

Lila, thank you and good morning to everyone on today’s call and to those of you who are listening on the webcast. Mark Kimbrough, our Chief Investor Relations Officer and I’m pleased to host you here this morning.

With us, our Chairman and CEO, Richard Bracken; our President and CFO, Milton Johnson; and Sam Hazen, President of Operation. We also have several other members of the HCA senior management team here this morning to assist during the Q&A.

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

Many of the factors that will determine the company’s future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events. And as you heard the call is being recorded, a replay will be available later today.

With that, let me turn the call over to Richard Bracken.

Richard Bracken

Okay. Thank you, Vic, and good morning to all. We do appreciate your participation on our call this morning. We have a lot to cover today so let me get to it. I’ll start by providing some overall observations for the year, and then Milton and Sam will follow with detailed review of the fourth quarter’s financial and operating results. Milton will then close this morning with our 2012 guidance and some of the key assumptions in that guidance.

Let me begin by saying that we are generally pleased with how our operating teams navigated through some pretty significant challenges the hospital industry faced in 2011. We ended the year not expecting to see significant improvement in unemployment rates and other key economic indicators, and also knowing that hospitals would not receive a Medicare payment rate increase for at least three quarters of the year.

In addition, we expect that the Medicaid payment pressures in certain states but as you now know we ended up with a greater than anticipated Medicaid rate cuts in both Florida and Texas in the second half of the year and as we have discussed at length in our call beginning with the second quarter of 2011, we have experienced a service mix shift from surgical to medical admissions.

Despite these significant challenges we produce revenue growth of nearly 6% and adjusted EBITDA growth of 3.3%. During 2011 we made significant investments in technology and our clinical quality and patient service agendas, and our market based service line strategies, and we’re confident these investments will continue to serve us very well in the future.

We’re particularly pleased with the successful efforts of our operating teams to adjust their offering operating cost in the second half of the year to offset the greater than anticipated revenue per admission pressures.

In our third quarter, our same facility operating expense per equivalent admission was flat and in the fourth quarter we actually saw four-tenth percent decline in our same facility operating expense per equivalent admissions.

For the full year, our operating expense per equivalent admission rose only 1.4% reflecting strong management of both overhead and variable expenses, while still supporting important growth initiatives. As we’ve discussed before part of our ability to manage operating costs effectively as result of our continued strong volume growth. This proved true throughout each quarter of 2011.

For the full year, our admissions grew 4.2% equivalent admissions were up 5.2% and emergency room visits were up 7.7%. On a same facility basis admissions grew 2.3% equivalent admissions 3% and ER visits up 6.2%.

We now have experienced 17 straight quarters of same facility equivalent admission growth, and Milton and Sam will provide some more color on our volume growth in a few minutes, but let me just say that we believe this growth not only confirms our favorable facility locations in areas with good population growth dynamics but also reflects an operating agenda that seeks greater efficiency and effectiveness in how we process patients through our hospital, equally important in this strategy is our commitment to improve clinical outcomes and enhance the overall patient experience.

As you might’ve noticed in our release this morning, our cash flows from operating activities totaled $3.9 billion in 2011. These funds along with the proceeds from our March IPO of approximately $2.5 billion gave us significant financial flexibility in 2011.

During 2011, we made capital investments of approximately $1.7 billion in our existing facilities and markets. We invested $1.45 billion to acquire full ownership of our HealthONE partnership in Denver and on prior calls we’ve talked at length about the benefits we foresee in this market in the coming years.

You’ll also recall that in September this past year we successfully repurchased more than 80 million shares of our common stock which was owned by Bank of America representing approximately 16% of our outstanding shares. We paid approximately $1.5 billion to purchase these shares at $18.61 a share, obviously an accretive transaction for our shareholders.

In addition, we were able to refinance and extend a significant amount of our LBO debt during 2001 at favorable rates and as a result, our near-term debt maturities had been substantially reduced and we will realize meaningful interest savings.

We have consistently said since returning to the public market that we plan to be flexible in determining the best usages of our cash flow, even with these substantial investments I just mentioned, we lowered our debt to adjusted EBITDA ratio from a little over 4.8 times at the end of 2010 to just under 4.5 times at the end of 2011.

As stated in our release this morning, our Board has approved a special cash dividend of $2 per share of common stock providing liquidity to our shareholders. This payout should not affect our ability to invest in our markets or impair our acquisition strategy. It’s important to note that the impact on our leverage from this dividend will be modest.

A discussion of HCA highlights for 2011 would be incomplete without recognizing the 76 HCA hospitals named among the 405 U.S. hospitals identified by the joint commission for accreditation of hospital organizations as top performers on key quality measures.

You may recall in September that the Joint Commission recognized these hospitals for evidence based care processes, closely linked to positive patient outcomes, we’re proud that 20% of those hospitals recognized are HCA facilities.

And finally, I want to commend our operating quality performance and IT&S teams who are responsible for the very successful rollout of our EHR in 2011, allowing virtually all HCA hospitals to meet Stage 1 Meaningful Use requirements during the first year.

We are pleased to be among the leaders in what we believe is an important foundational step in our ability to create a clinical data set to assist in the provision of more cost efficient and effective healthcare services.

And finally on February 1st we closed on an acquisition of an 82-bed hospital in Wichita, Kansas, that complements our 760-bed Wesley Medical Center and we are pleased to welcome them to our organization.

So, with that, let turn the call over to Milton.

Milton Johnson

Thank you, Richard, and good morning to all. I hope each of you have had the opportunity to review the company’s fourth quarter earnings release issued this morning. We have a lot of moving parts in this quarter, while attempt to clarify major issues, as well as provide more insight into our 2012 earnings guidance provided in today’s earnings release.

As Richard mentioned, the fourth quarter results provided strong volume growth and excellent expense management. We did, however, continue to experience an unfavorable shift in service mix compared to the prior year, along with Medicaid reductions in a couple of states, which resulted in lower revenue per equivalent admission growth.

Before I begin to get into the details, let me point out that this is the first quarter that our HealthONE joint venture is now fully consolidated in our financial and operating stats. It is not included in same facility financials or operating metrics.

We are accounted for investment in HealthONE using the equity method through October of 2011. With our share of the operations all recorded in the line item equity and earnings of affiliates in our consolidated income statement. Our share of HealthONE’s earnings represented approximately 90% of the total equity in earnings of affiliates in our consolidated income statements for each of the last three years.

We began consolidating HealthONE’s operations in our consolidated income statement beginning November 2011 and the equity earnings of affiliate line item has been and is expected to continued to be significantly reduced compared to periods prior to November 2011.

Revenues in the fourth quarter increased 8.5% to $7.769 billion, primarily driven by increased patient volume and the consolidation of the HealthONE joint venture. Same facility revenues increased 2.2%.

Net income attributable to HCA Holdings, Inc. in the fourth quarter totaled $1.935 billion or $4.25 per diluted share. This includes a pretax gain on acquisition of controlling interest in our equity investment in HealthONE of $1.522 billion or $3.13 per diluted share, reflecting the remeasurement to estimated fair value of our investment in HealthONE following our acquisition of remaining 40% ownership from the Colorado Health Foundation.

Also, in the fourth quarter results include a pretax on sales and facilities of $145 million or $0.18 per diluted share, primarily reflecting the sale of our Palmyra Medical Center in the quarter. Tax rate in the quarter was favorably impacted due to the majority of the HealthONE gain being a non-taxable item.

During the fourth quarter, same facility admissions increased 2.5% while same facility equivalent admissions increased 3.2% each compared to the prior year fourth quarter.

As noted in this morning’s release, excluding international facilities, patient volume growth in the quarter was primarily driven by medical admissions which increased 4.8%, while surgical admissions declined at 1.8% on a same facility basis. This is fairly consistent with the prior two quarters.

We continue to see our patient volume growth resulting primarily from governmental payers. However, we have seen some improving trends in our commercial payer volume. Same facility Medicare admissions and equivalent admissions increased 4.2% and 4.8% respectively in the quarter.

Same facility Medicare admissions include both traditional and managed Medicare. Managed Medicare admissions increased 8.1% on a on a same facility basis and represents 24.2% of our total Medicare admission.

Same facility Medicaid admissions increased 3.1% and same facility equivalent admissions increased 4.3% in the quarter compared to the prior year. During the fourth quarter same facility managed care and other admissions decline 0.7%. However, same facility equivalent admissions increased 0.8% compared to the prior year. This is the second consecutive quarter that we have experienced growth in managed care equivalent admissions.

Same facility total surgeries declined 1.8% compared to the prior year, reflecting a decline in inpatient surgeries of 2.1% and outpatient surgeries of 1.6%.

Same facility uninsured admissions increased 5.2% or 1,399 admits in the fourth quarter compared to the prior year. Same facility uninsured admissions represents 7.2% of total admits in the quarter, compared to 7% in the prior year’s fourth quarter.

We continue to experience strong growth in the company’s ER visits, a major driver of hospital inpatient volume. During the fourth quarter the same facility ER visits increased 4.4% compared to the prior year.

Same facility revenue growth in the fourth quarter was primarily driven by solid equivalent admissions growth. The continued shift in our medical mix during the quarter is reflected in the same facility revenue per equivalent admission decline of 1% during the fourth quarter.

Our same facility Medicare revenue per equivalent admissions increased 0.7% in the quarter. Same facility Medicare case mix index decreased 1% from last year’s fourth quarter. However, it increased sequentially 0.5% from the third quarter of 2011.

Same facility Medicaid revenue per equivalent admission excluding UPL declined by 10.4%, primarily reflecting reimbursement reductions in Taxes and Florida. Same facility Medicaid revenue per equivalent admission including UPL reductions declined 14.2% in the quarter compared to the prior year.

Same facility managed care and other revenue per equivalent admission growth was below recent trend, increasing 1.3% in the fourth quarter, reflecting an unfavorable shift in service mix. Managed care and other case mix index for the quarter declined 0.7%. We experienced year-over-year declines in neonatal patient volumes, as well as cardiovascular surgery and spine surgery.

Same facility charity care and uninsured discounts increased by $269 million in the fourth quarter compared to the prior year. During the fourth quarter, same facility charity care discounts totaled $680 million, an increase of $76 million from prior year, while same facility uninsured discounts totaled $1.348 billion, an increase of $193 million in the prior year.

We were very pleased with expense management in the fourth quarter, as same facility operating expense per equivalent admission declined 0.4% compared to the prior year. On a reported basis, operating expense per equivalent admission increased 0.6%.

Salaries per equivalent admission on a same facility basis increased 0.7% in the quarter when compared to the prior year. Hospital-only productivity performance as measured by man hours per equivalent admission improved 3%, while the company improved 2.2% on a same facility basis compared to the prior year.

Wage rate growth was 1.8% for the fourth quarter on a same facility basis. Same facility personnel cost associated with our physician employment company increased $39 million to $249 million compared to the prior year fourth quarter.

Same facility supply cost per equivalent admission declined 4.5% in the fourth quarter, reflecting a decline in surgical volumes and continued effective execution of our supply chain initiative. Same facility other operating expense increased 0.9% in the fourth quarter consistent with prior quarters.

The company recognized $120 million of EHR incentive income related to the Meaningful Use of certified EHR technology and approximately $19 million of EHR-related expenses in the fourth quarter. In response to new accounting guidance, the company revised its accounting recognition of income from EHR incentive payments.

EHR incentive income is not included in revenues but is presented as a separate line item in our consolidated income statement. For the year, EHR incentive income totaled $210 million and we incurred $77 million of EHR-related expenses. During 2011, the company received $306 million in EHR incentive cash payments.

For the fourth quarter, cash flows from operating activities increased to $1.387 billion from $534 million in the prior year, primarily reflecting improvements in working capital items of $388 million and $467 million related to income tax.

CapEx for the fourth quarter increased to $509 million from $465 million in the fourth quarter of 2010, $14 million of the increase reflects the consolidation of the HealthONE joint venture.

Based on account receivable, December 31, 2011 were 53 days compared to 50 days at the end of the third quarter and 49 days at December 31, 2010.

At December 31, 2011, the company’s debt to adjusted EBITDA ratio was 4.46 times, compared to 4.81 times at December 31, 2010. At the end of the quarter, we had $2.137 billion of borrowing capacity under our senior secured credit facilities.

We will use available cash and the company’s credit facilities to fund this morning’s announcement of a special dividend of $2 per share or approximately $952 million. Our leverage ratio pro forma for the dividend as of 12/31/11 4.63 times.

Now before going to Sam, let me go ahead and cover our 2012 guidance. We estimate that for 2012, consolidated revenues for HCA should range from $32 billion to $33 billion. Included in our estimate is $2.1 billion to $2.2 billion in revenue from HealthONE. Our estimate does not include any additional revenues from acquisitions that may be completed in 2012.

Adjusted EBITDA, we estimate a range from $6.2 billion to $6.45 billion for the year, while earnings per diluted share we estimate a range from $3.35 to $3.55 for 2012.

On a same facility basis, we expect overall volume growth at a slightly lower rate than 2011. HealthONE will be included in our consolidated volume stats, but will not be included in same facility stats.

On a consolidated basis, we expect equivalent admission growth to range from 7% to 8% for the year. On a same facility basis, we expect equivalent admission growth to range from 2% to 3% for the year.

With respect to net revenue per equivalent admission growth, we expect to continue to see unfavorable rate impact from changes and service mix during the first quarter of 2012. But we expect less rate impact from service mix changes for the remaining three quarters of 2012.

On a consolidated basis excluding UPL, we expect net revenue per equivalent admission growth in the range of 3% to 3.5% for 2012. On a same facility basis excluding UPL, we expect net revenue per equivalent admission growth in the range of 1.5% to 2%.

Our guidance assumes an expense growth outlook that will continue to benefit from our low inflationary environment. We will continue to invest in our clinical and EHR development strategy. Our total expense growth is modeled based upon our expected revenue growth for 2012.

Our guidance includes estimated EHR incentive income in a range of $325 million to $350 million and EHR-related expenses in a range of $140 million to $160 million. Also, capital expenditures for 2012 should range from $1.8 billion to $1.9 billion, with the increase primarily reflecting for change and recognition of HealthONE-related capital expenditures.

So, with that, I’ll pause and turn the call over to Sam.

Sam Hazen

Good morning. I’m going to focus my comments on more details related to the volumes statistic this quarter. I’ll begin with a look inside our portfolio to give you some perspective on the performance across the market.

Once again, the company had very good balance across our 16 divisions with respect to volume growth for the quarter as compared to the previous year. All 15 domestic divisions had year-over-year same facilities admission growth.

The range of growth was a low of 0.3% to a high of 8.2%. 13 out of 16 divisions had year-over-year growth in same facilities adjusted admissions and of the three that did not have growth, one was flat and the other two were down 1% or less.

14 out of 15 domestic divisions had growth in same facilities emergency room visits as compared to the prior year. Of this, 11 divisions had growth in excess of 3% with a high of 9.5%. The only division that did not have growth was down 0.3% year-over-year.

Surgical volumes were down again this quarter as compared to the prior year. The trend was not materially different than previous quarters this year. Within surgery, cardiovascular volume trends slightly improved in total.

Inpatient cardiovascular surgeries were down 3.6% for the quarter as compared to the prior year. This is a slight improvement over the September year-to-date trend which was a decline of around 5%. We did see a deteriorating trend in the most revenue intensive component of cardiovascular surgeries with open-heart related cardiovascular cases being down for the quarter 7.8%. Year-to-date September, we were down only 1.5%. This trend change was a significant component of the managed care revenue softness for the quarter with commercial volumes in this category down 19%, as compared to 5% through September.

The company has rolled out a comprehensive surgery growth initiative which is designed to improve our surgical volumes. We are implementing this initiative in a manner similar to our emergency room initiative, which has yielded positive results for the company over the past few years.

Included as part of this initiative are enhancements to the process of scheduling surgical cases. These enhancements which include improvement in both process and technology will make it easier and more efficient for our physicians to schedule cases, while at the same time, increasing our operating room capacity. Also, we are dedicating additional capital spending in our budget to enhance further the technology and equipment necessary to attract more surgeons.

We have increased the resources in our physician outreach and communication function to ensure that any operational scheduling or equipment issues are addressed in a timely manner, also as part of this initiative, we have established that each of our hospitals have surgical services advisory council to ensure that both certain operating standards are met and our physician to have the necessary input into our surgical operations.

We believe this additional effort, coupled with our comprehensive service line strategy will help differentiate us in the market over time and allow us to continue to grow market share and improved clinical outcome.

And one final point on volume, which we also believe to be a part of the explanation for our managed care revenue softness is on our women’s and children’s services. Deliveries were down this quarter 2.4% on a same facility basis. Through September, we were down 0.8%, most of the difference this quarter is explained by Medicaid volume and not managed care volume. Managed care deliveries were actually up this quarter by 1.9%. Year-to-date, they were down 1.3%.

Normally, this translates into more neonatal volume, but in the fourth quarter our managed care neonatal patient days were down 6.5% with length of stay accounting for 3.6% of this decline. Length of stay is generally a proxy for acuity in our neonatal units. Through September, the length of stay for our managed care neonatal business was down only 1.2%.

This decline in conjunction with the decline in open-heart surgical volume explains a large portion of the change in managed care revenue for the fourth quarter. We are confident in our women’s and children’s service line strategy and believe them to be well-crafted to compete effectively in the marketplace.

To wrap up, I want to provide you with our perspective as we head into 2012 on a broader trend across HCA’s market. We have studied the macro trends in our market and in addition to the forecast that Milton provided in his comments, our revenue guidance for 2010 is built in part on the following four observations.

First, market demand for in-patient services is strengthening some and we are forecasting it to grow overall in the range of 0.5% to 1%. Second, market demand for emergency services should remain strong and continue to grow in the 2% to 3% range. Third, commercial enrollment and volume should remain stable. And fourth, the competitive landscape is anticipated to remain largely unchanged in comparison to 2011.

We have seen our market share growth some over the past year as a result of our service line strategy, capital investment strategy, position alignment strategy and quality improvement strategy. As we move into 2012, we are anticipating a continuation of this performance.

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

Vic Campbell

Thank you, Richard and Milton. Lila, would you like to come back on and we’ll poll for questions?

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions) Our first questions comes from Adam Feinstein with Barclays Capital.

Adam Feinstein – Barclays Capital

Okay. Thank you. Good morning, everyone and great news on the dividend payment. I guess, I just want to ask on the volume side. Clearly, your volumes had been stronger than what the market growth rate has been and Sam, I appreciated the details you gave earlier. I just wanted to just get some additional thoughts in terms of, as you guys think about the markets you’re in and just what maybe going on there with demographics and everything else. Just curious if, how you’re thinking about, your overall market share and then just on the mix question with the volumes, I guess just, what is your sense in terms of the mix impact on other hospitals in the same markets?

Richard Bracken

All right, Adam. Thank you. Sam, do you want to start out, basically he’s asking about market share and the mix shift.

Sam Hazen

Just to remind everybody once again. Our market share data is somewhat lagging and to date we are starting to get in third quarter market share data in certain markets and we have better market share data through the second quarter.

And for HCA on a 12-month running basis, our market share has grown modestly and a markets like that has been slightly flat to up maybe 0.5 point over the 12-month period. And what we have seen inside that market share is generally statistics that are reflective of what we’ve been reporting.

For example, women services during this time period have been down 3.5% and HCA’s market share is modestly down like 5 basis point. Our cardiology, for example, has been down about 4% in the market and HCA’s picked-up market share around 9 basis points.

So within the different categories our market share trend are generally favorable, but reflective of the overall volume trends that we’ve reported over the year. I will say that I think as the year has progressed, we have picked-up slightly more market share than what we’ve reported through the second quarter with the volumes that we reported in the third quarter, as well as the volumes that we reported in the fourth quarter.

I haven’t seen this specific service line data yet to understand whether or not we’re gaining or losing market share within the different service lines, but as soon as we get that information, we study it and we work with our division President’s to ensure that the information is being used to adjust our strategies and so forth. Milton, did you want to add something to it.

Milton Johnson

Just one other comment, as you know our market share data is inpatient-only, it doesn’t capture the outpatient activity. And the company, has been seeing very strong emergency room, volume growth over the past year, over 6% as Richard mentioned for the year just ended 2011. I think that strategy and the growth we’re seeing in our emergency rooms contributing to the overall adjusted admission growth that we were reporting especially over the last two quarters.

Operator

Thank you. Our next question comes from Gary Lieberman with Wells Fargo. Please go ahead.

Gary Lieberman – Wells Fargo

Thanks, good morning.

Richard Bracken

Good morning.

Gary Lieberman – Wells Fargo

It seems like your operating expense, you had better success controlling it in the second half of the year than maybe you did in the first half of the year. And it sounds like from your comments you expect that to generally continue into next year. Any concern as you get into the second half of 2012? If there is anything specific, did anniversaries that might make some of the operating expense benefits, a little bit more difficult to get?

Richard Bracken

Mil, can you take that?

Milton Johnson

Well, sure. I think overall, no doubt during the second half of 2012 our comps will become more difficult with the operating expense performance that we have generated in 2011. I’m not aware of any particular item out there.

I do think, as I have said in the comments, a low inflationary period. We’re projecting that’s going to carry through the year. We have attractive supplier initiative underway that we think will also help us. If we see a stabilization and the service mix which we’re calling for really in the second, third and fourth quarter of next year, that may put some year-over-year comp pressure on supply costs, but I don’t consider that to be a major headwind for us.

So, I do think our costs, overall trends should be similar, but I think it would be more difficult in the second half of the year, certainly more difficult than you will see in the first quarter of 2012.

Gary Lieberman – Wells Fargo

Just on the balance sheet, if you look at the other accrued expenses accrued in the fourth quarter, is there anything in particular there is that primarily just the addition of HealthONE to the balance sheet?

Milton Johnson

Yeah. Got to -- if I understand, this deferred HITECH revenue...

Gary Lieberman – Wells Fargo

Okay. Right.

Milton Johnson

Deferred income.

Operator

And we’ll take our next question comes from with Justin Lake with UBS. Please go ahead.

Justin Lake – UBS

Thanks, good morning. Just question around the EBITDA numbers for this year and just how you’re thinking about the bigger picture from growth perspective? I think you have typically talked the EBITDA growth for the business being mid single digits. I’m backing into about 1% ex-items this year for healthcare IT and HealtONE. It makes sense. I know there are a number of moving parts, so I’m hoping you can do just two things, one, can you walk us through the moving parts that are a headwind for this? I’m thinking UPL, Medicaid, just kind of level set us. Give us a quick comment in terms of, do you still think the longer term growth for EBITDA in this business is at 5%, 6%?

Milton Johnson

Of course, the range of EBITDA growth based on the $6.2 billion to $6.45 billion, of course, would be 2.3% to 6.4% EBITDA growth all-in compared to 2011. If you look at some of the major, major pieces of it and walk through it, and again there’s different ways of cutting this no doubt and looking at it. We’re looking at next year in our guidance probably around 80 basis points to 1% sort of tailwind from HITECH. We’re also looking in the neighborhood of probably around 4% or so of tailwind from HealthONE included in that guidance.

Now, the headwinds we’ve got are primarily, of course, it’s going to be the UPL, which I think we’ve guidance of probably $80 million to $90 million sort of hit there with respect to UPL, and then on Texas Medicaid, there should be about $60 million headwind there versus $20 million that we had this year. So a net $40 million impact on the growth rate. So, if you take all that into account, the pluses and minuses, we’re showing the underlying business growing about probably in that 1.5 to 3 range, somewhere in that zone.

Justin Lake – UBS

Great. Thanks for the detail.

Richard Bracken

Thanks, Justin.

Operator

Thank you. Our next question comes from A.J. Rice with Susquehanna Financial.

A.J. Rice – Susquehanna Financial

Thanks, everybody. Just thought I might ask you to update us on anything new or different we’re talking about on the Parallon initiative and then specifically, the supply cost there, you’ve alluded to that a couple of times and I know last quarter you talked about our far east initiative on basic supplies any update on that as well.

Richard Bracken

Milton, you want to go again?

Milton Johnson

Yeah, I mean, Richard on Parallon, first of all here with us this morning is Michael O’Boyle who just joined us in January as our new CEO of Parallon of course to replace Beverly Wallace who retired at the end of the year. We are very, very happy to have Michael on board and his guidance of Parallon over the coming years.

Really when we look at the supply agenda with respect to HPG we continue to see a good growth opportunities from HPG. We continue to see opportunities again with our contracting strategies especially as we roll out some strategies around medical devices and it’s a very market by market approach. It’s a very sensitive approach to our physicians but it is one that we believe we’ll continue to be able to yield results.

One example is that we bring our supply chain strategies into the EHR opportunities there as well. So we have a lot of opportunity there with respect to, I think you’re mentioning or referencing our outsourcing imitative in China. That continues to develop at this point that initiative is not having a material impact on the company, but one we’re continuing to develop in 2012.

Richard Bracken

Thanks, A.J.

Operator

Thank you. Our next question comes from Darren Lehrich with Deutsche Bank.

Darren Lehrich – Deutsche Bank

I wanted to just ask a little bit about managed care contracting how it’s evolving in 2012 what your general pricing outlook is on Sam, you’ve obviously given us commentary on mix. So thanks for that, but maybe more from the standpoint of how contracting is going and are you seeing bundled structures at this point in our networks just how you see that evolving in ‘12?

Richard Bracken

Juan, do you want to do that? Juan Vallarino, Heads up our Managed Care.

Darren Lehrich – Deutsche Bank

Hi, Juan.

Juan Vallarino

Hi, how you’re doing? It’s really more of the same. I assume they have very different approaches yet, if talking about our network the discussion back and forth, but I think for the foreseeable or next year it’s going to be much more the same range of the guidance given contracts virtually the same couple of pilots in there.

Richard Bracken

I’m going to remind you that we’ve got about 85% to 90% of our 2012 managed care revenue currently under contract and at 5% to 6% sort of contracted rate increased zone with structures under those contracts very similar to what we’ve been operating under in recent years. We got about half of our 2013 managed care revenue under contract and at same sort of rate growth range at this point, and again with underlying structures consistent.

So, although, there would be discussions, I think it especially gets closer to 2014, and assuming healthcare reforms continues to be on track and the like. But as of now, I would say our managed care pricing and our structures are similar to what -- and largely consistent with what we have been working with in recent years.

Darren Lehrich – Deutsche Bank

If you could just help me square then the managed care pricing growth, I think you told us was 1.3% in the quarter on an equivalent admission basis, but the mix was down just only about 1%. So, may be just help us think a little bit more about that number in light of the pricing growth that you’re talking about here?

Richard Bracken

So, Sam, I think in his comments addressed the primary reasons that our yield is below our contracted rate and it has to do with basically our surgical volumes in a few areas.

Sam Hazen

Let me just add to that for one minute. I think when we look at managed care activity and I want to give you some stats through the end of year as well as the fourth quarter, because I think it will help understand what changed in the fourth quarter and caused our trend to move from 4% or so down to 1.5% to 2%, and it really involves the fact that the book of business that grew and moved up to where we were basically flat with managed care admissions for the quarter is in the medical admission category.

We were up almost 3% in the fourth quarter on medical admissions. Year-to-date through September we were flat. Within medical admissions, the case mix and revenue per admission is almost 1.5 of surgical admissions.

And so when you look within surgical admissions, we were down less in the fourth quarter, not a whole lot, but less, we were down about 5% in the fourth quarter and through September year-to-date are down 5.5%. In the mix, in the combination of the weighting of the differences between revenue per medical admission patient versus the revenue per surgical admission starts to bring down the composite rate.

And obviously, we do okay on medical admissions, we do better on surgical admissions, but the weighting brings the overall composite revenue per adjusted admission to a number that below our contracted number. So, said another way, we just had movement in our book of business.

Within surgery we did see a little bit of a decline in the cardiovascular -- a large decline actually like I said in my comment in the neonatal. That contributed to some of it, but I think the mix of business here is also a significant contributing factor. I think Sam too the comp we had last year was a pretty high, that contributed to piece of it as well.

Darren Lehrich – Deutsche Bank

Okay. Thank you.

Richard Bracken

Thanks, Darren.

Operator

Thank you. Our next question comes from Christine Arnold with Cowen And Company.

Christine Arnold – Cowen And Company

Hi there, you mentioned in your prepared remarks that you’re beginning to see an increase in commercial volume. Could you elaborate on what you’re seeing and do you think that we’ll see an improvement in the pricing metrics on the commercial side next year, kind of next quarter, first quarter or full year ‘12? And then could you give us the UPL numbers for this year, just for this quarter please?

Milton Johnson

Okay. This is Milton. Let me give you the trend here on our managed care adjusted admission growth for the year and this trend is encouraging relative to the 2012 outlook. Our managed care adjusted admission we had a decline of 0.6% in the first quarter of 2011 versus 2010. In the second quarter we were flat. In the third quarter we actually had growth. We grew 0.5% in managed care and other adjusted admission growth, that’s the first quarter we have reflected growth in years and that’s that.

And now, in the fourth quarter we were up 0.8% in the fourth quarter versus the fourth quarter of 2010. So each quarter this year a continuing improvement in the growth rate and so we’re encouraged by that as we go into 2012.

Now with respect to the rates, we’re going through this service mix shift that Sam just described very well relative to the yield that we’re getting on that rate. I think we’re going to see probably continued pressure on yields in the first quarter, but as we get further into 2012, I think we’re going to see a stable -- we’re seeing a stabilization now, we’ve got a difficult comp in the first quarter of 2012 and after that we should start to see that stabilization resulting in more yield pull through closer to our contracted rate rather than what we’re seeing now.

With respect to UPL, for the quarter we’ve reported EBITDA from the UPL program in the fourth quarter of $48 million that compares to $86 million of EBITDA in the fourth quarter of 2010. For the year, $231 million of EBITDA UPL program versus $304 million in 2010. So, a $73 million decline for the year, $38 million for the quarter.

Christine Arnold – Cowen And Company

On the managed care adjusted admissions, are you expecting that to be a positive turf in 2012?

Richard Bracken

Well, we’re not giving guidance on details about payer on volume, again, but we are encouraged looking at the trend going into 2012, especially with some of the recent news around unemployment, that picture looking a little bit better as well.

Christine Arnold – Cowen And Company

Okay. Thank you.

Richard Bracken

Thanks, Christine.

Operator

Thank you. Our next question comes from Frank Morgan with RBC Capital Markets.

Frank Morgan – RBC Capital Markets

Good morning. Looking at your really strong free cash flow and in fact you paid this special dividend. I’m just curious how will you be thinking about that in the future be it additional dividends, be it share repurchases and kind of what was the criteria that really sets you up to do that dividend this quarter. So just some color there about how you think about the world going forward, particularly going into 2013?

Milton Johnson

Thank you, Frank. Richard, do you want to do that?

Richard Bracken

Yeah, obviously, the way we think about the special dividend, it’s really a method of returning some liquidity to all of our shareholders. And without requiring them to reduce their ownership position and so this is really -- this makes a lot of sense given the interest rates and the generally lower industry valuation environment. We have said repeatedly that our strong cash position allows us to be very flexible in creating value and that’s going to be our go forward strategy.

A strong cash flow allows us lots of choices you saw over 2011. We not only fully sourced our capital budgets, but we repurchased the shares from Bank of America 80 million shares. We’ve completed key acquisitions and all these issues are -- we will evaluate as we go forward.

Strong cash flow gives us that positive set of choices and we’ll continue to play that kind of discipline to where we can create value for the shareholders and still maintain our market position. And we’ll be flexible and supple about that as we go forward.

Frank Morgan – RBC Capital Markets

Thanks.

Richard Bracken

Thanks, Frank.

Operator

Our next question comes from Sheryl Skolnick with CRT Capital. Please go ahead.

Sheryl Skolnick – CRT Capital

Good morning, gentlemen, and very nice job to everyone pulling out of a difficult second quarter into a much stronger second half. But you’ve done it before, so I guess you pulled the rule book out and adopted it and you did a good job.

But I want to look forward a little bit, and while I don’t want to dump any kind of cold water on what should be a very nice party today. I do need to ask about readmissions and that little lawsuit down in Florida, so not related, but I think two important things.

First of all, if I understand all of your strategies correctly from a quality of care point of view from an accuracy and process and clinical protocol point of view, I would understand you to already be working towards reducing unnecessary or avoidable readmissions. So, there’s two questions about that. One, by how much more would your volumes be growing if you weren’t avoiding those readmissions?

Two, how much more do you have to go? Three, what are you including in your guidance for fourth quarter of 2012 when the rules changed for payment? And then if you could tell us what the situation is with the lawsuit down in Florida? It’s great, we appreciate it.

Richard Bracken

All right, Sheryl. I’m going to bump, as you would expect, to Jon Perlin the readmission discussion. John is our Chief Medical Officer as you well know, make sure everybody else knows, but on the litigation, we have pretty standard policy over the years that we do not comment on pending litigation. So, I would like to leave it at that on that particular case at this point.

Sheryl Skolnick – CRT Capital

Great.

Jon Perlin

Well, thanks Rick, in the area of readmission as you probably know, the initial CMS data have come out. They’re tracking readmissions for heart attack, heart failure and pneumonia. And our data look pretty comfortable to the industry and in some instances better.

Obviously, it’s an area where we want to make sure that patient care is integrated. it’s an area tests us in terms of continuity care models and with the large number of employed providers, especially in the area of cardiovascular services, we have the opportunity to create longitudinal relationships, as well as with our voluntary medical staff.

So, it’s an area where we see a good connection between the hospital-based services and non-hospital based services. And if there is any opportunity capacity created that would be one potential benefit, but we see this really an opportunity for good patient care across to continue.

Sheryl Skolnick – CRT Capital

Okay. I’m sorry. I understand that and I think I understand the nuances there of connecting with the non-hospital base continuing, which seems to be the key because you can’t control what happens after they’re discharged, but what I’m also trying to get at is, there seems to be for those hospital companies that perhaps have not been proactive in trying to improve the process and quality of care and reduce not only unnecessary readmissions, but also length of stay, there would be a difference between your already industry leading volume growth. In other words, if you weren’t avoiding those readmissions, can you give me a sense or will you be able to give us a sense at some point as to how much you are leaving on the table?

Sam Hazen

Sheryl, this is Sam Hazen. I think just to add to what John said and it’s through our analysis and our programs and other efforts, at this particular point in time we’re viewing readmission as an immaterial risk to sort of our volume metrics at this particular point in time.

Sheryl Skolnick – CRT Capital

Okay. All right. That’s great. I think I get that. Could you just explain the big tax item in the cash flow this year and how much you’re looking for cash flow from operations for next year?

Richard Bracken

Sure, Milton?

Milton Johnson

Yeah, with respect to tax item, we settled a couple of tax cases closed out a couple of years and we picked up about $172 million in refunds related to those years. So, now I believe we have all of our tax years closed through 2004.

And so we’re very pleased to get those settled and agreed to we think in terms of reasonable. So, we did pick up a refund. Of course, that should not reoccur. Also, this year and into fourth quarter we benefited from accelerated depreciation with some of the tax law changes as a result of the recession, so able to expense for tax faster than we are writing off or depreciating the book. That certainly helped our effective tax rate as well during the year.

Of course, that will work against us the future period. As far as the our cash flow from ops going forward, of course, another thing benefited this year, it was the HITECH incentive payment, it also was a benefit to our cash this year.

So, going forward I would say that our cash flow operations for next year would range probably around $3.4 billion to $3.6 billion framed around the same range of our EBITDA target that we’ve given.

Sheryl Skolnick – CRT Capital

I think I’m just going to quit my job and go buy HCA’s stocks and bonds because you guys keep returning lots of value to shareholders, so thank you.

Richard Bracken

Thank you, Sheryl.

Operator

Our next question comes from Gary Taylor with Citigroup.

Gary Taylor – Citigroup

Hi, good morning, good quarter. The question I just wanted to focus on was as you think about the fourth quarter of 2012, a couple moving parts, one I think I’m understanding that unless the Texas Medicaid waiver has extended, there’s some risk to the continuing UPL benefit and I wasn’t, I wasn’t clear exactly maybe what you are assuming for the year?

And then the second part of the question for the fourth quarter is obviously there’s a pretty wide range of potential outcomes on the Medicare update given the MS-DRG coding add back and the potential for some other coding callback et cetera those two items almost net each other off in my mind in the dollar fashion for 4Q, but I’m just wondering what’s your range of expectations were for those two items?

Richard Bracken

I think on the Medicare side Gary all we’re doing -- we’re projecting current law. Obviously there will be inpatient update you want to have you that will be a with, but at this point our expectations and estimates are based on current law. In terms of UPL, I know Mil you talked a little about the down graph that we expect and it relates, I don’t know so much of fourth quarter, it relates to the full year.

Milton Johnson

It relates to the full year about probably $80 million to $90 million of additional drop in EBITDA from UPL program for 2012 versus 2011. Of course, like I said, we did have a $73 million decline in 2011 versus 2010. We’ve just used our best information.

There’s still some uncertainty and details we don’t know about the new waiver and how it’s going to play out in some of our markets, but we’ve used our best information, our best estimate to come up with the guidance that we’re giving on UPL for 2012, but there is certainly still some moving parts.

Gary Taylor – Citigroup

Am I right that that waiver would have to get extended again to preserve even that diminished level of funding? Is it a waiver for one-year? Am I right?

Milton Johnson

Its five years.

Richard Bracken

Gary, it’s a five-year waiver, I mean there could be adjustments in how the waiver is implemented clearly during that five-year period. So, it’s a five-year wavier.

Gary Taylor – Citigroup

Great.

Richard Bracken

Gary, Thanks.

Vic Campbell

We’ve got time for one last question.

Operator

And we’ll take our next question from Tom Gallucci with Lazard.

Tom Gallucci – Lazard

And thank you for letting me slip into the wire there back…

Richard Bracken

(Inaudible) I wouldn’t have let you through.

Tom Gallucci – Lazard

So much for old friend, I guess. Any way, just really two follow-ups, One, you pointed to the neonatal trends there Sam earlier. I was curious what sort of volatility do you normally see in that business? Can you point anything that’s maybe unique now or is it explainable? I think Gary, just sort of touching on the Washington environment and some of the variables, I know you’re particularly active there Vic. Any color that you all can offer in terms of what you are hearing and what might out on specific initiatives that are on the table right one?

Richard Bracken

One thing that’s happened within our neonatal businesses is the clinical initiatives that we put towards many years ago and I think HCA has some credit externally around 39-week policies and so forth and that has had some impact on our neonatal unit.

The other thing that we’ve seen across the market is, infertility volumes through infertility clinics had been down during the recession, which makes sense to me at a certain level and that does have some implication on multiple birth and how it plays out in the neonatal setting. Outside of that, we’re really not seeing anything material that we can point to with neonatal activity across the company.

So, those are just some high level observations that we think have had some impact. Again, the fourth quarter was dramatically different in the first nine months of the year, so I’m not necessarily focusing in on that as any kind of significant trend change. It’s just that component of the explanation for this quarter.

Vic Campbell

And, Tom, this is Vic. On Washington, you know, probably as much as I know. Right now, clearly, we have got a Doc Fix Bill that goes through at the end of February. I think the general thinking is, it gets extended for 10 months through the end of the year and the payfors that are being discussed are the same payfors that were out there at the end of last year, last year they were talking about a two-year fix versus 10-month. There are some.

However, they would like to fix this and resolve it in its entirety, and there is a good bit of discussion about the OCF funds possibly being use there, but there are lot of folks who would like to use those funds as well. So, your guess is as good as mine.

Again, looking at the Doc Fix Bill, it’s not a terribly material amount of money they have to come up with if they have to deal with it on a 10-monht basis. Outside of that particularly piece, I don’t think much happening in healthcare legislation this year, it’s more of an election year.

Tom Gallucci – Lazard

Okay. Thank you.

Richard Bracken

All right. With that I want to thank everybody for being on the call. Mark and I are here all day. So look forward to see and talking to many of you. Thanks again.

Operator

Thank you ladies and gentlemen. That will conclude today’s presentation. We appreciate your attendance. You may now disconnect.

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