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Executives

Steve Filton – Chief Financial Officer

Alan Miller – Chief Executive Officer

Analysts

Bryan Sekino – Barclays

Tom Gallucci – Lazard Capital

Darren Lehrich – Deutsche Bank

Ralph Giacobbe – Credit Suisse

A.J. Rice - UBS

Gary Lieberman – Wells Fargo

Gary Taylor – Citigroup

Kevin Fishbeck – Bank of America

Todd Corsair – UBS

Whit Mayo – Robert Baird

Adam Feinstein – Barclays

Frank Morgan – RBC Capital Markets

Universal Health Services Inc. (UHS) Q1 2012 Results Earnings Call April 27, 2012 9:00 AM ET

Operator

Good morning. My name is Christine, and I’ll be your conference operator. At this time, I would like to welcome everyone to the UHS First 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 will now turn the conference over to Mr. Steve Filton, CFO.

Steve Filton

Thank you and good morning. Alan Miller, our CEO is also joining us this morning. Welcome to this review of Universal Health Services’ results for the first quarter ended March 31, 2012.

During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast, projections, and forward-looking statements.

For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2011.

We’d like to highlight just a couple of developments and business trends before opening the call up to questions.

As discussed in our press release last night, the company recorded net income attributable to UHS per diluted share of a $1.31 for the quarter, after adjusting for the prior year impact of several reimbursement items recorded during the quarter, our adjusted net income attributable to UHS per diluted share for the quarter ended March 31, 2012 was a $1.13.

On a same facility basis, revenues in our Behavioral Health division increased 5.3% during the first quarter of 2012. We note that the PSI facilities are included in our same-store data for the entire quarter.

Adjusted admissions and patient days to our behavioral health facilities owned for more than a year increased 9.2% and 2.8%, respectively during the first quarter. Revenue per adjusted patient day rose 2.4% during the first quarter of 2012 over the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 26.8% during the quarter ended March 31, 2012 as compared to 26.5% during the comparable prior year.

On a same facility basis in our acute care division revenues increased 0.8% during the first quarter of 2012. The increase resulted primarily from a 1.6% increase in adjusted admissions to our hospitals owned for more than a year.

The relatively muted revenue growth reflects a difficult comparisons to the prior year quarter when our net revenues were favorably impacted by positive changes in payor mix especially stabilization in uninsured volumes.

On a same facility basis operating margins for our acute hospitals decreased to 18.6% during the first quarter of 2012 from 20.5% during the first quarter of 2011. We also note that there are no EHR-related revenues included in our quarterly financial statements.

Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $315 million and $223 million during the three-month period ended March 31, 2012 and 2011.

As a percentage of acute care net revenues, bad debt, charity, care expense and the uninsured discount in this year’s first quarter were at levels higher than those experienced during the first quarter 2011.

However, due primarily to the increase in behavioral health revenues and the very low levels of bad debt and uninsured discounts in that business, our overall percentage of bad debt, charity care and uninsured discounts were lower than those experienced during the first quarter of 2011.

Our cash from operating activities was approximately $134 million during the first quarter of 2012, as compared to $183 million in the first quarter of 2011.

Our accounts receivable days outstanding increased to 56 days during the first quarter of 2012, primarily due to a lack of Medicaid payments from the State of Illinois and the lack of disproportionate share payments from Texas, as well as the Rural Floor settlement recorded as receivable during the quarter.

At March 31, 2012 our ratio of debt-to-total capitalization was 59.6%. We spent $93 million on capital expenditures during the first quarter, included in our capital expenditures were the construction cost related to the ongoing construction of a new acute care hospital in Temecula, California and a new bed tower at our Wellington facility in Florida. Active in the first quarter of 2012, we have completed all of the divestitures required by the FTC as part of the PSI acquisition.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Adam Feinstein of Barclays.

Bryan Sekino – Barclays

Hi. Good morning. This is Bryan Sekino on behalf of Adam this morning. Just wanted to know if you could provide us with some details in Vegas on some of the mix shift that you saw in acute care versus the strong Q1 of ‘11, if you could provide us with some details on how the mix shift, if that was really the bullish of the mix shift in the quarter?

Steve Filton

Sure, Bryan. I mean, I think that, in talking about the comparison, the sort of anomaly was in the first quarter of last year. For those of you who recall, we talked a great deal in Q1 of ‘11 about the fact that rather dramatically unemployment rates had declined in the Vegas market from like 15% at the end of ‘10 to 12% in the first quarter of ‘11, we saw a benefit from that in our business almost immediately. We saw a reduction in uninsured volumes in the first quarter of ‘11 that was -- had an extremely favorable effect on our results and our revenues per admission, et cetera.

As the 2011 progressed, the payor mix sort of regressed back to kind of a normal mean if you will both in the Vegas market I think in the portfolio in general and most of those trends continued into the first quarter of ‘11 and those, excuse me, into the first quarter of ‘12, and those trends are again the same as we have about the last few quarters.

Commercial volumes are down, Medicare volumes are down, really the only volumes that are up are Medicaid, which is actually managed Medicaid and to some degree our uninsured volumes, that’s particularly true in some of our more economically troubled markets like Vegas and South Taxes, but it is generally true to the portfolio and that’s what made the comparison so difficult from an acute care perspective in Q1.

Bryan Sekino – Barclays

Okay. And then, just a question on the behavioral side, it looks like your adjusted admissions were up very strong and adjusted patient days were up, but there was a gap in the growth? Is there a shift in more acute versus RTC, or is there also some length of stay pressures from the Medicaid payors as well?

Alan Miller

Brian, it’s again -- it’s a continuing trend where we’re seeing compression in our length of stay, not anything new, but also not something that seems to be decelerating yet at this point.

It is primarily focused in the residential business -- length of stay is down on both sides of our behavioral business, but primarily on the residential side. And it is mostly I think a function of Medicaid and managed Medicaid payors intentionally obviously trying to get their patients out of the residential facilities sooner than previously.

Bryan Sekino – Barclays

Okay. Thanks a lot.

Operator

Your next question comes from the line of Tom Gallucci of Lazard Capital.

Tom Gallucci – Lazard Capital

Good morning. Thanks for the details Steve. I guess just on volumes, over and above mix on absolute utilization, did you see anything that was new or different as you sort of look inside the details of the numbers that indicate that anything is better or worst and maybe where they’re trying to bid in in recent quarters or somewhat stabilization?

Steve Filton

No, the growth in the volumes, that 1.6% growth in adjusted admissions -- same-store admissions. We thought -- seemed to be much as expected and were reasonable number. I think, Tom, we are more focused on the fact that when the economy begins to improve in number of our markets but in particularly some of our larger markets, that we are well-positioned to benefit from that and we are waiting patiently for that to happen.

Obviously, this has been an extended recession and it’s been particularly extended again in some of our most important markets. So, that’s really where we are keeping our eye on most importantly.

Tom Gallucci – Lazard Capital

Okay. So not seeing things worst but doesn’t sound like you’re still waiting for things to get a little bit better. On the cash flow you mentioned some of the state collections, I guess in particular, was there anything else that you can talk about on collections or rates are still pretty consistent relative to outside, I guess of the states that you mentioned?

Steve Filton

Yeah. I think from a rate perspective there is nothing significant going on either from our government payors or our private payors. I mean the biggest collection issue which we discussed last quarter as well is almost a complete lack of payments from Illinois Medicaid. Although, payments did resume again this past week, so we view that as an encouraging sign.

And we believe the Texas Medicaid disproportionate share payments, which were not made in Q1, we’re actually expecting at least a portion of those payments to be made either today or Monday. So, we’re hoping to get a little bit of easing of that pressure.

Tom Gallucci – Lazard Capital

Okay. And is that Illinois resumed, did they took a catch up or how fast do you expect to make up with what you haven’t been paid in the past?

Steve Filton

I wish I could precisely answer that question, Tom, the state is not terribly helpful in letting folks know what their plan is, although they certainly have taken the position consistently that they intent to pay all the outstanding receivables.

So that’s our expectation and obviously, that’s the way we’ve reflected in our financials. But there is no plan that the state has issued as to when the timing of payments will take place.

Tom Gallucci – Lazard Capital

Okay. Thanks Steve.

Operator

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

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everybody. A couple of things here, I guess, first, I wanted to start with capital deployment. It does look like you had a little back in the quarter on share repurchase and I guess I’d be curious just to know, if you’re preserving capital for any particular reason at the moment be it, to the extent that ties into what you’re seeing in the acquisition pipeline. How we should be thinking about that and how maybe that’s changed over the last six months or so, as you think about deploying capital?

Steve Filton

Darren, I don’t think there is anything terribly new this quarter, as I think, we’ve probably said pretty consistently over the course of the last few quarters. We are mostly focused on generating cash and repaying debt as effectively as we can.

We are entertaining other opportunities both internal and external to deploy capital, if we discover or are able to take advantage of opportunities that we find really compelling, we’re prepared to do so. But, again, I’ll make the point that in our mind there are going to have to be pretty compelling.

Darren Lehrich – Deutsche Bank

Okay. I guess, just with the Knapp deal, looking like its turn off the table for now. Is there anything else that that looks more imminent in the pipeline, just on the acute side. Would love to get a comment or two there about what kind of things you’re evaluating?

Steve Filton

Yeah. So as we discussed last quarter, the Knapp deal that we have previously announced has elapsed largely because the seller has been unable to meet all their obligations and our involvement, some litigation at the moment. So you’re right that we put that off to the side, sort of, as is the practice, Darren. And I don’t know think we’re going to make any specific comments about opportunities on either side of the businesses.

Again just suffice to say that we’re continuing to look and we’re continuing to pursue internal opportunities as well. I mentioned in my remarks that we’re building new hospitals or new acute capacity in California and Florida. And we certainly continue to explore those opportunities as well.

Darren Lehrich – Deutsche Bank

Right. Okay. And then just -- as you look at the acute business, obviously the comp was was the big factor here. Is there any way to help us think about how things progressed over the course of the quarter? And can you just comment a little bit about how you use see that comp impacting Q2, I know it was still pretty strong throughout the first half last year but how should we be thinking about that?

Steve Filton

Well as far as the progression goes, Darren, I would say that both volumes in payor mix probably strengthened a little bit as the quarter went on although in fairness I don’t -- I’m not exactly sure how or what to read into that. You are absolutely right. I mean, our expectations that we set couple of months ago when we gave guidance for 2012. Does that acute care revenue growth would be fairly modest in 2012 in the, kind of, 2.5% to 3% range?

Part of that thinking was that we knew that in the first half of the year the comparisons would be difficult. So even though we didn’t get into specifics and won’t do that today either. I think the notion was we would be somewhat lower than 2.5% to 3% in the first half of the year and somewhat little bit higher in the back half of the year as the comparisons got easier, and that’s still our view.

I should make the point that I think the first quarter played out very consistent with our internal expectations, certainly from an overall basis. But from a pricing perspective, I think we’re a little disappointed with the level of acute care pricing but don’t view it at all was as outlined with our full-year guidance.

Darren Lehrich – Deutsche Bank

Okay. Thanks a lot.

Operator

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

Ralph Giacobbe – Credit Suisse

Thanks. Good morning. Just, Steve, going back to what you just said in terms of the pricing number, down 0.8 on the acute care side obviously impacted by the mix but I just wondering on the peer pricing side, maybe, you could remind us what rates you’re getting from managed care if it’s sort of in line with what you’ve historically got and little but lower and maybe even on the Medicaid side, maybe tell us what the pure price, sort of decline was in the first quarter?

Steve Filton

I think from a rate perspective, Ralph, we continue to get commercial rate increases in the 5% to 10% range that we’ve talked about for some time. Our Medicaid declines as we been saying since July of last year or insert of three or 4% range. And I think what’s driving -- I tried to outline before, what’s driving the pressure on acute care pricing is not rates from a particular payor, but the mix of business and that mix continues to shift from our better paying commercial and Medicare patients to our weaker paying Medicaid and frankly non-paying patients.

That trend has been in place for a while now and that’s -- the fact that that trend was interrupted in the first quarter of ‘11 last year, and we’re seeing sort of just -- it resumed in the back half of ‘11 and into ‘12. That’s really what’s driving that very difficult comparisons in Q1.

Ralph Giacobbe – Credit Suisse

Okay. That’s fair. Maybe you can give us in terms of your managed care contracts, do you have what percentages done for ‘12 versus ‘13?

Steve Filton

I would say, at this point, we have probably got somewhere between two-thirds and three-quarters of our 2012 contracts done and maybe quarter to a third of our ‘13 contracts.

Ralph Giacobbe – Credit Suisse

Okay. And then just going back to the behavioral side, your conversation earlier around the decline in length of stay. Is this then we should think about that’s going to comp out shortly or is there just a lot more days to come out as more -- as we get more of shift to manage Medicaid?

Steve Filton

I’m not sure Ralph that we can answer that question with great confidence. There is pressure on length of stay has been existing now for some time. I think it is largely a function of state Medicaid programs or they’re contractor managed Medicaid providers, who are attempting to address budgetary concerns and drive costs down by reducing length of stay.

As we expect with Medicaid rates, we think that pressure will ease a little bit in this next budgetary cycle beginning this summer, but I suspect that we may not see length of stay compression completely stabilized at that point. It may still continue to trend downwards.

Ralph Giacobbe – Credit Suisse

Okay. That’s all I had. Thank you.

Operator

Your next question comes from the line of A.J. Rice of UBS.

A.J. Rice – UBS

Thanks. Hi, everybody. A couple of questions, if I could ask. On the acute side, the year-to-year margin trend down 190 basis points. I assume that you would say that’s mostly due to the top line pressure, but I did want to at least ask is there anything on labor or supply that’s worth calling out that you saw in the quarter that would -- was particularly noteworthy, absent just the natural effect of the pressure on the top line?

Steve Filton

No. A.J., I think that we would attribute the margin decline almost exclusively to the top line pressure.

A.J. Rice – UBS

Okay. You didn’t recognize any high-tech revenue in the -- or incentive payments in the quarter. You did collect -- it looks like $17 million in cash. Do you have any updated estimate or what is your thought on how much you would likely collect in cash this year and any thought on time -- updated thought on timing of recognition?

Steve Filton

I mean, I think, I would just kind of reiterate what we talked about from the free cash flow perspective last year -- excuse me -- at our 2012 guidance. And that is, we expect to generate free cash flow in the $400 million to $500 million range. Again, much like our operating income guidance, I don’t think we have any changes to that.

A.J. Rice – UBS

Okay. And then just finally on the Medicare proposed rule, any comment or thought or reaction of that relative to what you were thinking?

Steve Filton

I mean, I don’t know what others have said, but I think we probably reacted by thinking that the update was maybe 100 to 150 basis points lower than we expected mostly because of the higher than expected coding adjustments in our higher threshold on the outliers. I’m not smart enough to predict how the final rule will look. Obviously, the industry will lobby hard for some relief on both those issues.

A.J. Rice – UBS

Right. Sure. Okay. All right. Thanks for your update.

Alan Miller

Hey A.J. A.J., you guys did very well in a drift. We got a first rounder in Jim Fords.

A.J. Rice – UBS

Thanks. Thanks Alan.

Alan Miller

Okay.

Operator

Our next question comes from the line of Gary Lieberman of Wells Fargo.

Gary Lieberman – Wells Fargo

Good morning. Thanks for taking my question. Behavioral continues to be very strong. Is it possible for you to parse out how much of that is organic, how much of that is continuing to benefit from the synergies on the Psych Solutions assets?

Steve Filton

I don’t know that I can do it precisely, Gary. I will tell you that we continue to improve the margin on the PSI assets or the PSI portfolio. And I think our view is that there is still a benefit to be -- continuing benefit that we had.

So we’re generally positive about April performance for two reasons. I mean, one is we view their revenue growth in that business as very solid and strong. We’ve been growing at above 5% for 2.5 years now in the teeth, obviously, of a very severe recession. And so we feel real good about the underlying demand in that business. And then we still feel as I said, there are opportunities that we’ve talked about in many occasion before to continue to drive slightly higher margins in the PSI portfolio.

Gary Lieberman – Wells Fargo

So, the total is compared to when you first purchased the assets, the total expectation is higher lower the same in terms of the total synergies that you’ll be able to get out of it?

Steve Filton

I mean, in terms of the margin improvement, which we pegged all along that’s sort of 50 to 100 basis points. Cumulatively, I’d say we feel fairly confident. We’ll come in at the high end of that number.

Gary Lieberman – Wells Fargo

Okay. Right. Thanks a lot.

Operator

Your next question comes from the line of Gary Taylor of Citigroup.

Gary Taylor – Citigroup

Hey, good morning. Just had two questions. Steve, is this the first quarter that PSI is fully in the same-store or was that last quarter?

Steve Filton

No. It’s the first quarter where we have a full quarter comparison.

Gary Taylor – Citigroup

Okay. So that’s what I thought. So you had been running on, kind of, the legacy UHS, north of 6% revenue growth for some time and this numbers is five to three. Did I miss any comment in terms of have you parsed out at all PSI versus legacy UHS or is the length of stay issue kind of impacting both of the assets?

Alan Miller

I think that the length of stay issue is affecting the residential assets primarily, again, in both portfolios. I will say and I know that you’re getting to this question -- getting to this point with your question, but having the PSI facilities in for a full quarter of comparison, we get a little bit of a drag from their Pines facilities in Virginia. Those were facilities that were somewhat of a problem for PSI.

They were I think troubled facilities at the time the PSI owned them and quite frankly remained so for us. So, including that, we closed down one of the three campuses that we operate there. That clearly drove revenue down in the quarter in effort to, sort of, right that ship and get the quality issues in mind for future growth, which I think we feel well poised to do. But it was a bit of a drag in the quarter and the mechanics of having PSI in the same-store comparison contributed to that.

Gary Taylor – Citigroup

Okay. That is what I presume you are not going to want to break those out separately anymore, but I was just wondering if the slightly slower revenue growth was impact of PSI coming into the quarter? And it sounds like it was. Would you agree -- I mean does leap year have a positive benefit for the behavioral book?

Alan Miller

I have always been a believer that leap year doesn’t have much of an effect either way. It affects the cosmetic metrics a little bit. You’ve got an extra obviously day of both admissions and patient days, but you also have an extra day of salary expense. And so I don’t think it makes a whole lot of difference.

Gary Taylor – Citigroup

Okay. And my last question maybe more for Alan, I’d be interested. I was reading the other day about this 1.5 billion Union Village development in Las Vegas, that’s supposed to have four hospitals. And just wondering if you guys had a view if that’s, kind of, still a pipe dream at this stage or if at any point geographically that would possibly create any threat to you, if they eventually get these hospitals built. Any thoughts around that?

Steve Filton

I’ll take that one Gary. So that big development which is in Southeast part of Las Vegas or in Henderson, has been on the boards for many, many years. It sounds like its a little bit closer to reality perhaps than it has been from a hospital perspective. I think the developers went to Catholic Healthcare West because they clearly have historically dominated that quadrant of the market.

What we have heard and I don’t mean it any way to be definitive is that whether or not Catholic Healthcare West will build or what they will build as part of that development is very much still uncertain at this point. So I think from our perspective that is not a quadrant of the city that we have ever competed terribly robustly in and I don’t think that’s changing anytime soon.

Gary Taylor – Citigroup

Okay. Great. That’s helpful. Thanks.

Operator

Your next question comes from the line of Kevin Fishbeck of Bank of America.

Kevin Fishbeck – Bank of America

Okay. Thank you. It wasn’t clear to me whether you answered this in response to AJ’s question, but as far as the EPS guidance that you’re giving, are you reaffirming that kind of ex the Medicare boost?

Steve Filton

Yeah. Our practice, I think always is, if we don’t say anything, we’re not changing anything. But yeah, we would reconfirm our year-end guidance.

Kevin Fishbeck – Bank of America

Okay. And then the Medicare boost would be on top of that one-time items you discussed this quarter would be on top of that?

Steve Filton

Right. I mean as -- we’re excluding that from our guidance just like we excluded them during the quarter.

Kevin Fishbeck – Bank of America

Okay. All right. Perfect. And I guess, maybe the answer was the response to Gary’s question, but I would have thought that the same store behavioral revenue growth would have been a little bit stronger even if we -- is it really just that one facility or is there anything else? I guess, how much was closing down that one campus to your same-store metrics?

Steve Filton

I don’t know the precise impact but that was probably the biggest impact, Kevin. We closed the facility in Missouri, a residential facility in a process to convert it to acute care beds that had again slightly negative impact in the quarter. Although, obviously we think in ongoing more positive impact, we continue to work on some regulatory issues in the Illinois, but I think long-term should have a positive impact. But I don’t know that any of those had real needle moving impacts.

Kevin Fishbeck – Bank of America

Okay. And then, as far as Vegas goes, we’re kind of seeing some modest economic improvement in Vegas. I mean, how in your experience, how long is there between a change in the underlying economic metrics in the market before that starts to really flow through to the numbers. Because it sounds like it’s not showing up yet but when would you start to expect that to show up?

Steve Filton

I think that historically, Kevin, our view is there’s usually something like a two to four quarter lag before our business or the hospital business starts to really get the impact of underlying economic metrics, particularly changes in unemployment. It’s why we were so surprised the year ago that we seem to get on almost, kind of, real-time immediate benefit from a decline in unemployment in that market. And why we frankly at the time didn’t think that was necessarily going to be sustainable.

But, sort of, to your point, I mean I think that some of the news coming out of the Vegas market over the last few months has been encouraging. We’re certainly encouraged by it. And we would hope that by the end of this year, we’d start to see some of that benefit in our business.

Kevin Fishbeck – Bank of America

Okay. Great. Thanks.

Operator

Your next question comes from the line of Todd Corsair of UBS.

Todd Corsair – UBS

Hey. Thanks. Just wondered, if you guys could comment on your outlook for allocating free cash flows, as someone earlier pointed out -- only a couple million spent on share repurchase during the quarter. And I think per your 10-K, you are expecting a pretty significant amount of free cash flow. So really just interested in, sort of, viewing where you stand in terms of balance sheet at this point?

Do you want to -- are you guys prioritizing, moving back toward investment grade or might we expect a more balanced allocation of free cash flow, perhaps is a little more towards the equity in terms of stock repurchase going forward?

Steve Filton

Todd, I think that Darren asked a similar question before and I just very quickly reiterate that -- absent compelling opportunities on the M&A front, we’re largely dedicated our free cash flow to debt repayment. But are exploring these opportunities and if compelling ones arise, we will be prepared to take advantage of them.

Todd Corsair – UBS

But outside of M&A stock repurchase is a far lower priority than debt reduction?

Steve Filton

I think all the priorities, sort of, our -- have to considered kind of -- at the same time and so I think if there is a lack of compelling M&A opportunities we might have a different point of view about free cash flow. I mean -- excuse me -- about share repurchase, but I don’t think we can kind of answer the opportunity in a vacuum. I think we are exploring all those alternatives at the same time.

Todd Corsair – UBS

That’s very helpful. Thanks and lastly, could you just refresh us on what remaining capacity you have under existing authorization?

Alan Miller

I think our existing authorization is fairly thin, but I don’t think that’s a determinative factor. If we think it’s appropriate to move forward, we certainly I think can expand that authorization with -- without a great deal of difficulty.

Todd Corsair – UBS

No obstacle there. Okay. Thanks very much for your time.

Operator

(Operator Instructions) Your next question comes from the line of Whit Mayo of Robert Baird.

Whit Mayo – Robert Baird

Hey. Thanks. Just a couple of final questions. Steve, is it still your expectation that the Medicare rule for behavioral will be a notice and will probably avoid the formal rule making session? And does that really mean anything to you one way or the other?

Steve Filton

Well, Whit. I think that the question has been put to us quite differently over the course of last few months and that is we expecting major changes to the site PPS regulations and we said, no. We expected that the action of CMS would likely either just be the regular market basket update or some minor tweaks to the system. That remains our expectation.

It strikes me, more about this than I do, but it strikes me that the investors and the investing public are coming around to that point of view. We’ve had that point of view for some months now.

Whit Mayo – Robert Baird

I agree. And maybe one other question, several of your peers are feeling the pinch on salaries and other expenses from employment costs income guarantees, whatever physician strategy they have and it’s really never been central to, sort of, what you guys view is core to your strategy. Just wanted to confirm that nothing has really changed one way or the other as you think about sort of realigning interests with physicians?

Steve Filton

Well, I think just to be clear, we certainly believe as I think most of our peers do, that physician integration is a critical piece of our strategy moving forward. I think as you described it and I think fairly described it, we may not be as enthusiastic about the idea that the only way to address the physician integration issue is through employment and acquisition. We’re pursuing, kind of, a whole array of alternatives including clinical integration, et cetera and we’ll continue to do so.

In large part, because we recognize I think as you -- your comments that the purchase of physician practices and the employment of physicians often results in negative consequences like increased costs, et cetera, that if we can, we prefer to avoid. But we very much view physician integration as a market-by-market issue.

And as I said, we don’t have a kind of one solution fits all approach to it. But we are very conscious of the fact that providers over the years have had very negative experiences in many cases with the economics of physician employment and acquisition and so we’re very cautious about it.

Whit Mayo – Robert Baird

Yeah. And maybe shifting gears just to high tech and maybe a longer term question. But do you have any internal thoughts as you look out to stage 2 and the requirements, and I know it’s a little over the horizon, but I guess I’m sort of curious what’s on the top of mind with your IT department right now?

Steve Filton

I’m not exactly sure, what you’re asking, Whit. If you’re asking do we think we can comply with the stage II requirements? I think the answer is yeah. Our EHR implementation, which is still in relatively early stages but we’ve got probably a quarter of our hospitals implemented at this point.

We’re feeling pretty good about the way it’s going. We’re not yet there in terms of meeting the meaningful use requirements. But we expect to be there and are feeling generally positive about the process.

Whit Mayo – Robert Baird

I guess, I was just, sort of, asking whether or not you felt that there were going to have to be more additional internal resources committed to get the stage 2 and 3 and maybe a corollary to that being the cost associated with it. I guess do you have a great idea for sort of what it looks into stage II and III at this point?

Steve Filton

Okay. I know, okay. I better I understand the question, better. I think that our -- at this point, our overall estimates of what the EHR will -- EHR implementation will cost us have not changed. But in fairness, I think your question points to a good point or makes a good point. It’s a changing process. Every time we do an implementation we sort of rethink our approach et cetera.

So, it’s certainly not impossible that some point down the road we come back and revise our estimates of cost or whatever. But at the moment, I think we’re comfortable with what we put out there.

Whit Mayo – Robert Baird

Got it. And one last one, sorry to slip this in, may have missed it. But did you give any colors on surgical growth and maybe sort of what you’re seeing with the birthrate and maybe acuity in the quarter?

Steve Filton

Yeah. Acuity has not really changed for us. We’ve not had any significant changes in acuity. I think birthrate remains as it has been for the last few years, down a little bit. From a surgical perspective, I think our overall surgeries were probably down 1% or 2% for the quarter with inpatient surgeries being down a little bit more and outpatient surgeries being a little bit better than that.

Whit Mayo – Robert Baird

Great. Very helpful. Thanks.

Operator

Your next question is a follow-up from the line of Adam Feinstein of Barclays.

Adam Feinstein – Barclays

Thank you. I know we asked one previously. So I will be brief here. But just wanted to -- just maybe ask you guys, have done a great job of investing CapEx over the years in some of these bigger projects. So, I just thought maybe it would be helpful to just give a quick update on some of the bigger projects in recent years, maybe just talk about how those have ramped up?

And as you think about doing future projects just wanted to get a quick update on some of the larger ones in recent years like Texoma and Palmdale and Wellington coming up?

Steve Filton

Sure. So the three big acute care projects that we’ve completed in the last few years, Adam, are a new hospital a replacement facility in the acquired Texoma market, which is north of Dallas, a replacement facility for our Lancaster Hospital in Palmdale, California, and then a significant new tower for Summerlin in Las Vegas.

Obviously, although, this wasn’t contemplated when we undertook those three projects, but they were all begun around the same time. They were all begun right in -- well frankly before the recession and opened in the middle of the recession. And so I think we’ve said a number of times that all three of those projects have been somewhat slower to ramp up than our original expectations.

On the other hand, I don’t think that our fundamental view of any of those projects has fundamentally changed from when we undertook them. We think that they will all be ultimately (inaudible) and helpful to our earnings.

Texoma is probably the one that’s had the most success so far. It’s a market that probably has had the least sort of economic drag. Southern California and Las Vegas have had more of an economic drag. So the Summerlin and Palmdale projects have been a little bit slower.

In terms of the new projects that we have going, the new hospital in Temecula, California, is part of our Riverside County network, where we’ve got three existing hospitals. There is data out there that shows that Temecula is sort of the largest metropolitan area without a hospital in the U.S. So we think that there is a tremendous unmet demand there that we are hoping to serve.

And then, our Wellington Hospital on the East Coast of Florida has been a hospital that has been extremely successful for us, particularly over the last five or seven years. And we’re just trying to take advantage of the fact that, we have had some capacity constraints there and so we will have that tower open by the end of this year.

Adam Feinstein – Barclays

Okay. All right. Thank you very much, guys.

Operator

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

Frank Morgan – RBC Capital Markets

Good morning. I hopped on late, so I apologize if you’ve already answered this. But did you talk about Steve the uninsured admit rates is that either the growth in it or the mix as a percentage of total admits that were uninsured?

Steve Filton

Frank, I think what we have said is that basically the trend we’re seeing in our acute care business is lower commercial than Medicare admits and higher managed Medicaid and self-pay admits. And that’s a trend that frankly is probably even present now for a good three, maybe four quarters.

Frank Morgan – RBC Capital Markets

Okay. Thanks.

Operator

There are no further questions at this time.

Steve Filton

Okay. Well, we thank everybody. We know everybody has a busy morning. And we look forward to speaking with you again next quarter.

Operator

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

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